The crisis of 1847
How the bank would respond, if it once again came under great pressure, was not stated in the Act of 1844. When the proponents of the Act were queried as to how the bank would react to a threat to convertibility, they responded that the Act itself provided assurance that such pressure would not appear, since the possibility of over-issuance of bank notes had been eliminated (Fetter 1965 [1978]: 201).
Unfortunately, the bank’s officers adopted the attitude that implementation of the Bank Act freed the bank from any necessity of taking extraordinary actions (as it had done multiple times before) because the Act itself eliminated the improper behaviour that had led to previous crises. This attitude, quite naturally, led the bank to seek to garner a larger share of the discount business. The bank reduced its discount rate from 4.0 to 2.5 per cent, thereby matching the market rate and confirming the predictions of London’s private bankers that the Bank of England would become much more aggressive in its pursuit of profits (Fetter 1965 [1978]: 202). The bank’s new policy certainly produced more income. By February 1845, the value of bills discounted by the bank had risen by nearly two thirds, and the bank’s total assets had risen by 64 per cent (based on data in Fetter 1965 [1978]: 204).Commercial deposits began growing rapidly in 1845, with the bulk of the growth being driven by special “railway deposits linked to payments for new securities, while the bank of England continued to expand its lending apace. The ratio of the Banking Department’s cash reserves to assets plunged throughout 1845. An improvement of the bank’s reserve ratio in the first half of 1846 gave way to a sharp drop later in the year, culminating in the suspension of the Bank Act in October 1847 (Fetter 1965 [1978]: 203).
Although the suspension took a great deal of pressure off the bank, it did not solve all its problems. One issue that bedevilled the bank was the fact that more than a fifth of the bank’s reserves were in silver. Since most European nations, as well as Asian countries, were on the silver standard, holding substantial silver reserves was appropriate. However, the bank could not redeem its notes in silver; banknotes were redeemable only in gold, which had the effect of reducing the bank’s effective reserve (Fetter 1965 [1978]: 206-7). Fearing that it would fall afoul of the law, the bank refused to lend on silver at all.
The British economy gradually recovered over the course of 1848, though the debate over how best to regulate the note issued continued for some time.