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money out of the banks and into their own possession with the least possible delay; therefore when the depositors of interior banks demanded cash, and such banks had as immediate reserve a cash fund amounting to only 6 per cent of their deposits, it followed that the eastern "reserve agents" were drawn upon in enormous sums.

On the New York banks the strain was particularly violent. During the month of June the cash reserves of banks in that city decreased nearly twenty millions; during July they fell off twentyone millions more. The deposits entrusted to them by interior institutions had been loaned, according to the banking practice, in the eastern market; their sudden recall in quantity forced the eastern banks to contract their loans immediately. But in a market already struggling to sustain itself from wreck, such wholesale impairment of resources was a disastrous blow. In the closing days of June the New York money rate on call advanced to 74 per cent, time loans being wholly unobtainable. The early withdrawals by depositors in the country banks were only a slight indication of what was to follow. In July this western panic had reached a stage which seemed to foreshadow general bankruptcy. Two classes of interior institutions went down immediately-the weaker savings banks and private banks, distributed in various provincial towns, which had fostered speculation through the use of their combined deposits by the men who controlled them all.

In not a few instances country banks were forced to suspend at a moment when their own cash reserves were on their way to them from depository centers. Out of the total of 158 national bank failures of the year, 153 were in the West and South. How widespread the destruction was among other interior banking institutions may be judged from the fact that the season's record of suspension comprised 172 state banks, 177 private banks, 47 savings banks, 13 loan and trust companies, and 16 mortgage companies.

During the month of July, in the face of their own distress, the New York banks were shipping every week as much as $11,000,000 cash to these western institutions. Ordinarily, such an enormous drain would have found compensation in import of foreign gold, and, in fact, sterling exchange declined far below the normal gold import point. But the blockade of credit was so complete that operations in exchange, even for the import of foreign specie, were impracticable. Banks with impaired reserves would not lend even on the collateral of drafts on London.

83. EVENTS IN THE PANIC OF 19071

BY RALPH SCOTT HARRIS

In July, 1907, it was felt in every circle that business trembled on the edge of an abyss. A continued money stringency forced Secretary Cortelyou in August to make deposits in banks and accept as security state, municipal, and railway bonds. Beginning in September there was a tone of ill-concealed fright among the most hopeful. Only the financial papers attempted to coax themselves back into the old confidence. During the second week in October call loans in New York ranged from 2 to 6 per cent; time loans from 6 to 7 per cent; commercial paper from 7 to 7 per cent. In these two weeks there were twice as many failures as in the same period of 1906. There were five times as many manufacturing failures in September, 1907, as in September, 1906.

A series of bank failures precipitated the spectacular part of the crisis. The first intimation of upheaval was the failure of the Stock Exchange firm of which Otto C. Heinze was the head. The suspension was due to a failure to corner the copper market. There was a well-defined suspicion that F. Augustus Heinze, president of the Mercantile National Bank, was interested in his brother's ventures and that the bank was being "used" in this connection. He and his supposed allies fell into public distrust. Seven banks and a trust company, with capital of $21,000,000 and deposits of $71,000,000, were dominated by these interests. Believing them able to weather the storm, the Clearing-House Association agreed to help them out if Heinze and his associates were eliminated. This was done. A few days later, however, the National Bank of Commerce refused to clear any longer for the Knickerbocker Trust Company, whose president was thought to be allied with the suspected interests. The result was a run on the Knickerbocker Trust Company, which, after paying out $8,000,000 in three hours, closed its doors. Runs followed on the Lincoln Trust Company and on the Trust Company of North America. Following several conspicuous commercial failures other banks in New York closed for safety's sake.

Meanwhile the money scramble began. Banks were forced to try to call loans to be prepared for the demand of banks and individual depositors. The Secretary of the Treasury deposited $35,000,000 in national banks in New York in four days.

Adapted from Practical Banking, pp. 250-57. (Copyright by the author. Published by Houghton Mifflin Co., 1915.)

Stock Exchange prices collapsed. A syndicate, headed by the late J. P. Morgan, stated that it would stand under the market, and placed $25,000,000 on call at 10 per cent; later $10,000,000 was made available at 50 per cent, the high price being fixed to discourage speculation. Soon the banks began to restrict cash payments; clearing-house loan certificates were issued. The demand for cash started a premium on currency the next week which continued the rest of the year. It offered an incentive for withdrawal of deposits. Large failures occurred as the result of the money stringency. On November 9 arrived the first large shipment of more than $100,000,000 in gold, imported to relieve the money stringency. The banks had already increased their circulating notes at this time.

But in the meantime the panic had seized the interior. Banks in most of the cities over 25,000 suspended cash payments. The clearing-houses stood guaranty on certificates. It is estimated that over $500,000,000 of substitute paper was issued. The country banks, having no clearing-house affiliations, suffered most. Many failures occurred among them.

Shipments of money to the West were made from New York. These varied from $4,400,000 for the week ending October 19 to $22,600,000 for the week ending November 16. In the week ending January 4 the tide turned and $5,500,000 was shipped to New York. The New York banks supplied the country with $125,000,000 between the beginning of the panic and the first of 1908. Still the reserves of the clearing-house banks were not seriously depleted, the importation of gold and the federal deposits having almost offset the loss of cash.

Perhaps the panic could have been localized had New York bankers been able to meet all demands without restriction. But restriction inspired country banks with a zeal to provide for any disaster. Hoarding followed. In December most country banks had higher reserves than at the beginning of the panic. The question which each country banker asked himself was, Can I afford to be less cautious than other bankers when I know the psychology of "panics" and "runs"?

84. THE HOARDING OF CURRENCY IN 18931

BY J. DEWITT WARNER

Then developed the feature that will forever characterize the stringency of 1893: instructive to those who have not already learned how immaterial is any ordinary supply of legal currency when

Adapted from Sound Currency, III (1896), p. 240.

compared with credit in its various forms—the real currency of the country. Almost between morning and night the scramble for currency had begun and culminated all over the country, and the preposterous bulk of our circulating medium had been swallowed up as effectually as, in a scarcely less brief period, gold and silver had disappeared before the premium on specie a generation before. Currency was hoarded until it became so scarce that it had to be bought as merchandise at a premium of 1 to 3 per cent in checks payable through the clearing-house; and to enable their families to meet petty bills at the summer resorts the merchants and professional men of the cities were forced to purchase and send express packages of bills or coin, while savings banks hawked their government bond investments about the money centers in a vain attempt to secure currency.

85. THE STRAIN UPON NEW YORK IN TIME OF PANIC1 BY O. M. W. SPRAGUE

The strain upon New York banks in emergencies is not limited to the withdrawals of balances by outside banks. Like the central money markets of other countries, New York is the cheapest market for loans in the United States, and is consequently resorted to by large borrowers from all sections. For this reason and on account of stock exchange and other financial dealings the demand for loans there is indefinitely large and attracts the surplus funds of the banks of the entire country. Loans of outside banks in New York are apt to be particularly large during those periods of months or even years when conditions are ripening for a crisis, because at such times the rates for loans in money centers always reach abnormally high levels. When a crisis does come, calls from the outside banks for the liquidation of their loans and the shipment of the currency received in payment are invariably even more in evidence than the drawing down of balances. The effects are far more disturbing, because of the shifting of loans which is involved.

There has been no crisis since the establishment of the national banking system in which the New York banks would have been at all likely to have resorted to suspension had their difficulties been confined to those of purely local origin. In 1873 the situation in

1 Adapted from "Proposals for Strengthening the National Banking System," Quarterly Journal of Economics, XXIV, 1909-10, pp. 221-22.

New York was so far improved at the time the banks restricted payments that the necessity for it was generally questioned. It was subsequently explained in a clearing-house committee report that the measure was taken on account of the threatened exhaustion of the cash reserves of the banks in response to the demands of the interior banks for the return of their deposits. In 1893 there was nothing in the nature of a panic in New York itself when this discreditable step was again taken. The banks succumbed to the prolonged drain of money to the West and Southwest, where numerous bank failures had generally weakened public confidence. Again, in the crisis of 1907, at the end of the week in which the troubles of the New York trust companies became known, the local situation was showing such decided evidence of improvement that but for the increased demands of the outside banks it is certain that cash payments would have been maintained.

86. SUSPENSION OF SPECIE PAYMENTS1

BY O. M. W. SPRAGUE

If the banks of the money centers refuse or even delay the shipment of funds deposited with them, the thousands of country banks will inevitably discontinue remittances upon items sent to them for collection. But is the reverse equally inevitable? If the initiative is taken by the country banks, is that sufficient reason for the discontinuance or restriction of the shipments of money to the interior by the banks of the money centers ? No, because the banks in the money centers reap great advantages from their position as clearing centers and as reserve agents. They incur a responsibility for maintaining the credit situation which does not rest upon the other banks.

Finally, what has been said of money centers generally in relation to the country banks applies with even less qualification to the responsibilities of the New York banks, to the banks of other money centers, and, indeed, to the banks of the entire country? There is always a chance that the New York banks, by meeting every demand upon them for cash, may be able to re-establish the ordinary course of payments between banks in different parts of the country, while nothing that the country banks and those of the secondary money centers may do can possibly bring this about. It follows, therefore, that even though in 1873, or on later occasions, some of

'Adapted from History of Crises under the National Banking System, pp. 61– 69. (National Monetary Commission, 1910.)

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