to be unnecessary to require any such collateral security from American houses of undoubted wealth and known prudence in the conduct of their affairs; and if one English house thought this unnecessary in the case of Messrs A. of New York, another thought it unnecessary in the case of Messrs B. of Boston, and so on; till at length the practice was in all cases resisted by the Americans as illiberal and invidious, and abandoned by the English as useless. The consequence was, that American houses of little standing or capital were able to obtain credits here, and frequently to an immense amount, without any collateral security whatever. This is what is technically called the 'open credit system,' and a most dangerous one it undoubtedly is. After it had been once established, we need not certainly wonder, --knowing the speculative disposition of the Americans, and the extraordinary facilities for obtaining loans that recently prevailed in all parts of the Union,-at the immense amount of their imports, or at the difficulties in which the parties in England who gave them credits are now involved.

The bills drawn by the American agents on and accepted by the English houses, were, as already stated, at four months; and as the goods paid for by means of these bills were sent to America generally within a month, and sold within two, there was ample time for remitting funds to England before the bill became due. And it was the belief that the bills were all issued in bona fide transactions, and that they would be provided for by the sale of an equivalent amount of produce, that seems to have rendered them peculiar favourites with the money-dealers and private bankers, by whom they were regarded as an approved species of paper.

But, exclusive of the obvious tendency of this system to foster overtrading, it was defective in another particular not so easily discovered It began to be no unusual thing for an American house which had obtained a credit for four months upon Messrs A. of London, to pay it off by getting a similar credit upon Messrs B., and then extinguishing this by a new credit upon Messrs C., and so on. This abusive practice was not, of course, resorted to by the first-rate American houses; and the more prudent and cautious of the English houses set their faces against it; but it was frequently practised without their knowledge, and some of the others being less scrupulous, a great amount of what was really accommodation paper got into the circle, and not being distinguishable from that which was legitimate, was as readily discounted.

It is a curious and not very easily explained circumstance, that, notwithstanding the intense competition that prevails in this coun

try in all departments of trade, the business, which for some years past had been reckoned equally safe and lucrative, of making advances on American account, was almost wholly confined to about seven houses, six in London and one in Liverpool. And we have good reason to think that we are rather within the mark when we affirm, that the aggregate acceptances of these seven houses became latterly so enormous as to have amounted at certain periods of 1835 and 1836 to no less than fifteen or sixteen millions sterling!

Unluckily, however, the capital of the houses in question was very far indeed from being at all equal to the safe transacting of such an amount of business. If we take that part of it which existed in this country, and could be made available to meet the engagements of the firms, at L.300,000 each, or at a gross sum of L.2,100,000, we shall not be within, but beyond the mark. The miserable inadequacy of such a capital, which did not in fact exceed one-seventh or one-eighth part of their acceptances, is too obvious to require to be insisted upon. It left no sufficient margin for accidents, or unfavourable contingencies of any sort; and it must have been clear to every one acquainted with the facts, that the moment any thing occurred to interrupt the regular receipt of remittances from America, or to prevent the discount of American bills in our markets,-that moment the system would fall to pieces, and all the houses which could not command extraordinary resources, would be compelled to suspend payments.

Simultaneously with the growth of that system of overtrading and spurious credit in America, already noticed, a similar system grew up in this country. It is unnecessary, however, to recapitulate the facts stated with respect to the origin and progress of that system in our last Number (Art. III.) But, in consequence of the heavy drain for bullion that set in upon the Bank of England, occasioned exclusively by the sudden and excessive increase in the number of joint-stock banks, and their over-issue, the Bank found it necessary to raise the rate of interest, and to adopt vigorous measures for contracting the currency. Now, it is of importance to remark, that down to this period -that is, to August last-all, or almost all the vast amount of discounts required by the American houses, had been furnished to them principally by the money-dealers of London; but latterly also, to a great extent, by the joint-stock banks. None of the houses had resorted for discounts to the Bank of England -their paper being negotiated by the parties referred to on decidedly cheaper terms than would have been charged by the Bank. In fact, the folly and recklessness displayed by the money-dealers

and provincial bankers was even more stupendous than that of the merchants, who had made themselves responsible, in the first instance, for such a mass of bills. Indeed, had it not been for the blind confidence and want of all discretion evinced throughout the whole of these transactions by the money-dealers, the merchants would not have become entangled to any thing like the extent that they did.

The rate of interest charged by the Bank of England being, as already stated, above the market rate, the Bank lent certain funds at her disposal, and which she could not otherwise employ, to the money-dealers, to be employed by the latter in the discount of good mercantile paper. The money-dealers thinking, for reasons best known to themselves, that the paper of the American houses was the best that could be had, employed the cash lent them by the Bank, in discounting their bills; and these being sent into the Bank for security, the latter became, for the first time, aware of the prodigious extent of American paper afloat, and of the vast engagements of the American houses. This discovery being made at a time when the Bank was under the necessity of exerting herself to contract the currency, and to bring back the exchange to par, could not fail to excite very uneasy feelings. And it is of importance farther to notice, that the Circular of the President of the United States, ordering the price of the public lands to be paid in specie, being issued on the 11th of July, the account of its appearance, and of the effect it was beginning to have, and would most likely continue to have, in the United States, came to this country about the same time that the attention of the Bank Directors was called to the mass of American paper in our market.

It is needless to say that this was a very delicate and difficult state of things to deal with. It must have been clear to every man of sense, that the affairs of the American houses had come to a crisis; and that what had happened in the United States, and was happening here, would ultimately put an end to that system of spurious credit and overtrading on which they had been proceeding. But, considering the degree in which the interests of most classes in this country were involved in this question-considering the vast amount of paper afloat-—that America was the best customer for our manufactures, and that about a fifth part of the whole foreign trade of the country is carried on directly with her, exclusive of a large portion carried on indirectly through American agency,-it became necessary to act with extraordinary circumspection. The great object should have been, to reduce the engagements of the American houses, without, if possible, bringing them into discredit. And, perhaps, it

would have been the best way to effect this for the Governor and Deputy-Governor of the Bank, to have gone privately to the leading partners of the houses, and have represented to them their fears as to the consequences that would most probably result from their keeping afloat so large a mass of paper, and the necessity that, in their judgment, existed for setting about its gradual reduction. But whether it were that the Directors conceived this would be an improper interference with other people's matters, or for some other reason, we believe they made no remonstrance of the sort; but, in the month of September last, after receipt of the intelligence of the commencement of the revulsion in America, the Governor of the Bank wrote to the agent of the Bank's branch in Liverpool, instructing him, consistently with the rule to be observed in London, to reject the paper of the American houses, which were specified by name! We take it for granted, that the Governor had the authority of the Court for writing this letter; but, however this may be, it seems to have been, in no ordinary degree, rash and ill-advised. The American houses had not, when it was written, applied to the Bank to discount a single bill; and though the Directors were bound, knowing their situation, to have been extremely cautious, had they come to them, this would not warrant their doing any thing, in anticipation, that might by possibility undermine the credit of parties not seeking their assistance. Besides, it is not practicable to throw out large classes of bills; at least, if the public interests be thereby materially compromised. The Bank may reject the paper of a particular house, though that is always invidious; but, if she attempt simultaneously to reject the paper of all the houses engaged in any very extensive department of business, it is quite certain, from the discredit such a proceeding will occasion, that she will, in the end, have a much greater mass of inferior paper thrust upon her than if she had acted on a more liberal system. But whatever may be thought of the act of writing such a letter, there can certainly be only one opinion as to the necessity that existed for making it most confidential,' and of maintaining profound secrecy with respect to it. Whether, however, it were owing to the inexcusable negligence of the letter-writer, or to some inconceivable folly on the part of the agent at Liverpool, to whom it was addressed, the latter did not regard it as confidential, but, on the contrary, showed it to certain parties! The effect was like magic. The credit of the American houses, that had previously stood so high, was instantly annihilated. The money-dealers and discount-merchants immediately turned round, and unceremoniously rejected the paper for which they had the moment before manifested so great

a liking. But the Bank not daring, under the circumstances, to act on the principle laid down in the letter, or to refuse paper said to be discredited by her own act, the money-dealers got out of the difficulty; and the Bank found herself compelled to take the paper they had created, and she had pronounced to be unsafe.

This, however, was but the least effect of this precipitate proceeding. Intelligence of what had happened in England was conveyed by the first packets to America, where it irreparably damaged the credit of the English houses. The American merchants, who already had to make head against the effects of the President's Circular, and the crippled state of credit at home, found, to their astonishment, that they had a new and most serious evil to contend with; and that they would not only be pressed for the immediate payment of the immense balances due by them to England, but would most probably have to provide for some millions of returned bills. The banks in all the Atlantic cities immediately took the alarm, lest bullion should be demanded for shipments to Europe, as well as for the West; and the severity of the crisis that had begun in the United States was in this way immeasurably aggravated. From the moment that the discredit took place here, it became apparent that the stability of such houses as could not command extraordinary resources, would entirely depend on the fact of their correspondents in America being regular in their remittances; and that their situation was so very perilous, that any unusual delay in the arrival of a packet might compel them to suspend payment.

It may be said, perhaps, that whether the letter in question had been written or not, the result must have been nearly the same-that the American houses had grossly overtraded, and that it was impossible for them to escape the effects of their folly. This is undoubtedly true. But with greater circumspection and prudence at the outset, by secretly admonishing the parties of their danger, and of the course the Bank might be compelled to pursue, the crisis might have been deferred till the engagements of the houses had been materially reduced; and had this been done, much mischief would have been obviated both in England and in America.

From the time that the drain for gold began to set against the Bank in April, 1836, it must have become evident to all persons in the least acquainted with principle, that there would be in the end a considerable scarcity of money, a difficulty of getting paper negotiated, and a fall of prices. But no anticipations of this sort, nor even the letter of the American President, and the discredit thrown on American paper, appear to have had any