If credit did not exist and everything had to be paid for in gold or silver, the limitations of speculation would be very narrow. The quantity of gold in circulation cannot be greatly increased at a moment's notice, and taking for granted that nothing occurs to diminish the supply of goods offered for sale, you cannot have a general rise in the prices of commodities, except by increasing the quantity of money in circulation, and the only way of so increasing it is by the creation of credit.

Up to a certain extent this can be safely done in a country like England. Our currency is "elastic," and there is no absolutely fixed relation between the amount of credit and the gold basis upon which it rests. But beyond certain limits there is a great danger attaching to the creation of credit, and the greater the inflation of credit, the more violent is the inevitable recoil in prices which leads up to the monetary crisis.

It must not be imagined that speculation has necessarily an evil effect upon business conditions. It is somewhat difficult to define speculation, because there is a speculative element in all modern business transactions, but the term is used here to denote particularly that class of business enterprise which is prompted by the expectation of a rise or fall in prices, and which is very often carried on with borrowed capital. Up to a certain point speculation of this kind is productive of more good than evil, and undoubtedly helps to prevent wide fluctuations in price. If the price of any commodity falls abnormally, the speculator steps in to buy, and so raises the price. Conversely, a rise in prices tempts the speculator to sell for the fall. In all markets, whether stocks and shares or corn or cotton, the speculative operator is always at work and by his dealings hinders prices from fluctuating too far in either direction.

But speculation occasionally runs wild, and it is then that it begins to be harmful. Speculation is good, over-speculation is excessively dangerous, because the artificial raising or lowering of prices is sure to result in a recoil, resulting in a contraction of credit and widespread disaster.

America is the home of the speculator, the reason being that immense sums of money are controlled by individuals or syndicates. The artificial interference with prices in a particular market can therefore be carried to a great extent, and sustained for a long period. In England we have as yet had few instances of such concentration of capital as is characteristic of American finance, and the speculator has often to depend upon borrowed capital.

We can now estimate the position of bankers in this country in those periods of reckless speculation which have culminated in a monetary crisis. It is safe to say that bankers cannot originate speculation. Without the existence of a spirit of speculation and the anticipation of making a quick profit, there will be but a small demand for borrowed capital from the productive and commercial classes. It is these classes who originate speculative movements. But, as we saw above, no speculation can spread very far without an extension of credit, and to a certain limited extent bankers can control the amount of credit at the disposal of the commercial classes. To a limited extent only this is true. A banker cannot know, and it is not a banker's function to inquire, the purposes for which each individual customer requires an advance, and whether his business is of a speculative character. If the banker decides that the loan is a safe one, and he can spare the money, he will usually be content with this knowledge.

But when the signs of speculation are evident to a banker, and to an experienced practical man of business it is not difficult to detect such signs, he can discourage further borrowings by raising the rate of interest, and he can prepare against possible emergencies by strengthening his own position and increasing his "liquid" assets.

When the early signs of an approaching crisis are detected, the first step should be to raise the prevailing rate of interest. This operates in two ways: (1) it attracts foreign capital and so helps to attract gold by turning the exchanges in our favour; (2) it discourages needless borrowing by the more timid class of business men.

Neither of these effects is certain. In normal times a rise in the rate of interest is certain to eventually attract gold, but in times of panic the foreigner may balance the increased risk against the increased profit, and decide against us. In the second case, as Mill points out in the paragraph quoted above, when panic has seized the commercial classes and failures follow each other in rapid succession, no increase in rates will discourage borrowing on the part of those whose position is desperate. It becomes a matter of extreme urgency; money must be obtained whatever the cost, and if the rate were raised to 50 per cent. there would be plenty of people who would borrow to escape certain failure.

But a word of warning is necessary. A very sudden rise in the rate of interest is often the most dangerous proceeding in cases of panic, because it has the effect of aggravating the prevailing feeling of nervousness and distrust, and is regarded by the public as a sign of weakness. When a crisis is imminent, the first step on the part of those upon whom responsibility rests should be to restore confidence; once this is done, the rest is easy. If one may make use of an everyday simile, the rate of interest at the time of a monetary crisis may be likened to the brake on a bicycle which is descending a steep hill with sudden and unexpected gradients. A rash use of the brake at the worst part of the hill will probably only precipitate the calamity which it is desired to avoid. The brake must be gradually brought into play in the earlier stages of the descent, and in like manner the rate of interest should be raised before the crisis has had time to develop into a panic.

The second palliative to a crisis is the free lending of money in all quarters where lending is warranted and the security is satisfactory. A refusal to lend might be the natural desire of banks, in order to strengthen their own position, but this restriction of credit should have preceded the time of the crisis; once the public is alarmed money must be lent in order to restore confidence. It must not be forgotten that every failure at such times is apt to bring about a series of catastrophes, because the suspension of payment by a business firm ties the hands of all of its creditors, as well as spreading alarm in other directions.

If neither of these steps results in the restoration of confidence, the last resource is the suspension of the Act of 1844. A long continued crisis must inevitably diminish the Bank Reserve, and as this Reserve gradually approaches the point of disappear-ance, the nervousness of the public is apt to become acute. Three times the suspension of the Act has been necessary, and every time it has had the desired effect of restoring confidence. The feeling that a further reserve of Bank notes has been created seems to bring about a revulsion of opinion and dissipate alarm.

Perhaps it is necessary to explain clearly what is meant by the "suspension of the Bank Act." A question set in a recent examination in banking came under the notice of the present writer, in which the examiner referred to the suspension of the Act as a "restriction of cash payment" by the Bank of England. Needless to say, this was quite wrong. The suspension was not a complete suspension of the Act, but only that part of Clause II. which forbids the issue of notes beyond the amount of the securities lodged in the Issue Department, except in exchange for gold or silver. No restriction of payment in cash was sanctioned or contemplated, and all notes presented during the period of suspension would be paid in gold if desired. The letter signed by Earl Russell and Mr. Gladstone, in 1866, authorising the suspension, runs as follows: ". . . If, then, the directors of the Bank of England, proceeding upon the prudent rules of action by which their administration is usually governed, shall find that, in order to meet the wants of legitimate commerce, it be requisite to extend their discounts and advances upon approved securities, so as to require issues of notes beyond the limits fixed by law, her Majesty's Government recommend that this necessity should be met immediately upon its occurrence, and in that event they will not fail to make application to Parliament for its sanction. No such discount or advance, however, should be granted at a rate of interest less than 10 per cent. . . ." (a)

It will be seen from this extract that the sole reason for the suspension was to enable the Bank of England to lend freely "to meet the wants of legitimate commerce."

If we except the Baring crisis of 1890, which was not known to the public until the danger was past, and which never looked like assuming the dimensions of a panic, thanks to the way in which the danger was met, we have been free from such disturbances in London for nearly thirty years. What are the reasons for this?

(a) Gilbart on Banking, Vol. II., p. 352.

It is hardly true to say that we have been free from speculation during this period. Yet what speculation has occurred has been both limited in its area and open in its character. Anything like a wide speculative movement has been hindered by the tendency to falling prices, which until the last few years has handicapped our trade.

We have had speculative movements on the Stock Exchange, as, for instance, in South African mining shares and South American securities; there has also been speculation in certain trades from time to time, but all these have been of an openly speculative nature, and the banks and more important financial houses have mostly abstained from direct participation.

A second reason for the absence of any monetary crisis during this period - a reason closely related to that just given - is, that bankers, profiting from past experience, have conducted their business on sounder lines.

A glance at some bank reports issued during the years between 1860 and 1870 will show that extravagant profits were often made, and the dividends and bonuses declared by many of the leading banks amounted to as much as 40 per cent per annum. When we compare these with the steady and moderate dividends now earned, the conclusion is forced upon us that much of the business carried on by banks at the former period must have been of a risky nature, and that bankers did not pay sufficient heed to the dangers of extravagant lending.

Of late years bankers have kept a distinctly larger percentage of liquid assets; this has tended to reduce profits, also to ensure a better margin of safety. Not only is this so, but bankers, in spite of the greater competition which has characterised recent years, have undoubtedly in the main been more careful in the manner in which they lend money.

Perhaps a third reason may be found in the decline in the number of bills offered to bankers for discount. A good mercantile bill forms an excellent banker's security, but it has been in the past difficult to distinguish these from accommodation bills. The Select Committee of the House of Commons, appointed after the crisis of 1857, reported that the existence of a large amount of such bills was the chief cause which led up to the panic, and, although accommodation bills are not yet unknown, it is probable that their number has greatly declined.