H.M. Hyndman

Commercial Crises of the Nineteenth Century

Chapter III
The crisis of 1836-1839

Great Britain had thus entered upon that series of trade depressions and trade inflations, of confident adventure and utter hopelessness, of “boom” and crisis, which have continued to our own day. It was during these first thirty years of the century that England fully confirmed and extended the position which she had gained during the great war. The first-fruits of all the great inventions fell to her lot, and the fact that these great inventions were brought to bear practically at almost the same time, in many different branches of industry, had a cumulative effect. A complete transformation was being carried out. An agricultural country, with a proportionate amount of native manufactures and a considerable commerce, was being turned into the workshop of the world, and the sea-carrying trade, owing to geographical position as well as naval victories, fell more and more into English hands.

At this period, also, for the first time since the downfall of the monasteries and the neglect to maintain the public roads which ensued thereupon, the internal communications of the island began to receive the attention which they deserved. This was a matter of pressing necessity. It was impossible to transport large quantities of manufactured goods to the seaports at a profit over such roads as those which led from one town in Lancashire and Yorkshire to another at the commencement of the development of the great machine industries. The cotton, wool, silk, and linen manufactures, carried on as they now were by steam-power, required great quantities of coal delivered at the mills at a cheap price; and the iron industry, which had received a tremendous impetus from many quarters, required still more coal and ores delivered at low rates in order to maintain that cheapness which could alone secure the continuance of England’s industrial supremacy. Canals, perhaps the cheapest and best means of conveying heavy goods even yet discovered, were the first important improvement made in this direction, and some of the greatest of these works were completed at the end of the eighteenth century, largely contributing to the development of the great cities which they connected with one another,

Turnpike roads constructed on sound principles soon followed, and the work done by the Romans hundreds of years before in this island was done over again, though far less solidly, to meet the exigencies of the new era. Tramways, also, which sometimes appear to us to be one of the methods of conveyance adopted by the present generation, were in common use in all the mining and industrial districts during the first quarter of the present century. Transport was, in fact, making strenuous efforts to keep pace with the exigencies of manufacture, and the appearance of steam vessels on the ocean was evidence to the more clear-sighted that no long time could elapse before the same great power would be applied to locomotion on land. The crisis of 1825 in nowise arrested this necessary development. If the numbers of the unemployed and the miserable condition of the mass of the people constituted, as at this period they unquestionably did, a serious political and social danger for the dominant classes, the cheap labour provided by the ill-paid toil of themselves, their wives, and their children, offered a premium on capitalist experiment in every direction. All the disturbances and riots, all the political discontent and social conspiracy, had little effect upon the steady, economical progress which went on below. The people starved; but production was enhanced and transport was improved in a manner altogether unprecedented. In 1830 the first railway was established in England between Liverpool and Manchester.

In this year, 1830, also, owing to good harvests and the recovery in business from the dulness which succeeded the collapse of 1825, a thorough revival set in so far as the interests of the profit-making classes were concerned. The rate of discount fell away and another period of speculation began with its inevitable accompaniments of inflation and over-trading. In the ten years, from 1821 to 1831, the population of England .and Wales alone increased from 12,000,000 to 14,000,000, though the condition of the working-people presented a sad contrast to the well-being of their forerunners in the first half of the previous century; and the enactment of the New Poor Law of 1834 rendered their prospects more hopeless than ever. In 1835 the Chartist movement took shape in an organised body, and from that date onwards for several years turmoil, rioting, and semi-insurrection pervaded the country.

But all this, though it might slightly impede, could not greatly check the expansion which had commenced a few years before. The year 1836 provided the second of two exceptionally abundant harvests in succession, and, similar causes producing the like effects, 1836 witnessed a recurrence of that mania of speculation and therewith an astounding expansion of confidence and credit which had ended in the crash of 1825. It is unnecessary to enlarge upon the folly of speculators and investors at such periods, unless new features of mania present themselves for analysis and consideration. The memory of investors and men of business is always short, and modern conditions of finance and commerce tend to limit their foresight. Thus each successive generation of ten years produces its fresh crop of needy adventurers and credulous premium-hunters. There is really no necessity to invent new methods: the financial three-card trick and the commercial confidence dodge never fail to attract a new set of victims, and those who perpetrate them successfully, instead of undergoing imprisonment, attain to the highest positions in the city, society, and politics.

Untaught by the lessons of the previous crash, the banks again did all in their power to push to the extreme the eager desire to embark on new ventures and to carry commercial initiative far beyond the farthest bounds of prudence. By the Bank Act of 1826, banking companies could be formed with the power to issue notes, under certain conditions, of a denomination not less than £5. In the first seven years after the promulgation of this Act, thirty-four such banks of issue were set on foot, and in the three following years, to the end of 1835,about the same number. “In the year 1836, speculation had again reached such a pitch that forty-two new banks of issue were established which, with their branches, gave a total of fully two hundred, and taking into consideration other credit establishments and their branch banks, there were no fewer than 670 such institutions on foot with about thirty-seven thousand shareholders; and of these three-fourths issued their own notes.” During these years, both the Bank of England and the other banks had issued paper largely in excess of the amounts previously in circulation. But now in the spring of 1836, the Bank of England, as in 1825, began to reduce its note issue, and was forced in view of the drain for gold which had set in to America to raise its rate of discount. Thereupon, the banks of issue, instead of following the Bank of England’s lead, issued fifty per cent. more notes than before, thus rendering the directors’ action to protect their gold reserve from depletion almost nugatory. Hence arose an expansion of credit which speedily gave rise to a glut. A great bank in Ireland suddenly failed, and a run commenced on the provincial banks of the South of England which threatened to end as disastrously as the similar run in 1825, seeing that the banks of issue held at this time but a sixth part of their note circulation in specie. This time, however, the Bank of England came to the rescue of one of the great northern banks, and a crash was staved off.

Now, however, became apparent the close connection of the English commercial and financial markets with those of the United States which, then and ever since, has rendered it inevitable that an industrial or financial crisis in the one country should more or less seriously affect the other. At this time, 1836-39, the United States were still, economically speaking, a dependency of Great Britain, though more than sixty years had passed since the Declaration of Independence. North America, in fact, stood to England in much the same relation that the Australian Colonies do now. The Great Republic supplied the Lancashire mills almost exclusively with cotton, as Australia now supplies Bradford, Huddersfield, and other cities with wool. In like manner, also, the United States, both as a Federal Government and as independent States, looked to this country for loans to develop their immeasurable resources.

The dependence of the English cotton industry upon the United States for its supply of raw material had already in 1824 and 1825 given rise to a vast deal of speculation which rose to such a point as to, assume the dimensions of a great modern “corner” in that staple. Then, however, as at a much later date, during the Civil War, it was discovered that when the price exceeded a certain figure, other countries were glad of the opportunity to supplement the deficiency and to benefit by English custom. During the interval between 1825 and 1836, the United States had entered upon a career of false banking based to a large extent upon fictitious land sales and backed up by loans incurred in Great Britain. From 1832 onwards, a period of wild speculation had commenced, which the banks as usual had helped to extend and intensify by an excessive issue of paper money, amounting in the year 1837 to £90,000,000 for a population of about 18,000,000; an inflation which individual capitalists carried yet further by raising loans on their private property and businesses in England.

In spite of the warnings of President Jackson, this dangerous system was pushed to the extreme. In vain was the extravagance, corruption, and swindling denounced by those who saw whither all this must lead. Paper money in excess seemed an easy way for all to make fortunes at once, and none would listen to reason so long as the universal prosperity seemed unshaken. In short, the old story of all such periods was retold on the other side of the Atlantic. The price of land and commodities, the rents of houses and the wages of labour, all rose together, and endless new enterprises were undertaken, numberless new houses were built. Any difficulty in high places was met by still further loans at high rates of interest in London and Amsterdam. There seemed literally no limit to the length to which things might be pushed, as there was assuredly no restriction put upon the action of the banks. No one seems to have imagined that the upset of all this extravagance and folly could come from England, which had been helping by her loans to breed this exaggerated confidence.

No telegraph then existed to keep the more wary on the alert as to the coming change. But the rise in the rate of discount which followed opened their eyes, and the crash which ensued was on a scale of truly New World magnitude. When credit first gave way the whole of the American banks suspended specie payments, and eventually in 1837, 618 banks, and in 1839, no fewer than 959 banks, failed. Notes became worthless, loans remained unpaid, advances were not to be had, bankruptcies seemed to become the rule in trade rather than the exception. The records of the period show that the Americans themselves felt for a time almost hopeless of any speedy recovery. The advocates of “soft money” had had for the moment their fill of it.

The influence of such a crisis as this in America reacted most injuriously upon Great Britain. Those who had made advances on American produce at high prices – and they had been made on a stupendous scale – saw no way of recovering their money. Those who had lent on lands or other estates, or had invested in the shares of American banks, saw their fortunes swept away by a stroke. American credit in England received a blow from which it took a long time to revive, and English literature was enriched by some scathing diatribes against American rascality and breach of faith. Not until 1839 was the full extent of the disaster appreciated, when a series of failures occurred far in excess of the average; the gold reserve in the Bank of England fell to little over two millions and a half; and unless exceptional measures had been resorted to, another financial crisis of a still worse character than that of 1837 would have followed the raising of the bank rate of discount to 6 per cent. No wonder that this year, 1839, looked black for the working-classes, and that revolutionary propaganda made rapid progress among the ill-paid or workless people. So bad was the lot of the workers that the “Condition of England “ question was the topic most seriously discussed in the Cabinet as in the street.

Yet throughout all this anarchy and apparent impoverishment, the well-to-do classes, it cannot be too often repeated, were becoming steadily richer, and the wealth of the country, as well as its power to produce more wealth, constantly and continuously grew. Exports and imports mounted upwards, the fluctuations bearing but a small proportion to the bulk of the whole. Public buildings, private mansions, great factories, vast warehouses, public works calling for huge capital expenditure, were all being erected at the very time when the state of large portions of the population occasioned grave anxiety to the statesman, the economist, and the philanthropist alike. Within a period of thirty years the annual rental of real property in England and Wales alone increased by £40,000,000: the tonnage of vessels sailing under the English flag was six-fold greater than it had been at the beginning of the century.

In agriculture the advance was not so rapid as in manufacture or in transport; but even there the increased power of production was very marked. The country was still almost entirely dependent on its own resources for the supply of wheat, and that supply had increased by 44,000,000 of bushels a year in the course of forty years, though the agricultural population had increased to a very small extent.

But with these unmistakable facts before them, and made day by day the subject of vigorous comments by able writers and speakers on the question from the point of view of the producers, the Government and the House of Commons confined themselves to tinkering with the banking system. Now it is quite unnecessary to say that when banks are carefully managed on a sound basis the danger of a financial and industrial crisis assuming unmanageable proportions, owing to undue and absurd inflation of the currency and consequent unreasoning speculation, is much lessened: But banking, after all, is only a convenient method of conducting one portion of the machinery of production and exchange under the capitalist system. So long as one class carries on the business of the country, solely for profit, and is prevented by the very law of its being from ordering matters in such wise that a proper harmony is established between expenditure on permanent works and on day-to-day business, it is quite impossible that the soundest methods of banking that can be established should do more than work the credit system with the least obstruction that circumstances will admit of. The experience of the English banks, and more particularly of the Bank of England during the crises up to the year 1839, had shown that the mischiefs, unfortunately the unrecognised mischiefs, of a method of creating wealth which refused to permit any control to those who actually created it, might be and had been much aggravated by mistakes in banking.

Let the Bank of England, it was said, be placed on such a footing that excessive issues of paper currency would be checked; let due warning be given of the approach of stringency by the reduction of the necessary reserve and all would be well. English trade was at this time becoming more and more a trade of borrowed capital. That is to say, men were looking to the banks to provide the bulk of the capital with which they traded at a rate of interest guided by the market rate, of which one and generally the crucial criterion was the bank rate, their own capital providing only a margin for possible loss. Joint Stock Banks were then in their infancy, and the importance of the Bank of England relating to the banking world of England and to the money market at large was much greater in every way than it is to-day. It was natural, therefore, for those who did not look below the surface to imagine that if the Bank of England was ordered aright, the probability of the recurrence of disastrous crises would be materially reduced if not moved altogether.

Without going at length into the history of the Bank of England, or discussing fully over again the much-debated Bank Charter Act of 1844, it is interesting to observe the steps which were taken by the government to remedy the evils of excessive note issue and over-confidence. The Bank of England holds quite an exceptional position as a bank. It is not a State bank like the Bank of France, nor is it together a private or Joint Stock Bank, seeing that has a practical monopoly of Government business, and, which is more important, is regarded by the majority even of business people, who ought to know better, as in some sort a State institution. In theory, and to a large extent in practice, the Bank of England is a bank like other banks, accepting deposits either with or without interest, and lending out those deposits again to other customers who need them in the shape of advances on bills or easily saleable securities at a margin. But this sort of business calls for a reserve to be used in case of panic; otherwise in a moment of stringency when everybody wants money there would not be cash enough to meet current demands.

Now, the Bank of England holds not only its own reserve to meet national demands for specie payments, but also the bullion to meet foreign payments. Moreover, the other banks, instead of keeping their own reserves, keep them in the Bank of England; and to the Bank of England alone can bankers and men of business resort in periods of great financial disturbance to obtain advances on Consols or other first-rate securities, which, though in ordinary times easily convertible into cash by means of sales or loans upon them, cannot be dealt with in the same way when all at the same moment are panic-stricken in their anxiety to obtain legal tender, and thus provide the means to pay their day-to-day liabilities. Of the attempts of the Bank to keep a reserve, and to manage a foreign drain after the resumption of specie payments in 1819, “a more miserable history can hardly be found.” So says a great authority, and the brief survey of the facts given in the foregoing pages certainly bears out this strong condemnation.

Instead of showing that sagacity, promptitude, and foresight which the public believe the heads of the City must be possessed of, the Directors of the Bank of England were just as silly as anybody else. It was to provide securities against the incapacity of the ablest financiers of the country that Peel’s Bank Act was passed into law. By this Act the Bank of England was divided into two parts – the department for the issue of notes and the banking department – which are really quite separate, though they remained, and still remain, under one roof. In the issue department, Bank of England notes, which are legal tender, can only be issued to the extent of £15,000,000 on Government securities, £11,015,100 of this being a Government debt. Any further issue of notes must be represented by gold coin and bullion in the hands of the Bank to the full amount, no issue against silver being permitted. That is the full extent to which the Bank is by law permitted to go.

Now, wonderfully as the amount of gold necessary to do a given amount of business has been reduced by the modern development of cheques and the clearinghouse, gold or absolutely sound notes must be obtained in sufficient quantity in times of difficulty to stem the current of panic, and enable trade to go on again as speedily as may be. Bad as the management of the Bank of England was from certain points of view in 1825 and in 1837, it can scarcely be questioned that the issue of notes which were absolute legal tender, but were not fully represented by bullion, did circumscribe the range of the mischief occasioned by those disastrous crises. But under the Act of 1844 such action by the Directors was no longer possible. The two departments were severed, and the one might be denuded of coin and bullion while the other had a superfluity, which it could not by law supply in the only way then possible to restrict the panic, namely, by issuing more notes. Thus a sudden drain produced a twofold effect.

In this case, as in many others of a like kind, the theorists saw farther than the practical men. While the bankers and City people approved of the Bank Act, with its division of departments, and rigid restriction of the note issue on securities to £15,000,000, such writers as Mill, Tooke, and others predicted that on the first serious crisis the Act, owing to the inelasticity which it caused, would be found to be unworkable, and would have to be suspended. As will be seen by what followed, they proved perfectly right; and it may be said even to-day that the Bank Act of 1844 is only maintained because, at the critical moment, everybody knows it will be treated as a dead letter. This strange sort of fatalism in business seems to be worthy of the singular arrangement by which a body of men who are not bankers, and whose personal and business interests may any day be opposed to the real interests of the Bank, are placed as Directors in control of that which is the most important banking institution of the greatest commercial country in the world.

It is not necessary to know much about the details of banking, or to master the theory on which the Bank Act of 1844 is founded, in order to understand the practical working of stringency in producing panic. Nearly all manufacturers and traders carry on their business now, as has been said, on borrowed capital. To meet their own bills for raw material or goods, they must discount other people’s bills. So long as the bank rate keeps at a point which enables them to borrow in the open market, that is, to discount their own and other people’s paper at say four or five, or even perhaps six per cent., they can make a reasonable profit on their own small capital, which forms the narrow basis of all this great edifice of business. But when, owing to a farther rise in the bank rate, and the stringency following thereupon, bill-brokers and bankers are more anxious to protect themselves than to provide for their customers, even those manufacturers, merchants, and traders who can still get accommodation by paying for it find that their margin of profit is swept away, and their own capital locked up in the business is actually threatened. A prolonged squeeze in such conditions would force half the business world into liquidation. For goods and commodities, however valuable they may be, represent to their owners no available means of meeting their engagements in cash, and cash or its equivalent alone is what is needed to enable the machine to pass its dead points; nor will the best securities supply the need of the moment, seeing that cases have occurred in which the Bank of England hesitated to advance upon Consols.

The crisis of 1836-1839, commonly spoken of as the crisis of 1837, was therefore the last which occurred under the old banking conditions. From 1841 onwards the system has remained the same in form so far as the Bank of England is concerned.

Last updated on 29.7.2007