Why Lombard Street Is Often Very Dull, and Sometimes Extremely
Excited.

Any sudden event which creates a great demand for actual cash may
cause, and will tend to cause, a panic in a country where cash is
much economised, and where debts payable on demand are large. In
such a country an immense credit rests on a small cash reserve, and
an unexpected and large diminution of that reserve may easily break
up and shatter very much, if not the whole, of that credit. Such
accidental events are of the most various nature: a bad harvest, an
apprehension of foreign invasion, the sudden failure of a great firm
which everybody trusted, and many other similar events, have all
caused a sudden demand for cash. And some writers have endeavoured
to classify panics according to the nature of the particular
accidents producing them. But little, however, is, I believe, to be
gained by such classifications. There is little difference in the
effect of one accident and another upon our credit system. We must
be prepared for all of them, and we must prepare for all of them in
the same wayby keeping a large cash reserve.

But it is of great importance to point out that our industrial
organisation is liable not only to irregnlar external accidents, but
likewise to regnlar internal changes; that these changes make our
credit system much more delicate at some times than at others; and
that it is the recurrence of these periodical seasons of delicacy
which has given rise to the notion that panics come according to a
fixed rule, that every ten years or so we must have one of them.

Most persons who begin to think of the subject are puzzled on the
threshold. They hear much of 'good times' and 'bad times,' meaning
by 'good' times in which nearly everyone is very well off, and by
'bad' times in which nearly everyone is comparatively ill off. And
at first it is natural to ask why should everybody, or almost
everybody, be well off together? Why should there be any great tides
of industry, with large diffused profit by way of flow, and large
diffused want of profit, or loss, by way of ebb? The main answer is
hardly given distinctly in our common books of political economy.
These books do not tell you what is the fund out of which large
general profits are paid in good times, nor do they ex plain why
that fund is not available for the same purpose in bad times. Our
current political economy does not sufficiently take account of time
as an element in trade operations; but as soon as the division of
labour has once established itself in a community, two principles at
once begin to be important, of which time is the very essence. These
are

First. That as goods are produced to be exchanged, it is good that
they should be exchanged as quickly as possible.

Secondly. That as every producer is mainly occupied in producing
what others want, and not what he wants himself, it is desirable
that he should always be able to find, without effort, without
delay, and without uncertainty, others who want what he can produce.

In themselves these principles are self-evident. Everyone will admit
it to be expedient that all goods wanting to be sold should be sold
as soon as they are ready; that every man who wants to work should
find employment as soon as he is ready for it. Obviously also, as
soon as the 'division of labour' is really established, there is a
difficulty about both of these principles. A produces what he thinks
B wants, but it may be a mistake, and B may not want it. A may be
able and willing to produce what B wants, but he may not be able to
find Bhe may not know of his existence.

The general truth of these principles is obvious, but what is not
obvious is the extreme greatness of their effects. Taken together,
they make the whole difference between times of brisk trade and
great prosperity, and times of stagnant trade and great adversity,
so far as that prosperity and that adversity are real and not
illusory. If they are satisfied, everyone knows whom to work for,
and what to make, and he can get immediately in exchange what he
wants'himself. There is no idle labour and no sluggish capital in
the whole community, and, in consequence, all which can be produced
is produced, the effectiveness of human industry is augmented, and
both kinds of producers both capitalists and labourersare much
richer than usual, because the amount to be divided between them is
also much greater than usual.

And there is a partnership in industries. No single large industry
can be depressed without injury to other industries; still less can
any great group of industries. Each industry when prosperous buys
and consumes the produce probably of most (certainly of very many)
other industries, and if industry A fail and is in difficulty,
industries B, and C, and D, which used to sell to it, will not be
able to sell that which they had produced in reliance on A's demand,
and in future they will stand idle till industry A recovers, because
in default of A there will be no one to buy the commodities which
they create. Then as industry B buys of C, D, &c., the adversity of
B tells on C, D, &c., and as these buy of E, F, &c., the effect is
propagated through the whole alphabet. And in a certain sense it
rebounds. Z feels the want caused by the diminished custom of A, B,
& C, and so it does not earn so much; in consequence, it cannot lay
out as much on the produce of A, B, & C, and so these do not earn as
much either. In all this money is but an instrument. The same thing
would happen equally well in a trade of barter, if a state of barter
on a very large scale were not practically impossible, on account of
the time and trouble which it would necessarily require. As has been
explained, the fundamental cause is that under a system in which
everyone is dependent on the labour of everyone else, the loss of
one spreads and multiplies through all, and spreads and multiplies
the faster the higher the previous perfection of the system of
divided labour, and the more nice and effectual the mode of
interchange. And the entire effect of a depression in any single
large trade requires a considerable time before it can be produced.
It has to be propagated, and to be returned through a variety of
industries, before it is complete. Short depressions, in
consequence, have scarcely any discernible consequences; they are
over before we think of their effects. It is only in the case of
continuous and considerable depressions that the cause is in action
long enough to produce discernible effects.

The most common, and by far the most important, case where the
depression in one trade causes depression in all others, is that of
depressed agriculture. When the agriculture of the world is ill off,
food is dear. And as the amount of absolute necessaries which a
people consumes cannot be much diminished, the additional amount
which has to be spent on them is so much subtracted from what used
to be spent on other things. All the industries, A, B, C, D, up to
Z, are somewhat affected by an augmentation in the price of corn,
and the most affected are the large ones, which produce the objects
in ordinary times most consumed by the working classes. The clothing
trades feel the difference at once, and in this country the liquor
trade (a great source of English revenue) feels it almost equally
soon. Especially when for two or three years harvests have been bad,
and corn has long been dear, every industry is impoverished, and
almost every one, by becoming poorer, makes every other poorer too.
All trades are slack from diminished custom, and the consequence is
a vast stagnant capital, much idle labour, and a greatly retarded
production.

It takes two or three years to produce this full calamity, and the
recovery from it takes two or three years also. If corn should long
be cheap, the labouring classes have much to spend on what they like
besides. The producers of those things become prosperous, and have a
greater purchasing power. They exercise it, and that creates in the
class they deal with another purchasing power, and so all through
society. The whole machine of industry is stimulated to its maximum
of energy, just as before much of it was slackened almost to its
minimum.

A great calamity to any great industry will tend to produce the same
effect, but the fortunes of the industries on which the wages of
labour are expended are much more important than those of all
others, because they act much more quickly upon a larger mass of
purchasers. On principle, if there was a perfect division of labour,
every industry would have to be perfectly prosperous in order that
any one might be so. So far, therefore, from its being at all
natural that trade should develop constantly, steadily, and equably,
it is plain, without going farther, from theory as well as from
experience, that there are inevitably periods of rapid dilatation,
and as inevitably periods of contraction and of stagnation.

Nor is this the only changeable element in modern industrial
societies. Credit--the disposition of one man to trust another--is
singularly varying. In England, after a great calamity, everybody is
suspicious of everybody; as soon as that calamity is forgotten,
everybody again confides in everybody. On the Continent there has
been a stiff controversy as to whether credit should or should not
be called capital:' in England, even the little attention once paid
to abstract economics is now diverted, and no one cares in the least
for refined questions of this kind: the material practical point is
that, in M. Chevalier's language, credit is 'additive,' or
additionalthat is, in times when credit is good productive power is
more efficient, and in times when credit is bad productive power is
less efficient. And the state of credit is thus influential, because
of the two principles which have just been explained. In a good
state of credit, goods lie on hand a much less time than when credit
is bad; sales are quicker; intermediate dealers borrow easily to
augment their trade, and so more and more goods are more quickly and
more easily transmitted from the producer to the consumer.

These two variable causes are causes of real prosperity. They
augment trade and production, and so are plainly beneficial, except
where by mistake the wrong things are produced, or where also by
mistake misplaced credit is given, and a man who cannot produce
anything which is wanted gets the produce of other people's labour
upon a false idea that he will produce it. But there is another
variable cause which produces far more of apparent than of real
prosperity and of which the effect is in actual life mostly confused
with those of the others.

In our common speculations we do not enough remember that interest
on money is a refined idea, and not a universal one. So far indeed
is it from being universal, that the majority of saving persons in
most countries would reject it. Most savings in most countries are
held in hoarded specie. In Asia, in Africa, in South America,
largely even in Europe, they are thus held, and it would frighten
most of the owners to let them out of their keeping. An Englishman a
modern Englishman at leastassumes as a first principle that he ought
to be able to 'put his money into something safe that will yield 5
per cent;' but most saving persons in most countries are afraid to
'put their money' into anything. Nothing is safe to their minds;
indeed, in most countries, owing to a bad Government and a backward
industry, no investment, or hardly any, really is safe. In most
countries most men are content to forego interest; but in more
advanced countries, at some times there are more savings seeking
investment than there are known investments for; at other times
there is no such superabundance. Lord Macaulay has graphically
described one of the periods of excess. He says'During the interval
between the Restoration and the Revolution the riches of the nation
had been rapidly increasing. Thousands of busy men found every
Christmas that, after the expenses of the year's housekeeping had
been defrayed out of the year's income, a surplus remained; and how
that surplus was to be employed was a question of some difficulty.
In our time, to invest such a surplus, at something more than three
per cent, on the best security that has ever been known in the
world, is the work of a few minutes. But in the seventeenth century,
a lawyer, a physician, a retired merchant, who had saved some
thousands, and who wished to place them safely and profitably, was
often greatly embarrassed. Three generations earlier, a man who had
accumulated wealth in a profession generally purchased real
property, or lent his savings on mortgage. But the number of acres
in the kingdom had remained the same; and the value of those acres,
though it had greatly increased, had by no means increased so fast
as the quantity of capital which was seeking for employment. Many
too wished to put their money where they could find it at an hour's
notice, and looked about for some species of property which could be
more readily transferred than a house or a field. A capitalist might
lend on bottomry or on personal security; but, if he did so, he ran
a great risk of losing interest and principal. There were a few
joint stock companies, among which the East India Company held the
foremost place; but the demand for the stock of such companies was
far greater than the supply. Indeed the cry for a new East India
Company was chiefly raised by persons who had found difficulty in
placing their savings at interest on good security. So great was
that difficulty that the practice of hoarding was common. We are
told that the father of Pope, the poet, who retired from business in
the City about the time of the Revolution, carried to a retreat in
the country a strong box containing near twenty thousand pounds, and
took out from time to time what was required for household expenses;
and it is highiy probable that this was not a solitary case. At
present the quantity of coin which is hoarded by private persons is
so small, that it would, if brought forth, make no perceptible
addition to the circulation. But, in the earlier part of the reign
of William the Third, all the greatest writers on currency were of
opinion that a very considerable mass of gold and silver was hidden
in secret drawers and behind wainscots.

'The natural effect of this state of things was that a crowd of
projectors, ingenious and absurd, honest and knavish, employed
themselves in devising new schemes for the employment of redundant
capital. It was about the year 1688 that the word stockjobber was
first heard in London. In the short space of four years a crowd of
companies, every one of which confidently held out to subscribers
the hope of immense gains, sprang into existence--the Insurance
Company, the Paper Company, the Lutestring Company, the Pearl
Fishery Company, the Glass Bottle Company, the Alum Company, the
Blythe Coal Company, the Swordblade Company. There was a Tapestry
Company, which would soon furnish pretty hangings for all the
parlours of the middle class, and for all the bedchambers of the
higher. There was a Copper Company, which proposed to explore the
mines of England, and held out a hope that they would prove not less
valuable than those of Potosi. There was a Diving Company, which
undertook to bring up precious effects from shipwrecked vessels, and
which announced that it had laid in a stock of wonderful machines
resembling complete suits of armour. In front of the helmet was a
huge glass eye like that of a Cyclops; and out of the crest went a
pipe through which the air was to be admitted. The whole process was
exhibited on the Thames. Fine gentlemen and fine ladies were invited
to the show, were hospitably regaled, and were delighted by seeing
the divers in their panoply descend into the river and return laden
with old iron and ship's tackle. There was a Greenland Fishing
Company, which could not fail to drive the Dutch whalers and herring
busses out of the Northern Ocean. There was a Tanning Company, which
promised to furnish leather superior to the best that was brought
from Turkey or Russia. There was a society which undertook the
office of giving gentlemen a liberal education on low terms, and
which assumed the sounding name of the Royal Academies Company. In a
pompous advertisement it was announced that the directors of the
Royal Academies Company had engaged the best masters in every branch
of knowledge, and were about to issue twenty thousand tickets at
twenty shillings each. There was to be a lottery--two thousand prizes
were to be drawn; and the fortunate holders of the prizes were to be
taught, at the charge of the Company, Latin, Greek, Hebrew, French,
Spanish, conic sections, trigonometry, heraldry, japaning,
fortification, bookkeeping, and the art of playing the theorbo.'

The panic was forgotten till Lord Macaulay revived the memory of it.
But, in fact, in the South Sea Bubble, which has always been
remembered, the form was the same, only a little more extravagant;
the companies in that mania were for objects such as these:--' "Wrecks
to be fished for on the Irish Coast--Insurance of Horses and other
Cattle (two millions)--Insurance of Losses by Servants--To make Salt
Water Fresh--For building of Hospitals for Bastard Children--For
building of Ships against Pirates--For making of Oil from Sun-flower
Seeds--For improving of Malt Liquors--For recovery of Seamen's Wages--For
extracting of Silver from Lead--For the transmuting of Quicksilver
into a malleable and fine Metal--For making of Iron with Pit-coal--For
importing a Number of large Jack Asses from Spain--For trading in
Human Hair--For fatting of Hogs--For a Wheel of Perpetual Motion." But
the most strange of all, perhaps, was "For an Undertaking which
shall in due time be revealed." Each subscriber was to pay down two
gnineas, and hereafter to receive a share of one hundred, with a
disclosure of the object; and so tempting was the offer, that 1,000
of these subscriptions were paid the same morning, with which the
projector went off in the afternoon.' In 1825 there were
speculations in companies nearly as wild, and just before 1866 there
were some of a like nature, though not equally extravagant. The fact
is, that the owners of savings not finding, in adequate quantities,
their usual kind of investments, rush into anything that promises
speciously, and when they find that these specious investments can
be disposed of at a high profit, they rush into them more and more.
The first taste is for high interest, but that taste soon becomes
secondary. There is a second appetite for large gains to be made by
selling the principal which is to yield the interest. So long as
such sales can be effected the mania continues; when it ceases to be
possible to effect them, ruin begins.

So long as the savings remain in possession of their owners, these
hazardous gamblings in speculative undertakings are almost the whole
effect of an excess of accumulation over tested investment. Little
effect is produced on the general trade of the country. The owners
of the savings are too scattered and far from the market to change
the majority of mercantile transactions. But when these savings come
to be lodged in the hands of bankers, a much wider result is
produced. Bankers are close to mercantile life; they are always
ready to lend on good mercantile securities; they wish to lend on
such securities a large part of the money entrusted to them. When,
therefore, the money so entrusted is unusually large, and when it
long continues so, the general trade of the country is, in the
course of time, changed. Bankers are daily more and more ready to
lend money to mercantile men; more is lent to such men; more
bargains are made in consequence; commodities are more sought after;
and, in consequence, prices rise more and more.

The rise of prices is quickest in an improving state of credit.
Prices in general are mostly determined by wholesale transactions.
The retail dealer adds a percentage to the wholesale prices, not, of
course, always the same percentage, but still mostly the same. Given
the wholesale price of most articles, you can commonly tell their
retail price. Now wholesale transactions are commonly not cash
transactions, but bill transactions. The duration of the bill varies
with the custom of the trade; it may be two, three months, or six
weeks, but there is always a bill. Times of credit mean times in
which the bills of many people are taken readily; times of bad
credit, times when the bills of much fewer people are taken, and
even of those suspiciously. In times of good credit there are a
great number of strong purchasers, and in times of bad credit only a
smaller number of weak ones; and, therefore, years of improving
credit, if there be no disturbing cause, are years of rising price,
and years of decaying credit, years of falling price.

This is the meaning of the saying 'John Bull can stand many things,
but he cannot stand two per cent:' it means that the greatest effect
of the three great causes is nearly peculiar to England; here, and
here almost alone, the excess of savings over investments is
deposited in banks; here, and here only, is it made use of so as to
affect trade at large; here, and here only, are prices gravely
affected. In these circumstances, a low rate of interest, long
protracted, is equivalent to a total depreciation of the precious
metals. In his book on the effect of the great gold discoveries,
Professor Jevons showed, and so far as I know, was the first to
show, the necessity of eliminating these temporary changes of value
in gold before you could judge properly of the permanent
depreciation. He proved, that in the years preceding both 1847 and
1857 there was a general rise of prices; and in the years succeeding
these years, a great fall. The same might be shown of the years
before and after 866, _mutatis mutandis_.

And at the present moment we have a still more remarkable example,
which was thus analysed in the Economist of the 30th December, 1871,
in an article which I venture to quote as a whole:

'THE GREAT RISE IN THE PRICE OF COMMODITIES.

'Most persons are aware that the trade of the country is in a state
of great activity. All the usual tests indicate that--the state of the
Revenue, the Bankers' Clearing-house figures, the returns of exports
and imports are all plain, and all speak the same language. But few
have, we think, considered one most remarkable feature of the
present time, or have sufficiently examined its consequences. That
feature is the great rise in the price of most of the leading
articles of trade during the past year. We give at the foot of this
paper a list of articles, comprising most first-rate articles of
commerce, and it will be seen that the rise of price, though not
universal and not uniform, is nevertheless very striking and very
general. The most remarkable cases are--

January December
L, s. d. L, s. d.
Wool--South Down hogs per pack 13 0 0 21 15 0
Cotton--Upland ordinary per lb. 0 0 7 1/4 0 0 8
No. 40 mule yarn, &c. per lb. 0 1 1 1/2 0 1 2 1/2
Iron--Bars, British per ton 7 2 6 8 17 6
Pig, No. 1 Clyde per ton 2 13 3 3 16 0
Lead per ton 18 7 6 8 17 6
Tin per ton 137 0 0 157 0 0
Copper--Sheeting per ton 75 10 0 95 0 0
Wheat (GAZETTE average) per qr. 2 12 0 2 15 8

--and in other cases there is a tendency upwards in price much more
often than there is a tendency downwards.

'This general rise of price must be due either to a diminution in
the supply of the quoted articles, or to an increased demand for
them. In some cases there has no doubt been a short supply. Thus in
wool, the diminution in the home breed of sheep has had a great
effect on the price--

In 1869 the home stock of sheep was 29,538,000
In 1871 27,133,000
Diminution 2,405,000
Equal to 8.1 per cent

and in the case of some other articles there may be a similar cause
operating. But taking the whole mass of the supply of commodities in
this country, as shown by the plain test of the quantities imported,
it has not diminished, but augmented. The returns of the Board of
Trade prove this in the most striking manner, and we give below a
table of some of the important articles. The rise in prices must,
therefore, be due to an increased demand, and the first question is,
to what is that demand due?

'We believe it to be due to the combined operation of three causes
cheap money, cheap corn, and improved credit. As to the first
indeed, it might be said at first sight that so general an increase
must be due to a depreciation of the precious metals. Certainly in
many controversies facts far less striking have been alleged as
proving it. And indeed there plainly is a diminution in the
purchasing power of money, though that diminution is not general and
permanent, but local and temporary. The peculiarity of the precious
metals is that their value depends for unusually long periods on the
quantity of them which is in the market. In the long run, their
value, like that of all others, is determined by the cost at which
they can be brought to market. But for all temporary purposes, it is
the supply in the market which governs the price, and that supply in
this country is exceedingly variable. After a commercial crisis, 1866
for example, two things happen: first, we call in the debts which are
owing to us in foreign countries; and we require these debts to be
paid to us, not in commodities, but in money. From this cause
principally, and omitting minor causes, the bullion in the Bank of
England, which was 13,156,000 L. in May 1866, rose to 19,413,000 L.
in January 1867, being an increase of over 6,000,000 L. And then
there comes also a second cause, tending in the same direction.
During a depressed period the savings of the country increase
considerably faster than the outlet for them. A person who has made
savings does not know what to do with them. And this new unemployed
saving means additional money. Till a saving is invested or employed
it exists only in the form of money: a farmer who has sold his wheat
and has 100 L. 'to the good,' holds that 100 L. in money, or some
equivalent for money, till he sees some advantageous use to be made
of it. Probably he places it in a bank, and this enables it to do
more work. If 3,000,000 L. of coin be deposited in a bank, and it
need only keep 1,000,000 L. as a reserve, that sets 2,000,000 L.
free, and is for the time equivalent to an increase of so much coin.
As a principle it may be laid down that all new unemployed savings
require _either an increased stock of the precious metals, or an
increase in the efficiency of the banking expedients by which these
metals are economised_. In other words, in a saving and uninvesting
period of the national industry, we accumulate gold, and augment the
efficiency of our gold. If therefore such a saving period follows
close upon an occasion when foreign credits have been diminished and
foreign debts called in, the augmentation in the effective quantity
of gold in the country is extremely great. The old money called in
from abroad and the new money representing the new saving co-operate
with one another. And their natural tendency is to cause a general
rise in price, and what is the same thing, a diffused diminution in
the purchasing power of money.

'Up to this point there is nothing special in the recent history of
the money market. Similar events happened both after the panic of
1847, and after that of 1857. But there is another cause of the same
kind, and acting in the same direction, which is peculiar to the
present time; this cause is the amount of the foreign money, and
especially of the money of foreign Governments, now in London. No
Government probably ever had nearly as much at its command as the
German Government now has. Speaking broadly, two things happened:
during the war England was the best place of shelter for foreign
money, and this made money more cheap here than it would otherwise
have been; after the war England became the most convenient paying
place, and the most convenient resting place for money, and this
again has made money cheaper. The commercial causes, for which there
are many precedents, have been aided by a political cause for the
efficacy of which there is no precedent.

'But though plentiful money is necessary to high prices, and though
it has a natural tendency to produce these prices, yet it is not of
itself sufficient to produce them. In the cases we are dealing with,
in order to lower prices there must not only be additional money,
but a satisfactory mode of employing that additional money. This is
obvious if we remember whence that augmented money is derived. It is
derived from the savings of the people, and will only be invested in
the manner which the holders for the time being consider suitable to
such savings. It will not be used in mere expenditure; it would be
contrary to the very nature of it so to use it. A new channel of
demand is required to take off the new money, or that new money will
not raise prices. It will lie idle in the banks, as we have often
seen it. We should still see the frequent, the common phenomenon of
dull trade and cheap money existing side by side.

'The demand in this case arose in the most effective of all ways. In
1867 and the first half of 1868 corn was dear, as the following
figures show:

GAZETTE AVERAGE PRICE OF WHEAT.
s. d.
December, 1866 60 3
January, 1867 61 4
February 60 10
March 59 9
April 61 6
May 64 8
June 65 8
July 65 0
August 67 8
September 62 8
October 1867 66 6
November 69 5
December 67 4
January, 1868 70 3
February 73 0
March 73 0
April 73 3
May 73 9
June 67 11
July 65 5

From that time it fell, and it was very cheap during the whole of
1869 and 1870. The effect of this cheapness is great in every
department of industry. The working classes, having cheaper food,
need to spend so much less on that food, and have more to spend on
other things. In consequence, there is a gentle augmentation of
demand through almost all departments of trade. And this almost
always causes a great augmentation in what may be called the
instrumental trades--that is, in the trades which deal in machines and
instruments used in many branches of commerce, and in the materials
for such. Take, for instance, the iron trade--

In the year 1869 we exported 2,568,000 tons
" 1870 " 2,716,000 tons
5,284,000 tons
" 1867 " 1,881,000 tons
" 1868 " 1,944,000 tons
3,826,000 tons
Increase 1,458,000 tons

that is to say, cheap corn operating throughout the world, created a
new demand for many kinds of articles; the production of a large
number of such articles being aided by iron in some one of its many
forms, iron to that extent was exported. And the effect is
cumulative. The manufacture of iron being stimulated, all persons
concerned in that great manufacture are well off, have more to
spend, and by spending it encourage other branches of manufacture,
which again propagate the demand; they receive and so encourage
industries in a third degree dependent and removed.

'It is quite true that corn has not been quite so cheap during the
present year. But even if it had been dearer than it is, it would
not all at once arrest the great trade which former cheapness had
created. The "ball," if we may so say, "was set rolling" in 1869 and
1870, and a great increase of demand was then created in certain
trades and propagated through all trades. A continuance of very high
prices would produce the reverse effect; it would slacken demand in
certain trades, and the effect would be gradually diffused through
all trades. But a slight rise such as that of this year has no
perceptible effect.

'When the stimulus of cheap corn is added to that of cheap money,
the full conditions of a great and diffused rise of prices are
satisfied. This new employment supplies a mode in which money can be
invested. Bills are drawn of greater number and greater magnitude,
and through the agencies of banks and discount houses, the savings
of the country are invested in such bills. There is thus a new want
and a new purchase-money to supply that want, and the consequence is
the diffused and remarkable rise of price which the figures show to
have occurred.

'The rise has also been aided by the revival of credit. This, as
need not be at length explained, is a great aid to buying, and
consequently a great aid to a rise of price. Since 1866, credit has
been gradually, though very slowly, recovering, and it is probably
as good as it is reasonable or proper that it should be. We are now
trusting as many people as we ought to trust, and as yet there is no
wild excess of misplaced confidence which would make us trust those
whom we ought not to trust.'

The process thus explained is the common process. The surplus of
loanable capital which lies in the hands of bankers is not employed
by them in any original way; it is almost always lent to a trade
already growing and already improving. The use of it develops that
trade yet farther, and this again augments and stimulates other
trades. Capital may long lie idle in a stagnant condition of
industry; the mercantile securities which experienced bankers know
to be good do not augment, and they will not invent other
securities, or take bad ones.

In most great periods of expanding industry, the three great causes
much loanable capital, good credit, and the increased profits
derived from better-used labour and better-used capitalhave acted
simultaneously; and though either may act by itself, there is a
permanent reason why mostly they will act together. They both tend
to grow together, if you begin from a period of depression. In such
periods credit is bad, and industry unemployed; very generally
provisions are high in price, and their dearness was one of the
causes which made the times bad. Whether there was or was not too
much loanable capital when that period begins, there soon comes to
be too much. Quiet people continue to save part of their incomes in
bad times as well as in good; indeed, of the two, people of
slightly-varying and fixed incomes have better means of saving in
bad times because prices are lower. Quiescent trade affords no new
securities in which the new saving can be invested, and therefore
there comes soon to be an excess of loanable capital. In a year or
two after a crisis credit usually improves, as the remembrance of
the disasters which at the crisis impaired credit is becoming
fainter and fainter. Provisions get back to their usual price, or
some great industry makes, from some temporary cause, a quick step
forward. At these moments, therefore, the three agencies which, as
has been explained, greatly develope trade, combine to develope it
simultaneously.

The certain result is a bound of national prosperity; the country
leaps forward as if by magic. But only part of that prosperity has a
solid reason. As far as prosperity is based on a greater quantity of
production, and that of the right articlesas far as it is based on
the increased rapidity with which commodities of every kind reach
those who want themits basis is good. Human industry is more
efficient, and therefore there is more to be divided among mankind.
But in so far as that prosperity is based on a general rise of
prices, it is only imaginary. A general rise of prices is a rise
only in name; whatever anyone gains on the article which he has to
sell he loses on the articles which he has to buy, and so he is just
where he was. The only real effects of a general rise of prices are
these: first, it straitens people of fixed incomes, who suffer as
purchasers, but who have no gain to correspond; and secondly, it
gives an extra profit to fixed capital created before the rise
happened. Here the sellers gain, but without any equivalent loss as
buyers. Thirdly, this gain on fixed capital is greatest in what may
be called the industrial 'implements,' such as coal and iron. These
are wanted in all industries, and in any general increase of prices,
they are sure to rise much more than other things. Everybody wants
them; the supply of them cannot be rapidly augmented, and therefore
their price rises very quickly. But to the country as a whole, the
general rise of prices is no benefit at all; it is simply a change
of nomenclature for an identical relative value in the same
commodities. Nevertheless, most people are happier for it; they
think they are getting richer, though they are not. And as the rise
does not happen on all articles at the same moment, but is
propagated gradually through society, those to whom it first comes
gain really; and as at first every one believes that he will gain
when his own article is rising, a buoyant cheerfulness overflows the
mercantile world.

This prosperity is precarious as far as it is real, and transitory
in so far as it is fictitious. The augmented production, which is
the reason of the real prosperity, depends on the full working of
the whole industrial organisationof all capitalists and labourers;
that prosperity was caused by that full working, and will cease with
it. But that full working is liable to be destroyed by the
occurrence of any great misfortune to any considerable industry.
This would cause misfortune to the industries dependent on that one,
and, as has been explained, all through society and back again. But
every such industry is liable to grave fluctuations, and the most
important--the provision industries--to the gravest and the suddenest.
They are dependent on the casualties of the seasons. A single bad
harvest diffused over the world, a succession of two or three bad
harvests, even in England only, will raise the price of corn
exceedingly, and will keep it high. And a great and protracted rise
in the price of corn will at once destroy all the real part of the
unusual prosperity of previous good times. It will change the full
working of the industrial machine into an imperfect working; it will
make the produce of that machine less than usual instead of more
than usual; instead of there being more than the average of general
dividend to be distributed between the producers, there will
immediately be less than the average.

And in so far as the apparent prosperity is caused by an unusual
plentifulness of loanable capital and a consequent rise in prices,
that prosperity is not only liable to reaction, but certain to be
exposed to reaction. The same causes which generate this prosperity
will, after they have been acting a little longer, generate an
equivalent adversity. The process is this: the plentifulness of
loanable capital causes a rise of prices; that rise of prices makes
it necessary to have more loanable capital to carry on the same
trade. 100,000 L. will not buy as much when prices are high as it
will when prices are low, it will not be so effectual for carrying
on business; more money is necessary in dear times than in cheap
times to produce the same changes in the same commodities. Even
supposing trade to have remained stationary, a greater capital would
be required to carry it on after such a rise of prices as has been
described than was necessary before that rise. But in this case the
trade will not have remained stationary; it will have
increasedcertainly to some extent, probably to a great extent. The
'loanable capital,' the lending of which caused the rise of prices,
was lent to enable it--to augment. The loanable capital lay idle in
the banks till some trade started into prosperity, and then was lent
in order to develope that trade; that trade caused other secondary
developments; those secondary developments enabled more loanable
capital to be lent; and that lending caused a tertiary development
of trade; and so on through society.

In consequence, a long-continued low rate of interest is almost
always followed by a rapid rise in that rate. Till the available
trade is found it lies idle, and can scarcely be lent at all; some
of it is not lent. But the moment the available trade is
discoveredthe moment that prices have risen--the demand for loanable
capital becomes keen. For the most part, men of business must carry
on their regular trade; if it cannot be carried on without borrowing
10 per cent more capital, 10 per cent more capital they must borrow.
Very often they have incurred obligations which must be met; and if
that is so the rate of interest which they pay is comparatively
indifferent. What is necessary to meet their acceptances they will
borrow, pay for it what they may; they had better pay any price than
permit those acceptances to be dishonoured. And in less extreme
eases men of business have a fixed capital, which cannot lie idle
except at a great loss; a set of labourers which must be, if
possible, kept together; a steady connection of customers, which
they would very unwillingly lose. To keep all these, they borrow;
and in a period of high prices many merchants are peculiarly anxious
to borrow, because the augmentation of the price of the article in
which they deal makes them really see, or imagine that they see,
peculiar opportunities of profit. An immense new borrowing soon
follows upon the new and great trade, and the rate of interest rises
at once, and generally rises rapidly.

This is the surer to happen that Lombard Street is, as has been
shown before, a very delicate market. A large amount of money is
held there by bankers and by bill-brokers at interest: this they
must employ, or they will be ruined. It is better for them to reduce
the rate they charge, and compensate themselves by reducing the rate
they pay, rather than to keep up the rate of charge, if by so doing
they cannot employ all their money. It is vital to them to employ
all the money on which they pay interest. A little excess therefore
forces down the rate of interest very much. But if that low rate of
interest should cause, or should aid in causing, a great growth of
trade, the rise is sure to be quick, and is apt to be violent. The
figures of trade are reckoned by hundreds of millions, where those
of loanable capital count only by millions. A great increase in the
borrowing demands of English commerce almost always changes an
excess of loanable capital above the demand to a greater deficiency
below the demand. That deficiency causes adversity, or apparent
adversity, in trade, just as, and in the same manner, that the
previous excess caused prosperity, or apparent prosperity. It causes
a fall of price that runs through society; that fall causes a
decline of activity and a diminution of profitsa painful contraction
instead of the previous pleasant expansion.

The change is generally quicker because some check to credit happens
at an early stage of it. The mercantile community will have been
unusually fortunate if during the period of rising prices it has not
made great mistakes. Such a period naturally excites the sanguine
and the ardent; they fancy that the prosperity they see will last
always, that it is only the beginning of a greater prosperity. They
altogether over-estimate the demand for the article they deal in, or
the work they do. They all in their degreeand the ablest and the
cleverest the mostwork much more than they should, and trade far
above their means. Every great crisis reveals the excessive
speculations of many houses which no one before suspected, and which
commonly indeed had not begun or had not carried very far those
speculations, till they were tempted by the daily rise of price and
the surrounding fever.

The case is worse, because at most periods of great commercial
excitement there is some mixture of the older and simpler kind of
investing mania. Though the money of saving persons is in the hands
of banks, and though, by offering interest, banks retain the command
of much of it, yet they do not retain the command of the whole, or
anything near the whole; all of it can be used, and much of it is
used, by its owners. They speculate with it in bubble companies and
in worthless shares, just as they did in the time of the South Sea
mania, when there were no banks, and as they would again in England
supposing that banks ceased to exist. The mania of 1825 and the
mania of 1866 were striking examples of this; in their case to a
great extent, as in most similar modern periods to a less extent,
the delirium of ancient gambling co-operated with the milder madness
of modern overtrading. At the very beginning of adversity, the
counters in the gambling mama, the shares in the companies created
to feed the mania, are discovered to be worthless; down they all go,
and with them much of credit.

The good times too of high price almost always engender much fraud.
All people are most credulous when they are most happy; and when
much money has just been made, when some people are really making
it, when most people think they are making it, there is a happy
opportunity for ingenious mendacity. Almost everything will be
believed for a little while, and long before discovery the worst and
most adroit deceivers are geographically or legally beyond the reach
of punishment. But the harm they have done diffuses harm, for it
weakens credit still farther.

When we understand that Lombard Street is subject to severe
alternations of opposite causes, we should cease to be surprised at
its seeming cycles. We should cease too to be surprised at the
sudden panics. During the period of reaction and adversity, just
even at the last instant of prosperity, the whole structure is
delicate. The peculiar essence of our banking system is an
unprecedented trust between man and man: and when that trust is much
weakened by hidden causes, a small accident may greatly hurt it, and
a great accident for a moment may almost destroy it.

Now too that we comprehend the inevitable vicissitudes of Lombard
Street, we can also thoroughly comprehend the cardinal importance of
always retaining a great banking reserve. Whether the times of
adversity are well met or ill met depends far more on this than on
any other single circumstance. If the reserve be large, its
magnitude sustains credit; and if it be small, its diminution
stimulates the gravest apprehensions. And the better we comprehend
the importance of the banking reserve, the higher we shall estimate
the responsibility of those who keep it.