Prices In 1857

Taken generally, a fall of 20 to 30 per cent.

The Economist gives the following account of the securities which were circulating in the market: "Such securities were a pure speculation on the future, and a speculation subject to one principal and many smaller casualties.

"Take the case of a railway; the line must be finished and placed in actual working before the obligations representing its cost can have any ascertained value at all. An unfinished railway or dock has no value whatever. In the second place the line must not only be finished and actually worked, but in order to impart value to the bonds and shares there must be a positive profit surplus. The difference between securities such as these, wholly dependent upon future and uncertain events to happen at distant and irregular dates and liable to become worthless by the premature stoppage of the undertaking, and the class of securities which long experience has shown to be best suited to the requirements of the bankers and money dealers, is not marked in its character, but so wide and glaring as to prepare any prudent person to expect mischief."

After this crisis trade revived, and a large number of finance companies were formed for the purpose of promoting all kinds of imaginary profits. From 1858 to 1868, 300 companies were formed with a nominal capital of £504,000,000, including for the year 1866 alone, 75 companies with a capital of £61,000,000.

The new banks transacted all kinds of business with foreign countries, and their success depended largely upon the state of trade with those countries. The finance companies advanced money upon all kinds of undertakings through the medium of bills kept in circulation.

The crisis of 1866 was started by the failure of Messrs. Overend, Gurney & Co. This house, which had then been recently converted into a company, was in its earlier days eminently successful. It is stated that in the year 1860 the partners divided £190,000 as profit. Its position in the money market was supposed to be of the highest character, so that the announcement of the failure had a disastrous effect. Lombard Street was impassable, and it was stated that no such panic had taken place since 1825.

Overend, Gurney & Co. had lent money to support all kinds of speculative enterprises, including the building of ships for the increased trade of the country.

The following account gives a graphic description of the great excitement caused by the stoppage: - At midday the panic was at its height. The demand for accommodation at the Bank of England was very great. Its reserve fell to £730,000, although three weeks earlier it stood at £5,844,000. Its loans on private securities increased from £18,507,000 to £33,447,000. The rate of interest rose to 10 per cent., and remained at that figure for 88 days.

The directors asked the Government to suspend the-Bank Act. This was granted, and its announcement had the same effect as in former years. Confidence was restored, but no infringement of the Bank Act took place.

The following table will show the bank rate in panic years: -

The effect of the panic of 1866 was so great that Lord Clarendon issued a despatch to foreign states, informing them that although the country had sustained serious losses, yet its trade was still bond fide.

The banks that failed in 1866, besides Barned's Bank at Liverpool, were the following: Overend, Gurney & Co. English Joint-stock Bank. Oriental Commercial Bank. New Zealand Banking Co. Hallett, Ommaney & Co. Imperial Mercantile Credit. Commercial Bank of India. European Bank. Robinson, Coryton & Co. Alliance Financial. Bank of London. Consolidated. Agra & Masterman.

Since 1866 there have been few bank failures until the year 1878, although in 1875 some of the banks lost large sums of money on accommodation bills.

The following is a list of failures of private joint-stock and foreign banks in recent years: -

The large number in 1878 included the City of Glasgow Bank, mentioned under Scotch banking, and the West of England and South Wales District Bank. Both of these banks had lent to individual customers large sums of money, quite out of proportion to their capital.

The West of England Bank had lent to one firm nearly £500,000, although its capital was only £750,000. This money was locked up in the worst kind of investment, viz., collieries, mines and iron works. When the directors endeavoured to realise what they had advanced upon those undertakings, they were unable to do so. If they had followed out the rule imposed by law on the State Banks of the United States, viz., that no bank should advance to any one person an amount exceeding one-tenth of its capital, then it would have been impossible for the bank to have failed with such heavy liabilities.

Many practical lessons can be learnt by studying these commercial disasters. However, it is impossible for banking to progress if large dividends are the sole aim of the banks in the United Kingdom. Merchants cannot obtain capital for speculative purposes unless the bankers did not to a great extent. provide it. In times of prosperity credit is abused, and by this means the trader incurs liabilities which he is unable to meet. This leads to a crisis, and then it is found out that capital, not income, has been spent. Capital is sunk on all kinds of undertakings, and cannot be reproduced for many years. In the various crises some of the banks had lent money upon mills, railways, docks, mines and machinery, instead of upon bills representing trade transactions.