We shall now consider certain periods in the history of banking when its progress has been retarded. The great foundation of our banking system is confidence, but when by reckless speculation on the part either of banks or of the commercial world there exists distrust, the result may be disastrous both to banking and commerce.

The history of English commerce shows great fluctuations in prices of commodities, in accordance with the laws of supply and demand. If any great catastrophe affects one industry, the effect is in time felt by other industries. This is partly due to the division of labour, which is the outcome of the expansion of trade. Manufacturers are able to produce goods in large quantities at a reduced cost in consequence of the division of labour. This cheapening process increases the demand for commodities. On the other hand, we must not forget that the system has its disadvantages, because trades become more dependent upon one another. For example, we know how dependent the iron industry is upon that of coal. The result is that the producer and consumer are not brought into contact with each other, and consequently when one fails a great number of intermediaries are affected.

We know that depressed agriculture causes stagnation in trade, because it is still a large industry in this country. Banks in agricultural districts are considerably affected when that industry is depressed.

If there is a series of bad harvests there is a less amount of capital to be spent upon other industries, consequently during such periods we should expect to see the deposits in banks decrease.

Credit is singularly varying. It confers advantages, but on the other hand there are corresponding disadvantages.

We have observed in a former chapter the disastrous effect upon banking by the indiscriminate circulation of bank notes, a form of credit which is now strictly regulated by Acts of Parliament.

Again, the use of credit enables capital to be transferred to places where it is more urgently needed. As a rule we might say that capital finds its way to places where it can be utilised with better advantage. Credit also increases efficiency and facilitates the business of the country. It tends to diminish the friction of exchange and steady prices.

We have already noticed that production is stimulated by the use of capital. Another point to remember is, that in times of good credit the bills issued against commercial transactions are taken readily, and consequently years of improving credit are years of rising prices. On the other hand, when credit is bad we find that prices fall.

There are great dangers attending our system of credit, and we shall observe that at various times the banks of this country have not made good use of the capital entrusted to them.

During commercial crises people exhaust their credit by converting floating capital into fixed. When prices rise, every one is anxious to secure large profits. At such times the liabilities of speculators are increased quite out of proportion to their means, and consequently when they are called upon to meet their engagements are unable to do so. One of the drawbacks to our present system of credit is that it enables an unsound business to be carried on, and consequently when the crash comes the effect is great. In fact, we lose in security what we gain in economy. The banks of this country exert a great power, and it must be their constant endeavour to keep aloof from the spirit of speculation. By prudent management they are able to exercise great influence, and consequently assist in the prevention of sudden collapses of credit.

The system of large deposits in banks is peculiar to England. The accumulation of capital affects trade and consequently prices. It has been stated by the late Mr. Bagehot that a rise in prices is caused by cheap money, cheap corn, and improved credit. "When this occurs, the banks have a large number of applications for loans, so that the borrower may benefit by the rise. As a natural consequence the rate of interest rises, and generally at a rapid rate. At such times the demand for capital is greater than the supply.

Whenever there exists a speculative mania, the result is a system of over-trading, and consequently liabilities are contracted which cannot always be met. At the same time we generally get an investing mania, brought about by the same causes. It has been truly stated in the excellent book entitled Lombard Street that any sudden event which creates a great demand for actual cash may cause a panic in a country where cash is economised and debts payable on demand are large. Accidental events, such as a bad harvest, a failure of firms, etc., cause a sudden demand for cash, and may lead to a panic.

In fact, the characteristic of a true crisis is a previous destruction of wealth. Gold, notes and banks are mere machinery required to carry on our modern system of credit. At each successive crisis attention has been drawn to the system of banking rather than to the fluctuation of trade and the speculative mania of the people.

We must not forget, however, that with the best system of banking it would be impossible for any bank to meet any large withdrawal of deposits. Ricardo says: "On extraordinary occasions a general panic may seize the country when every one becomes desirous of possessing himself of the precious metals as the most convenient mode of realising or concealing his property. Against such panic banks have no security on any system."

The late Professor Jevons endeavoured to account for periodical crises by the appearance of spots on the sun's disc at intervals of 11.1 years. We know that the condition of trade is largely dependent upon the harvests not only at home but abroad.

It seems that the price of Delhi wheat reached a maximum in value every ten years. We know that the amount of heat received from the sun is varying, and may suppose that the crops would vary in the same proportion. "The crops of Western Europe have always been strongly affected by communication with the Indies. Several of the crises are distinctly traceable to this cause, especially those at the beginning of the eighteenth century. That was a time of wild enterprise in the tropical regions, as the very names of the South Sea Company, the Mississippi Scheme, the Darien Project, etc., show. The Dutch, English, and French East Indian Companies were then potent bodies, the constant subject of legislation and controversy. Thus it is my present belief that to the trade with India, China, and probably other parts of the tropical and sub-tropical regions, we must attribute the principal fluctuations in European commerce. Surely there is nothing absurd in such a theory when we remember that the present crisis is at least partly due to the involvement of the City of Glasgow Bank in the India trade, through the medium of some of their chief debtors. Thus the crisis of 1878 is clearly connected with the recent famines in India and China, and these famines are confidently attributed to solar disturbance."