The peculiar regularity with which financial crises occurred during the nineteenth century, at intervals of as near as possible ten years, has given rise to extraordinary theories to account for these so-called credit cycles, no less an authority than Professor Jevons seeking to find an explanation in the periodic recurrence of spots on the sun's surface.

Such theorists seem to wander unnecessarily far afield in their search for a cause, but, although we cannot perhaps accept such explanations, yet we cannot but be impressed by the striking regularity of the crises up to the last quarter of the century.

In 1825 there was an especially virulent panic, usually attributed to speculation in foreign mining companies, when the Bank of England was reduced to issuing forgotten £1 notes. In 1836 there was a crisis which was one of the immediate causes of the restriction of country note issues by the Act of 1844. Again in 1847, speculation in railway companies precipitated a crisis which necessitated the suspension of a part of the Act of 1844. Ten years later a totally unexpected crisis took the mercantile world by surprise, and resulted in a second suspension of the Act.

The next, and probably the worst panic, that of 1866, is usually associated with speculative company promotion following upon the passing of the Companies Acts of 1862, and was precipitated by fluctuations in the price of cotton due to the American Civil War. It was especially notable for the failure of Overend, Gurney & Co., the bill brokers, with liabilities of over ten millions, and for the third and last time the Act of 1844 had to be suspended, while such was the gravity of the situation that the Bank Bate remained for three months at 10 per cent. England's credit has seldom been so low on the continent, and notwithstanding the high rate of interest, gold was attracted very slowly.

The last of the series occurred in 1875, and is generally ascribed to the reaction following the abnormally high prices of 1872 and 1873, and to the great amount of accommodation bills in existence.

The City of Glasgow Bank failure in 1878 caused some anxiety in London, but did not produce an actual crisis, while the suspension of Baring's, in 1890, might have easily caused a panic, but for the promptitude with which the Bank of England and the leading joint stock banks joined in guaranteeing the engagements of the defaulting firm.

A study of these crises seems to convince us that in economics, no less than in the physical world, the law is true that "Every action has its reaction, equal in extent and opposite in direction" After each crisis comes almost invariably a period of stagnation. Speculation is checked, moneyed men are afraid to venture, prices droop. This state of affairs gradually and naturally wears away. Men become more enterprising, confidence returns, speculation grows and gives way to over-speculation, and over-speculation ends suddenly in a monetary crisis, and maybe a panic.

Speaking generally, all, or almost all, monetary crises are caused by excessive speculation. John Stuart Mill has an excellent description of the steps which lead to such crises (a): "There is said to be a commercial crisis when a great number of merchants and traders at once either have, or apprehend that they shall have, a difficulty in meeting their engagements. The most usual cause of this general embarrassment is the recoil of prices after they have been raised by a spirit of speculation, intense in degree, and extending to many commodities. . . . At periods of this kind a great extension of credit takes place. Not only do all whom the contagion reaches employ their credit much more freely than usual, but they really have more credit, because they seem to be making unusual gains, and because a generally reckless and adventurous spirit prevails. . . . When, after such a rise, the reaction comes and prices begin to fall, speculative purchases cease. When everybody seems to be losing, and many fail entirely, it is with difficulty that firms of known solidity can obtain even the credit to which they are accustomed, and which it is the greatest inconvenience to them to be without. . . . There is super-added in extreme cases a panic as unreasoning as the previous over-confidence; money is borrowed for short periods at almost any rate of interest, and sales of goods for immediate payment are made at almost any sacrifice."

(a) Political Economy, Book III., Chap. XII., s. 3.

If we analyse the above paragraph, we find three important points to remember: First of all, there must be a speculative spirit abroad, "a generally reckless and adventurous feeling," as Mill calls it. Unless this feeling becomes general, it is almost impossible for the demand for credit to assume such proportions as to threaten the stability of the financial world. Take, for example, that form of business which is most openly speculative, that is to say, Stock Exchange operations; for the past ten years or so, long before the late war had so disastrously influenced prices, the public have been cajoled by every artifice and by the most reckless prophecies, to give their assistance in forcing up prices in one or the other of the Stock Exchange markets. But in spite of some very clever engineering, prices have gradually drooped, and the embryo "booms" have died at their birth, the chief reason being that the spirit of speculation was, for the time being, dormant.

Secondly, it will be noticed that speculation acts by means of its effect upon prices. Speculation means an increased demand, it may be for the majority of commodities, it may be for one particular commodity, but in the latter case such a rise will usually affect the prices of all commodities in that group, because what is a finished product in one trade is only raw material in another.

The third point to remember is that speculation acts upon prices by means of an increase in credit; "at periods such as these," says Mill, "a great extension of credit takes place."