Books: A Brief History of Panics

C >> Clement Juglar >> A Brief History of Panics

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When the panic came the Bank was very much shaken. At the beginning of
April, 1837, the New York banks suspended payments because demands for
hard money for export played the chief role; the other banks suspended
in their turn, promising to resume with them.

The Bank of the United States, suspended also, Mr. Biddle, the
President, asserting that it would have continued to pay were it not for
the injury done by New York. This was false, for the New York banks
shortly after resumed payment, hoping they would be imitated, but the
other banks refused to do so. Mr. Biddle wished, in the first place, to
await the result of the harvest. To uphold the Bank, he tried to bring
about exchanges, both with banks and general business, not only in
America but in Europe, in order to establish a unity of interests which
would sustain him and conceal his real condition. In this he was
successful to a certain degree, for in 1840 in his balance sheet
$53,000,000 of paper of the different States was shown up. He wished
above all to secure the monopoly of the sale of cotton: a senseless
speculation hitherto unexampled, [Footnote: A similar episode has
occurred in our time in the speculation in metals by the "Comptoir
d'Escompte."] the like of which may never be seen again.

Whilst the Bank came to the relief of New York business through its
exchange and its deferred notes, Biddle posed as the great cotton agent,
on condition that the Bank's agents should be consigned to at Havre and
Liverpool. In their embarrassment this proposition was accepted by the
planters. Cotton was thus accumulated in those two places. This monopoly
advanced the price, and vast sums were realized, which enabled him to
enlarge the scope of his business. In 1837 he was enabled by this means
to draw on London for L3,000,000 sterling; the difference between 5 to 6
per cent. interest and discount at 2 per cent. produced a very handsome
profit. The cotton merchants prospered as well as the exchange agent,
and Mr. Biddle paid the planters in bank notes which the Bank could
furnish without limit, while he received in Europe hard money for the
cotton; this aroused opposition.

In the second half of 1837 he established in Missouri, Arkansas,
Alabama, Georgia, and Louisiana a number of new banks, to make advances
to the planters, and to sell their products for them in Europe. They
started with very slight capital, they observed no rules in issuing
paper, their bank notes fell 30 per cent. in 1838, and the planters
would not take them.

The Bank of the United States, fearing lest foreign capitalists should
take advantage of the difficulties of the planters by buying this
cotton, cheapened on account of the encumbrances upon the district
producing it, resolved to come to the rescue of the Southern banks, and
to join them in their operations by purchasing their shares and their
long-time paper, having two years to run. It thus put $100,000,000 into
the business, and in 1838 it had loaned them upon their cotton crops not
less than $20,000,000 at 7 per cent. payable in three years.

It had bought the bank shares at 28 per cent. below par; through its help
they had risen again to par; and then it threw them upon the London
market, which absorbed them. In order to explain the immense credit
enjoyed in Europe by the United States and their banks, we must observe
that the extinguishment of the National obligations through surplus
crops threw a false light upon the credit of the States, as well as
particularly upon that of the corporation. For many years American
investments had been sought for above all others in London, and as
nothing happened during the first year to destroy that confidence, the
amount thus employed increased from $150,000,000 to $200,000,000 in
1840. In Pennsylvania $16,000,000 of European money was used in the Bank
of the United States, and $40,000,000 in those of the different States,
all of which was payable in two or three years.

Mr. Biddle had succeeded in sustaining the different States with the
National credit. He knew how to utilize the credit of American goods in
Europe, and drew from the London market an immense sum against exchange
long-time paper and paper payable in America. The Bank's paper fell from
4 to 6 per cent., and it was in such demand that the Bank of England
took it at 2 to 3 per cent. discount. But finally the market had all
that it could take. The attention of merchants was attracted to Mr.
Biddle's gigantic speculations, who paid paper in America and collected
hard money in London. Business interests complained about the
contraction in the market. The Bank's stock of cotton increased
steadily, and between June and July it rose from fifty-eight to ninety
million bales.

This speculation had already yielded $15,000,000 profit, but the market
was overloaded, and quotations could not keep up. The planters had made
a great deal by the advance in cotton, but the paper money remitted them
lost from 15 to 25 per cent. A panic was approaching. The cotton crop,
amounting to 400,000 bales, was one fifth less than was expected; they
awaited an advance in price, but the contrary occurred. The high prices
had brought out all the stored cotton; the factories had reduced their
work. Nevertheless bale after bale was forwarded to Liverpool and to
Havre. The sale in this last port in February and March, 1839, having
produced a loss, they continued to store it. As soon as Mr. Biddle was
aware of this stoppage he sought to hide the difficulty by extending his
business. He proposed to start a new bank in New York (the other had
headquarters in Philadelphia) with a capital of $50,000,000. He once
more issued long-time paper, and bought with American paper canals,
rail-roads, and shares which he threw upon the English market. This
lasted until the long-time paper lost 18 per cent. in America, and until
American exchange and investments were no longer received on the
Continent.

The Parisian house of Hottinguer like its other agents, sold little
until the first of July, and when it saw that the effort to monopolize
cotton could not succeed, fearing to continue this gigantic operation,
it declared that it employed too much capital. In the midst of all this,
some new bills of exchange reached Paris without consignment of
corresponding value; and the house of Hottinguer protested.

Hope of Amsterdam discontinued his connection. The London agent called
upon the Bank of England for help, which was granted upon the guaranty
of certain firms of that place and a deposit of good American paper.

Rothschild accepted the refused bills of exchange, after having found
out that a sum of L400,000 would suffice for Mr. Biddle's agent; these
L400,000 offered as a guaranty consisted of Government stock, and of
shares in railroads, canals, and banks. This agreement was not given out
freely, which still further increased the feeling of distrust. A crisis
in which $150,000,000 of European capital were destined to be engulfed
was rapidly approaching.

BREAKING OUT OF THE PANIC OF 1839.--The English papers had already
warned the people to be distrustful. The _Times_ said it was
impossible to have any confidence in the Bank as long as it would not
resume specie payments. Mr. Biddle defended himself through papers paid
for the purpose, finally in the Augsburg Gazette, while he waited for
the soap bubble to burst. His retained defenders claimed that the
150,000 bales of cotton sent to Europe had not been sold, but received
on commission. Advances in paper had been made which in the month of
August, 1839, were to be paid in notes by the Southern banks, for a new
grant made to the Bank by the State of Pennsylvania permitted it to buy
the shares of other banks, and by this means to gain their management;
their notes lost 20 to 50 per cent. as compared with the Northern banks.

Through his profit upon the difference of the notes, and through the
payment for the cotton in paper, and through the sale of bullion
exchange, Mr. Biddle had made five to six million dollars, which lay at
his command in London.

The protection of his bills of exchange made a great impression in
England; the rebound was felt in America, where the panic, moderated in
1837 through the intervention of the Bank, burst forth with renewed fury
in 1839, and brought about the complete liquidation of that
establishment.

At the same time the English market was very much pressed, for,
according to a notice of the Chamber of Commerce, the number of that
year's bankruptcies was greater than usual. From June 11, 1838 to June,
1839, there were 306 bankruptcies in London, and 781 in the
"provinces,"--in all, 1,087. At Manchester there were 82, at Birmingham
54, at Liverpool 44, at Leeds 33. The London Exchange was flooded with
unsalable paper, an occurrence which had also taken place on a smaller
scale in 1837.

Such was the interruption of business that interest for money rose to 20
per cent., and the discount rate for the best paper to 15 or 18 per cent.

The various States in the Union had contracted debts with inconceivable
ease, and interest payments were provided for by new loans. President
Jackson declared it necessary to make a loan in order to pay interest
moneys. It was deemed inexpedient to impose new taxes to provide for the
cost of the public works. Great was the embarrassment in America, and as
no more money came from England, it was necessary for the Americans to
look for it in their own country.

Business circles were flooded with long-time paper running at a discount
of one half of 1 per cent. a month. Discount rose to 25 per cent. The
panic was so great that all confidence was destroyed. The Bank of the
United States, in order to maintain its credit, paid its depreciated
long-time paper.

The struggle between the Bank and its opponents, led by President Van
Buren, re-commenced. These last declared that the Bank had erred in
circulating the $4,000,000 of notes of the old bank, which should have
been retired coincidently with the charter; and the Senate forbade their
circulation.

The Government claimed large sums from the Bank, the statement of which
showed close to $4,000,000; and, as it could not secure this amount in
money, it was decided to issue $10,000,000 of Treasury bonds. The Bank
party wished to push the Government into bankruptcy, in order to induce
it to turn to them for help, and, through the issue of "circular
specie," oblige it to adopt a system of paper money.

A bill was brought forward with this view. Biddle, who wished to
increase the circulation, said he could resume specie payments, and thus
forced his shares to rise; but the rejoicing of the Bank party was soon
disturbed by the fact that collectors of taxes were forbidden to receive
any bank note for less than $20, which was not redeemable in hard money.

After a struggle of eight years the separation became complete, and the
administration of National finances was withdrawn from the Bank.

In 1836, a law was passed providing that upon the expiration of its
charter, the National funds should be again deposited with it, as soon
as the Bank resumed specie payment. Upon the suspension in 1837, the
Government was forced to abate the law, in order to protect the specie,
and imposed on its financial and postal agents some of the duties of the
Treasury. In 1840, the management of the public Treasury constituted a
separate and distinct department. Such was the liquidation following the
panic, that Congress granted the Bank three months in which it must
either resume specie payment or liquidate. To conform to this decree the
State of Pennsylvania fixed the resumption of specie payments by its
banks, for January 15, 1841. The shares of the Bank, which had yielded
no dividend in 1839, and offered a similar outlook for the first half of
1840, fell to $61. They had been quoted as high as $1,500. General
liquidation and a loss of 50 per cent. was inevitable. This occurred in
1841. Thus ceased for a time the bank mania in the United States.

We will recall here Buchanan's opinion about the Bank: "If the Bank of
the United States, after ceasing to be a national bank, and obtaining a
new charter in Pennsylvania, had restrained itself to legitimate
banking, had used its resources to regulate the rate of home exchange,
and had done everything to hasten the resumption of specie payments, it
would have resurrected the National Bank.

"But this is no longer possible; it has defied Congress, violated the
laws, and is mixed up in politics. The people have recognized the
viciousness of its administration; the President, Mr. Biddle, has
concluded the work Jackson began."

Tables indicating the banks which suspended during the panic: In 1814,
90; in 1830, 165; in 1837, 618; in 1839, 959. The last panic, from 1837
to 1839, produced, according to some pretty accurate reports of 1841,
33,000 failures, involving a loss of $440,000,000.

PANIC OF 1848.--The entire discounts, which had risen to $525,000,000 in
1837, fell to $485,000,000 in 1838, only to rise again to $492,000,000
in 1839, and the real liquidation of the panic occurred only then.
Discounts fell at once to $462,000,000, then $386,000,000; the abundance
of capital, and the low price at which it was offered, cleared out bank
paper until it was reduced from $525,000,000 to $254,000,000 in 1843.
[Footnote: We have not the outside figures, the maximum or minimum.]

The metallic reserve increased from $37,000,000 to $49,000,000 (1844);
the circulation was reduced from $149,000,000 to $58,000,000.

The number of banks in 1840, from 901 fell to 691 in 1843, and the
capital itself from $350,000,000 in 1840 was reduced to $200,000,000 in
1845 and to even $196,000,000 in 1846.

All these figures clearly indicate liquidation. The market, freed from
its exchange, was enabled to permit affairs to resume their ordinary
course.

In fact an upward movement was taking place. Discounts rose from
$264,000,000 to $344,000,006 in 1848.

Banks increased from 691 in 1843 to 751 in 1848, and their capital grew
from $196,000,000 in 1846 to $207,000,000. The paper circulation rose
from $58,000,000 to $128,000,000 in 1848. Deposits from $62,000,000
reached $103,000,000 in 1848. The metallic reserve alone fell from
$49,000,000 in 1844 to $35,000,000 in 1848.

The consequences of the European panic were felt in America, but without
causing much trouble. The liquidation of the panic of 1839 was barely
over, and was still too recent to have permitted sufficient extension of
business.

Embarrassments were slight and brief; discounts, nevertheless, fell from
$344,000,000 to $332,000,000.

The store of bullion, in spite of the surplus and the favorable balance
produced by the export of grain to Europe, fell from $49,000,000 to
$35,000,000; with the following year the forward movement recommenced.

PANIC IN 1857.--The stoppage in 1848 was very brief. Discounts rose
regularly from $332,000,000 to $364,000,000, $413,000,000, $557,000,000,
$576,000,000, $634,000,000, and finally $684,000,000 in 1857. The
progression was irresistible. The circulation rose from $114,000,000 to
$214,000,000. The banks increased at such a rate that, from 707 in 1846,
with a capital of $196,000,000, there were in 1857 1416, whose capital
had risen to $370,000,000,--a very inferior figure, in comparison to
the number of banks, to that of 1840, when 901 banks only had a capital
of $358,000,000.

The metallic reserve, from $35,000,000 in 1847, easily reached
$59,000,000 in 1856: but it was in proportion neither with the number
of the banks nor their discounts and circulation; and, after all, this
is only a moderate sum. We have not the extreme maximum or minimum, and
the suspension of specie payments took place notwithstanding the amount
of cash on hand, which was greater in 1857 than in 1856.

Deposits accumulated from $91,000,000 to $230,000,000; they rose to
their greatest height in the very year of the crisis; nevertheless,
they could not be drawn out.

During the Eastern war the prosperity of the United States had been so
great that the clearing-houses established in New York in 1853, and in
Boston in 1855, offered only a slight opposition to the excessive issue:
at least, in 1837 the Congressional report stated the cash on hand was
$6,500,00--that is to say, $1.00 in metal to each $6,00 in paper.

In 1857 cash on hand was $14,300,000, or $1.00 in hard money for each
$8.00 in paper.

The banks had attracted deposits by high interest, and loaned the money
to wild speculators. On the 22d of August, 1857, the amount of loans had
become almost $12,000,000, counting together metal, notes, and deposits.

From December, 1856, to June, 1857, they had shown great strength.
Discounts had risen from $183,000,000 to $190,000,000 in June; cash on
hand had risen from $11,000,000 to $14,000,000. The only evidence of
weakness, so to speak, was that the withdrawal of deposits had risen from
$94,000,000 to $104,000,000, while the circulation diminished $1,000,000.

In June "the position of the Bank ought not to have caused any fear, to
the most far-sighted," says the report of the Committee of Inquiry.

Foreign exchange was favorable, and it is known that is the bankers'
guide. June, July, and August were tranquil, except for a slight
disturbance in business experienced by the country bankers through the
constantly increasing amount of notes presented for redemption, and
among the city bankers by requests for discount.

The collapse of the "Ohio Life," which had the best New York connection,
was the first muttering of the storm, and was soon followed by the
suspension of the Mechanics' Banking Association, one of the oldest
banks in the country. The suspension of the Pennsylvania and Maryland
banks followed. Public confidence remained unshaken--it relied upon the
circulating medium.

Only one bank went to protest, and that on September 4th, on a $250
demand. Another protest followed on the 12th, a third on the 15th,
both for insignificant amounts. Demands in the way of withdrawal
amounted to almost nothing, and there was nothing like a panic.

The deposits at the savings banks were a little less, but this did not
continue. Only at the close of September was the demand by the country
banks for payment upon the Metropolitan American Exchange Bank for
payment greater than it had ever been.

On the 13th of October, with exchange at par, an abundant harvest, with
a premium of 1/4 to 1/2 per cent. on metal, the banks suspended specie
payment, but resumed it on the 11th of December. The most critical
period lasted about a month. The first step towards resumption of
payments was made after the resolution adopted by the Committee of
Liquidation to call upon the country banks to redeem the notes of the
Metropolitan Bank, paying an allowance of 1/4 of 1 per cent. interest,
running from the 20th of November.

At this time the city bankers held, in bills issued and in signed parcels
of $5,000 each, about $7,000,000 due by the country banks. They were thus
enabled to accomplish the payment of their notes at the rate of 20 per
cent. a month by the 1st of January, 1858. The same favor of repaying
their notes at the rate of 6 per cent. was granted to the city banks.

We need not inquire if, having granted this delay, the banks proved
their liberality. The abundant harvest also assisted liquidation.

From 1853 to 1857 the metallic reserve fell to $7,000,000, deposits
rose to $99,000,000, and discounts and loans to $122,000,000.

BANKS OF NEW YORK.

Proportion of
Metallic Reserve. Deposits. Discounts, the Metallic
Advances. Reserve to
Deposits.

1854 ... $15,000,000 $ 58,000,000 $ 80,000,000 26%
1855 ... 9,900,000 85,000,000 101,000,000 11%
1856 ... 10,000,000 100,000,000 112,000,000 10%
1857 ... 7,000,000 99,000,000 122,600,000 7%

The reduction of the metallic reserve, increase of deposits and of
discounts and of advances, are here clearly indicated.

From 1853 to 1857 the bank circulation hardly varied $100,000,
indicating that the demand for hard money came from abroad and from the
interior. The circulation was not the cause of the suspension,--at least
such was the opinion expressed by the superintendent of the New York
banks in his report.

In 1856 twenty-five companies were started, and three bankers opened
business with a capital of $7,500,000, of which $7,200,000, was paid in.

In 1857 there were only five of these banks and three bankers having a
capital of $6,000,000, of which only $4,000,000 were paid in. The
collateral deposited by the banks represented $2,500,000 in 1856, on
which credit of $2,000,000 in notes was granted.

In 1857 the same collateral did not exceed $560,000 estimated value, on
which a credit of $383,000 in paper was granted.

At the height of the crisis failures were so numerous that a general
suspension of payments, and, in consequence, a stoppage of business was
dreaded. This suspension, in place of being general, turned out to be
merely partial; it occurred at a juncture when it might well be feared
that it would lead on to the very greatest disasters, but, far from
harming, it helped the market. The banks had suspended payment upon a
common understanding among themselves and with business circles. The
critical moment having passed, tranquillity reappeared as soon as the
course determined on was known.

If suspension of payment hurts the credit of a bank, it does not
necessarily lead to the depreciation of its bank notes.

There are a good many proofs of this: in 1796, when the Bank of England
suspended, its bank notes did not depreciate; and if this state of
things did not last, the blame must be laid upon the excessive issue.
And in France, in 1848 as well as in 1871, the Bank of France suspended
without the depreciation of its bank notes becoming very noticeable. So,
in New York, bank notes passed at 2 or 3 per cent. loss at this crisis.

The crisis disappeared with the end of the year, and resumption of
payments took place between New York and Hamburg, with the return of
specie and a rate of 4 per cent.

It was the same in France and England. A more serious panic and a more
rapid recovery had never been seen. The rigidness and not the severity
of the pressure that had to be exercised shows the condition of
business. There had been most blamable practices employed; but the
market as a whole was sound, and had faced the storm.

Only four banks had suspended, three of which were shaky before the
panic, and the fourth had already resumed payments.

At no other period could one have obtained such an amount of credit upon
a simple paper circulation; fictitious paper was the source of all the
wrecks. To get it into circulation the most varied contrivances were
resorted to, and fraud itself was not wanting; the signatures even
became fictitious, their owners could not be found. Shams and
discriminations under all forms, designed to permit speculation without
capital, without exchange of goods, without real transactions between
the drawer and the acceptor of the bill of exchange, were rife.

In his message, President Buchanan ascribed the crisis to the vicious
system of the fiduciary circulation, and to the extravagant credits
granted by the banks, although he was aware that Congress had no power
to curb these excesses. When there is too much paper, when the public
has created an endless chain of bank notes, representing no real value,
it is enough that the first ring break for the whole gear, thus no
longer held together, to fall to pieces. If we mark the situation of the
New York banks before and during the panic--that is to say, in 1852 and
in 1857, we will ascertain as follows:

June, 1851. June, 1856. June, 1857.

Capital ............ $59,700,000 $92,300,000 $107,500,000
Circulation ........ 27,900,000 30,700,000 27,100,000
Deposits ........... 65,600,000 96,200,000 84,500,000
Paper discounted ... 127,000,000 174,100,000 170,800,000
Cash on hand ....... 13,300,000 18,500,000 14,300,000

This table demonstrates that two items show a great increase: capital
increased $47,000,000 and paper discounted $43,000,000; while, in face
of an increase of $1,000,000 of specie on hand, the note circulation
decreased $800,000.

Far from finding a mistake, we find a proof of the Directors' prudence.
If there was an error in the issuing of paper, it was not on the side of
the banks; it was the public itself that was chiefly in fault.

We find the causes of the panic in the issues of railway obligations and
shares, which had chiefly been placed in European markets, and whose
gross amount was estimated at L1,000,000. The speculation in land and
railroads had been carried on either with borrowed money or by open
credits, and by accommodation notes, back of which there was no second
party.

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