Books: A Brief History of Panics
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Clement Juglar >> A Brief History of Panics
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The mistake of the banks was in trying to conduct their whole business
by their note circulation and to concentrate their capital in the bank
offices, and meanwhile, as they refused to loan to the stockholders of
the banks, discounts in New York fell off $10,000,000. Finally the
capital could not be entrusted to the disposal of the banks and it was
necessary to compel them to make a deposit of $100,000 for each
association, and $50,000 for each banker.
Such were the final advices given by the inspector-general of the banks
of New York at the close of his report, dealing with how to prevent the
recurrence of panics. To have confidence in their efficacy, it was
necessary to forget the past and its lessons.
The reforms already made and those still asked for in the bank system
could yield no remedy for those abuses lying beyond legislative action.
The American newspapers did not hesitate to demand them, well aware that
they would produce no effect; however, they congratulated themselves
with having drawn away from effete Europe one million sterling now
realized upon the soil of the United States without any equivalent given
for it to the foreign lenders.
PANIC OF 1864.--The crisis of 1864 was mixed up in the United States
with the War of Secession; it was a political crisis, and is not
properly to be considered here.
PANIC OF 1873.--During the last two months of 1872 the American market
had been very much embarrassed; the lowest rate of discount was 7 per
cent., and in December it was quoted at even 1/32 of 1 per cent. or a
quarter of 1 per cent. a day!
The year 1873 was anxiously awaited in hope of better times. In the
middle of January, 1873 the rate of interest declined a little to 6 or 7
per cent., but soon the rate of 1/32 of 1 per cent. per day reappeared
and continued until the month of May.
In the first days of April the market was in full panic; it grew
steadier in the first week of May, and in the month following. It
relapsed on September 1st, and requests for accommodation redoubled
until the sharpest moment of the panic. On that day there were no quoted
rates; money could not be had at any price: some few loans were made at
1-1/2 per cent. per day.
This panic broke forth on September 18th, through the failure of Jay
Cooke, after a miserable year, during which money was constantly sought
for and was held at very high prices in all branches of business. As to
the loans for building railroads, they followed one another so rapidly
that, from the month of October, 1871, to the month of May, 1873, they
could not be placed at a lower rate than 7 per cent. Bankers succumbed
beneath the burden of their unsalable issues. This was a grave
misfortune for the railroads. In the single year 1873 there were
constructed 4,190 miles of railroad in the United States, which, at
$29,000 per mile, represented the enormous sum of $121,000,000, and in
the last five years $1,700,000,000.
The commercial situation was not so bad, and the number of failures did
not reach the proportion that might have been feared.
After the failure of Jay Cooke came those of Fiske & Hatch, of the Union
Trust Company, of the National Trust Company, and of the National Bank
of the Commonwealth. On the 20th of September, for the first time, the
Stock Exchange in New York City was closed for ten days, during which
legal-tender notes were at a premium of 1/4 per cent. to 3 per cent.
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 passed 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 Associated 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 Associated 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 titles 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 competition,
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 circumspect. 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 circumstances 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 accumulation 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
associated 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 passive role to intervene
and to do a novel thing: they issued certificates that they accepted in
the name of the most embarrassed institutions 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 assurance 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 institutions 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 anticipated.
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 circumstances 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
succumbed 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 pass 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.
It suspended payment on May 6th, and the same day it was debited with
$555,000; the books had been erased and overcharged for the benefit of
one client alone to the amount of $766,000. He was a debtor to the
amount of $2,400,000, six times the Bank's capital, and a portion of
this debt was under a good many names of subordinate clerks. This same
client had three open accounts, one as administrator, then a general
account, and a special account. The whole thing was fictitious; the
schemers sought to conceal irregularities, and had thus imposed on the
examiners and on the Directors themselves.
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