The alarm that existed was kept up by the monthly accounts of the bullion in the Bank of England. The public returns showed a gradual decline from April, 1836, to February, 1837. It was therefore supposed that the Bank of England would be under the necessity, for its own safety, of still further contracting its issues, and thus increasing the existing pressure. This apprehension caused all persons who had money to retain it in their possession, and bankers and others withheld accommodation they would otherwise have been disposed to grant.
This state of alarm was considerably augmented by the publication of the Report of the Secret Committee of the House of Commons upon Joint-Stock Banks. This committee had been appointed on the motion of Mr. Clay, the Member for the Tower Hamlets, whose speech on the occasion might be termed a bill of indictment. The joint-stock banks had rapidly increased; they had issued small shares; they had large nominal capitals; they had circulated an excessive amount of notes; they had promoted speculation. These were the charges brought against them; and they had greater weight from being advanced by a member who was known to be friendly to joint-stock banking. The report of the committee appeared to sustain all Mr. Clay's accusations. This report was highly creditable to the talents and industry of the committee, but marked by a decided hostility of tone. While it enumerated all the actual or possible imperfections of the joint-stock banks, it ascribed to them scarcely a single excellence. At the same time, the committee deferred to the succeeding session the proposal of any measures for their improvement; thus the public were led to suppose that in the following session some stringent measures would be adopted with reference to joint-stock banks, but what they would be none could conjecture.
Had the report appeared at any other period it might possibly have done good; but as its appearance was contemporaneous with a pressure on the money market, and a high state of alarm, it unquestionably tended to weaken public confidence, at a time when it required to be strengthened. Persons who were unfriendly to joint-stock banks seized the opportunity of dispraising them, and believed, or pretended to believe, that the banks were unsound, and would certainly stop payment. Others, who were friendly, were apprehensive that the banks, being still in their infancy, would be found too weak to withstand the storm now raised against them. But though this alarm began with respect to joint-stock banks, it did not end there. It was soon foreseen that if a few joint-stock banks were to stop payment, the private banks in their neighbourhood would be put to a severe trial; and if the banks should even be compelled to withhold their usual advances to their customers, the credit of individuals must suffer. Hence the private bankers and the merchants, as well as the joint-stock banks, made preparations to meet any event that might occur, and by thus increasing the pressure on the London money market, occasioned still farther apprehensions.
The alarm was augmented by the stoppage of the Agricultural and Commercial Bank of Ireland, in the month of November, and the demand for gold which that stoppage occasioned in Ireland. The joint-stock banks of England now became subject to increased suspicion; the accommodation they had been accustomed to obtain by the rediscount of their bills in the London market was considerably restricted; and in the beginning of December, the Northern and Central Bank at Manchester, a bank having a paid-up capital of £800,000, with above 1,200 partners, and forty branches, applied for assistance to the Bank of England. This was afforded upon condition, in the first instance, that they should wind up all their branches, except that at Liverpool; and afterwards farther assistance was granted, upon condition they should discontinue business after February, 1837. Soon afterwards, the old and respectable London banking-house of Messrs. Esdaile and Co. received assistance upon similar terms.
The pressure which existed in England rapidly extended to America. A large amount of American securities, consisting chiefly of bonds of the respective States, had been remitted to the agency houses in England. This circumstance, in connection with the exportation of gold to America, attracted the notice of the Bank of England. A large amount of bills drawn from America upon first-rate London houses was rejected. In America the pressure became severe - money was wanted to remit to England to meet the drafts that had been drawn upon England, either upon credit or against securities that could not now be sold. The rate of discount at New York rose to two, and even to three per cent. per month.
From the pressure upon the money market, and from the great fall in the price of American produce, the cotton and other commodities sent from America to meet drafts upon the English agents could not be sold except at a ruinous loss. And other remittances not having arrived, several houses in the American trade, who were said to have given extensive credit to parties in America, applied for assistance to the Bank of England.
Such was the character of the pressure of 1836. We next proceed to the pressure of 1839. The pressure of 1836 may be said to have commenced from the month of May in that year. From that month the stock of gold in the Bank gradually and uniformly declined until February, 1837, when it reached its lowest point of depression. From this point it uniformly advanced: the lowest point of the circulation was in December, 1836, though even then it was not lower than it had been in the preceding January. The Bank raised the rate of interest from 4 to 4 1/2 per cent. in July, and to 5 per cent. in the following September.
During the whole of the year 1837 the amount of gold in the Bank of England continued to increase; the Bank extended its circulation, and after the payment of the July dividends, money became very abundant, and the market rate of interest experienced a considerable fall. The foreign exchanges continued to be favourable during the early part of 1838, and gold accumulated in the coffers of the Bank of England. In the spring of that year the directors of the Bank of England sent nearly a million of gold to America. Money became increasingly abundant, and the rate of interest fell. In February the Bank reduced their rate of discount to 4 per cent., and the interest on the loans granted during the shutting of the funds was reduced in March to 3 1/2 per cent. The low rate of interest caused large sums of money to be invested in American securities. Bonds of all kinds issued by the Bank of the United States, by the various States in the Union, and by numerous private undertakings, were poured upon the English market, and found eager purchasers. Several of the directors of the Bank of England, in their individual character as merchants, became agents for the distribution of these securities. About July the exchanges became unfavourable, and in the latter part of the year some symptoms of uneasiness were apparent in the money market; but as the stock of bullion in the Bank of England was considerable, and the directors granted their usual loans in December at 3 1/2 per cent., public confidence was not shaken. In the beginning of the year 1839 the exchanges became increasingly unfavourable, and the monthly returns of the Bank showed a gradual diminution in the stock of gold. The price of corn rose so high as to admit of foreign wheat at the lowest rate of duty. This occasioned a further demand for gold to be exported. The stock of gold in the Bank of England rapidly declined, until, in the month of October, it was no more than £2,525,000, while the liabilities of the Bank upon notes amounted to £17,612,000, and upon deposits to £6,734,000. The Bank directors were very anxious to stop this demand for gold. With this view, they raised the rate of interest on May 16th to 5 per cent., on June 20th to 5 1/2 per cent., and on August 1st to 6 per cent.; and they charged the same rate upon their short loans. They are supposed to have sold large amounts of Government stock and exchequer bills, and on July 13th they announced that they were ready to receive proposals for the sale of the dead weight. None of the offers, however, met their approbation. Finding these measures not speedily effective, an arrangement was made with the Bank of France for a loan of £2,500,000. Messrs. Baring and Co. drew bills on account of the Bank of England upon houses in Paris for this amount, which the Bank of France undertook to discount. The directors also determined to refuse to discount any bills drawn or indorsed by any private or joint-stock bank of issue. Notwithstanding these measures, the stock of gold in the Bank continued to decrease until the 18th October, when it reached the lowest point of depression. From this point it continued to advance, and the pressure began gradually, but slowly, to subside.