The Sun.
London, England, 1866-08-04 00:00:00

The State

Market.

(From the Economist of to-day.)
We may perhaps be more apprehensive than is
reasonable, but at the same time we cannot but re-

gird the present state of the money market with
much anxiety. The state of the Bank of England,
as shown in the return, is obviously and admittedly
unsatisfactory. The reserve in the banking de-
partment is very low, and the bullion in both de-
partments is but little increased, and is considerably
below the normal £15,000,000 at which we wish to

see it. The rate of discount has been at 10 per
cent. since the beginning of May, and yet the state
of the Bank is as unsatisfactory as we have de-
scribed. Trade is suffering deeply and acutely
under the influence of the prolonged high rate of

discount. Are we to look for its continuance much

Longer, or are we not to look for it ?
There are connected together in this inquiry

two questions of a very different nature. First a
domestic, and, second, a foreign question ; and
the considerations applicable to the one are by no
means in either case to be extended to the other.
First, as to the domestic question, there is no doubt
that ever since the failure of 0 verend, Gurney,
and Co., the public hold a clear £3,000,000 of Bank
of England notes in excess of the usual number.
By referring to the table in our City article it will
be found that the circulation (including the post
bills) was at the corresponding dates—

1863 £22,340,809
1864

1862
23,203,757

1866
showing the great augmentation which domestic
discredit has this year made. And the reserve in
the banking department is, of course, £300,000 the
worse. That sum is gone out to the public, and if
it had been at home the reserve would have been
£6,273,000 instead of £3,273,000. Last year the
reserve was £6,461,000, and the rate of interest was
4 per cent.
This is the exact state of things which Mr. Glad-
stone's letter was meant to meet. The subsidiary
circulations have been vastly reduced iu amount and

in efficiency.
The country circulation has been lessened, partly
in consequence of the panic and partly in conse-
quence of the usual changes at this season of the
year.
The credit currency of the country is to a much
greater degree impeded. Owing to the discredit
which exists a great many bank notes are kept in
the country, and will be so until confidence is re-
stored. The issue of more bank notes authorised by
the late Government was essentially an issue of
substitution to supply the place of a cheque cur-
rency largely impeded, and a country circulation
somewhat reduced.

But it is obvious that a mere change of one sort of
paper credit for another ought to make no difference
in the rate of interest of money. If it were necessary
for the bank to issue permanently £3,000,000 more,
the issue on securities should be changed to
£18,000,000, instead of £15,000,000. The latter was
fixed as the practical minimum, and if the mini-
mum changes, the limits must change too. Mr.
Watkin acutely observed that in 1857, £2,000,000
had been carried to the account of the banking de-
partment, and wished that such had been the case
now. The Bank, as we understand, followed the
precedent of 1847, when the Act of 1844 was not
violated ; in 1857, nothing was carried to the bank-
ing department till it was necessary to break the
Act ; and as a matter of precedent and usage the
Bank of England is justified in the course it has
now pursued, but at the same time, as far as prin-
ciple goes, the letter of licence means to authorise
an extension of not issue by the Bank of England
equivalent to the destruction of auxiliary circu-

lations : and such a substitution ought not to
cause a 10 per cent. rate in the money market.
If it be only one sort of credit replacing
another, we ought to be able soon to manage it
without difficulty and at reasonable cost. But the
grave difficulty is the foreign discredit, which we
are now for the first time to a similar extent ex-
periencing. The failure of Overend and Co., the
suspension of Peel's Act, and the long continuance
of 10 per cent., have produced a distrust of English
bills on the continent, and any one who has a debt
to receive in England now asks for money, not for
bills. He will not, as a rule, take bills, except those
of three or four first-rate houses, and the usual bill
currency of the world is suspended to a correspond-
ing extent. As we have before explained, we believe
that if the Bank of England had reduced their rate
to 8 per cent. six weeks or two months since, this
discredit would never have happened. The conti-
nental creditors of England would then have been
in comparison confiding and hopeful. But, unfor-
tunately, this opportunity was missed, the discredit
was excited, and we have now to deal with the
result.

We own we should be bold enough still to recom-
mend a reduction of the rate of discount, and a re-
duction at once. Of course such matters can be
but matter of opinion, but we believe that even still
such a step would stop the foreign demand upon us
for money. But if that step be not taken now,
probably it will not be taken for some weeks.
The Bank accounts, while the rate is what it
is, are not likely to improve much ; indeed,
they may get worse, as there is always a demand
for gold for harvest and even for travelling purposes
in the autumn. And if the present state of affairs
is not broken now, it may not be broken
for weeks to come. We quite admit that the re-
duction of the rate of discount might not now have
all the good effects it would have had some weeks
since. It is the nature of such remedies to gain by
promptitude and to lose by delay ; and it is easily
lost, and very slowly regained. We think still that
the Bank might venture on the bold experiment of
reducing the rate, though we admit it requires much
more courage than when it was first suggested, and
the Bank rejected it.
But whatever we recommend, we do not now ex-
pect that so long as the bank accounts continue as
they are at present, that the bank directors will
adopt what we admit to be an experimental, but
believe would be a wise, policy. And if they do
not, we must pay 10 per cent. for a considerable
time to come.