Books: A Brief History of Panics
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Clement Juglar >> A Brief History of Panics
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MILLIONS OF DOLLARS.
------+-------+-------+-------+-------+---------+-------+-------+-------+
| |SPECIE | | DIS- | INDIVI- |NUMBER | |SURPLUS|
|CIRCU- | ON | LEGAL | COUNTS| DUAL | OF | |AND UN-|
YEAR |LATION | HAND |TENDERS| AND | DEPOSITS| BANKS |CAPITAL|DIVIDED|
| | | | LOANS | | | |PROFITS|
------+-------+-------+-------+-------+---------+-------+-------+-------+
|MAX MIN|MAX MIN|MAX MIN|MAX MIN|MAX MIN|MAX MIN|MAX MIN|MAX MIN|
1904 | | | | | | | | |
1st Q| 380| 453| | | | | | |
2nd "| | | | | | | | |
3rd "| | |169 | | | | | |
4th "| |504 | |3772 |3707 |5477 |776 |594 |
1905 | | | | | | | | |
1st "| 424| |178 | | | | | |
2nd "| | | 157| | | | | |
3rd "| |495 | | | | | | |
4th "| | 460| |4016 |3889 |5833 |808 |632 |
1906 | | | | | | | | |
1st "| 498|492 |175 | | | | | |
2nd "| | | | | | | | |
3rd "| | | | | | | | |
4th "| | 459| 152|4366 |4289 |6199 |847 |687 |
1907 | | | | | | | | |
1st "| | |173 | | | | | |
2nd "| 543| | | | | | | |
3rd "| | | | | | | | |
4th "| |531 | 151|4678 |4819 |6625 |901 |749 |
1908 | | | | | | | | |
1st "| | | | | | | | |
2nd "| | |192 | | | | | |
3rd "| | | | | | | | |
4th "| 599|680 | |4840 |4720 |6865 |921 |779 |
1909 | | | | | | | | |
1st "| | |198 | | | | | |
2nd "| 615| | | | | | | |
3rd "| | | | | | | | |
4th "| |694 | 176|5148 |5120 |7006 |953 |825 |
1910 | | | | | | | | |
1st "| 667| | | | | | | |
2nd "| | | | | | | | |
3rd "| | | | | | | | |
4th "| |672 | 169|5467 |5304 |7204 |1004 |894 |
1911 | | | | | | | | |
1st "| 680| | 168| | | | | |
2nd "| | | | | | | | |
3rd "| | |185 | | | | | |
4th "| |761 | |5663 |5536 |7328 |1026 |930 |
1912 | | | | | | | | |
1st "| 704| | | | | | | |
2nd "| |769 |188 | | | | | |
3rd "| | | | | | | | |
4th "| | | |6058 |5944 |7420 |1046 |969 |
1913 | | | | | | | | |
1st "| 717|749 | | | | | | |
2nd "| | |189 | | | | | |
3rd "| | | | | | | | |
4th "| | | |6260 |6051 |7509 |1059 |1007 |
1914 | | | | | | | | |
1st "| 720| |201 | | | | | |
2nd "| |792 | |6357 |6111 |7493 |1057 |1003 |
3rd "|1018 | 746| | | | | | |
4th "| 848| 534| 128| | |7581 |1065 |1007 |
1915 | | | | | | | | |
1st "| 746| 591| 127|6499 |6348 |7599 |1066 |1012 |
------+-------+-------+-------+-------+---------+-------+-------+-------+
The adage "buy cheap and sell dear," or its practical equivalent--so
scary and imitative are investors--_Buy during the last of a selling
movement and sell during the last of a buying movement_, resolves
itself, we venture to repeat, into: _Buy when the decline caused by a
panic has produced such liquidation that discounts and loans, after
steady and long-continued diminution, either become stationary for a
period or else increase progressively coincident with a steady increase
in available funds; and sell for converse reasons_.
These conclusions are also reached by our author through analyses of the
Financial History of England, France, Prussia, Austria, etc. These I
omit as unnecessarily wearisome to the reader since I give that of our
own country. However, I will here quote the following: "What must be
noted is the reiteration and sequence of the same points _(faits)_
under varying circumstances, at all times, in all countries and under
all governments," and also this table showing all the panics and their
practical coincidence in the past eighty-five years, in France, England,
and the United States.
France England United States
1804 1803
1810 1810
1813-14 1815 1814
1818 1818 1818
1825 1825 1826
1830 1830 1829-31
1836-39 1836-39 1837-39
1847 1847 1848
1857 1857 1857
1864 1864-66 1864
1873 1873
1882 1882 1884
(a 1889-90 (a 1890-91 1890-91
p 1894 p 1894 1893-94
p 1897 p 1897 1897
r 1903 r 19O3 1903
o 1907 o 1907 1907
x 1913 x 1913 1913
i i
m m
a a
t t
e e
l l
y) y)
Truly these thirteen panics in the three countries have been practically
simultaneous and one common cause must have originated them. The only
cause common to all was overtrading to such an extent that neither
credit nor money were to be had, so that a forced liquidation or panic
inevitably ensued.
The above table effectually does away with the theory that new tariffs
are directly productive of panics. For most certainly new tariffs did
not occur in England, France, and the United States just before or
during all the panic years enumerated, and yet, practically
simultaneously in free-trade England, high-protection France, and
sometimes low-tariff, sometimes high-protection United States have
panics occurred for eighty years.
But, as I have shown in a note attached to this Introduction, a new
tariff or a general change of duties is apt to precipitate a panic, on
account of the unsettling of business, and that the consequent shaking
of credit adds its quota to the forces finally culminating in a panic
cannot be doubted. As a matter of history with us, substantially new
tariffs have always happened to be the immediate forerunners of a panic,
and this I believe to be true in the case of other countries.
Why is this? Is it not because the people instinctively turn to
tinkering at and changing their chief tax--the tariff--whenever they as
a whole need financial relief; and have we not shown that such relief is
needed almost every ten years, when the overtrading, inseparable from
the development of all thriving communities has made the call for credit
impossible to grant?
A new tariff may defer, or hurry, or, occurring simultaneously, will
intensify a panic, but it may not hope to avert one when due: yet if its
changes be very gradual, fixed and long predicted, and of a nature to
bring about or confirm a judicious tariff for revenue only, they will
materially help to put business on so firm and sound a basis that
recovery from the inevitable, and approximately decennial panics, will
be wonderfully expedited. Thus a new tariff is a quite accurate
forewarning of a panic, and is also to no inconsiderable extent a
contributory cause. (See foot-note on page 5, _seq., Interrelations of
Panics, Tariffs, and the Condition of Agriculture_, etc.; and
especially what is said of the panic of 1848, on page 10.)
M. Juglar has fully analyzed the three phases of our business life into
Prosperity, Panic, and Liquidation, which three constitute themselves
into the business cycle, that for forty years past (that is, since the
present Bank of England Act, and practically since that of the Law
governing the Bank of France, both of which then increased the required
specie reserve) has been of about ten years. These ten years may be
apportioned roughly as follows: say, Prosperity for five to seven years;
Panic a few months to a few years, [Footnote: The panic after 1873 is
the only one I know extending to anything like the length it attained.
This may be ascribed to the immense development and consequent
speculation, and to the inflation of the currency coming after the
period about the Civil War.] and Liquidation about a few years.
I have already pointed out the signs of prosperity, of panic, and of
liquidation, but in view of existing conditions perhaps it may be well
to restate here the quite familiar fact that the completion of
liquidation that precedes the beginning of another period of prosperity
is characterized by lack of business, steady prices, and a marked growth
in available banking funds.
[The various tables spread through this pamphlet are fully explained by
their headings and the text.]
In conclusion I wish to express my thanks for the courtesy M. Juglar
has extended me, and to state my appreciation of the motives,
painstaking patience, and undoubted originality he has shown in
explaining and executing so faithfully and with such genius a most
laborious and yet spirited work. It is only justice that such an
achievement should have been awarded a prize by the French Institute
(Academy of Moral and Political Sciences) and have gained for M. Juglar
the Vice-Presidency of the "Society for the Study of Political Economy."
DeCourcy W. Thom.
Wakefield Manor.
A HISTORY OF PANICS IN THE UNITED STATES
CONSIDERED WITH SPECIAL REFERENCE TO AMERICAN BANKS.
The English Colonies soon after their settlement issued paper money.
The first was Massachusetts, which issued it even before her
independence, in 1690, to obtain funds in order to besiege Quebec.
This example was followed to such an extent that it caused a marked
speculation in favor of hard money, varying according to the quantity of
notes in circulation. In 1745, after a successful campaign against
Louisburg and the taking of that fortress, two million pounds of paper
money were issued, which step decreased its value. When liquidation
occurred these paper pounds were not worth 10 per cent. of their face
value.
The War of Independence obliged Congress to issue three million of paper
dollars. This amount increased to $160,000,000, so that Congress
declared, in 1779, that it would not issue more than $200,000,000.
Notwithstanding this guaranty, notwithstanding the forced and legal
rating conferred by this enactment, notwithstanding the war spirit, it
depreciated; and in 1779 it was necessary to decree that, disregarding
its normal value, it should be taken at its face. In 1780 it was no
longer taken for customs dues. In 1781 it had no rating and was not even
taken at 1 per cent. of its face value.
Between 1776 and 1780 the issue of paper money increased to $359,000,000.
BANK OF NORTH AMERICA.--In 1781 Mr. Morris, Treasurer, persuaded
Congress to form a bank (the Bank of North America) with a capital of
$10,000,000, of which $400,000 should be turned over to help the
national finances. The capital was too insignificant and the course of
politics too unpropitious to accomplish this end. However, the example
encouraged the States to take up their paper money. Upon the adoption of
the United States Constitution the issuing of paper money ceased, and
gold and silver were the only means of circulation. Thence arose great
embarrassment for the Bank of North America, which, hampered by its
loans to the Government, increased its note circulation to an enormous
proportion. The ebb of paper through every channel finally aroused the
public fears, and people refused the notes. Every one struggled to
obtain metallic money, hence it became impossible to borrow, and
bankruptcy followed. Such was the, excitement that the Philadelphians as
a body demanded and obtained from the Assembly of Representatives a
withdrawal of the charter; but the Bank, relying upon Congress,
continued until March 17, 1787; succeeded even in extending its charter
fourteen years; and later obtained a second extension, limited, however,
to Pennsylvania.
The difficulty experienced in the manufacture of money led Mr. Hamilton,
Secretary of the Treasury, to propose to Congress in 1790 the founding
of a National Bank. After some doubts as to the power of Congress, it
was authorized. It began operations in 1794, under the title of "Bank of
the United States," with a capital of ten millions, eight millions being
subscribed by private individuals, and two millions by the Government.
Two millions of the first sum were to be paid in metallic money, and six
millions in 6 per cent. State bonds; the charter was to run till March
4, 1811. It seemed to be a good thing for the public and the
stockholders, for during twenty-one years it paid an average of 8 per
cent. dividends. In 1819 the question of renewing its privileges came
up, the situation being as follows:
ASSETS. LIABILITIES.
6 per cent. Paper $ 2,230,000 Capital Stock $10,000,000
Loans and Discounts 15,000,000 Deposits 8,500,000
Cash 10,000,000 Circulation 4,500,000
The profits from the Bank, the prosperous state of the country, and the
increase of productions led people to think that the issuing of paper
money caused it all; seduced by this alluring theory the "Farmers' Bank"
was founded in Lancaster in 1810, with a capital of $300,000. Others
followed; such was the mania that the Pennsylvania Legislature was
forced to forbid every corporation to issue notes. Despite this
preventive message the excitement rose so high that companies, formed to
build harbors and canals, also put notes into circulation; in this way
the law was eluded.
From 1782 to 1812 the capital of the banks rose to $77,258,000; upon the
1st of January, 1811, there were already eighty-eight banks in
existence. Until the declaration of war (June, 1812), the issuing of
notes was always made with the intention of redeeming them, but the
over-issue soon became general, and depreciation followed. The
periodical demands for dollar-pieces for the East Indian and Chinese
trade were warnings of the over-speculations on the part of those
companies whose members were not personally liable. Traders, who through
their notes or their deposits had a right to credit with the banks, did
not hesitate to ask for $100,000, whereas, formerly they would have
hesitated to ask for $1,000. The war put a stop to the exportation of
precious metals, which, in the ordinary course of things, limits the
issue and circulation of paper. The upshot of this was to redouble the
note issue, each one believing its only duty was to get the largest
amount into circulation. Loans, and enormous sums of money, were
distributed above all reason among individuals and among the States. The
increase of dividends and the ease of obtaining them extended the spirit
of speculation in certain districts, and especially among those who
owned land. The remarkable results shown by the Bank of Lancaster, the
"Farmers' Bank," which, by means of an extraordinary issue of notes, had
yielded as much as 12 per cent. and piled up in capital twice the amount
of its stock, caused it to be no longer thought of as a bank intended to
assist trade with available capital, but as a mint destined to coin
money for all owning nothing at all. Led by this error, laborers,
shopkeepers, manufacturers, and merchants betook themselves to quitting
active occupations to indulge in golden dreams. Fear alone restrained
some stockholders connected with the non-authorized companies, and led
them to seek for a legal incorporation.
In Pennsylvania, during the session of 1812, an act was passed
authorizing twenty-five banks, with a capital of $9,000,000. The
Executive nevertheless refused to ratify it, and returned it with some
very well-deserved comments. In a second debate the first resolution was
rescinded by a vote of 40 to 38. In the following session the
proposition was renewed with more vigor, and forty-one banks with a
capital of $17,000,000 were authorized by a large majority; the
representations of the Executive proved useless, and they immediately
entered upon their duties with an insufficient capital.
To discount their own stock was a soon-discovered method. They thus
increased the amount of notes, which depreciated in comparison with hard
money, and dissipated on all hands the hope of exchanging with it.
In the absence of a demand from abroad for hard money, the demand came
from within our own borders.
The laws of New England, which were very severe upon the banks, had
placed a penalty of 12 per cent. upon the annual interest payments of
those persons who did not pay their notes. The natural result was a
difference of value between New England and Pennsylvania, which measured
the depreciation caused by paper in the latter district. As remittances
on New England could only be made in hard money, the equilibrium of the
banks was disturbed; they were not able to respond to the demands for
redemption, and a suspension of payments by the banks of the United
States, except those of New England, took place in August and September,
1814.
THE PANIC OF 1814.--An agreement took place at Philadelphia between the
bank and the chief houses allied with it to resume payments at the end
of the war.
Unhappily, the public did not demand the accomplishment of this promise
at the time fixed, and the banks, led on by the thirst of gain, issued
an unprecedented amount of bank notes. The general approbation brought
about a still further increase in their number: the bank notes of the
Bank of Philadelphia were at a discount of 80 per cent.; the others at
75 per cent, and 50 per cent., and metallic money disappeared to such an
extent that paper had to be used to replace copper coin. The
depreciation of fiat money raised the price of everything; this
superficial occurrence was looked upon as a real increase, and gave rise
to all the consequences that a general inflation of value could produce.
This mistake on the subject of artificial wealth made landed proprietors
desire unusual proceeds. The villager, deceived by a demand surpassing
his ordinary profits, extended his credit and filled his stores with the
highest-priced goods; and importations, having no other proportion to
the real needs than the wishes of the retailers, soon glutted the
market. Every one wished to speculate, and every one eagerly ran up
debts. Such was the abundance of paper money that the banks were alarmed
lest they could not always find an investment for what they
manufactured. It thus happened that it was proposed to lend money on
collateral, while the greatest efforts to bring about its redemption
were being made. This state of things lasted till the end of 1815, when
it was recognized that the paper circulation had not enriched the
community, but that metallic money had enhanced.
The intelligent portion of the nation comprehended that even where the
estimated value of property had been highest, the true welfare of
society had diminished. They learned too late the baleful effects of
this circulation of paper money; the greater part of the States and
cities had nothing to show for it.
A new class of speculators then appeared, trying to pass these worthless
bank notes: forgers of paper money became more active. In the midst of
this disorder a National Bank, which should afford a solid basis for the
paper circulation, was considered. Influenced by these difficulties, and
in hopes of remedying them, the Secretary of the Treasury proposed to
Congress, in September, 1814, a few days after suspension, to found a
national bank, in order to re-establish metallic circulation, an end
which the State banks had failed to accomplish.
This project, which lent the national credit to the capital of the bank,
was antagonized by a good many members who exaggerated its consequences;
at the same time that they took more or less important sums in bank
notes, or borrowed from the banks upon the nation's guaranty, in order
to re-establish the public credit and to obtain means for prolonging the
war.
CAUSES OF THE PANIC OF 18l4.--The bank directors laid the blame upon the
blockade of the ports, which, interfering with, indeed even preventing,
the export of products, occasioned the outflow of the metals. The
national loans to carry on the war also had their influence. From the
beginning of hostilities until 1814 they increased to $52,848,000,
distributed as follows: Eastern States, $13,920,000; New York,
Pennsylvania, Maryland, and District of Columbia, $27,792,000; Southern
and Western States, $11,186,000.
Nearly all of this was advanced by the cities of New York, Philadelphia,
and Baltimore. The banks made advances beyond their resources,
augmenting their circulation in consequence. [Footnote: The cause of the
crisis, according to the Committee of the Senate, was the abuse of the
banking system; the great number and bad administration of the banks;
and their speculations designed to advance their stock, and to
distribute usurious dividends. When the Bank of the United States saw
the danger that menaced it, it reduced its discounts and circulation.
The circulation of the country banks fell from $5,000,000 to $1,300,000,
and the total circulation from $10,000,000 to $3,000,000.
Increase and Decrease Circulation in Pennsylvania.
City Banks. Country. Total.
1814 ........ $3,300,000 $1,900,000 $5,200,000
1815 ........ 4,800,000 5,300,000 10,100,000
1816 ........ 3,400,000 4,700,000 8,100,000
1817 ........ 2,300,000 3,800,000 6,100,000
1818 ........ 1,900,000 3,000,000 4,900,000
1819 ........ 1,600,000 1,300,000 2,900,000
Number
of Banks. Capital. Circulation. Specie.
1811 ... 88 $52,000 00 $28,000 00 $15,000 00
1815 ... 208 82,000 00 45,000 00 17,000 00
1816 ... 246 89,000 00 68,000 00 19,000 00]
From the 1st of January, 1811, to the 1st of January, 1815, one hundred
and twenty new banks were registered, thus raising their capital to more
than $80,000,000; this increase took place during a war that entirely
did away with foreign trade. The expenses of the war declared against
Great Britain in June, 1812, were defrayed by notes issued by the banks
of the various States. Six million dollars were obtained from them in
1812, in the following year, 1813, twenty million, and then fifteen
million in exchange for twelve million of Federal stock, issued at the
price of $125 face for every $100 paid in. Until January 1, 1814, in
order to avoid taxation, Treasury bonds were issued in addition to what
was contributed by the banks.
In 1812 ..................... $3,000,000
" 1813 ..................... 6,000,000
" 1814 ..................... 8,000,000
Up to this time no account of their administration had been rendered,
but now Mr. Bland, a Maryland representative, called attention to the
fact that all their operations seemed veiled from the public.
Unfortunately we have been unable to find a statement of the discounts.
The suspension of specie payments differed with the corresponding state
of affairs in England, inasmuch as it was not general, and, since each
State was independent, the depreciation varied. It became very difficult
to circulate paper, and the Government was again obliged to issue
Treasury bonds, bearing 6 per cent. interest. In February, 1815, peace
having been proclaimed, it was hoped that the banks would resume specie
payments. There was no sign of it. The re-establishment of peace merely
made some of the legal regulations seem less pressing upon the banks.
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