The course of exchange being unfavourable, had occasioned a demand for gold for exportation. The bank became under the necessity of restraining its issues.
The house of Sir Peter Pole and Co., who were agents to several country banks, stopped payment. This occasioned a general alarm, and the notes of private bankers became discredited throughout the country. As the bank had ceased to issue notes under £5, it was obliged to find gold for the country bankers to pay off their notes; but the gold failing, the bank reissued its £1 notes, some of which, happily, had not been destroyed. Notwithstanding the great liberality of the bank, several London bankers, and a much greater number of country bankers, were obliged to suspend their payments. Most of the joint-stock companies that had been formed in the season of speculation fell to the ground.1
The following is the opinion of J. H. Palmer, Esq., the governor of the bank, as to the causes of the wild spirit of speculation which had preceded the panic: -
"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 the 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."
1 The crisis was at its height from Monday, the 12th, to Saturday, the 17th December. Up to the night of Wednesday the bank restricted its issues, to the ruin of houses of first-rate importance. Becoming sen sible of its error, it discounted liberally the three last days of the week, issuing upwards of £5,000,000 of notes; otherwise, the ruin would have been universal.
Some of the other witnesses considered the panic to have arisen from an over-issue of notes on the part of the Bank of England and the country bankers. But whatever may have been the cause, the bank certainly acted with great liberality at the period of the alarm, even at the risk of its own stoppage of payment.
"Will you describe the manner in which the bank lent its assistance at that time? - We lent it by every possible means, and in modes that we never had adopted before. We took in stock as security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on deposit of bills of exchange to an immense amount; in short, by every possible means consistent with the safety of the bank; and we were not, upon some occasions, over nice; seeing the dreadful state in which the public were, we rendered every assistance in our power.
"Did any communication take place between the bank and the government respecting an order in council to restrain payments in gold at that period? - Yes; it was suggested by the bank.
"What answer did his Majesty's government give to that? - They resisted it from first to last.
"The Bank of England issued one-pound notes at that period. Was that done to protect its remaining treasure? - Decidedly; and it worked wonders, and it was by great good luck that we had the means of doing it: because one box containing a quantity of one-pound notes had been overlooked, and they were forthcoming at the lucky moment.
"Had there been no foresight in the preparation of these one-pound notes? - None whatever, I solemnly declare.
"Do you think that issuing of the one-pound notes did avert a complete drain? - As far as my judgment goes, it saved the credit of the country."
Evidence of Jeremiah Harman, Esq. (p. 154.)
On the last day of December, 1825, the coin and bullion in the bank amounted to only £1,260,890.
1826. Jan. 13. The government made a communication to the bank directors, stating its intention, in order to prevent a recurrence of panic, to propose to parliament the gradual abolition of country bank notes under £5, and also proposing to the bank. -
"First, That the Bank of England should establish branches of its own body in different parts of the country.
"Secondly, That the Bank of England should give up its exclusive privilege as to the number of partners engaged in banking, except within a certain distance from the metropolis."