H.M. Hyndman

Commercial Crises of the Nineteenth Century

Chapter IV
The Crisis of 1847

England had now commenced that period of railway construction and Free Trade which raised the commercial prosperity of the country to a higher point than ever. There were those who imagined – and they were by no means the most foolish people in the country – that this improvement in communications, followed as it was in 1846 by a cheapening of the main staple of food by the removal of all Protective duties on wheat, would do away once for all with starvation and distress, and bring classes together as they had never yet been combined. As a consequence, crises would in future be unknown, and trade would progress inevitably upwards with increasing benefit to the whole population. But the way in which Englishmen set to work to supply themselves with railroads was in itself a marked instance of the anarchy then prevailing in regard to what constitute public interests. At first when railways were in the experimental stage, and this stage lasted, so far as public opinion was affected, much longer than is commonly supposed, it was perhaps advisable, in the then condition of development, that no direct steps should be taken by the Government to control or administer the projected lines, When, however, it became apparent that nothing short of a complete revolution in the entire system of internal transport was being brought about, it was certainly the duty of Parliament to adopt such measures as would restrict waste and prevent the reckless gambling which followed so soon as it was found that railway construction was likely to prove profitable.

It is always impossible for the capitalists of any country to maintain permanently an equilibrium between the amount expended on works of permanent utility, but of slow return in the shape of profit, and the extent of the funds which should be used to carry on business of more immediate practical usefulness. But when a mania for some new form of undertaking seizes upon the investing public, then the savings of the community are too often utterly thrown away upon hopeless enterprises or squandered in constructing works for which there is no real need at the time. This was certainly the case in regard to the era of railway construction. The railway system was “rushed” by speculators and promoters, as the gold-fields were afterwards rushed by the workers. It was a time of furious competition for fresh enterprises. Incompatible schemes jostled one another for precedence. Concession-hunting, regardless of the real value of the enterprise for which the Act was to be obtained, was everywhere the order of the day. People who could ill afford to lose joined in the chase, scraping together every farthing they could rake up, not for the sake of carrying out a useful undertaking, but for the sake of the premium which they hoped to obtain on their shares from someone else. The working capital of business was diverted from its natural province to hurry on the development more rapidly than ever.

Parliament, it is true, stepped in to limit to some extent, by more stringent regulations and detailed requirements, the unreasoning demands for new charters. But this had little effect. The most tremendous efforts were made to hurry forward the completion of reports, and estimates, and plans, and evidence of traffic and public utility. It was indeed a time of stress and strain. All the records of the period prove that the eagerness displayed reached the pitch of positive lunacy. Half-a-dozen or more schemes were proposed for each of the possible routes, and as many more for those which were manifestly hopeless from the first. Each promoter was far more anxious to crush his rivals than to ensure the soundness of his own enterprise. All were in the most desperate haste to put in their demands before the appointed time for closing the list of applications. If half the proposed lines had been carried out, Great Britain would have been gridironed from one end to another with railways, and ordinary traffic would have been rendered impossible. Engineers, draftsmen, lithographers, engravers, and, above all, lawyers, had more work than they could do, paid for at rates far in excess of any that they had previously been able to command. Landowners who opposed and landowners who favoured railways alike asked prices for their land quite beyond anything which it could have realised in a free market. The cost of construction was thus enormously enhanced in the case of successful competitors for any given time; and the people of England are actually paying to-day, in the shape of excessive fares, for the privilege of that ruinous competition, which has only resulted in a monstrous monopoly.

The number of projected railways was, indeed, outside of the limits of reason, and the mileage to which the royal assent was given, though the distances to be traversed seem small in these days of Atlantic and Pacific, and Siberian Railways, was out of all proportion to the capacities of that date, or to the capital available for purposes of construction. On the one day of the 16th July, 1845, no fewer than 05 railway bills received the royal assent, which involved the construction of 600 miles of railway, costing at the lowest estimate upwards of £13,000,000. In the same session of Parliament, 678 projects were submitted, and of these 136, with a mileage of 1,142 miles, involving a capital outlay of nearly £26,000,000, were sanctioned by Parliament. In the course of a single month calls were made on shareholders in home and foreign railways to the extent of £5,227,725. During the years 1845-47 no less than £90,000,000 were spent on railway building. For these, it must be remembered, were the days when Hudson was the Railway King, and people of the highest position and culture were grovelling at the feet of the vulgar potentate, in order to share in the vast wealth which he was assumed to be the master of.

Such an enormous sinking of capital as this on works of permanent utility but of slow return, such a whirl of speculation in shares as followed, must have resulted in a crisis sooner or later. But as Herr Max Wirth truly says, had a good harvest secured the people cheap food, had the raw materials of the chief industries remained at a moderate price, thus enabling the factories to continue the work of production unchecked, and thus to increase the quantity of their output which could find a market, the danger might have passed over without more serious disturbance, and even the worst features of the crisis itself might have possibly been avoided. As it was, however, on the top of all this railway development came a succession of failures of the potato crop in Ireland, a short cotton crop in America and bad harvests in England. Raw materials, instead of being cheap, were very dear, and the prices of the necessaries of life rose two and threefold. Workers were discharged on all hands in England, while millions dependent on one uncertain staple of food were starving in Ireland, and all the improvement in the external trade which had been established could not make amends for the utter collapse in the home markets.

Natural causes conspired this time with the artificial mismanagement to intensify the crisis. The necessity for importing grain on a large scale to meet the prevailing distress was one of the causes which brought the agitation for the repeal of the Corn Laws to a successful issue in 1846. A great speculation in grain had also begun which tended to complicate matters. Thus, already in 1846, there were all and more than usually marked symptoms of an approaching crisis in industry and finance. But the directors of the Bank of England were no more capable of discerning the signs of the times after the enactment of the Bank Charter Act of 1844 than they were before. Once more, by their policy, they helped to fan the speculation, and by maintaining their rate of discount at the low point of 2 per cent. and then 3 per cent., prepared the way for the tremendous drain of gold which set in during the early months of 1847, and scared the whole business community.

The heavy fall in the price of wheat which tumbled in four months from 102s. to 48s. the quarter, though very advantageous to the people at large, brought about one failure after another among grain houses which had not anticipated any such sudden change. In October, the bank rate of discount was 8 per cent, and Consols had gone down from 94 in January, 1847, to 79 in that month. Railway shares fell 15 to 25 per cent., bills could scarcely be discounted at any price, respectable houses were closing their doors by the dozen, workmen were being discharged in every direction, 2,500 navvies being left workless by the contractors for the London and North Western Railway alone. Tens of thousands of workers were, in fact, out of employment and starving, and the condition of the people during the winter seemed likely to be worse than ever; while, what was taking place already in Ireland, and what followed in that awful winter of 1847, has never been forgotten or forgiven by Irishmen in any part of the world.

It was at this juncture, October, 1847, that the worthlessness of the Bank Act of 1844 in time of crisis was first made manifest to the world. Utter carelessness was, as usual, followed by unreasoning panic. As the gold was drained away to meet foreign demands, the directors were forced by the conditions of their charter to lessen the accommodation which they could give at the very moment when the need for such accommodation was most pressing, and nothing short of the most liberal extension of credit to those who could reasonably demand it could, by any possibility, check the panic. The bank rate stood at 8 per cent., and before the Bank Act was suspended and the directors were permitted to issue notes in excess of the £15,000,000 allowed by law without holding gold against them, the banking department was actually reduced to less than £2,000,000. The bank must have stopped payment so far as the banking department was concerned, unless what was virtually bankruptcy had been declared and the Bank Act had been suspended. This suspension itself, though it improved matters, did not at once end the crisis, which dragged on for fully three months more. Confidence had been immediately shaken, and the lack of coin tended to lengthen the period of inevitable distrust.

By degrees, as the memorable year 1848 approached, confidence began to be re-established, and the bank rate gave evidence, by its steady reduction, that the season of panic was over and that only a sort of reasonable mistrust in some quarters survived.

Already the record is becoming almost monotonous in its similarity. The circumstances, indeed, change; but the blunders are repeated and the follies reproduce themselves with an unvarying regularity. New methods of production are discovered and applied. Straightway, they are pushed to such an extent without consideration or foresight, that, though the few become rich, the many are fearfully impoverished and suffer more from social and economical perturbations than from any natural misfortune. An energetic people, with an unbounded territory around them, begin to develop its resources in earnest, and again carry the process to such a pitch as to be incompatible with the system of profit under which they are working, and the methods of banking attendant thereon. Another collapse follows, affecting populations on both sides of the Atlantic. A means of land transportation, more rapid and advantageous than any before known, is adopted in the wealthiest and most civilised country in the world. The first effect of what should be an advantage to all the inhabitants is first to turn the heads of the entire money-manipulating portion of the population, to force on a mania for speculation of a most injurious kind, and, eventually, in conjunction with other causes, to throw once more thousands of people out of work and into misery and starvation. So little do the governing classes and mercantile men appreciate the situation that they themselves set on foot, with a view to lessen the evils arising from these recurring periods of break-down, a banking arrangement which can only be saved from landing the whole country in bankruptcy by declaring its own bankruptcy just before this actually occurs.

But in this crisis of 1847 we can trace more clearly than heretofore the international and almost world-wide nature of these commercial convulsions. Paris, Amsterdam, Frankfort, and New York, all felt the counterstroke of this primarily English crisis of 1847, and the great political revolutionary movement of 1848 on the Continent, which in part assumed a socialistic shape, was preceded by the shock of the economic earthquake that had its centre of disturbance in London. Bankruptcies, not only of trading firms, but of industrial concerns, followed. The same causes which had occasioned the upset in English business, outside the great railway mania, were now manifestly at work on the Continent. Banks were compelled to raise their rates of interest on advances to protect themselves; and that mutual interchange of compliments, in the shape of unloading securities by turns on the various international financial exchanges, became henceforward a permanent portion of the general system of finance. The next great crisis will exhibit this solidarity of markets in a yet more striking manner.

Meanwhile, a sort of law of periodicity was beginning to be traced. Men had not yet begun to talk of ten years as the trade cycle, but that ups and downs of trade were to be looked for as a necessary accompaniment of the great extension of modern industry and finance was a growing opinion. In England, at any rate, 1815, 1825, 1837 and 1847, induced all connected with business to regard similar phenomena of inflation as the almost certain forerunners of a similar crash in due time.

Last updated on 29.7.2007