Chapter 25: Credit and Fictitious Capital

I have already shown (in Volume 1, Chapter 3, 3, b) how the function of money as means of payment develops out of simple commodity circulation, so that a relationship of creditor and debtor is formed. With the development of trade and the capitalist mode of production, which produces only for circulation, this spontaneous basis for the credit system is expanded, generalized and elaborated. By and large, money now functions only as means of payment, i.e. commodities are not sold for money, but for a written promise to pay at a certain date. For the sake of brevity, we can refer to all these promises to pay as bills of exchange. Until they expire and are due for payment, these bills themselves circulate as means of payment; and they form the actual commercial money. To the extent that they ultimately cancel each other out, by the balancing of debts and claims, they function absolutely as money, even though there is no final transformation into money proper. As these mutual advances by producers and merchants form the real basis of credit, so their instrument of circulation, the bill of exchange, forms the basis of credit money proper, banknotes, etc. These are not based on monetary circulation, that of metallic or government paper money, but rather on the circulation of bills of exchange.

W. Leatham (banker in Yorkshire) writes in his Letters on the Currency, 2nd edn, London, 1840: ‘I find, then, the amount for the whole of the year of 1839… to be £528,493,842’ (he assumes that foreign bills of exchange make up about a fifth of the total) ‘and the amount of bills out at one time in the above year, to be £132,123,460’ (p. 56). The bills of exchange make up ‘one component part greater in amount than all the rest put together’ (p. 3). ‘This enormous superstructure of bills of exchange rests (!) upon the base formed by the amount of banknotes and gold, and when, by events, this base becomes too much narrowed, its solidity and very existence is endangered’ (p. 8). ‘If I estimate the whole currency’ (he means of the banknotes) ‘and the amount of the liabilities of the Bank and country bankers, payable on demand, I find a sum of 153 million, which, by law, can be converted into gold… and the amount of gold to meet this demand’ only 14 million (p. 11). ‘The bills of exchange are not… placed under any control, except by preventing the abundance of money, excessive and low rates of interest or discount, which create a part of them, and encourage their great and dangerous expansion. It is impossible to decide what part arises out of real bona fide transactions, such as actual bargain and sale, or what part is fictitious and mere accommodation paper, that is, where one bill of exchange is drawn to take up another running, in order to raise a fictitious capital, by creating so much currency. In times of abundance and cheap money this I know reaches an enormous amount’ (pp. 43–4). J. W. Bosanquet, Metallic, Paper and Credit Currency, London, 1842: ‘An average amount of payments to the extent of upwards of £3,000,000 is settled through the Clearing House’ (where the London bankers exchange due bills and filed cheques) ‘every day of business in the year, and the daily amount of money required for the purpose is little more than £200,000’ (p. 86). (In 1889, the total turnover of the Clearing House amounted to £7,618 3/4 million, which, in roughly 300 business days, averages £25 1/2 million daily. – F. E.) ‘Bills of exchange act undoubtedly as currency, independent of money,’ in as much as they transfer property from hand to hand by endorsement (p. 92). It may be assumed that ‘upon an average there are two endorsements upon every bill in circulation, and… each bill performs two payments before it becomes due. Upon this assumption it would appear, that by endorsement alone property changed hands, by means of bills of exchange, to the value of twice five hundred and twenty-eight million, or £1,056,000,000, being at the rate of more than £3,000,000 per day, in the course of the year 1839. We may safely therefore conclude, that deposits and bills of exchange together, perform the functions of money, by transferring property from hand to hand without the aid of money, to an extent daily of not less than £18,000,000’ (p. 93).

Tooke has the following to say about credit in general: ‘Credit, in its most simple expression, is the confidence which, well, or ill-founded, leads a person to entrust another with a certain amount of capital, in money, or in goods computed at a value in money agreed upon, and in each case payable at the expiration of a fixed term. In the case where the capital is lent in money, that is whether in banknotes, or in a cash credit, or in an order upon a correspondent, an addition for the use of the capital of so much upon every £100 is made to the amount to be repaid. In the case of goods the value of which is agreed in terms of money, constituting a sale, the sum stipulated to be repaid includes a consideration for the use of the capital and for the risk, till the expiration of the period fixed for payment. Written obligations of payment at fixed dates mostly accompany these credits, and the obligations or promissory notes after date being transferable, form the means by which the lenders, if they have occasion for the use of their capital, in the shape whether of money or goods, before the expiration of the term of the bills they hold, are mostly enabled to borrow or to buy on lower terms, by having their own credit strengthened by the names on the bills in addition to their own’ (Inquiry into the Currency Principle, p. 87).

Charles Coquelin, ‘Du crédit et des banques dans 1’industrie’, Revue des Deux Mondes, 1842, Vol. 31: ‘In every country, the greater part of credit transactions take place within the orbit of industry… the raw material producer advances his product to the manufacturer who processes it, and receives from him a promise to pay on a certain date. The manufacturer, after completing his share in the work, advances his product in turn to another manufacturer who is to process it further, on similar conditions, and in this way credit extends ever further, from one person to another, right through to the consumer. The wholesaler makes advances of commodities to the retailer, while he himself receives these from the manufacturer or an agent. Everyone borrows with one hand and lends with the other, sometimes money, but far more frequently products. There is thus an incessant exchange of advances in industry, which combine and intersect each other in all directions. The development of credit is nothing more than the multiplication and growth of these mutual advances, and this is the true seat of its power’ [p. 797].

The other aspect of the credit system involves the development of the money trade, which in capitalist production naturally keeps step with the development of trade in commodities. We have seen in the previous Part (Chapter 19) how the maintenance of a reserve fund for businessmen, the technical operations of receiving and paying out money, international payments, and hence the bullion trade as well, are concentrated in the hands of money-dealers. Alongside this money-dealing, the other side of the credit system also develops, the management of interest-bearing capital or money capital as the special function of the money-dealers. The borrowing and lending of money becomes their special business. They appear as middlemen between the real lender of money capital and its borrower. To put it in general terms, the business of banking consists from this aspect in concentrating money capital for loan in large masses in the bank’s hands, so that, instead of the individual lender of money, it is the bankers as representatives of all lenders of money who confront the industrial and commercial capitalists. They become the general managers of money capital. On the other hand, they concentrate the borrowers vis-à-vis all the lenders, in so far as they borrow for the entire world of trade. A bank represents on the one hand the centralization of money capital, of the lenders, and on the other hand the centralization of the borrowers. It makes its profit in general by borrowing at lower rates than those at which it lends.

The loan capital which the banks have at their disposal accrues to them in several ways. What is firstly concentrated in their hands, as the cashiers of the industrial capitalists, is the money capital which every producer and merchant keeps as a reserve fund or which flows to him as payment. These funds are thus transformed into money capital for loan. In this way the reserve fund of the business community is restricted to the necessary minimum, by being concentrated as a social fund, and one part of the money capital, which would otherwise be dormant in reserve, is loaned out and functions as interest-bearing capital. Secondly, their loan capital is formed from the deposits made by money capitalists, who hand over to them the job of loaning it out. With the development of the banking system, and particularly once they pay interest on deposits, the money savings and the temporarily unoccupied money of all social classes are also deposited with them. Small sums which are incapable of functioning as money capital by themselves are combined into great masses and thus form a monetary power. This collection of small amounts, as a particular function of the banking system, must be distinguished from the banks’ function as middlemen between actual money capitalists and borrowers. Finally, revenues that are to be consumed only gradually are also deposited with the banks.

Lending is effected (we are dealing here only with commercial credit proper) by discounting bills – transforming them into money before their due date – and by advances of various kinds: direct advances on personal credit; loans against securities, such as interest-bearing paper, government paper and stocks of all sorts; and notably also advances against bills of lading, dock warrants and other certified titles to ownership of goods, as well as overdrafts on deposits, etc.

Now the credit that the banker gives can be provided in various forms, e.g. in bills and cheques on other banks, credit facilities of a similar kind, and finally, if the bank is authorized to issue notes, in its own banknotes. A banknote is nothing more than a bill on the banker, payable at any time to its possessor and given by the banker in place of private drafts. This last form of credit seems especially striking and important to the layman, firstly because this kind of credit money emerges from commercial circulation into general circulation and functions here as money; also because in most countries the major banks that issue notes are a peculiar mishmash between national banks and private banks and actually have the government’s credit behind them, their notes being more or less legal tender; and because it is evident here that what the banker is dealing in is credit itself, since the banknote merely represents a circulating token of credit. But the banker also deals in credit in every other form, even if he advances money deposited with him in cash. In actual fact, banknotes are simply the small change of wholesale trade, and the deposit is always the main thing as far as the banks are concerned. The Scottish banks provide the best proof of this.

Special credit institutions, like special forms of banks, need not be considered in any more detail for our present purpose.

‘The business of bankers… may be divided into two branches… One branch of the bankers’ business is to collect capital from those who have not immediate employment for it, and to distribute or transfer it to those who have. The other branch is to receive deposits of the incomes of their customers, and to pay out the amount, as it is wanted for expenditure by the latter in the objects of their consumption… The former being a circulation of capital, the latter of currency… ‘One’ relates to the concentration of capital on the one hand and the distribution of it on the other’, the other ‘is employed in administering the circulation for local purposes of the district’ (Tooke, Inquiry into the Currency Principle, pp. 36, 37).*

We shall return to this passage in Chapter 28.

Reports of Committees, Vol. VIII. Commercial Distress, Vol. II, part I, 1847–8. Minutes of Evidence. (Quoted from now on as Commercial Distress, 1847–8.) In the 1840s, twenty-one-day drafts of one bank on another were often accepted in lieu of banknotes when discounting bills of exchange in London. (Evidence of J. Pease, country banker, nos. 4636 and 4645.) According to the same report, it was customary for bankers to give their customers bills of this kind in payment quite regularly, whenever money was tight. If the recipients wanted banknotes, they had to have these bills discounted again. For the banks, this amounted to a privilege of coining money. Messrs Jones Loyd and Co. had made payments in this way ‘from time immemorial’, whenever money was scarce and the interest rate above 5 per cent. The customer was eager to get these banker’s bills, as it was easier for him to get a bill on Jones Loyd and Co. discounted than his own; they often changed hands twenty or thirty times (ibid., nos. 901 to 905, 992).

All these forms are ways of making claims for payment transferable. ‘There is scarcely any shape into which credit can be cast, in which it will not at times be called to perform the functions of money; and whether that shape be a banknote, or a bill of exchange, or a banker’s cheque, the process is in every essential particular the same, and the result is the same’ (Fullarton, On the Regulation of Currencies, 2nd edn, London, 1845, p. 38 †) – ‘Banknotes are the small change of credit’ (p. 51).

The following passages are from J. W. Gilbart’s The History and Principles of Banking, London, 1834. ‘The trading capital of a bank may be divided into two parts: the invested capital, and the borrowed banking capital’ (p. 117). ‘There are three ways of raising a banking or borrowed capital. First, by receiving deposits; secondly, by the issuing of notes; thirdly, by the drawing of bills. If a person will lend me £100 for nothing, and I lend that £100 to another person at 4 per cent interest, then, in the course of a year, I shall gain £4 by the transaction. Again, if a person will take my “promise to pay”,’ (‘I promise to pay’ is the usual formula for English banknotes) ‘and bring it back to me at the end of the year, and pay me 4 per cent for it, just the same as though I had lent him 100 sovereigns, then I shall gain £4 by that transaction: and again, if a person in a country town brings me £100 on condition that, twenty-one days afterwards, I shall pay the same amount to a person in London, then whatever interest I can make of the money during the twenty-one days, will be my profit. This is a fair representation of the operations of banking, and of the way in which a banking capital is created by means of deposits, notes, and bills’ (p. 117). ‘The profits of a banker are generally in proportion to the amount of his banking or borrowed capital… To ascertain the real profit of a bank, the interest upon the invested capital should be deducted from the gross profit, and what remains is the banking profit’ (p. 118). ‘The advances of bankers to their customers are made with other people’s money’ (p. 146). ‘Precisely those bankers who do not issue notes, create a banking capital by the discounting of bills. They render their discounts subservient to the increase of their deposits. The London bankers will not discount except for those houses who have deposit accounts with them’ (p. 119). ‘A party who has had bills discounted, and has paid interest on the whole amount, must leave some portion of that amount in the hands of the banker without interest. By this means the banker obtains more than the current rate of interest on the money actually advanced, and raises a banking capital to the amount of the balance left in his hands’ (pp. 119–20).

Economizing on reserve funds, deposits, cheques: ‘Banks of deposit serve to economize the use of the circulating medium. This is done upon the principle of transfer of titles… Thus it is that banks of deposit… are enabled to settle a large amount of transactions with a small amount of money. The money thus liberated, is employed by the banker in making advances, by discount or otherwise, to his customers. Hence the principle of transfer gives additional efficiency to the deposit system…’ (p. 123). ‘It matters not whether the two parties, who have dealings with each other, keep their accounts with the same banker or with different bankers; for, as the bankers exchange their cheques with each other at the clearing house… The deposit system might thus, by means of transfers, be carried to such an extent as wholly to supersede the use of a metallic currency. Were every man to keep a deposit account at a bank, and make all his payments by cheques, money might be superseded, and cheques become the sole circulating medium. In this case, however, it must be supposed that the banker has the money in his hands, or the cheques would have no value’ (p. 124).

The centralization of local commerce in the hands of the banks is effected: (1) by branch banks; the country banks have branch establishments in the smaller towns of their area; the London banks in the different districts of London; (2) by agencies: ‘Each country banker employs a London agent to pay his notes or bills… and to receive sums that may be lodged by parties residing in London for the use of parties residing in the country’ (p. 127). ‘Each banker accepts the notes of others, butdoes not reissue them. In all larger cities they come together once or twice a week and exchange their notes. The balance is paid by a draft on London’ (p. 134). ‘It is the object of banking to give facilities to trade, and whatever gives facilities to trade gives facilities to speculation. Trade and speculation are in some cases so nearly allied, that it is impossible to say at what precise point trade ends and speculation begins… Wherever there are banks, capital is more readily obtained, and at a cheaper rate. The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and of beer gives facilities to gluttony and drunkenness’ (pp. 137, 138). ‘As banks of circulation always issue their own notes, it would seem that their discounting business was carried on exclusively with this last description of capital, but it is not so. It is very possible for a banker to issue his own notes for all the bills he discounts, and yet nine-tenths of the bills in his possession shall represent real capital. For, although in the first instance, the banker’s notes are given for the bill, yet these notes may not stay in circulation until the bill becomes due – the bill may have three months to run, the notes may return in three days’ (p. 172). ‘The overdrawing of a cash credit account is a regular matter of business; it is, in fact, the purpose for which the cash credit has been granted… Cash credits are granted not only upon personal security, but also upon the security of the Public Funds’ (pp. 174, 175). ‘Capital advanced, by way of loan, on the securities of merchandise, would produce the same effects as if advanced in the discounting of bills. If a party borrows £100 on the security of his merchandise, it is the same as though he had sold his merchandise for a £100 bill, and got it discounted with the banker. By obtaining this advance he is enabled to hold over this merchandise for a better market, and avoids a sacrifice which, otherwise, he might be induced to make, in order to raise the money for urgent purposes’ (pp. 180–81).

The Currency Theory Reviewed, etc., pp. 62, 63: ‘It is unquestionably true that the £1,000 which you deposit at A today may be reissued tomorrow, and form a deposit at B. The day after that, reissued from B, it may form a deposit at C… and so on to infinitude; and that the same £1,000 in money may thus, by a succession of transfers, multiply itself into a sum of deposits absolutely indefinite. It is possible, therefore, that nine-tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers who are respectively accountable for them… Thus in Scotland, for instance, currency’ (mostly paper money at that) ‘has never exceeded £3 million, the deposits in the banks are estimated at £27 million… Unless a run on the banks be made, the same £1,000 would, if sent back upon its travels, cancel with the same facility a sum equally indefinite. As the same £1,000 with which you cancel your debt to a tradesman today, may cancel his debt to the merchant tomorrow, the merchant’s debt to the bank the day following, and so on without end; so the same £1,000 may pass from hand to hand, and bank to bank, and cancel any conceivable sum of deposits.’

(We have seen how Gilbart was already aware in 1834 that ‘whatever gives facilities to trade gives facilities to speculation. Trade and speculation are in some cases so nearly allied, that it is impossible to say at what precise point trade ends and speculation begins.’ The easier it is to obtain advances on unsold commodities, the more these advances are taken up and the greater is the temptation to manufacture commodities or dump those already manufactured on distant markets, simply to receive advances of money on them. As to how the entire business community in a country can be caught up in swindling of this kind, and where it ends up, we have a striking example in the history of English commerce between 1845 and 1847.

At the end of 1842 the depression which English industry had been suffering almost uninterruptedly since 1837 began to ease. In the two following years the export demand for English industrial products rose even more; 1845–6 marked the period of greatest prosperity. In 1843 the Opium War had opened up China to English trade. The new market offered a new pretext for an expansion that was already in full swing, particularly in the cotton industry. ‘How can we ever produce too much? We have 300 million people to clothe,’ I was told at the time by a Manchester manufacturer. But all the newly erected factory buildings, new steam engines and spinning and weaving machines were not sufficient to absorb Lancashire’s streaming surplus-value. The same passion which increased production went into the building of railways. The thirst of the manufacturers and merchants for speculation found initial satisfaction, from summer 1844 onwards. Stock was underwritten to the limits of possibility, i.e. as far as there was money to cover the initial payments. As for the rest, a way would be found! When the further payments did fall due – and according to Question 1059, Commercial Distress, 1848–57, the capital invested in railways in 1846–7 amounted to £75 million – recourse to credit was necessary, and the main business of the firm generally had to suffer.

This business was already under strain in the majority of cases. The enticingly high profits had led to operations more extensive than the liquid resources available could justify. But the credit was there, easy to obtain and cheap at that. The bank rate was low: 1 3/4 to 2 3/4 per cent in 1844, below 3 per cent until October 1845, then rising for a short period to 5 per cent (February 1846) before falling again to 3 1/4 per cent in December 1846. In its vaults, the Bank had a gold reserve of unheard-of dimensions. All domestic share prices stood higher than ever before. Why let the splendid opportunity pass? Why not get into the swing of it? Why not send all that could be manufactured to foreign markets which were crying out for English goods? And why should the manufacturer himself not pocket the double profit from selling his yarn and cloth in the Far East and selling the return cargo in England?

This was the origin of the system of mass consignments to India and China against advances, which developed very soon into a system of consignments simply for the sake of the advances, as is described in more detail in the following notes, and which could lead only to a massive flooding of the markets and a crash.

The crash was precipitated by the harvest failure of 1846. England, and Ireland especially, needed an enormous import of provisions, particularly corn and potatoes. But the countries that supplied these could be paid only to an exceedingly small extent in English industrial products. Precious metal had to be given in payment; at least £9 million in gold went abroad. A full £7 1/2 million of this came from the Bank of England’s reserves, substantially impairing its freedom of action on the money market. The other banks, whose reserves were with the Bank of England and in practice identical with its own, now had likewise to restrict their accommodation of money. The rapid and easy flow of payments came to a halt, at first here and there and then generally. The Bank rate, which in January 1847 was still 3 to 3 1/2 per cent, rose in April, when the first panic broke out, to 7 per cent; in summer there was a small and temporary respite (6 1/2 per cent, 6 per cent), but when the new harvest was also bad, panic broke out afresh and more violently. The Bank’s official minimum lending rate rose to 7 per cent in October, and in November to 10 per cent, so that the great majority of bills could be discounted only at colossal and usurious rates of interest, if at all. The general stagnation of payments caused the bankruptcy of a few leading firms and very many medium and small ones; the Bank itself was in danger of collapse, as a result of the clever Bank Act of 1844 and the restrictions this imposed.* The government suspended the Bank Act on 25 October, bowing to a universal demand, and thereby released the Bank from the absurd legal fetters imposed on it. It was now able to put its supply of banknotes into circulation without any obstacle; and since the credit of these banknotes was actually guaranteed by the credit of the nation, and thus unimpaired, the monetary tightness was decisively eased. Of course a great number of firms still collapsed, both small and large, those that were hopelessly ensnared, but the peak of the crisis was over, and the Bank rate fell again to 5 per cent in December. During 1848 a new revival of business activity began to develop, breaking the edge of the revolutionary movements on the Continent in 1849 and leading in the 1850s to a previously unheard-of industrial prosperity, only to be followed by the crash of 1857. – F. E.)

(1) A document issued by the House of Lords in 1848 deals with the colossal devaluation of government bonds and other stocks

during the crisis of 1847. According to this, the fall in value by 23 October 1847, compared with the level in February the same year, was:

On English government bonds		£93,824,217
On dock and canal stock		£ 1,358,288
On railway stock		£19,579,820
Total		£114,762,325

(2) As for swindling in the East India trade, where bills were no longer drawn because commodities had been sold, but rather commodities sold in order to draw bills which could be discounted and converted into money, the Manchester Guardian has a report on 24 November 1847.

Mr A in London instructs a Mr B to buy from the manufacturer C in Manchester commodities for shipment to D in East India. B pays C in six months’ drafts to be made out by C on B. B secures himself by six months’ drafts on A. As soon as the goods are shipped, A makes out six months’ drafts on D against the mailed bill of lading. ‘The shipper and the co-signee were thus both put in possession of funds – months before they actually paid for the goods; and, very commonly, these bills were renewed at maturity, on pretence of affording time for the returns in a “long trade.” Unfortunately losses by such a trade, instead of leading to its contraction, led directly to its increase. The poorer men became, the greater need they had to purchase, in order to make up, by new advances, the capital they had lost on the past adventures. Purchases thus became, not a question of supply and demand, but the most important part of the finance operations of a firm labouring under difficulties. But this is only one side of the picture. What took place in reference to the export of goods at home, was taking place in the purchase and shipment of produce abroad. Houses in India, who had credit to pass their bills, were purchasers of sugar, indigo, silk, or cotton, – not because the prices advised from London by the last overland mail promised a profit on the prices current in India, but because former drafts upon the London house would soon fall due, and must be provided for. What way so simple as to purchase a cargo of sugar, pay for it in bills upon the London house at ten months’ date, transmit the shipping documents by the overland mail; and, in less than two months, the goods on the high seas, or perhaps not yet passed the mouth of the Hoogly, were pawned in Lombard Street – putting the London house in funds eight months before the drafts against those goods fell due. And all this went on without interruption or difficulty, as long as bill-brokers had abundance of money “at call”, to advance on bills of lading and dock warrants, and to discount, without limit, the bills of India houses drawn upon the eminent firms in Mincing Lane.’

(This fraudulent procedure remained in vogue as long as goods had to sail to and from India round the Cape. Now that they pass through the Suez canal, and in steamships at that, this method of creating fictitious capital has lost its foundation: the long journey time. In fact, now that the telegraph makes the state of the Indian market known to the English businessman the same day, and the state of the English market to the Indian dealer, such a method has become completely impossible. – F. E.)

(3) The following passage is taken from the report on Commercial Distress, 1847–8, already quoted: ‘In the last week of April, 1847, the Bank of England advised the Royal Bank of Liverpool that it would thereafter reduce its discount business with the latter bank by one half. The announcement operated with peculiar hardship on this account, that the payments into Liverpool had latterly been much more in bills than in cash; and the merchants who generally brought to the Bank a large proportion of cash with which to pay their acceptances, had latterly been able to bring only bills which they had received for their cotton and other produce, and that increased very rapidly as the difficulties increased… The acceptances… which the Bank had to pay for the merchants, were acceptances drawn chiefly upon them from abroad, and they have been accustomed to meet those acceptances by whatever payment they received for their produce… The bills that the merchants brought… in lieu of cash, which they usually brought… were of various dates, and of various descriptions; a considerable number of them were bankers’ bills, of three months’ date, the large bulk being cotton bills. These bills of exchange, when bankers’ bills, were accepted by London bankers, and by merchants in every trade that we could mention – the Brazilian, the American, the Canadian, the West Indian… The merchants did not draw upon each other; but the parties in the interior, who had purchased produce from the merchants, remitted to the merchants bills on London bankers, or bills on various parties in London, or bills upon anybody. The announcement of the Bank of England caused a reduction of the maturity terms of bills drawn against sales of foreign products, frequently extending to over three months’ (pp. 26, 27).

As described above, the period of prosperity of 1844–7 was linked in England with the first great railway swindle. The report quoted has the following to say as to the effect of this on business in general. In April 1847 ‘almost all mercantile houses had begun to starve their business more or less… by taking part of their commercial capital for railways’ (p. 42). ‘Loans were made on railway shares at a high rate of interest, say, 8 per cent, by private individuals, by bankers and by fire-offices’ (p. 66). ‘Loans to so great an extent by commercial houses to railways induced them to lean too much upon banks by the discount of paper, whereby to carry on their commercial operations’ (p. 67). (Question:) ‘Should you say that the railway calls had had a great effect in producing the pressure which there was’ (on the money-market) ‘in April and October’ (1847)? – (Answer:) ‘I should say that they had had hardly any effect at all in producing the pressure in April; I should imagine that up to April, and up, perhaps, to the summer, they had increased the power of bankers in some respects rather than diminished it; for the expenditure had not been nearly so rapid as the calls; the consequence was, that most of the banks had rather a large amount of railway money in their hands in the beginning of the year.’ (This is corroborated in numerous statements made by bankers in C. D. 1848–57). ‘In the summer that melted gradually away, and on the 31st of December it was materially less. One cause… of the pressure in October was the gradual diminution of the railway money in the bankers’ hands; between the 22nd of April and the 31st of December the railway balances in our hands were reduced one-third; and the railway calls have also had this effect… throughout the Kingdom; they have been gradually draining the deposits of bankers’ (pp. 43, 44).

The same was said by Samuel Gurney (head of the notorious firm of Overend, Gurney and Co.). ‘During the year 1846… there had been a considerable demand for capital, for the establishment of railways… but it did not increase the value of money… There was a condensation of small sums into large masses, and those large masses were used in our market; so that, upon the whole, the effect was to throw more money into the money-market of the City than to take it out’ [p.159].

A. Hodgson, director of the Liverpool Joint-Stock Bank, shows how far the bankers’ reserves may consist of bills of exchange: ‘It has been our habit to keep at least nine-tenths of all our deposits, and all money we have of other persons, in our bill case, in bills that are falling due from day to day… so much so, that during the time of the run, the bills falling due were almost equal to the. amount of the run upon us day by day’ (p. 53).

Speculative bills. – ‘5092. Who were those bills (against sold cotton) generally accepted by?’ – (R. Gardner, the cotton manufacturer repeatedly mentioned in this work:) ‘Produce brokers: a person buys cotton, and places it in the hands of a broker, and draws upon that broker, and gets the bills discounted.’ – ‘5094. And they are taken to the banks at Liverpool, and discounted? – Yes, and in other parts besides… I believe if it had not been for the accommodation thus granted, and principally by the Liverpool banks, cotton would never have been so high last year as it was by 1 1/2d. or 2d. a pound.’ – ‘600. You have stated that a vast amount of bills were put in circulation, drawn by speculators upon cotton brokers in Liverpool; does that system extend to your advance on acceptances upon colonial and foreign produce as well as on cotton?’ (A. Hodgson, a Liverpool banker:) ‘It refers to all kinds of colonial produce, but to cotton most especially.’ – ‘601. Do you, as a banker, discourage as far as you can that description of paper? – We do not; we consider it a very legitimate description of paper, when kept in moderation. This description of paper is frequently renewed.’

Swindling in the East Indian and Chinese market in 1847. Charles Turner (head of one of the leading East India houses in Liverpool): ‘We are all aware of the events which have taken place as regards the Mauritius trade, and other trades of that kind. The brokers have been in the habit… not only of advancing upon goods after their arrival to meet the bills drawn against those goods, which is perfectly legitimate, and upon the bills of lading… but… they have advanced upon the produce before it was shipped, and in some cases before it was manufactured. Now, to speak of my own individual instance: I have bought bills in Calcutta to the extent of six or seven thousand pounds in one particular instance; the proceeds of the bills went down to the Mauritius, to help in the growth of sugar; those bills came to England, and above half of them were protested; for when the shipments of sugar came forward, instead of being held to pay those bills, it had been mortgaged to third parties… before it was shipped, in fact almost before it was boiled’ (p. 78). ‘Now manufacturers are insisting upon cash, but it does not amount to much, because if a buyer has any credit in London, he can draw upon the house, and get the bill discounted; he goes to London, where discounts now are cheap; he gets the bill discounted, and pays cash to the manufacturer… It takes twelve months, at least, for the shipper of goods to get his return from India… a man with ten or fifteen thousand pounds would go into the Indian trade; he would open a credit with a house in London, to a considerable extent, giving that house one per cent; he, drawing upon the house in London, on the understanding that the proceeds of the goods that go out are to be returned to the house in London, but it being perfectly understood by both parties that the man in London is to be kept out of a cash advance; that is to say, in other words, the bills are to be renewed till the proceeds come home. The bills were discounted at Liverpool, Manchester… or in London… many of them lie in the Scotch banks’ (p. 79). – ‘786. There is one house which failed in London the other day, and in examining their affairs, a transaction of this sort was proved to have taken place; there is a house of business at Manchester, and another at Calcutta; they opened a credit account with a house in London to the extent of £200,000; that is to say, the friends of this house in Manchester, who consigned goods to the East India House from Glasgow and from Manchester, had the power of drawing upon the house in London to the extent of £200,000; at the same time, there was an understanding that the corresponding house in Calcutta were to draw upon the London house to the extent of £200,000; with the proceeds of those bills sold in Calcutta, they were to buy other bills, and remit them to the house in London, to take up the first bills drawn from Glasgow… There would have been £600,000 of bills created upon that transaction.’ – ‘971. At present, if a house in Calcutta purchase a cargo’ (for England) ‘and give their own bills upon their correspondent in London in payment, and they send the bills of lading home to this country, those bills of lading… immediately become available to them in Lombard Street for advances, and they have eight months’ use of the money before their correspondents are called upon to pay.’

(4) In 1848, a secret committee of the House of Lords sat to investigate the causes of the crisis of 1847. The evidence taken by this committee was not published until 1857 (Minutes of Evidence, taken before the Secret Committee of the H. of L. appointed to inquire into the Causes of Distress, etc., 1857; quoted as C. D. 1848–57). In this, Mr Lister, director of the Union Bank of Liverpool, said among other things:

‘2444. In the spring of 1847 there was an undue extension of credit… because a man transferred property from business into railways and was still anxious to carry on the same extent of business. He probably first thought that he could sell the railway shares at a profit and replace the money in his business. Perhaps he found that could not be done, and he then got credit in his business where formerly he paid in cash. There was an extension of credit from that circumstance.’

‘2500. Were those bills… upon which the banks had sustained a loss by holding them, principally bills upon corn or bills upon cotton? – They were bills upon all kinds of produce, corn and cotton and sugar, all foreign produce of all descriptions. There was scarcely any thing perhaps with the exception of oil, that did not go down.’ – ‘2506. A broker who accepts a bill will not accept it without a good margin as to the value.’

‘2512. There are two kinds of bills drawn against produce; the first is the original bill drawn abroad upon the merchant, who imports it… The bills which are drawn against produce frequently fall due before the produce arrives. The merchant, therefore, when it arrives, if he has not sufficient capital, has to pledge that produce with the broker till he has time to sell that produce. Then a new species of bill is immediately drawn by the merchant in Liverpool upon the broker, on the security of that produce… Then it is the business of the banker to ascertain from the broker whether he has the produce, and to what extent he has advanced upon it. It is his business to see that the broker has property to protect himself if he makes a loss.’

‘2516. We also receive bills from abroad… A man buys a bill abroad on England, and sends it to a house in England; we cannot tell whether that bill is drawn prudently or imprudently, whether it is drawn for produce or for wind.’

‘2533. You said that almost every kind of foreign produce was sold at a great loss. Do you think that that was in consequence of undue speculation in that produce? – It arose from a very large import, and there not being an equal consumption to take it off. It appears that consumption fell off a great deal.’ – ‘2534. In October produce was almost unsaleable.’

How the height of the crash sees a general sauve-qui-peut is testified to in the same report by an expert of the highest rank, the worthy and wily Samuel Gurney of Overend, Gurney and Co. ‘1262… When a panic exists a man does not ask himself what he can get for his bank-notes, or whether he shall lose 1 or 2 per cent by selling his exchequer bills, or 3 per cent. If he is under the influence of alarm he does not care for the profit or loss, but makes himself safe and allows the rest of the world to do as they please.’

(5) On the mutual satiation of the two markets, Mr Alexander, a merchant in the East India trade, said before the House of Commons committee on the Bank Act of 1857 (quoted as B. A. 1857): ‘4330. At the present moment, if I lay out 6s. in Manchester, I get 5s. back in India; if I lay out 6s. in India, I get 5s. back in London.’ So that the Indian market was satiated by England and the English market similarly by India. And this was the case in 1857, scarcely ten years after the bitter experience of 1847!