Books: A Brief History of Panics
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Clement Juglar >> A Brief History of Panics
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The certificates issued by the clearing house, when credit had entirely
disappeared, rendered a great service and sustained a great number of
houses in equilibrium, which without this assistance must have
succumbed. They were granted especially to the banks belonging to the
Association, in order to make their daily settlements.
During the crisis of 1873 the same means had been resorted to, but too
late; the panic was already at its height and the commotion general, so
that nothing could re-establish confidence. This was not the case in
1884: the rapidity and decision with which the Associated Banks took
steps gradually re-established confidence throughout the country. The
maximum of issue did not exceed $24,900,000, of which $7,000,000 were
for the National Metropolitan Bank; from the 10th of June balances at
the clearing house were paid in legal money. Commercial paper, which for
the most part was the collateral for these certificates, had already
been redeemed. The Metropolitan National Bank alone requested time to
liquidate.
The issue of these certificates was very rapid: $3,800,000 on the 15th
day of May, $6,800,000 on the 16th, $6,700,000 on the 17th, or more than
$17,000,000 in these first three days; then on the 19th, 20th, and 22d,
$1,500,000, and that was all. The remainder of the amount was given in
driblets. Payments, although slower, were made from the 1st of July to
the 1st of August.
Let us now run over these occurrences: in 1873 instead of $24,900,000 in
certificates $26,565,000 had been issued; $22,000,000, had been issued
between the 22d and the 29th of September, the redemptions took place
from the 3d of November to the 31st of December.
In both cases the same amount, so to speak, had been sufficient to
answer for all needs. If so small a difference sufficed to save a
disordered market, people could not understand why panics could not be
provided against. It was necessary to remember that this assistance was
only felt when the decline of prices had already re-established an
exchange of goods, bringing about the liquidation of houses
unfortunately involved.
From the month of June, owing to the bank balances or the rate of
exchange, the tranquillity and steadiness which had become
re-established grew daily; after the storm of the first few days no new
disasters had occurred except the failures of Mathew and of Morgan.
The position of the market grew firmer and the clearing house reduced
its loan certificates, which now replaced the former excessive issues of
bank notes. From $24,000,000 they had already decreased to $18,000,000;
of this amount $6,000,000 were taken by banks as a last resource, and
there then remained only $12,000,000 in circulation. These $6,000,000
had served to sustain the shaken banks, and it is pleasant to state that
outside of these requirements the amount needed was no larger.
Failures had ceased in the great centres, but they continued in the
interior of the country; the shock, like a great wave, took a certain
time to overrun the various States.
SUCCESSION OF PANICS IN THE UNITED STATES STUDIED THROUGH THE BALANCES
OF THE BANKS.--Following the historical summary of panics in the United
States it will be useful to have a general table, so as to glance at the
very rare documents which permit us to follow the working of the Banks
through their balance sheets. We know their organization, and we take
upon ourselves to state results flowing from it.
It strikes us at once that abuses and panics have constantly occurred.
Can we note a difference in the frequency and gravity of the casualties,
according to whether we observe them working under the former or the new
(the National Bank) system, inaugurated during the War of the Secession
in 1864, when the machinery for the issue of bank notes was insufficient
for the new requirements?
Without lingering over the regulations before and after 1864, let us
consider the differences we may ascertain by examining the balance
sheets. Unfortunately, the exactness of our observation is lessened on
account of the very diversity of the field it covers.
In the case of the banks of the United States we have had to content
ourselves with the returns that the Comptroller of the Currency gives in
his annual report on a stated day during the months of February, May,
June, October, and December, beginning with the year 1865. Before that
period we had only the yearly situation of the banks of the different
States upon one given day; we are better informed on the second period;
however, basing our conclusions upon the few balance sheets we possess,
we ascertain the same series of development and increase. Although there
are lapses, still, from another point of view, the table will be more
complete, because it embraces all the banks of the United States. On
such an extended field, it is true, we risk seeing great discrepancies
disappear and lose themselves in the magnitude of the amounts whose
movements we follow. In order better to grasp them, we have put before
us the returns of the banks of the United States, together with those of
the Associated Banks of New York City; we may thus recognize and follow
the share played by each of them.
During the first period of the State Banks (1811-1864), the increase in
the number of the banks was continuous, except for two stoppages, in
1841 and in 1862; in 1841, during the liquidation of the panic of 1839,
and in 1862 at the beginning of the War of Secession; the crisis of 1857
did not interrupt the movement.
The capital of the banks had followed the same changes. From $52,000,000
in 1811 to $368,000,000 in 1840, a reduction to $196,000,000 in 1846,
and finally the last maximum reached in 1861, $429,000,000, at the
breaking out of the war. In 1864 a new organization of the banks under
the name of "National Banks" presented to the State Banks, without
suppressing them, a state of affairs destined to cause their
liquidation, which, in fact, practically occurred.
As in England and France, the amount of discounts, as the balance sheets
give it to us, rose each year during the prosperous period.
Thus from 1830 to 1839 it reached $492,000,000 from $200,000,000, to
decline again to $254,000,000 at the end of the liquidation in 1843.
In the following period the same rising movement from $254,000,000 to
$344,000,000 was reproduced in 1848. The panic in Europe burst forth in
1847; it resounded very slightly in the United States in 1848, as its
subsequent liquidation in 1849 indicates, which only reduced the local
discounts to $332,000,000.
A new period of prosperity followed the preceding events; the growing
movement re-appeared, and from $332,000,000 carried the amount of the
discounts to $684,000,000 between 1849 and 1857. The panic broke out
simultaneously throughout the whole world; but notwithstanding the
wrecks it caused, such was the saving already, so healthy was the
general situation of business, that, after having thrown out a little
scum, the current of affairs resumed its course until 1861, and
discounts had already reached the amount of $696,000,000. This amount is
greater than that we have noted in 1857, but at that time (whilst the
movement continued in Europe up to 1864), despite the shock it received
by the declaration of war here, there was complete stoppage until the
end of the struggle; we have here come across a political panic, not a
business one. Peace re-established, the movement resumed its course
under new conditions and with a reorganization of the banks under the
name of "National Banks." A change was due, but, as everything was made
ready, it was speedy. The first balance sheet of the National Banks
dates from 1864. The amount of discounts had already exceeded the sum of
$100,000,000 in 1865, and grew to $500,000,000 in 1866. Once started the
movement took its own course:
1865 ...... $166,000,000 1870 ...... $725,000,000
1866 ....... 500,000,000 1871 ....... 831,000,000
1867 ....... 609,000,000 1872 ....... 885,000,000
1868 ....... 657,000,000 1873 ....... 944,000,000
1869 ....... 686,000,000
The yearly progression was interrupted as in Europe, and the explosion
occurred at the same time. The rise in prices stopped, and incipient
liquidation became apparent at the end of the year, and reduced the
amount of paper on hand to $846,000,000, but, instead of lasting, as in
Europe, a movement of revival, analogous to that which had followed the
panic of 1864 in England, occurred. The amount of discounts rose from
$856,000,000 to $984,000,000 in 1875, and then, and then only, the real
retrograde movement showed itself as in Europe, and reduced the amount
of the discounts to $814,000,000 in 1879, simultaneously with the
movement in France and in England, when prices had reached the lowest
quotations, and when a resumption of business was about to occur. In a
word, affairs resumed their course; from the end of the year the amount
of paper discounted rose to $933,000,000, and the steady advance as set
forth in table No. 3 continued each year, until it reached
$1,300,000,000 in 1884. The panic had burst forth in Europe in 1882, and
the agitation, so lively was its impulse, lasted during eighteen months;
but, as we have stated, the rise in prices ceased in 1882.
Starting from this time, a reaction appeared. The paper on hand lowered
to $1,200,000,000 in 1885. This liquidation was scarcely noticeable,
because we cover the whole Union, and there is always an upward movement
in the new portions of it which have not yet taken part in business
movements. If we note what occurred in the Associated Banks of New York,
the very place where the greatest amount of business is carried on, the
depression of the amount of paper on hand is most noticeable after the
inflation observed at the height of the panic, while the decrease that
we point out showed itself more slowly with the slackening of business.
Thus, in the last period, the greatest amount of paper appears on
hand--at the close of 1881, $350,000,000, and the minimum in December,
1884, the very year the panic had burst forth, and when, during the
first months, the sum of $351,000,000 reappeared once more; except for a
million, exactly the same amount there was in 1881.
This maximum amount was only an accident, under the influence of
pressing needs at the time of the difficulty, for since 1881 the yearly
reduction of the maximum and minimum amounts ensued. This tendency had
occurred suddenly, and disappeared likewise; the resumption dating from
1885, a year sooner than in Europe.
The discounts of the New York Banks, which had been reduced to
$287,000,000, rose immediately upon the opening of the new period of
prosperity, and a growing activity carried them to $408,000,000 in 1889;
after a few more fortunate years we come to the end of the period of
prosperity and high prices.
We gather the following about discounts from the balance sheets of the
Associated Banks of New York. If we cast our eyes over the balance
sheets of the National Banks of the Union, we must note a falling off of
$100,000,000 in the paper discounted, that is, from $1,300,000,000 to
$1,200,000,000 (1884-1885). After this short period of stoppage, clearly
indicating the necessity for liquidation, discounts resumed their steady
expansion, and rose to $1,470,000,000 in 1886, to $1,587,000,000 in
1887, and finally to $1,684,000,000 in 1888, when we were in the midst
of a period of development and consequently of high prices and of
prosperity; and the same is true in France and England.
The study of a single section of the balance sheets, that of discounts
and loans, has allowed us to follow the periods of prosperity, of panic,
and of liquidation. When we next consider the other sections, we find
the confirmation of our anticipations. Among these sections, in the
order of importance, we notice first, public deposits in the form of
running accounts; they constitute the reverse of the loans and
discounts, whose total is immediately credited to the banks' clients,
and the increase of paper on hand also follows. From 1865 to 1873 the
steady increase was uninterrupted, viz., from $183,000,000 to
$656,000,000; the maximum amount shows itself in the first quarter of
1873, eight months before the maximum of discounts and loans; in 1888
they ran down to $622,000,000; there is, say, a difference of
$300,000,000 between the two totals, and this difference is the same, we
observe, as that between the highest and the lowest of the two sections,
as we notice it in the same year, during the liquidation of the panic of
1873. [Footnote: See table of balance sheets of the Banks of the United
States.]
In the last period the progression is the same; from $598,000,000 the
amount of deposits advanced to $1,350,000,000, whilst discounts and
loans reached $1,684,000,000; that is to say, there was still a
difference of $334,000,000. The relationship of the two sections was
much more marked than in France and in England, where the amounts
carried in accounts current vary more.
In the United States we then experienced a market based on credit,
which, through discounts or loans by the banks, had reached the amount
of the accounts current, and was about to call the clearing house into
action to settle debts everywhere.
The office of the circulation of bank notes, subsequent to the severe
regulations enacted in 1863 for the organization of National Banks, had
varied in the last two periods that we are studying. From 1863 to 1873,
after the war troubles, in proportion as greenbacks were withdrawn, the
bank notes issued by the National Banks not only took their place, but
replaced those of the State Banks, whose position the National Banks had
taken.
We observe them rise firstly from $66,000,000 to $341,000,000
(1865-1873) at the sharpest period of the panic. We might even charge
them with causing it, if the disproportion alone of the two sums,
$341,000,000 bank notes compared with $944,000,000 of bills discounted,
did not at once repel this theory. It is only necessary to glance at
this idea to see its falsity.
The maximum circulation of bank notes has here coincided with the panic,
a thing which had not happened either in France or in England for a long
time, and instead of presenting its highest figure during the
liquidation of the panic of 1873, it shows us its lowest figure,
$290,000,000 in 1877. Far indeed from increasing at this time as
happened in Europe, the amount of bank notes in circulation decreased by
means of the ebbs of metallic cash into the coffers of the banks: in
reality the cause was lacking here; the ebb of specie was hardly felt at
all.
With $4,000,000 in 1865, the reserve was poorly provided, increasing to
$48,000,000 in 1870. At the end of the bursting forth of the panic of
1873 it became reduced to $10,000,000, at the worst of the panic to
$16,000,000; then, under the influence of a slight whirl, it rose to
$33,000,000 in 1874, without reaching the highest figure of the
preceding period, but soon the flow reappeared and reduced this metallic
reserve to $8,000,000 in 1875. It was not until after this depression
that the true ebb reappeared, when the circulation of bank notes was at
its lowest figure ($290,000,000).
Whilst the $8,000,000 specie reserve grew successively to $54,000,000,
$79,000,000; $109,000,000, and finally to $128,000,000 in 1878, 1879,
1880, and 1881; that is to say, upon the approach of the panic, the
circulation also expanded from $290,000,000 to its highest figure
$323,000,000 in 1882, the year of the European crash and of the stoppage
of the rise of prices in the United States. As to the minimum amount of
the specie reserve, it is to be noted in 1883, between the critical
years 1882 and 1884.
Metallic reserves are too small in the United States for their
fluctuations to exhibit the same regular course they offer us in Europe;
the least need exhausts them, and the smallest payments fill them to
overflowing. The panic soon brought about a default in payment and a
need of metallic money to re-establish equilibrium, but this remedy, if
it does precede panics, sometimes precedes them by a year, as we have
observed in 1883, and the same irregularity is apparent whether we
observe the banks of the whole United States, or the Associated Banks of
the City of New York.
After the panic of 1882-1884, the ebb of specie into the coffers of the
National Banks of the United States and of the Associated Banks of New
York resumed its usual course, and raised its level in the case of the
National Banks from $97,000,000 to $177,000,000 between 1883 and 1885,
and even to $181,000,000 in 1888. This ebb occurred both in England and
France at the same time, proving that cash reserves do not increase to
the detriment of each other; it is a flood of specie or of bar-gold
rendered easily available, through the conclusion of the decline of
prices and the slackening of business, extending to the whole world, and
in which each one partakes in proportion to its wealth, and above all in
proportion to its credit circulation, and of the perfection of the
settlements by means of clearing houses.
This regular course in the metallic reserves is no longer to be noted in
the circulation of bank notes; instead of increasing and of entering its
exchanges during the return of specie into the coffers of the banks,
they again took part in the paper-money reserves. From $323,000,000 in
1882 we see the circulation of bank notes decrease each year little by
little until it is reduced to $151,000,000 in 1888; and this remarkable
fact confronts us in the face of an unheard of expansion of business,
almost 50 per cent. greater than in 1873; and of a twofold simultaneous
reappearance of $84,000,000 specie and of $172,000,000 bank notes. What
then is the role of specie and of bank notes in the course of business
in the United States? Much inferior to that which it plays in Europe in
the absence of the machinery of a clearing house embracing the whole
country, instead of being limited to some large cities.
The multiplicity of banks has strikingly helped the economic progress
of the United States. From 1,500 National Banks in 1865 with a capital
of $393,000,000, the number rapidly rose to 2,089 in 1876.
The panic of 1873 did not hinder the movement; however, during its
liquidation, the number shrank to 2,048, only to rapidly advance to
2,500 by the close of 1882, and 2,664 in 1884, and this movement did not
even suffer a slackening as in 1873 during the liquidation of its
crisis; it continued steadily, and we enumerate 3,120 banks in 1888.
The increase is a third more than in 1876, but it is far from being thus
in the case of the capital, which only rose from $504,000,000 to
$588,000,000--that is, only 16 per cent. The small banks in the new
centres of population are the factor, then, which annually increases the
number.
THE CONDITION OF BUSINESS IN 1888-92.--[Footnote: The facts I state in
this _resume_ are based upon statistics printed in the _Commercial
and Financial Chronicle_.--DEC. W. THOM.]--The year 1888 was fairly
prosperous despite a Presidential election, but securities were heavy,
depression was general, and some few stocks shrank amazingly. Excessive
issue of new railroad securities and disastrous competition between
certain of the Southwestern roads were without prudence. Money was easy,
bank-note circulation continued to decrease till it was only $151,000,000,
and legal tenders to $81,000,000, but specie reserve rose to $181,000,000,
the banking capital to $592,000,000 plus, the exports to $1,350,000,000,
and discounts and loans rose to $1,684,000,000.
The sharp speculations in wheat and the formation of the French copper
corner caused a certain fluctuation in general business. Large crops,
excepting wheat; a flourishing cotton manufacture, a decline in
production of petroleum by agreement, a 6 per cent. decline in pig-iron
production, a very heavy one in Bessemer iron, and a very small export
trade as compared with imports occurred. But in the year 1889, the
export movement, consisting largely of cotton, was very great, being the
greatest since 1880, and near the maximum, and compared favorably with
the immense imports induced by the new tariff of 1890. In fact, the year
1889 surpassed all its predecessors in the volume of trade movements;
the bank clearings showing an increase of 13 per cent. over 1888. The
cotton, corn, and oats crops were the largest ever raised, and the wheat
crop was almost the largest. But cotton brought fair prices, and cotton
manufactures and production of iron were also considerably ahead of any
previous year, while petroleum played an important part at good prices.
Railroad earnings showed a wonderful recovery from 1888, and many
reports gave the largest figures ever recorded.
During this year many consolidations and a number of foreclosures
occurred. Railroad building fell to 5,000 miles compared to 7,000 in
1888. In general business, manufacturing and trade were extremely
active, yielding plenty of work, good wages, and fair profits.
But the wool crop and its manufacture, a decline in the anthracite coal
production, farm-mortgage pressure in the middle West, and low rates for
corn and oats were untoward circumstances. Speculation on the general
exchange was small, indicating a growing congestion, as was proved by
the low bank reserves, especially in the last quarter of the year; but
there was a heavy absorption of investment securities.
Gold, to the amount of $37,000,000, was exported in the first six
months. A small amount of it returned before 1890. Failures exceeded
those of 1888 by 203 in number and about 20 per cent. in money. The
woollen trade contributed much of this showing.
Importations surpassed all previous years, while exports exceeded them
by nearly $20,000,000, and the net export of gold amounted to nearly
$40,000,000. Money was easy during the first quarter, and then for a
week a 10 per cent. rate occurred.
Thereafter, excepting the usual July 1st hardening, easy rates prevailed
till August. Stiffening and fluctuating rates ensued till 30 to 40 per
cent. in exceptional cases had been reached in December.
During the year, bank circulation declined to $126,000,000. Specie
reserve sank to $164,000,000 and rose to $171,000,000 with the ending of
the year; legal tenders to $84,000,000, and the number of banks rose to
3,326; their capital to $617,000,000; their deposits to $1,436,000,000,
and their discounts and loans to $1,817,000,000, and surplus and
undivided profits to $269,000,000.
Unused deposits, capital, surplus, and undivided profits were growing
very small in comparison with loans and discounts at the end of the year.
The banks had to work closely, and the demands of the South and West for
currency were severely felt.
PANIC OF 1890.--In this condition the year 1890 opened, and, with ever
growing pressure for bank accommodation, displayed great activity
throughout all departments of trade and transportation, with an
unequalled volume of transactions.
But it was as impossible to grant to the overtrading the money
needed,--though the Secretary of the Treasury, in seventy days, threw a
million a day into the market by buying Government Bonds,--as it had
been for the "Gentleman's Agreement" of 1888--that of the chief railroad
presidents--to maintain rates, to permanently sustain prices of railroad
securities against an oversupply of them; however, both delayed the
inevitable.
The debates on the silver question in Congress, leading to hopes of
cheap money, and the higher prices due to this temporary and delusive
stimulus; the large gross railroad earnings, demand for structural iron;
the Buenos Ayres crisis, leading London to ship us large amounts of our
securities; our small wheat, oats, and corn crops, and large cotton
crop; the tariff discussion, ending with the McKinley Bill on October
6th, and the low bank reserves and money pressure beginning in August
and lasting pretty steadily till December, and an immense shrinking of
securities, were the chief features of the year; and failures beginning
with that of Decker, Howell, & Co., in New York, on November 11th, and
reaching a climax with the embarrassment of Baring Brothers [Footnote:
Meanwhile Messrs. Charles M. Whitney & Co., David Richmond, J. C.
Walcott & Co., Mills, Roberson, & Smith, Randall & Wierum, Gregory &
Ballou, P. Gallaudet & Co., had failed in New York, the North River Bank
of that city had been thrown into a receivership, and in Philadelphia
the failure of Messrs. Barker Brothers, had been followed by a number of
others. This was all bad enough, but sinks into insignificance when we
recall the financial terror inspired by the great and historic house of
Baring Brothers proving unable to meet its engagements, amounting to
about, L28,000,000. The Bank of England received notice of its
difficulties on September 7th, and by the 15th had secured from a
syndicate, composed of the great London houses, a guaranty that it would
be protected from loss to the amount of L4,000,000 if it would liquidate
the Barings' business, and from the British Government the right to
issue L7,000,000 of notes provided that sum was used to loan the
Barings, and it therefore assumed on that date the task of paying the
Barings' acceptances of L21,000,000 and L7,500,000 of other liabilities.
Thus was averted what would probably have been the greatest panic in the
world's history. That which occurred was a mere bagatelle to what was
threatened. It is difficult to bestow too much credit upon Mr. William
Lidderdale, Governor of the Bank of England, for conceiving and managing
this plan. He has saved hundreds of thousands of homes and interests
from misery. Under his able administration it is expected to extinguish
the Barings' liabilities without calling on the Government, and it is
believed something will be saved for the Barings from their former
assets in business. This is deeply to be wished, for though the Barings
have continued business under form of a stock concern with a million
pounds capital, they are wonderfully restricted as compared with their
former state. They have performed in banking too many helpful actions in
furtherance of civilization to be eclipsed without sincere regret.] in
mid-November, which failure itself greatly accelerated the panic, were
the chief events of the year. Railroad building had increased to 6,081
miles, and the consequent new securities were poorly absorbed.
Manufactures were generally prosperous.
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