Cordage stock had advanced twelve per cent on the New York market, selling at 147. Sixteen weeks later, it fell below ten dollars per share, and with it, during the opening week of May, the whole stock market collapsed. The bubble of inflated credit being punctured, a general movement of liquidation started. This movement immediately developed very serious symptoms.

Panic is in its nature unreasoning; therefore, although the financial fright of 1893 arose from fear of depreciation of the legal tenders, the first act of frightened bank depositors was to withdraw these very legal tenders from their banks. Experience has taught depositors that in a general collapse of credit the banks would probably be the first marks of disaster. Instinct led them to get their money out of the banks and into their own possession with the least possible delay, therefore when the depositors of interior banks demanded cash, and such banks had in immediate reserve a cash fund amounting to only six per cent of their deposits, it followed that the Eastern "reserve agents" were drawn upon in enormous sums.

On the New York banks the strain was particularly violent. During the month of June the cash reserves of banks in that city decreased nearly twenty millions; during July, they fell off twentyone millions more. The deposits entrusted to them by interior institutions had been loaned, acording to the banking practice, in the Eastern market; their sudden recall in quantity forced the Eastern banks to contract their loans immediately. But in a market already struggling to sustain itself from wreck, such wholesale impairment of resources was a disastrous blow. In the closing days of June, the New York money rate on call advanced to seventy-four per cent, time loans being wholly unobtainable. The early withdrawals by depositors in the country banks were only a slight indication of what was to follow. In July, this Western panic had reached a stage which seemed to foreshadow general bankruptcy. Two classes of interior institutions went down immediately-the weaker savings banks, and private banks, distributed in various provincial towns, which had fostered speculation through the use of their combined deposits by the men who controlled them all.

In not a few instances, country banks were forced to suspend at a moment when their own cash reserves were on their way to them from depository centers. Out of the total of one hundred and fiftyeight national bank failures of the year, one hundred and fifty-three were in the West and South. How wide-spread the destruction was among other interior banking institutions may be judged from the fact that the season's record of suspension comprised 172 State

banks, 177 private banks, 47 savings-banks, 13 loan and trust companies, and 16 mortgage companies.

During the month of July, in the face of their own distress, the New York banks were shipping every week as much as $11,000,000 cash to these Western institutions. Ordinarily, such an enormous drain would have found compensation in import of foreign gold, and, in fact, sterling exchange declined far below the normal gold import point. But the blockade of credit was so complete that operations in exchange, even for the import of foreign specie, were impracticable. Banks with impaired reserves would not lend even on the collateral of drafts on London.

So large a part, indeed, of the Clearing-House debit balances were now discharged in loan certificates that a number of banks adopted the extreme measure of refusing to pay cash for the checks of their own depositors. Long continued, a situation of this kind must reduce a portion of the community almost to a state of barter; and in fact a number of large employers of labor actually made plans in 1893 to issue a currency of their own, redeemable when the banks had resumed cash payments. On the 25th of July, the Erie Railroad failed, the powerful Milwaukee Bank suspended, and the situation appeared well-nigh hopeless.

Relief came in two distinct and remarkable ways. Large as the volume of outstanding loan certificates already was, three New York banks combined to take out three to four millions more, and this credit fund was wholly used to facilitate gold imports. At almost the same time, the number of city banks refusing to cash depositors' checks had grown so considerable that well-known money-brokers advertised in the daily papers that they would pay in certified bank checks a premium for currency. This singular operation virtually meant the sale of bank checks for cash at a discount. Through the money-brokers, therefore, depositors paid in checks the face value of such currency as was offered, plus an additional percentage.

This premium rose from one and a half to four per cent, and at the higher figures attracted a mass of hoarded currency into the brokers' hands. This expedient was applied on an unusually large scale, and it had the good result of helping to keep the wheels of industry moving. Its bad result was that it caused suspension of cash payments in the majority of city banks; for, of course, when a premium of four per cent was offered in Wall Street, for any kind. of currency, it was out of the question for the banks to respond unhesitatingly to demands for cash by speculative depositors. Most of the banks cashed freely the checks of depositors where it was shown that the cash was needed for personal or business uses.

The panic, in short, had ended, but not until the movement of liquidation had run its course. The record of business failures for the year gives some conception of the ruin involved in this forced liquidation. Commercial failures alone in 1893 were three times as numerous as those of 1873, and the aggregate liabilities involved were fully fifty per cent greater. It was computed that nine commercial houses out of every thousand doing business in the United States failed in 1873; in 1893, the similar reckoning showed thirteen failures in every thousand.

107. The Course of the Panic of 190712

BY RALPH SCOTT HARRIS

In July, 1907, it was felt in every circle that business trembled on the edge of an abyss. A continued money stringency forced Secretary Cortelyou in August to make deposits in banks and accept as security state, municipal and railway bonds. Beginning in September there was a tone of ill-concealed fright among the most hopeful. Only the financial papers attempted to coax themselves back into the old confidence. During the second week in October call loans in New York ranged from 21⁄2 to 6 per cent; time loans from 6 to 7 per cent; commercial paper from 7 to 71⁄2 per cent. In these two weeks there were twice as many failures as in the same period of 1906. There were five times as many manufacturing failures in September, 1907, as in September, 1906.

A series of bank failures precipitated the spectacular part of the crisis. The first intimation of upheaval was the failure of the Stock Exchange firm of which Otto C. Heinze was the head. The suspension was due to a failure to corner the copper market. There was a well-defined suspicion that F. Augustus Heinze, president of the Mercantile National Bank, was interested in his brother's ventures, and that the bank was being "used" in this connection. He and his supposed allies fell into public distrust. Seven banks and a trust company with capital of $21,000,000 and deposits of $71,000,000 were dominated by these interests. Believing them able to weather the storm, the Clearing House Association agreed to help them out if Heinze and his associates were eliminated. This was done. A few days later, however, the National Bank of Commerce refused to clear any longer for the Knickerbocker Trust Company, whose president was thought to be allied with the suspected interests. The result was a run on the Knickerbocker Trust Company

12 Adapted from Practical Banking, 250–257. Copyright by the author Published by Houghton Mifflin Co. (1915).

which, after paying out $8,000,000 in three hours, closed its doors. Runs followed on the Lincoln Trust Company and on the Trust Company of North America. Following several conspicuous commercial failures, other banks in New York closed for safety's sake.

Meanwhile the money scramble began. Banks were forced to try to call loans to be prepared for the demand of banks and individual depositors. The Secretary of the Treasury deposited $35,000,000 in national banks in New York in four days.

Stock Exchange prices collapsed. A syndicate, headed by the late J. P. Morgan, stated that it would stand under the market, and placed $25,000,000 on call at 10 per cent; later $10,000,000 was made available at 50 per cent, the high price being fixed to discourage speculation. Soon the banks began to restrict cash payments; clearing-house loan certificates were issued. The demand for cash started a premium on currency the next week which continued the rest of the year. It offered an incentive for withdrawal of deposits. Large failures occurred as the result of the money stringency. On November 9 arrived the first large shipment of more than $100,000,000 in gold, imported to relieve the money stringency. The banks had already increased their circulating notes at this time.

But in the meantime the panic had seized the interior. Banks in most of the cities, over 25,000, suspended cash payments. The clearing-houses stood guaranty on certificates. It is estimated that over $500,000,000 of substitute paper was issued. The country banks, having no clearing-house affiliations, suffered most. Many failures occurred among them.

Shipments of money to the West were made from New York. These varied from $4,400,000 for the week ending October 19, to $22,600,000 for the week ending November 16. In the week ending January 4 the tide turned and $5,500,000 was shipped to New York. The New York banks supplied the country with $125,000,000 between the beginning of the panic and the first of 1908. Still the reserves of the Clearing-House banks were not seriously depleted, the importation of gold and the federal deposits having almost offset the loss of cash.

Domestic exchange was paralyzed, New York drafts selling from sixty cents discount to ten dollars premium in different parts of the country. As for foreign exchange, the ordinary rules applying were suspended. Drafts on London were bought when the export point had been passed, the reason prompting buyers being their ability to sell gold at a premium.

Common stocks fell, as did preferred stocks and bonds, although not to so low a point. By the first of the year securities took a

brighter outlook on life. To sustain the stock market, the national banks increased loans and discounts some $63,000,000 between the last of August and the first of December. This was in addition to the syndicate pool of $35,000,000 previously mentioned.

Perhaps the panic could have been localized had New York bankers been able to meet all demands without restriction. But restriction inspired country banks with a zeal to provide for any disaster. Hoarding followed. In December most country banks had higher reserves than at the beginning of the panic. The question which each country banker asked himself was, Can I afford to be less cautious than other bankers when I know the psychology of "panics" and "runs"?

Failures drop thick and fast when the panic is past. The financial battlefield is gory with the slain and, what is more, the trampled. And failures after the depression sets in are larger and more important. From 3,635 failures in the last three months of 1907, bankruptcies increased to 4,909 in the first quarter in 1908.

108. The Order of Events in a Crisis18

BY ARTHUR T. HADLEY

The order of events in a crisis is generally this:

I. A shock to public confidence in a period of liberal, not to say inflated, credit, creates a demand for ready money. No one is sure that his neighbor will remain solvent. Each man is therefore anxious to secure himself against future loss. Every borrower seeks means of paying his obligations and increases the demand for money; almost every capitalist tries to enlarge his cash reserves and thus lessens the available supply.

2. This increase of demand and diminution of supply at first puts up the interest rate on short-time loans. Money is needed to tide over the immediate exigency, and every one is willing to pay large prices in order to obtain it. But this is only a temporary measure. Under the stress of need for securing money, people who have engagements to meet sell their goods at a sacrifice in order to obtain it. An unusually large supply of products and securities is thrown upon the market just at the time when many property owners feel themselves least able to invest, and when some consumers are restricting their purchases instead of expanding them. The temporary increase in the interest rate gives place to a more lasting fall in prices.

Adapted from Economics, 297-299. Copyright by G. P. Putnam's Sons

(1896).