A Brief History of Panics and Their Periodical Occurrence in the United States Part 6

above certified cheques.

On the 18th there was a run on the deposits. Withdrawals continued on the 19th and 20th, especially by the country banks, and the banks'

correspondents. No security could be realized upon; and in order to relieve the situation the Secretary of the Treasury bought $13,500,000 of National 5-20 bonds, stating that he could do no more.

The New York Stock Exchange was reopened September 30th, without any notable occurrence; but everything was very low. Several other suspensions occurred--for instance, that of Sprague, Claflin, & Co.

The rate of discount being 9 per cent., a panic was feared in London.

The banks pa.s.sed the most critical period on October 14th; out of $32,278,000 legal-tender dollars at the beginning of the panic, only $5,800,000 remained on hand. Not until the middle of November did the decline stop and a slight advance take place. Throughout the panic the bank reserves were much below the legal requirement of 25 per cent; from the 13th to the 30th of September they fell to 24.44 and 23.55 per cent.

The New York Clearing House in September adopted a measure which permitted dealings to continue. It authorized the banks to deposit the bills on hand, or the other securities they had accepted, in exchange for which they issued certificates of deposit bearing 7 per cent. in notes of $5,000 to $10,000 to the extent of 70 per cent. of the security deposited. Thus $26,565,000 of them were put into circulation.

Furthermore, they made a common fund of the legal tenders belonging to the a.s.sociated Banks for mutual aid and protection. The suspension of payment took place first in New York and then extended to the large cities of the Union; it lasted forty days, until the 1st of November; this measure was looked upon as having prevented the greatest disasters.

The table setting forth the situation, compared with the balance sheets of the a.s.sociated Banks of New York on January 1st, April 1st, July 1st, September 1st, and October 1st of the years 1870, 1871, 1872, and 1873, shows us the following changes: discounts had fluctuated from $250,000,000 in January, 1870, to $309,000,000 in September, 1871; they had become reduced to $278,000,000 in September, 1873, on the eve of the panic, and from the month of September, liquidation of the panic having begun, they were reduced to $250,000,000. Deposits from $179,000,000 in January, 1870, rose to $248,000,000 in July, 1871, with $296,000,000 of bills discounted, and once more reached $198,000,000 in September, 1873, with $278,000,000 of discounts and $195,000,000 in December.

Even at the most critical moment of the panic they continued larger than the usual average of the preceding years.

The metallic reserves played too feeble a role to have caused failure; they had varied from $34,000,000 in June, 1870, to $9,000,000 in September, 1871, $18,000,000 in September, 1873, and $23,000,000 in December, 1873.

The circulation varied still less: from $34,000,000 in January, 1876, it decreased to $27,000,000 in July, 1872, and remained at the same figure during the year 1873, if we can judge of this by the balance sheet rendered on the first day of each quarter. In each case there is no opportunity for us to charge an excessive issue.

According to the statement of the Comptroller of the Currency, paper discounted decreased between the 12th of September and the 1st of November from $199,000,000 to $169,000,000.

To sum up, the circulation had fluctuated very little; deposits from $99,000,000 had increased to $167,000,000 between the 12th and 20th of September, at the most critical period; and when suspension was universal, they had declined to $89,000,000. After the breaking out on the 18th of October, and since then from the 22d of November, they had risen to $138,000,000.

The metallic reserve, after a brief revival from $14,000,000 to $18,000,000 between the 12th and 20th of September, had fallen back to $10,000,000, only to rise to $14,000,000 in November.

In the midst of these difficulties, the securities of the various States held up. Since the first months of 1873, the demands of the English market caused an upward movement in them; in September it was impossible to make a loan, without using them as collateral. In order to help the market somewhat, the Treasury bought about $13,000,000 of National securities on the Stock Exchange, but, lacking resources, that was the only effort it could make. The German Government invested quite a large sum in the new five per cents., so that the advance in public securities lasted through the whole year: the market rate for 5-20's advanced from 91 per cent. in April to 96 per cent. in October, in the midst of the market's panic.

The $15,000,000 of indemnity awarded by the Geneva Court of Arbitration, and paid by England for having admitted privateers into her ports, was put into 5-2O's. Apart from this strength in the public securities, the railway obligations, especially those upon new roads, were very much depressed; they could no longer be placed, ninety new companies having stopped paying their coupons, whilst those of the old lines held their quotations.

Great speculators, Vanderbilt at the head, formed syndicates, embracing several companies, and made prices as suited their plans. The death of Mr. Clarke in June dealt the first blow to this combination, and the failure of George Bird Grinnell brought about its dissolution.

The liquidation of this tremendous concern kept down prices for a long time.

The price of gold, still quoted at 112-1/2 per cent. in January, 1873, rose to 119-1/2 per cent. in April, superinduced by speculation, for at the height of the panic it declined to 106 on the 6th of November.

It is true that at that time all doubtful accounts were liquidated, and demands for gold had disappeared; if we were to rely upon the export figures only, we would find them less than in the preceding years.

Exchange rates were much more depressed; from 109.45, representing par, they fell to 107.25 for the best 60-day paper. This paper was much sought after by speculators, who, when discounting it, procured bonds authorizing them to transfer the t.i.tles unless payment was made promptly at maturity. Prices fell so low that it was often impossible to negotiate paper at any price. The activity reigning at the beginning of the year showed itself in the Exchange movement; the excess of imports over exports rose in the first months to $100,000,000, whilst in the preceding year it did not exceed $62,000,000; prices ruling in the American market attracted goods from all quarters.

PANIC OF 1884.--The panic which burst upon the United States in 1884 was the last thunder-clap of the commercial tempest which had reigned since the month of January, 1882. Public opinion already recalled the decennial period which separated the existing panic from that of 1873.

The acute period was of short duration; the crash occurred on May 14th, and the decline of values had touched bottom by the end of June. From the 9th of June the people began to steady up, they felt the ground firmer under their feet. The situation gave evidence of great strength; and, notwithstanding the dearness of money, and an enormous fall in prices, there were only a few failures, and at the close of the year equilibrium was re-established, although the liability of the losses had risen to $240,000,000. These losses, it is true, were almost entirely borne by financiers and speculators, rather than by manufacturers and traders.

The month of May, 1884, concludes the prosperous period which followed the crisis of 1873. During this period the most gigantic speculations in railroads occurred; the zenith of the movement was in 1880, and as early as 1881 a retrograde movement began, only to end in the disasters in question. The decline in prices had been steady for three years; they had sunk little by little under the influence of a ruinous compet.i.tion, caused by the number of new lines and the lowering of rates, but above all through the manipulations by the managers on a scale unexampled until now. In connection with the disasters of May, 1884, the names of certain speculators who misused other people's money, such as Ward, of Grant & Ward; Fish, President of the Marine Bank; and John C. Eno, of the Second National Bank, will long be remembered. General Grant, who was a silent partner in Ward's concern, was an innocent sufferer, both in fortune and reputation.

The Marine Bank suspended on the 5th of May, and in the following week the Metropolitan drew down in its train a large number of bankers and houses of the second order. The confusion was then at its height. Owing to the very delicate mechanism of the credit circulation, the banks and the clearing house were the first attacked and the most shaken, but they immediately formed themselves into a syndicate to resist the storm which was upsetting all about them. As cheques were no longer paid, settlements no longer took place, and the credit circulation was suspended; this stoppage was liable to induce the greatest consequences, hence it was necessary to be very circ.u.mspect. Here it was not possible to suspend the law, as in England the Act of 1844 was suspended, permitting an excess of the official limit for the note issue, but the banks could have been empowered to demand authority to change the proportion enacted by the law creating National Banks. They had no recourse to any of these violations of the Statutes, which prove only too often under such circ.u.mstances that regulation by law is impossible; they satisfied themselves, without having the public powers intervene, with issuing clearing-house certificates, that is to say, promises, which they were bound to accept as cheques in settling up the operations of each day. It was through this help that the Metropolitan Bank was enabled to resume payments on the 15th of May, the evening of the day following its suspension. The Second National Bank was a loser through the acts of its President, Mr. John C. Eno, but his father and the Directors hastened to make good the deficit. At this moment the excitement was intense, deposits were withdrawn, and 1 per cent. a day was paid, and even more, to obtain ready money or credit; under the influence of numerous sales of securities, exchange fell rapidly, metallic money was secured in London even, to be hurried to New York.

Never could purchases be made under better auspices. Above all is this true when we observe that the condition of companies was much better known than in 1873. The year 1883 had been disturbed by numerous failures. There had been no crash, but prices, far from advancing, had held their own with difficulty. On the eve of the breaking out of the panic there was complaint about the acc.u.mulation of goods in the warehouses, and of the difficulty of making exports. No scheme worked out, despite a very high protective tariff, and people were asking themselves what was its effect under the influence of unfavorable exchanges. Gold flowed away from the country, and cash on hand decreased each day.

On the 1st of January, 1884, the New York & New England Railroad was placed in the hands of a receiver by order of the court. The same thing happened on the 12th of January to the North River Company. In February, March, and April many houses exhibited their balance sheets. The fall in prices grew accentuated not only on the Stock Exchange, but in all markets. The discomfort increased until the 6th of May, the day on which occurred the failure of the National Marine Bank, whose President was a.s.sociated with the house of Grant and Ward, which went down shortly afterwards with a liability of $17,000,000. This financial disaster made a great stir. Anxiety spread everywhere, when on the 13th of May the President of the Second National Bank of New York was also forced to suspend payment with a liability of $3,000,000; this was the final blow to credit. Every operation was suspended, all exchange became impossible; not securities but money was lacking. At one time the panic was such that the rate of discount and loans rose to 4 per cent. a day!

Although the panic was general, it was rather a panic of securities in the chief places of the United States, especially in New York.

One no longer knew on whom to count to provide ready money. Offerings were made on the Stock Exchange where there were no bidders, and the market disappeared in the midst of a panic which paralyzed every one.

This melancholy state of things was still further aggravated on the 14th of May by the failure of Donnel, Lawson, & Simpson and Hatch & Foote. On May 15th it was the turn of the Savings Banks of New York, of Piske & Hatch, and of many others. It was impossible to obtain any credit from the banks, and all securities were unsalable, unless at ruinous rates.

Reduced to such an extremity, it was necessary to adopt some course to help the market and avoid suspension of payments.

The certified checks issued by the banks did not answer, and it was necessary to have recourse to a new means of settlement. The members of the clearing house emerged from their usual pa.s.sive role to intervene and to do a novel thing: they issued certificates that they accepted in the name of the most embarra.s.sed inst.i.tutions whose fall they wished to avert, in order to prevent the failure of others. Then, as everybody was making default, the Secretary of the Treasury in his turn wished to aid the common effort to sustain the credit of the situation, and, in order to accomplish this by the most regular methods, he pledged himself to prepay the debt, whose term was close at hand.

Despite these last helps it was easily seen how great must be the disorder, to induce recourse to such methods. Never had they been employed until now, which is proof enough of the enormity of the situation, whose equilibrium, had been disturbed since 1887, the year in which high prices in everything had been reached on the Stock Exchange.

To still further increase the joint responsibility of the members of the clearing house, it was agreed that a committee should be charged with receiving as collateral bills and securities in exchange for which certificates of deposit bearing 3 per cent. were issued at the rate of 75 per cent. of the amounts deposited. This agreement being adopted, a way to re-open the National Metropolitan Bank was sought. A selection made from its collection of bills showed the securities it could pledge for clearing-house certificates; and, its circulation being thus re-established, it was enabled on May 15th to take part in settlements.

Upon the announcement of a syndicate composed of the banks and the clearing house, things settled down; the general distrust diminished; there was the necessity and wish to realize, but funds were lacking.

The rise in the discount rate attracted foreign capital little by little, and exchange grew easier. With the help of the syndicate the credit circulation became re-established, and the rate of discount declined to 5 per cent. For commercial needs money was always to be had at 4-1/2 per cent. and at 5 per cent. when at the Stock Exchange it was necessary to pay 4 per cent. per day!

The panic was terrible from the 3d to the 10th of May; for two days no one wished to part with his money; it was impossible to borrow on any collateral, at any price whatever. Hence came a decline in the public securities, which fell below the low prices of 1873.

The public complained that it could not have foreseen the panic, because the loss of gold had been concealed by the oft-repeated a.s.surance that there was a reserve of $600,000,000 in Washington.

Similar situations in 1857 and in 1873 were recalled, and it was remarked that like troubles had not occurred until after a long period of high prices, when capital was scarce and the rate of interest high, whereas this was far from being the case at this period.

It was nevertheless notorious that the decline in prices began two years back, that the advance in prices had been stopped by the breaking out of the panic of 1882 in Europe, at Paris, and that since that moment prices had begun to decline, less rapidly, however, than in Europe, because the shock had then merely disturbed a market which had not yet recovered from the panic of 1873, from which, in consequence of the Franco-Prussian war, France had escaped. The mine not being sufficiently charged in the United States the explosion had not recurred.

Speculation, unable to restore a new impulse to the rise in prices, was nevertheless able to hold its own, until May, 1884, when the delayed explosion finally occurred, covering the market with ruins and bringing about a liquidation with its accustomed train, a great and lengthy decline of prices.

We may here note similar delays in the breaking out of panics, in the period of 1837, 1839, 1864-1866 in France and in England. Even an involved state of affairs may be hidden by certain conditions, and the situation, although itself exposed to the same excessive speculation, may witness the breaking out of the panic which has been delayed for a certain time, only to occur simultaneously with the beginning of a decline of prices, and when it is thought that danger has been escaped.

As in Brussels and in the United States in 1837-1839 and in England in 1864-1866, large houses and powerful inst.i.tutions of credit had maintained a whole scaffolding of speculation which was already out of plumb, but still able to stand upright through the general effect of the parts which connected them, and in this unstable equilibrium it sufficed for a single one to detach itself in order to overthrow the whole edifice at a juncture at which it was hoped it would continue to stand and even grow stronger. Does not this prove that after these epochs of expansion and activity characterizing prosperous periods (and there is no prosperous period without a rise in prices) a stoppage is necessary, a panic allowing a period of rest to permit the liquidation of transactions employed in helping to make a series of exchanges at high prices, and to allow the capital and savings of countries which had been too rapidly scattered and exhausted to reconstruct themselves during these years of tranquillity and of slackening business?

Confidence had already returned in New York despite the steady demands of the country bankers upon their correspondents, which pulled down the reserve below the legal limit; nevertheless in the midst of all the failures there was no suspension of specie payments.

The crisis of 1884, according to the Comptroller of the Currency, had been less foreseen than the crisis of 1873, and this notwithstanding it was sufficient to observe the number of enterprises and schemes flung as a prey to speculation, in order to foresee that financial troubles and disasters to the country must result.

The continuation of payments in gold, the low prices, and the outlook for a fine harvest gave courage, preserved the remaining confidence, and already allowed a speedy resumption of business to be antic.i.p.ated.

The panic, although spreading over the whole Union, raged especially in New York. Without wishing to expatiate upon its primary causes, the Comptroller of the Treasury could not help remarking that it had shown itself under the same circ.u.mstances as recently as in 1873; above all there were issues for new enterprises; the speculation had rushed to take them up at a premium, and people now asked their true value.

At this juncture railroad earnings, instead of increasing, showed weakness, and suffered a slight reaction; the solvency of houses interested began to be doubted; new loans were refused them, and immediately the artificially constructed edifice gave way.

To advance prices on the Stock Exchange, the banks had made immense loans on the shares and obligations of the new railway issues, and as soon as quotations, artificially maintained at the rates to which they had been carried, began to drop, everything became unsalable. Until this occurrence, led on and fascinated by the rise in prices, every one had bought; hardly was the advance arrested when every one reversed their operations at the same time. The bankers had loaned not only their capital but in addition a part of their clients' deposits; brokers had encouraged a speculation which brought them business; and thus it was that all hands had flung themselves upon a path that could only lead to ruin.

The Comptroller of the Currency remarks with pride that, in the midst of the general upheaval and numerous failures of honorable houses, only two National Banks were involved: one of them failed, the other suspended payment.

The amount of liability of the banks and bankers of New York who succ.u.mbed during the month of May was estimated at $32,000,000, whereas that of the only National Bank which shared their fate did not exceed $4,000,000, the bank which suspended not having occasioned any loss.

Unhappily the year did not pa.s.s without its being necessary to mention new misfortunes: eleven National Banks failed, and it is a fact that among the banks and private bankers more than a hundred were counted in the list.

Despite the close watch bestowed upon the banks it was surprising to uncover all the tricks to which the National Marine Bank of New York was given over, and, which until now had escaped the official examiners.