But these principals of the banking community comprise the whole nation; changes, therefore, which befall the nation act directly on banking. The habits of a population may vary much from year to year. The persevering thrift of Frenchmen steadies the loan market of France; it ever adds to its resources and marvellously retrieves disasters. It is much otherwise with Anglo-Saxons, be they Englishmen, Colonists, or Americans. An increase of property leads at once to an increase of consumption; and that consumption often goes on undiminished after adverse times have set in, thus entailing an inevitable destruction of capital. A fever of speculation will break out, as in the body physical. Because some railways have paid well, and carry large premiums, far more railways are commenced than there are means of completing, whilst the premiums won for their shares are expended in wasteful luxury, to the serious lessening of the country's wealth. There are multitudes of Anglo-Saxons who consume as much in bad years - or other public disorders, such as war - as in good years; the Frenchman betakes himself to retrenchment at once, and then all Europe is surprised, and sometimes uneasy, at the unexpected economical strength he displays. England and America have often made the discovery, to their astonishment, that they have been spending not income but capital; that they not only have not saved when there was nothing to save, but have continued their rate of consumption, and on pay-day, be it for the nation or the individual, have to learn amidst suffering that their property is less than it was. Debts have been contracted, means to meet them have vanished, accounts at banks are reduced, bills are not paid, great firms break, and hurricanes sweep over the bewildered money market. It is not to be denied that the banker at the moment is the judge of the state of affairs, and may, with or without reflection, determine to lend less or to lend more. But his action is only identical with a seller of cattle at a fair, who, for an hour or two may fix the price of his animals, but, if he must sell them, he must submit to the market price at last.
It must be observed that in seasons of regular trade and expenditure the actual figure at which the rate of discount stands does not necessarily denote a prosperous or a damaged economical condition. A low rate does not always indicate a thriving trade, nor a high rate distressed commerce. Thus a high rate of interest in the United States and the Colonies implies no disadvantage, nor any exceptional risk; it is a natural result of the great returns which industry gives in new countries; men can afford to pay a higher charge for loans, because capital is so exceedingly productive. Thus some years ago 7 per cent, was obtained for a long period by the Bank of England with ease, and paid with equal ease by the applicants for discount, though at the present time such a rate would be felt oppressive. The superior productiveness of trade at one time compared with another explains the difference of feeling.
But though the law of the banking market places the normal determination of supply and demand in the banking market in the banker's two principals, and in the wealth which they, and not he, handle, it is nevertheless a painful but notorious fact that the banking market is exposed, beyond all others, to desolating storms. \The discount market is the most sensitive, the most sudden, and often the most difficult to forecast of all markets. Its peculiar dangerousness in England springs mainly from the vast multitude of transactions, pressing from every region on earth, and converging upon a single centre of commercial credit, London. Often it is very hard to discern in time the forces at work, or to predict their consequences; there are moral forces, too, to be reckoned with, which at times are as fitful as the winds. Confidence enters as an ingredient into banking - confidence in the depositor that the banker will hold his funds in safe keeping, and confidence with respect to the borrower that he will preserve and not destroy what is lent to him. Such confidence is easily shaken when once depositors begin to doubt whether the banker may not have entrusted his funds to people who have lost them, The failure of a few great houses, the explosion of a large finance company or two, the stoppage of a bank is sufficient to throw the banking world into an agony of alarm. Such calamities lie in the very nature of banking, for banking is credit, lending; and the depositor, who knows that the banker will lend his deposit, does not know whom he lends it to. There is plenty of room here for wild impulses of ignorant panic. At such seasons depositors rush in upon the bankers for repayment, the banks urgently reclaim advances, the assistance given to trade, which is the best service that banking renders, and, still more, which is relied upon by merchants and traders as a regular resource of their business, is diminished or refused altogether. Merchants, though substantially solvent, are from this sudden desertion of the bankers, for the moment unable to meet their engagements, and frantic demand for help runs up the rate of interest to a disastrous height. The cause of such tempests undoubtedly resides in the state of the country's wealth; but their violence in the banking market is generated by moral impulses, so well summed up in the fearful word panic. Such crises, as they are called, are inherent in banking operations which cover the whole globe; but the ruin they create is so severe, and their effects, not only on merchants and traders, but on the general population of a country are so painful, that it becomes a matter of high importance to ascertain, as far as is practicable, their true nature, and to seek to gather lessons which may help to mitigate or even avert such calamities.
I. In the first place, a crisis in the money market is something radically different in kind from a disturbance, however severe, in a branch of commerce. From an occurrence of this latter kind the element of vague and reckless terror is absent. This element appears in banking because the depositor has no other security for the safety of his debt but the solvency of the banker and what wild undertakings may he not have supported with means which belonged to others? The banker, too, becomes very uneasy: what grand houses or companies, whose bills he holds in hundreds, or whose names figure in his books against heavy advances, may be unsound at the core, and suddenly declare themselves insolvent? Many of these houses may be really solvent; but what man can face his liabilities if they are all flung on him together in the middle of apparent sunshine? Then there is always the danger peculiar to banking. If ordinary persons are asked to pay their debts, and cannot, the process of bringing them into the Bankruptcy Court is long; they are not ruined at once; but a bank that refuses to pay its cheques is instantly arrested in its business; it shuts its doors; and probably will never survive the blow. Its affairs go into liquidation. But the mischief takes a much wider range. If houses have failed in a particular trade, the blow is limited to themselves and the number of persons directly associated with them in that trade. The calamity with a banking crisis is national. Trade in England, to a vast extent, is worked by loans obtained from banks on discount. A sudden rise in the charge for discount, still more the difficulty of obtaining it at all, paralyses trading operations all over the nation which were framed upon reliance on discount and a moderate rate for its aid. The rise to 10 per cent, in a week, or even a day, converts most legitimate mercantile enterprises into loss, or even ruin. In ordinary times business moves along with so much smoothness, that the thought of danger, or even pressure, occurs to no one; yet in these pleasant waters the whirlwind arises with the suddenness and destructiveness of a typhoon. Merchants buy, order cargoes, sign bills, incur liabilities infinitely transcending their own ability to pay, in the unclouded assurance that the bills which they receive for goods sold will be discounted, that is, will be converted into purchasing or paying power by bankers. All traders are mere intermediate machinery between makers and consumers, between growers of cotton in America and the wearers of calico shirts in England. Indeed, trade might be defined as the planting of goods in the places where they are wanted. In performing this function, modern trade avails itself of the resources of banks - that is, to go back to our analysis, the cotton merchant buys by the help of the corn which the farmer has sold. By this process he carries on a business, with advantage to society, far exceeding his own personal means. What if this resource fails him? He relied upon it; but he cannot make bankers prudent. He is no wild speculator himself, he pursues the well-worn path of ordinary business; yet he may be brought to bankruptcy by the imprudent operations of bankers. By the system of bills, the whole body of traders are partners with the banking community, and yet they have neither the knowledge nor the power of checking which real partners possess.