How Mr. Gladstone's Bank Letter of 1866 Procured a Loan of Six Millions for Russia

Author(s) Karl Marx
Written 9 November 1868


Source: Marx-Engels Collected Works, Volume 21, p. 28;
First published: in The Diplomatic Review, December 2, 1868.
Collection(s): The Diplomatic Review

Marx wrote this item at the request of Collet Dobson Collet, the publisher of The Diplomatic Review (see Marx's letters o Engels of November 14 acid 23, 1868, MECW, Vol. 43). The editor was David Urquhart, a journalist and former diplomat. In the early 1820s Urquhart published The Portfolio, a collection of diplomatic documents and papers relating to the diplomacy, of European powers, including documents exposing the diplomatic activity of Palmerston, who virtually, directed Britain's foreign policy for many years.

In 1853, in a series of articles entitled Lord Palmerston Marx used, along with other documents, some of those published by Urquhart. Later, some of Marx's articles were reprinted in Urquhart's journal The Free Press. At the same time, Marx sharply criticised Urquhart for his anti-democratic views and emphasised the principal difference between his own stand as a proletarian revolutionary and the Urquhartites' reactionary, position.

When publishing this item by Marx, the editors of The Diplomatic Review prefaced it with a note recommending Marx as the author of Revelations of the Diplomatic History of the ]8th Century and of Capital.

Mr. Gladstone's letter of the 11th of May, 1866, suspended the Bank Charter Act of 1844 [1] on the following conditions: -

1. That the minimum rate of discount should be raised to 10 per cent.

2. That if the Bank overstepped the legal limitation of its note issue, the profits of such over-issue should be transferred from the Bank to the Government.

Consequently the Bank raised its minimum rate of discount to 10 per cent. (which means 15 to 20 per cent. for the common run of merchants an d manufacturers), and did not infringe the letter of the Act in regard to the note issue. They collected, in the evening, notes from their banking friends and other connexions in the City to reissue them in the morning. They infringed, however, the spirit of the Act by allowing, under the Government letter, their Reserve to dwindle down to zero, and that Reserve, according to the contrivances of the Act of 1844, forms the only available assets of the Bank as against the liabilities of its banking department.

Mr. Gladstone's letter, therefore, suspended Peel's Act in such a way as to perpetuate and even artificially exaggerate its worst effects. Neither Sir G. C. Lewis's letter of 1857 nor Lord John Russell's letter of 1847 [2] lay open to the same censure.

The Bank maintained the 10 per cent. minimum rate of discount for more than 3 months. This rate was regarded by, Europe as a danger signal.

The most morbid sense of distrust in English solvency having thus been created by Mr. Gladstone, out comes Lord Clarendon, the man of the Paris Conference[3] , with an explanatory letter, published in The Times, to the English Embassies on the Continent. He told the Continent, in so many words, that the Bank of England was not bankrupt (although it was really so, according to the Act of 1844), but that, to a certain degree, English industry and commerce were so. The immediate effect of his letter was not a "run" of the Cockneys upon the Bank, but a "run" (for money) of Europe upon England. (That expression was used at the time by Mr. Watkin in the House of Commons.) Such a thing was quite unheard of in the annals of English commercial history. Gold was shipped from London to France, while, simultaneously, the official minimum rate of discount was 10 per cent. in London, and 3 1/2 to 3 per cent. at Paris. This proves that the withdrawal of gold was no regular commercial transaction. It was solely the effect of Lord Clarendon's letter.

The 10 per cent. minimum rate of discount having thus been kept up for more than three months, there followed the inevitable reaction. From 10 per cent. the minimum rate receded by quick steps to 2 per cent., which, a few days ago, was still the official Bank rate. [4] Meanwhile, all English securities, railway shares, bank shares, mining shares, every sort of home investment, had become utterly depreciated, and was anxiously shunned. Even the Consols declined. (On one day, during the Panic, the Bank declined making advances upon Consols.) Then the hour had struck for Foreign Investments. Foreign Government Loans were contracted, under the most facile conditions, on the London market. At their head stood a Russian Loan for 6 millions sterling.[5] This Russian Loan, which, a few months ago, had miserably broken down at the Paris Bourse, was now hailed as a godsend on the London Stock Exchange. Last week only Russia has come out with a new loan for 4 millions sterling. Russia was in 1866, as she is now (November 9, 1868), almost breaking down under financial difficulties, which, consequent on the agricultural revolution she is undergoing, have assumed a most formidable aspect.

This, however, is the least thing Peel's Act does for Russia — to keep the English money-market open to her. That Act puts England, the richest country in the world, literally at the mercy of the Muscovite Government, the most bankrupt Government in Europe.

Suppose the Russian Government had had lodged, in the name of a private firm, German or Greek, from one to one and a half millions sterling at the beginning of May, 1866, in the banking department of the Bank of England. By the sudden and unexpected withdrawal of that sum, she might have forced the banking department to stop payment at once, although there were more than thirteen millions sterling of gold in the issue department. The bankruptcy of the Bank of England might, then, have been enforced by a telegram from St. Petersburg.

What Russia was not prepared for in 1866, she may make ready to do — if Peel's Act be not repealed — in 1876.

  1. ↑ The Bank Charter Act (An Act to Regulate the Issue of Banknotes, and for Giving to the Governor and Company of the Bank of England Certain Privileges for a Limited Period) was introduced by Robert Peel on July, 19, 1844. It provided for the division of the Bank of England into two separate departments, each with its own cash account — the Banking Department, dealing exclusively with credit operations, and the Issue Department, issuing banknotes. The Act limited the number of banknotes in circulation and guaranteed them with definite gold and silver reserves which could not be used for the credit operations of the Banking Department. Further issues of banknotes were allowed only, in the event of a corresponding increase in the precious metal reserves. The issue of banknotes b), provincial banks was stopped. The Act was suspended several times by the government itself, in particular during the monetary crises of 1847 and 1857.
    The crisis of 1866 in England was particularly, manifest in the sphere of credit. In May 1866, when the financial panic reached its climax acid the Bank of England was in danger of bankruptcy, its Board received a letter, signed by the Prime Minister Russel and the Chancellor of the Exchequer Gladstone, sanctioning the suspension of the 1844 Act (see The Times, No. 25497, May 14, 1866); this allowed the Bank to extend credit operations and somewhat mitigate the financial panic in the country.
    Marx analysed the Act of 1844 and its significance in a number of articles for the New York Daily Tribune: "The Vienna Note. — The United States and Europe. — Letters from Shumla. — Peel's Bank Act". The Bank Act of 1844 and the Monetary Crisis in England", "The British Revulsion", "The English Bank Act of 1844", etc. A detailed description of the Act was given by Marx in Capital, Vol. III (Chapter XXXIV).
  2. ↑ Marx means the first two occasions when the Bank Act of 1844 was suspended — the letters from Prime Minister Russell and Chancellor of the Exchequer Wood, dated October 2,7), 1847, to the Governor and Deputy-Governor of the Bank of England (in: Report from the Secret Committee of the House of Lords appointed to inquire into the causes of the distress.... London 1848), and from Prime Minister Palmerston and Chancellor of the Exchequer Lewis of November 12, 1857, to the Governor and Deputy-Governor of the Bank of England (in: The Times, No. 22837, November 13, 1857).
  3. ↑ Marx refers to the congress of representatives of France, Britain, Austria, Russia, Sardinia, Prussia and Turkey in Paris, where a peace treats, was signed on March 30, 1856, putting an end to the Crimean War, 1853-56. Marx here alludes to the fact that Clarendon, the bead of the British delegation, failed to carry out the plans of British diplomacy to the full because of Anglo-French contradictions and a noticeable rapprochement between France acid Russia.
  4. ↑ The articles headed "Money Market and City, Intelligence" (The Times, Nos. 25539 and 25579, July 2 and August 17, 1866) voiced alarm about the flow of English capital abroad, mainly to France, ane] about the consequent fall in the discount rate of the Bank of England.
  5. ↑ The agreement on another 5-per cent Anglo-Dutch loan to Russia was concluded on November 4, 1866, to cover her foreign payments, particularly her debts.