While, however, the profits of a banker from the ordinary operations of his business may be diminished, it is possible he may have opportunities of making other profits by those fluctuations in the prices of public securities which usually occur in the different periods of a circle of the currency. In the first period, immediately after a pressure, money is abundant without speculation; in the second period, money is abundant and speculations abound; in the third period, speculation begins to decline and money is in demand; in the fourth period, money is scarce and a pressure arrives. It is impossible to say how long each of these periods may last, as they will be influenced by political events - the abundance of the harvests - the direction which speculation may take - and the state of the public mind. Their approach or decline is generally indicated by the stock of gold in the Bank of England.
During the first period money will be abundant, because the importation of gold will cause an increased issue of bank notes; because, the import of commodities being diminished, there will be fewer bills drawn from abroad upon English houses, and offered for discount to the London bankers; and because trade will have become paralyzed at home, and prices will have fallen, so that less money will be required to carry it on. A banker, at this period, will have more money than he can employ. But at this period, the prices of the public funds and of other securities are low. The Act of 1844, by causing great fluctuations in prices, gives great advantage to prudent capitalists, at the expense of the less prudent or less wealthy classes of the community. "All fluctuations in trade," says Mr. Gurney, "are advantageous to the knowing man." l To those who are not "knowing men," these fluctuations are injurious. The abundance of the circulation produces a multiplication of contracts, and then the contraction of the circulation produces an inability to fulfil them.2 And those who have stock or any other kind of saleable property, are obliged to realize in order to fulfil their engagements. Bankers may during this period make advantageous investments; and as they may calculate that another pressure will not arrive for two or three years, they may purchase a limited amount of securities that have six or twelve months to run. During the second period, money will be in demand, though there may be no great advance in the rate of interest. The securities purchased by the banker in the first period will now be falling due or advancing in price. But this will be the period of his greatest danger, and he must have a care not to let his desire of getting higher interest lead him to make undue advances upon the commodities or securities that may be the subject of speculation. The third period will be the most profitable for the banker in his direct business. Money will be in full demand at a good rate of interest, and his deposits will hardly have begun to decline. He should now sell out stock and exchequer bills, or any other securities likely to be affected by the approaching pressure. He should make advances only by discounting short bills or making short loans. He should weed his accounts of such customers as have deeply engaged in the previous speculations - and put himself in a condition to support liberally through the pressure those who may be entitled to his assistance.
1 Lords, 1324. 2 Lords, 3845.
It seems, therefore, probable that bankers will, under the Act of 1844, endeavour to make up for diminished profits by investing more largely in securities. According to the evidence of Mr. Pease, the fluctuations in the currency have already produced similar effects in the departments of trade and commerce.
"I stated, as clearly as I was able to do, that the man who bought from hand to mouth, which is the common case, and did not watch those fluctuations of capital, so as to buy when things were unusually depressed, and to sell when things rose again, failed. The only man who succeeded in making money, succeeded in carrying on a speculative kind of business that has arisen from the want of regularity in the values of money and produce. The man who did not so speculate - buying largely at one time and selling very freely at another - did not succeed. It is of great importance that persons who do not desire to carry on a speculative business should have some assurance that it is moderately productive. That assurance they have lost, by being suddenly deprived by those fluctuations of that which they thought they had secured by their industry."
1 Commons, 4700, 4702.
Though we would not confound this kind of speculation with that which takes place by means of time bargains on the Stock Exchange, yet we do not think it desirable that banks should deal in the public securities merely with a view of making a profit from the fluctuations in price. Sometimes the banker will be out in his calculations, and, instead of selling at a profit, he will have to sell at a loss, or else submit to a lock-up of his funds. And at all times there is a danger that he will acquire a speculative feeling which will lead him to disregard the steady pursuit of his trade.