A PRESSURE on the money market may be defined as a difficulty of getting money in the London market, either by way of discounting bills, or of loans upon Government securities. This difficulty is usually accompanied by an unfavourable course of exchange, and a high rate of interest. These circumstances have the relation to each other of cause and effect. The unfavourable course of exchange induces the banks to limit their accommodation, and by rendering money more scarce, increases its value, and leads to an advanced rate of interest. The removal of the pressure is in the same order: - the foreign exchanges become favourable, money becomes more abundant, and the rate of interest falls. The degree to which the exchanges are unfavourable is indicated by the stock of gold in the Bank of England; and when this is at its lowest amount the pressure may be considered to have attained its extreme point; for as the amount of gold increases, the banks will extend their accommodation, and the pressure will subside.
If we take a review of all the recent pressures on the money market, we shall find they have always been preceded by the following circumstances: - First, by abundance of money; secondly, by a low rate of interest; thirdly, by some species of speculative investments. The principal pressures that have occurred of late years, have been those of 1825, 1836, 1839, 1847, 1857, 1866, 1875, and 1878.
The following is Mr. Horsley Palmer's opinion of the causes of the pressure of 1825, as stated to the Bank Committee of 1832: -
"Will you state to the committee what, in your opinion, was the nature and the march of the crisis in 1825? - I have always considered that the first step towards the excitement was the reduction of the interest upon the Government securities; the first movement in that respect was, I think, upon £135,000,000 of five per cents, which took place in 1823. In the subsequent year, 1824, followed the reduction of £80,000,000 of four per cents. I have always considered that reduction of interests, one-fifth in one case, and one-eighth in the other, to have created the feverish feeling in the minds of the public at large, which prompted almost everybody to entertain any proposition for investment, however absurd, which was tendered. The excitement of that period was further promoted by the acknowledgment of South American republics by this country, and the inducements held out for engaging in mining operations, and loans to those governments, in which all classes of the community in England seem to have partaken almost simultaneously. With those speculations arose general speculation in commercial produce, which had an effect of disturbing the relative values between this and other countries, and creating an unfavourable foreign exchange, which continued from October, 1824, to November, 1825, causing a very considerable export of bullion from the Bank - about seven millions and a half. Commercial speculations had induced some bankers, one particularly, to invest money in securities not strictly convertible, to a larger extent than was prudent; they were also largely connected with country bankers. I allude to the house of Messrs. Pole and Co. - a house originally possessed of very great property, in the persons of the partners, but which fell with the circumstances of the times. The failure of that banking-house was the first decisive check to commercial and banking credit, and brought at once a vast number of country bankers, which were in correspondence with it, into difficulties. That discredit was followed by a general discredit throughout London and the interior." - P. 47.
"With regard to the pressure of 1836, there was in the beginning of that year no appearance of distress; but, on the contrary, every symptom of prosperity, attended by its usual concomitant, a readiness to engage in speculative undertakings.
The following description of this period is taken from the speech of Mr. Clay, on introducing his motion respecting Joint-Stock Banks, May 12, 1836: -
"To what extent the operations of the joint-stock banks may have contributed to create the present state of excitement in the commercial world, must, of course, be mere matter of conjecture. That they have had some considerable influence is probable, from the fact that the excitement and rage for speculation is greatest in those parts of the kingdom where the operations of those establishments have been most active. London has been comparatively unmoved, but Liverpool and Manchester have witnessed a mushroom growth of schemes not exceeded by the memorable year 1825. I hold in my hand a list of seventy contemplated companies, for every species of undertaking, which have appeared in the Liverpool and Manchester papers within the last three months. This list was made a fortnight or three weeks since, and might probably now be considerably extended. It is impossible also, I think, not to suspect that the facility of credit, and consequent encouragement to speculation, to which I have alluded, cannot have been without its effect in producing the great increase of price in almost all the chief articles of consumption and raw materials of our manufactures. That increase has been enormous - not less than from twenty to fifty, and even one hundred per cent. in many of the chief articles of produce, of consumption, and materials of our manufactures."
These appearances continued with little alteration until the month of July, when the Bank of England raised the rate of discount to four-and-a-half per cent. It then became known that there had been a demand upon the Bank for gold from the preceding April, and this measure was adopted by the Bank as a means of rendering the foreign exchanges more favourable. This being found ineffectual, the Bank in September raised the rate of discount to five per cent. Besides raising the rate of interest, the Bank adopted other measures for increasing the value of money. A large amount of American bills upon first-rate houses had been offered for discount and rejected. A high degree of alarm was immediately spread throughout the community. The dread of a panic similar to that of 1825 almost universally prevailed. Those who had money were unwilling to part with it - trade became suddenly stagnant - the prices of all commodities fell considerably, and numbers of commercial houses, chiefly of the second class, suspended payment. Many railway and other projects now fell into oblivion.