Blackwood's Edinburgh Magazine, Volume 66, No. 410, December 1849

Various circumstances have been studiously kept out of view by the free-trade party, in reference to the years from 1842 to 1846, which really were mainly instrumental in producing the prosperity of that period. And many others have been emphatically dwelt upon, in reference to the years since 1846, which really had very little hand in producing these disasters.

The first circumstance which had a powerful influence in producing the prosperity from 1842 to 1846, was the return of fine seasons after five bad harvests in succession, which closed in 1841. The summer, and still more the autumn, of 1842, was a long and unbroken period of sunshine, which gladdened the hearts of men after the long series of dreary and cheerless years which had preceded it. The subsequent years, from 1842 to 1846, were very fine seasons, the harvests of which were all above an average. This is decisively proved by a comparison of the average prices of grain for the years from 1839 to 1841, and from 1842 to 1845.19 The tariff of 1842 without doubt contributed to bring about, in some degree, this reduction of prices; but still, as the sliding-scale was then in operation, and the import duties were in general 8s. and 9s. the quarter, the effect must have been mainly owing to the succession of fine seasons. No one can have lived through that period, without recollecting that this was the case. But the cheap prices which result from abundant harvests and improved cultivation at home, are the greatest of all public blessings, as much as the cheap prices arising from an extended foreign importation and declining agriculture at home, are the greatest of all curses. The first enriches the manufacturer, by the previous comfort of the farmer, and the plenty diffused through the land by his exertions; the last gives a temporary stimulus to the manufacturer, by the cheapness which is fatal to the domestic cultivator, and, by abridging the home market, speedily makes the manufacturer share in his ruin.

The second circumstance which tended to produce the prosperity from 1842 to 1845, was the glorious successes which, in the first of these years, succeeded to the Affghanistaun disasters. We all recollect the throb of exultation which beat in the breast of the nation when the astonishing news arrived, in November 1842, that a single Delhi Gazette had announced the second capture of Cabul, in the centre of Asia, and the dictating a glorious peace to the Celestial Empire, under the walls of Nankin. Not only was our Indian empire secured for a long period, by those astonishing triumphs, but its strength was demonstrated in a way of all others the best calculated to insure confidence in its future prosperity. The effect of this upon our manufacturing and commercial prosperity was great and immediate. Confidence revived from so marvellous a proof of the resources and spirit of the nation, which had so speedily risen superior to so terrible a disaster. Speculation was renewed on a great scale, from the sanguine ideas entertained of the boundless markets opened for our manufactures in the centre of Asia, and in the Chinese dominions. Sir Robert Peel is entitled to great credit for the glorious turn thus given to our Eastern affairs, and the gleam of sunshine which they threw upon the affairs of the nation; for his fortitude, when the previous disastrous news arrived, was mainly instrumental in producing it. But free-trade principles, and the tariff of 1842, had no more to do with it than they had with the affairs of the moon.

The third circumstance which tended to bring about the prosperity from 1842 to 1845, was the revival in the home market, which, on the first gleam of returning prosperity, arose with redoubled energy from the very magnitude of previous deterioration and suffering. During the long train of disasters which followed the great importation of grain, and consequent exportation of the precious metals, in 1839 – which compelled the Bank of England, for the first time, recorded in history, to have recourse to the Bank of France for assistance – all classes of the people had undergone very severe privations. The depression had been general in extent, and unprecedented in duration, till it was entirely thrown into the shade by the effects of the terrible monetary crisis of October 1847. Stocks of goods were reduced to the lowest amount consistent with the keeping up even a show of business; comforts of various sorts had been long abandoned by a large portion of the middle and working classes. At the same time, capital, in great part unemployed, accumulated in the hands of moneyed men, and the competition for safe investment lowered the rate of interest. It was soon down to 3 and 2-1/2 per cent. In these circumstances the revival of trade, owing to the Eastern victories and fine harvest of 1842, acted immediately, and with the most vivifying effect, on the home market. A rush took place to replace worn out garments, to revive long abandoned but unforgotten enjoyments. This result always ensues, and is attended with very important effects, after a long period of depression and suffering. It is beginning, though in a slight degree, and from the same causes, amongst us at this time. But, no opinion can be formed, of the extent or probable duration of such revived activity, from its intensity on its first appearance.

The last, and, without doubt, the most important circumstance which produced the great prosperity from 1842 to 1845, was the monetary change produced by the Bank Charter Act of 1844.

Sir Robert Peel admitted, in the debate on the currency at the opening of last session of parliament, that the act of 1844 had failed in one of its principal objects – viz., the discouraging of perilous and irrational speculation. He might have gone a step farther, and admitted that it had been the greatest possible encourager, for a short season, of the most absurd and dangerous undertakings. The proof of this is decisive. The Bank Charter Act was passed in May 1844, and from that time till the first check experienced in October 1845, was, beyond all comparison, the wildest and most absurd season of speculation ever known in English history. Among others, railways, to the amount of £363,000,000 sterling, received the sanction of the legislature, within two years after the new Bank Charter Act had passed. And so far was government from giving any check to these undertakings – the results of which, monstrous when co-existing with a fettered currency, are apparent in the present wreck of railway property – that they gave them the utmost encouragement, both by lowering the sum required for deposits from ten to five per cent, and by bestowing, at once in public and private, the most lavish encomiums on the immense present and prospective blessings they would confer upon the country. It is not surprising that a government, looking only to temporary objects, did so; for the railway mania, while it lasted, and before the ruinous effects in which it necessarily terminated, when fettered by the currency laws, had developed themselves, gave a passing stimulus to the demand for labour, and increase to industry, which rendered men blind to the whole consequences of the course on which they were launched. Sir Robert Peel ably and emphatically enforced the favourable condition of the nation, and dwelt with peculiar emphasis on the diminution in criminal commitments through the country, in his opening speech of the session of 1846 – although he ascribed it to the free-trade measures, not the first effect of the general insanity on the subject of railways.

It is now perfectly apparent, and is generally understood, that the fatal Bank Charter Act was the main cause of the ruinous railway mania which has since spread distress and ruin so widely through the country. The reason is evident. It at once emancipated the Bank directors from every consideration, except that of making the most, as ordinary bankers, of their capital; and subjected them to such heavy expenses, from the vast quantity of specie they were obliged to keep in their vaults, as rendered a very extensive pushing of their business in every direction a matter of necessity. The effect of these concurring circumstances was soon apparent. Interest was lowered, immediately after the passing of the Bank Charter Act, to two per cent for first-class bills, or still lower, as appears from the subjoined table furnished by Messrs Gurney and Overend, "the greatest bill-brokers in the world."20 The facility of getting discounts increased beyond all precedent the issues of the banks. Those of the Bank of England rose to £21,000,000; and of all country bankers in a similar proportion. The total notes in circulation, in England alone, reached £28,000,900; in Great Britain and Ireland they exceeded £39,000,000. It was this copious issue of notes which gave, for the time at least, nearly sufficient accommodation for the immense undertakings which were set on foot; which, beyond all doubt, both gave birth to, and nurtured the infancy of that vast network of railways which so soon overspread the country, and, while it was in course of formation, diffused such general prosperity over the land.

Had the impulse thus given to industry, and the enormous domestic undertakings thus set on foot by the sanction and with the approbation of government, been cautiously sustained, as a similar impulse had been during the war, by a corresponding increase of the circulation, based on a footing which was not liable to be contracted by a failure of the harvest, or an enhanced demand for gold in foreign states, it might have been the commencement of an era of prosperity, and a general spread of happiness, unprecedented in British annals. It had one immense advantage, which distinguished it both from the previous lavish expenditure during the war, and the extravagant South American speculations which ended in the monetary catastrophe of December 1825. The money was all expended at home, and on undertakings useful to the nation. No man will dispute, that, whether or not all the railways undertaken during that period were in themselves reasonable, or likely to yield a dividend to the shareholders, they were beyond all doubt, one and all of them, advantageous to the public. They afforded facilities for the transit of goods and the conveyance of passengers, which were not only an immense advantage to individuals, but a great relief and benefit to the commerce and manufactures of the country. So far from being blamed, government deserve the very highest credit for having given this direction to the industry and expenditure of the nation. Their fault consisted in the simultaneous and fatal measures they adopted regarding the currency.

Having taken this great step in the right direction, it became the first and most important duty of government to have provided, simultaneously with the commencement of the undertaking, a currency independent of foreign drains, commensurate to the vast addition made to the industry and engagements of the nation. Its capital was far more than adequate to the undertakings, how vast soever. This is now decisively proved by the event. Two-thirds of the railways are finished; the remaining third is in course of construction; and interest is in London from three to two-and-a-half per cent. But capital alone is not sufficient for carrying on undertakings. Currency also is requisite; and if that be deficient, the most boundless overflow of capital will not avert a monetary crash, or save the nation from the most dreadful calamities. Here, too, the event has thrown a broad and decisive light on this vital question, and the cause of our calamities. Interest was fixed by government, after the crash, for advances by the Bank of England, in October 1847, at eight per cent; it rose, in private transactions, to twelve and fifteen per cent. Why was that? Not because capital was awanting, but because the bankers, from the drain of specie to buy foreign grain, and the operation of the Bank Charter Acts of 1844 and 1845, could not venture to issue notes to their customers. The nation resembled a great army, in which vast stores of provisions existed in the magazines at its disposal, but a series of absurd regulations affecting the commissariat prevented the grain they contained being issued to the soldiers. Accordingly, when the absurd restrictions were removed, things soon began to amend. When the Bank Charter Act was pro tempore repealed, by Lord John Russell's famous letter of October 1847, the effect was instantaneous in allaying the panic, and interest gradually fell, until now money has become overflowing, and it is to be had at two per cent, although the years since that time have been the most disastrous to capital ever known in the British annals, so that no subsequent increase has been possible.

What government should have done, when they engaged the nation in the vast system of inland railways, was what Pitt actually did, with such happy effect, when its currency was exposed to a similar strain from foreign expenditure, and immense engagements, in 1797. They should have provided a currency under proper control as to amount, but capable of being increased, according to the wants and engagements of society, and, above all, not liable to be withdrawn by the mutations of commerce, or the demand for gold in foreign states. The example of Great Britain during the war, when a gigantic expenditure, varying from eighty to one hundred and twenty millions yearly, was carried on for twenty years with the aid of such an expansive domestic currency– not only without any lasting distress, save from the stoppage of foreign markets, but with the utmost prosperity and happiness to all classes, although guineas had altogether disappeared from the circulation – was not only an example of what was required, but the best indication of how it was to be done. No period more loudly called for such a precautionary measure than one in which, under the sanction of government, no less than £363,000,000 was to be expended on railways in the short space of four years – a sum equal, if the change in the value of money is taken into consideration, to £500,000,000 during the war – at a time when all other branches of industry, foreign and domestic, were in an unusual state of activity, from the sudden return of prosperity after a long period of suffering. To expect that the nation, without some addition to its currency, could carry out so great an increase in its undertakings, was as hopeless as to imagine that an army, with a half added to its mouths, is to go on successfully with no addition made to its distribution of rations. And it is evident that this addition to the currency could be effectually made only by extending the paper circulation on a scale proportioned to the increase of work undertaken. By no possible means could gold, in adequate quantities, be brought to the scene of activity, the place where it was required; and even if brought there, no reliance could be placed on its continuing there for any length of time. On the contrary, nothing is more certain than that it would speedily be re-exported to other countries where it was less plentiful, and, therefore, more valuable; and thus its support would have been lost at the very time when it was most required.

The rise of prices during the war, when such a domestic currency was provided by government in adequate quantities, was really owing, not so much to the circulation having become redundant, as to its having permitted an adequate remuneration to be given to industry. This is a most important consideration, which Mr Taylor has most ably illustrated. The proof that the circulation had not, like the assignats of France, become redundant, is to be found in two things which are decisive of the point: 1. At no period of the war was there any difference between the price of an article when paid in bank notes and when paid in silver. No man ever saw the price of anything five pounds in bank notes, and four pounds ten shillings in silver. Gold bore an enhanced price, because it was required urgently for the operations of the Continental armies. 2. The increase in the paper circulation, considerable as it was, was yet not so great as the parallel and simultaneous increase in our national industry, as measured by our exports, imports, and public expenditure.21 Prices rose, therefore, and reached, for a time, more than double their level anterior to the contest, not because too much paper had been put in circulation, but because enough had been issued to let the demand for labour keep pace with the enlarged undertakings of the nation.

Instead of imitating this great and decisive example of wise and statesmanlike policy, what did Sir Robert Peel and the Free-traders do, on the commencement of a similar period of vastly augmented national industry? Why, they did just the reverse. Not only did they make no provision for enlarging the currency of the nation at the time, when they themselves had occasioned or sanctioned so immense an increase to its undertakings, but they took the most effectual measures possible to contract the circulation, both in gold and paper, directly in proportion to the necessity for its expansion. They first passed a law which limited the circulation of the Bank of England, irrespective of the notes issued on the basis of gold in their coffers, to £14,000,000; and that of the whole banks in Great Britain and Ireland to about £32,000,000; and then they introduced a system of free trade which permitted the unlimited entrance of foreign agricultural produce at a nominal duty, and thereby sent nearly half the gold headlong out of the country. Under the influence of this monstrous system, the gold in the vaults of the Bank of England was progressively diminished, until, in the end of October 1847, it was reduced to £564,000 sterling in the banking department; at the very time that, by the same judicious law, above £8,000,000 of sovereigns were lying useless, and locked up in the issue department of the same establishment. The governor of the bank very candidly admitted, in his examination before the House of Lords, that the bank, under the existing system, might have broke while there were still £8,000,000 of sovereigns lost to them and the nation in the cellars of the issue department.22 Of course the whole banks of the country were compelled instantly to contract their credits, and force payment of their debts, and thence the universal distress and ruin which ensued. And all this took place at the very time that the bank had eight millions of sovereigns chained up by act of parliament in its cellars, at the issue end of the building; and when the government, which so chained it up, had landed the nation, by act of parliament, in engagements requiring an expenditure on railway shares of £363,000,000 in the next four years. You may search the annals of the world in vain for a similar instance of infatuation in the rulers of a nation, and self-immolation in a people.

It will be said that the vast importation of grain, in the course of 1847, was a matter of necessity, from the failure of the potato crops in Ireland in the preceding autumn; and that, be the consequences what they may, they cannot be ascribed to Sir Robert Peel or the Free-traders. In one sense this is undoubtedly true. It is certain that the most staunch Protectionists would never have objected to the largest importation of grain, and exportation of sovereigns, in a period such as that of severe and unlooked-for scarcity. It was the precise object of the sliding-scale to admit grain, in periods of scarcity, free of all duty. But what the Free-traders and Sir Robert Peel are chargeable with, is having established a system of currency so fettered and restricted by absurd regulations, that the exportation of sovereigns led necessarily and inevitably to a contraction of paper accommodation, and a shock to credit over the whole country; and aggravated the danger by a monstrous regulation, which exposed the bank to the risk of stopping payment when they had still eight millions in gold – enough to have enabled them, perhaps, to go on – at one end of their establishment. They are responsible for the dreadful error of having not only done nothing to extend and secure the currency from being exported or contracted, when they had added so enormously to the internal engagements of the kingdom, but done everything, by the establishment of a permanent system of free trade, and a permanently fettered currency, to secure its reappearance on occasion of every future recurrence of an indifferent harvest, or any continuance of a great importation.

It is the consciousness of this terrible calamity, impending over the nation, which terrifies all the directors of banks, and paralyses industry in so grievous a manner over the whole country. If you ask any moneyed man, what is the cause of the insecurity so universally complained of in money transactions over the country, and the reluctance of bankers to advance largely, even when their coffers are overflowing, to persons of the best credit? they will invariably answer, that they are afraid of a commercial crisis; that they do not know when it may come on: and that they must be, at all times, prepared for a storm. It is this indefinite dread, the natural result of the catastrophe of 1847, which renders them so cautious, and keeps the nation starved of accommodation, at the very time that Lombard Street is overflowing with money seeking for investment. It is no wonder they are afraid. The sword of Damocles is suspended over their heads, and thence their terror. They know that the heavy rains, and consequent importation of grain, in 1839 into the British islands, forced the Bank of England to apply for aid to the Bank of France, caused the United States Bank of America to stop payment, and rendered three-fourths of the traders in the United States bankrupt. The recollection of the dreadful crisis of 1847, brought on by the great importation of grain and exportation of sovereigns in that year, is fresh in their minds. They see the importations of food going on without intermission, in the face of exceedingly low prices, at the rate of fifteen millions of quarters a-year, being nearly quadruple that of 1839, which was four million quarters.23 They know that the grain countries will take our gold to any amount, but not our manufactures, because they do not want them, or are too poor to buy them; and they ask, How is all this grain to be paid? In what is all this to end? How are the bills, drawn to pay for these exports, to be met? So general is this feeling of dread, from the effects of a drain on our metallic resources to pay for the vast importations of grain going forward, that when the author, in the beginning of last autumn, said to the chief officer of one of the first banking establishments in Britain, that "three weeks' rain in August would render half the merchants in England bankrupt," he replied – "Sir, three weeks' rain in August will make half the merchants in Europe bankrupt."

That it is this fatal dependence of the currency, and consequent credit of the country, on the retention of its gold circulation, under circumstances when, from the vast importation of grain going forward, it is impossible to retain it, which is the real cause of the calamitous state of the country for the last three years, and not either the potato rot or the European revolutions, to which the Free-traders ascribe it, is evident from the slightest consideration. The potato rot of 1846, which has been the sheet-anchor of the Free-traders ever since – the scapegoat which they hoped would answer for all their sins – was never, by the most determined of their party, set down as having occasioned a loss of above £15,000,000 sterling. Call it £20,000,000 to avoid cavil. The strength of the case will admit of any concession. Now, the value of the agricultural produce of the United Kingdom, prior to the free trade in grain, was generally estimated at £300,000,000.24 A deficiency of £20,000,000, or a fifteenth part, might occasion, doubtless, the most acute local distress in the districts in which it was most severely felt; but it could never, irrespective of its action on the currency, occasion a general monetary and commercial crisis. England and Scotland exported little or nothing to the boys of Munster and Connaught, where the failure occurred. There is no more reason, had it not been for the currency laws, why a failure of the potato crop in Ireland should have produced a monetary crisis in Great Britain, than a failure in the potato crop of Norway.