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The Pamphlet Collection of Sir Robert Stout: Volume 73

A Disastrous Scheme

A Disastrous Scheme.

In 1797, the Bank of England, and the whole commercial community, wore only saved from bankruptcy by the Government authorissing the Bank to issue notes. The bullion brokers had drained the Bank of its gold; the Bank contracted its issue of notes and credit, in order to force back gold into its coffers, and the Government was obliged to step in and authorise immediate issue of notes. This policy was continued during the war, and until 1816, when gold payments were resumed. Then followed regularly periods of prosperity, followed by terrible periods of monetary disaster. Those disasters came about every eight or ten years, notably in 1825, 1837, 1847, 1857, and 1866. The cause was always the same, viz., the bullion dealers and money-brokers hoarded gold, drained the Bank of gold, and so contracted the currency. Gold, being a commodity like any other article, was of course subject to the ordinary law of supply and demand; and the money-brokers, when it paid them to export gold to other countries, had no difficulty in draining the Bank of England of its gold. The Bank, being based upon the erroneous principle that its only safety lay in forcing back the gold into its coffers with the utmost despatch, in order to stop the drain, immediately stopped supplies of its notes or advances to merchants and others, and charged enormous rates of discount and interest to its customers, and so its customers were forced to realise and pay proceeds into the Bank. A crisis was the result, and bankruptcies of the most widespread character took place. The Bank, to save itself, as was supposed, proceeded to ruin the community. Invariably the State had to step in, and, by authorising unlimited issues of notes, to save the Bank and the community. These crises, as I have said, all arose from having a gold standard of payment, which is of fluctuating value. You will find all page 6 of them described and commented on in Mr Henry Dunning McLeod's Books on Banking. His accounts of them are most interesting reading, but are too long to quote. One short extract I shall give. In 1866, when Overend, Gurney and Co. failed with millions of liabilities, McLeod's remarks are the following:—"The result of such a catastrophe was easily foreseen—not another Bank could have survived the next day; and that evening the Government again authorised the Bank to issue at discretion at not less than ten per cent. The Bank advanced £12,255,000 in five days, and the panic passed away."