THE CRISIS IN THE CITY.
THE Bank of England has displayed sense and spirit this week, though also it may have displayed audacity. As we understand the many accounts published, the great house of Baring Brothers, which throughout this century has been at least the second commercial firm in the world—vide its history in Vincent Nolte's " Fifty Years in Both Hemispheres," the proof-sheets of which the first Lord Ashburton corrected—though not only sol- vent, but rich, had fallen into the snare which sooner or later tempts all such houses, and almost all great banks. It had advanced enormous sums, chiefly to South American Governments and great industrial under- takings, on the security of bonds which the public were expected to buy, and as a rule did buy, at an advance. Such business is perfectly legitimate and exceedingly profitable, but carries with it the serious risk that if any occurrence temporarily discredits those bonds, the financing house may find itself in the position of a landlord who owns half a county, but, from some defect in title, cannot raise £10,000 in a hurry. It is loaded, as the habit/as of the City phrase it, with a vast " lock-up." The accident in this instance occurred in the shape of an insurrection against the Argentine Govern- ment, since which time all South American securities have been falling ; American railway securities fell heavily, though independently, at the same time ; there was a general tightness in the money market caused by wild speculation of all kinds, and the great house found that it could not raise without help from the Bank the immense sums in cash it required to meet its daily accruing obliga- tions. It had the money in bonds and properties ; but to sell those bonds in masses would have forced down prices ruinously, and it accordingly applied for aid. The trans- action occurs every day, the only thing which made it notable being the gigantic scale of Barings' business, and. as we judge by the result, the validity of the security they could offer. The scale, however, of the request, though a reason for hesitation on the part of Directors, who after all are trustees, was also a reason for acceding to it. " Barings"' has been an institution rather than a house of business ; its transactions have affected the whole world ; and its suspension even for a month would have temporarily destroyed public confidence in the credit of the soundest firms. There would have been a furious panic ; a rush on the banks for deposit-money ; a, shower of drafts on the Bank of England, which never retains the enormous stock of bullion the Bank of France thinks necessary ; huge failures, and all the misery and destruction of property which marked 1866—the year of the " Black Friday "—aggravated by the fact that many of the usual holders of great sums of money have of late been "underwriting" great industrial enterprises, —that is, in practice, have lent money on profits which, however certain, are still in the future. London might have been within measurable distance of a state of barter. It is the first duty of the Bank of England to prevent a crash of that sort, if it can do it without danger to its shareholders, and in this instance the danger was almost inappreciable. The great moneyed houses and the great banks felt the seriousness of the situation, as much as the Bank of England, and, indeed, the Treasury itself did, and they guaranteed the Bank, in sums said on Friday to reach the amazing total of seventeen millions sterling. The great house was saved, and a terrible catastrophe, almost as bad for business as a revolution, was successfully averted. There will be plenty of discussion yet in Parliament, where men can speak freely, as to the wisdom of the course adopted, and as to the policy of ever allowing a national institution to assist individual firms, however broad their base ; but in- termediately the broad facts speak for themselves. The greatest, richest, and soberest firms in England think the Bank entirely right, and think it so strongly, that they stake their own money in heaps upon the wisdom of its course. If the evidence of experts is ever worth having, it is in intricate financial affairs, and in this instance the evidence of experts is unanimous, and is, at all events, so far sincere that they stake upon it their own capital and credit.
A great catastrophe has been averted by great measures, and the proceedings of the week redound to the credit of the City ; but we must also add that the catastrophe ought never to have been possible. It is ridiculous for outsiders to criticise the management of a house like the one endangered, which they can by no possibility understand without information not in their. possession ; but there are some general considerations on which even the public are competent to form opinions. Modern business, and especially modern financing business on the large scale, is getting to be dangerous business. We pointed out last week how enormously the risks of speculation, or of any transac- tion in which profit depends on the price obtained for bonds, were being increased by the internationalisation of finance, which makes it necessary to calculate probabilities too numerous for anybody to obtain the necessary knowledge. Nowadays the price of American railway bonds, say, may depend, and depend for a short time seriously, upon the price of South African diamond shares—the holder of the latter selling the former in masses, in order not to let go of his hopes—and nobody who takes pay in bonds can ever be absolutely safe. We also pointed out the uncertainty produced by the gigantic scale on which mammoth millionaires now operate, and the plain im- possibility of discovering what some of them are at,— whether, that is, it is calculation, or whim, or the excite- ment of a battle which induces them to run up or run down prices in such a bewildering way. We have also pointed out repeatedly that there is a limit on safe transac- tions produced merely by the limitation on ordinary brain-power, a transaction being possible to a Napoleon of finance which is impossible to a mere Junot or Massena. Napoleons never transmit their genius, and when operations rise to a certain scale, no house of long standing can be sure that it possesses the necessary brain-power for their safe and successful management. Their managers may be, and, we suspect, very often are, just in the position of many Generals who can manoeuvre thirty thousand men admirably well, but can no more direct an army of a quarter of a million than they can play the part of Providence to a planet. People are not the same in great matters as in small, have not the same judg- ment, the same nerve, or, above all, the same ability to select the multiplicity of agents whom in all vast transactions they must trust. These are all sources of error in modern business ; and there is another yet. We very much doubt whether men, whatever their experience, do deal with millions as they deal with thousands or even hundreds of thousands of pounds. They ought to be much more careful of the bigger sums ; but, so far as we have been able to observe, they are much less so. Lord Beaconsfield, a most acute observer of men, noticed this as a habitual trait in the conduct of the rich ; and you may constantly see the same thing in Parliament, where it is much easier to get a new vote for five millions than a new vote for £50,000, the great sum for the great end not really making the impact on men's minds which the lesser sum for the lesser end instantly does. We suspect it is the same in the City, and that the great affair causes less thought in the great mer- chant than the smaller one ; in fact, that he hardly applies thought to it at all, but sees the great profit, and works by rules open to all men, instead of his own special power and knowledge. He is certainly more tempted by the profit ; certainly less able to judge, if he is offering bonds, what the public will see in them ; and most certainly less willing to face a loss which merely from its scale, and not from its proportion to his means, he is sure to think unendurably heavy. He is, in fact, at once a feebler and a more audacious man, and runs risks which, were the scale but smaller, he would instantly perceive. Shrewd promoters know this well, and constantly swell the amount of the capital they propose to employ merely because they- know that a demand for a penny will be scrutinised through a microscope, and a demand for a pound only with ordinary eyes. Large figures tempt large dealers to encounter large risks ; and in some instances— we think that of the Buenos Ayres Waterworks was one—altogether blind their usually accurate insight. The Barings, to be in their present position, must have dealt on too large a scale, and such dealing is, and will always remain, the temptation and the danger of such firms. They are insurance offices which never distribute the risks of their insurances.
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