So it was in the great American crisis of 1873. Railways had been commenced in the wilds, far beyond the spare capital of the nation to complete. The very process of consuming the capital expended on these works spread a sunshine of seeming prosperity all around. Amidst premiums and unlimited markets for stock and shares all appeared to be growing rich together, and spent - that is, consumed goods - profusely. If a people chose to eat and drink up all their property in one year, gigantic would be the abundance of enjoyments poured out upon every family; but they would starve the next. The time arrived at last, when wealth failed and was not to be procured, railway shares and bonds became unsaleable, and the wasteful but radiant consumption ceased. The national impoverishment then became visible to every eye.
In all these transactions the banks were largely implicated. They did not the less develop the mischief because their securities seemed to protect them. They encouraged new projects, they helped to raise up the premiums, they derived vast profits from the demand for loans with augmented interest. Few bankers dreamt of the specific and formidable danger of a multitude of schemes, however sound in themselves, begun with no other foundation for their completion than a vague reliance on the future resources of bankers. How many bankers knew that they were but mere machines, that the causes of prosperity or adversity lay in the state of the nation's wealth, in the production or destruction of commodities? All goes on thrivingly till at last the means of the nation are crippled by the disproportion between wealth destroyed and wealth reproduced. Then on speeds the storm. The bankers, previously so open-handed, refuse further advances and recall the old ones. Companies are brought to a standstill with works unfinished. Their bonds, thought to be such excellent securities, are unsaleable and unrealisable. Merchants and traders, who have been all along outside of these proceedings, cannot obtain discount except upon ruinous terms. They cannot meet their engagements because the banks they relied on cannot furnish the wonted accommodation. Property is sacrificed by forced sales, and fear and ruin walk over the whole commercial world.
The day of crisis is the day of the settlement of losses, the day of discovering who is to lose. This it is which creates the agony - the panic. The fact stands suddenly revealed that huge losses have been made - that wealth is gone; and then bursts upon a surprised world the terrible anxiety, whose debts are sound and will be paid. The stock of commodities of every kind is found to be fearfully reduced. Those who had the wealth placed in their own hands have used it up and destroyed it, whether by actual waste, or by a consumption unproductive for the time and generating precisely the same effects as waste. On whom does the waste fall? is the question of questions in a crisis. Not on the workmen who laboured on the unfinished railways, for they received wages, and with them consumed the wealth. Nor generally on the contractors who set them to work; they received means to give wages as the work went along. Yet many of these are caught by the storm; it burst suddenly when they were receiving help from banks and financial institutions in reliance on early payments from the real owners of the work done. When contractors fail many are the creditors who suddenly find themselves stripped of their property. Financial houses spread the desolation wider. Countless bills are found to be worthless, and suspensions spring up in crowds. Customers who had contrived to borrow from banks are asked to repay and cannot. Their shares cannot be sold. Banks are exposed to great peril, for their second principals, their borrowers, are failing fast. Still the terrible anxiety is, Who is to lose? for in such a vast machinery of lending and debts, it is hard to tell who are the real owners of the property lost, and must pay for it. If a bank suspends, hundreds, perhaps thousands of persons are brought into danger, nay, possibly into ruin.
In the day of alarm the supreme question is the state of the second principals of bankers, those to whom they have transferred the funds of their depositors. Have. the banks lent to men who cannot repay their loans? and this in reality means, Have the banks done good or bad banking? The position of the Bank of England in a crisis affords grand instruction on this vital matter. No one ever distrusts the Bank of England; no depositor suspects that it has lent his deposit, his purchasing power, improperly. Not a man is eager to obtain back his deposit on the ground that the Bank may be in difficulties from its borrowers being unsound. This untarnished credit is the child of good banking. The Bank exercises its specific function well. It chooses its second principals skilfully. No one of its first principals trembles for the safety of the Bank's debt to him. And if bankers chose they might all bank in the same manner, and then the special disaster of a crisis - vague suspicion and terror - would never arise. No banker need lend without solid security. The difficulty might present itself, possibly, that the bank might not be able to realise its loans instantly on the day of trouble; but if the element of suspicion were absent, if the depositors knew for a certainty that they were really safe, the quality of this danger would be very mild. In the worst crisis the tendency of deposits at the Bank of England is not to diminish but to increase. The Bank of England can lend largely in a crisis, precisely because no one is impelled by fright to make a run upon it. If confidence were complete, as here supposed, the Bank might even lend its last farthing, and yet be in no danger. The situation would be known, and its signature, even if its reserve of gold had dwindled down to a trifle, would be accepted by any trader; it would be as good to him as money, the distinguishing characteristic of a panic being absent - distrust. Thus, in the agony of 1866, one of the most eminent banks in London was in some peril, simply because its deposits were immense, and the feeling was not perfect that it had lent with entire safety. No doubt if banks were always to lend with perfect prudence - such as is often seen in agricultural banks, whom the tempest in the money-market seldom even shakes - safety would be procured at the cost of many fairly promising enterprises deriving no help from banks; but security against panics is a benefit of the highest value, and careless banking undoubtedly promotes the diminution of a nation's capital. It is an invariable sequence of a crisis that the industry of a nation is for a period, more or less long, paralysed.