credit situation throughout the country had become strained, and accordingly, by restricting credits and by making call loans instead of time loans, many of them endeavored to strengthen their own institutions, but they could do little for the protection of the general credit situation.

The point to which bank credits throughout the country may be expanded with safety depends upon many circumstances and varies from time to time. A ratio of reserves to liabilities may be perfectly safe under certain conditions and quite unsafe under other conditions. It is a fatal mistake to assume that bank credits always can be expanded with safety to the maximum allowed by the reserve requirements of the National Bank Act. Recent experience has shown that though the minimum reserves required under the National Bank Act are sufficient in ordinary times, they are not sufficient at all times, and that credits may be expanded beyond the limit of safety although the legal ratio of reserves to liabilities be maintained. It is not sufficient to consider merely the rate of interest in Wall Street. It is rot sufficient to consider the rate of interest and financial conditions throughout the United States. It is necessary to consider the whole world. The financial and commercial relations between the leading countries of the world are so close that any shock affecting financial conditions in one country would be felt by them all. A great war, or a financial crash in any country, would affect financial conditions throughout the whole civilized world.

It is necessary to consider, also, the prospective expansion of business and the prospective demand for credits and currency throughout the world. Furthermore, allowance must be made for events that cannot be foreseen. There are times when exceptional conditions render necessary an exceptional expansion of bank credits or of the currency as a temporary measure of relief, as, for example, when a panic is threatened by reason of the sudden withdrawal of currency in unusual amounts to be hoarded by depositors who have lost confidence in the banks. In such case, however, safety requires that, as soon as the immediate need of the extraordinary expansion shall have been removed, bank credits and the currency shall again be contracted to a normal limit.

There are in the United States approximately seven thousand national banks, besides more than twice as many state banks and trust companies. Each of these institutions acts for its individual interest alone, independently of the others, and the prevailing tend

ency of each at all times is to expand its credits to the limit permitted by law. The country banks lend their surplus resources in the form of deposits at interest to the banks in the larger cities, and the banks in the principal money centers commonly expand their credits as much as practicable by lending on call such sums as they deem it unsafe to lend on time or by discount of commercial paper. Each bank with a deposit in another bank assumes that, in case of need, it can strengthen its reserve by drawing upon this deposit; but it fails to consider that, when thus it strengthens its own reserve, it must to the same extent weaken the reserve of the other bank, and that the deposits of banks with other banks add no strength to the general credit situation. Each bank that has loaned money on call assumes that, in case of need, it can strengthen its reserve by calling such loans; but it fails to consider that, generally, when a loan is called the borrower is obliged to borrow the same sum from some other bank, although a high rate of interest may be exacted, and, therefore, that call loans affect the security of the entire bank situation practically to the same extent as time loans.

In the United States there is no way of regulating the supply of bank credits and of holding part of the potential supply in reserve for periods of financial stringency. Consequently, nearly always there is either an overabundance of money (meaning credit which the banks are ready to lend) or a money famine. It has been argued that the volume of credits granted by the banks depends upon business activity and upon the consequent demand for credit and not. upon the power of the banks to grant credits, and, therefore, that the willingness of the banks to make loans at very low interest rates has little effect in causing an expansion of bank credits. Experience shows, however, that the contrary is the case, at least in the United States. It is true that when there is loss of confidence and when business is depressed interest rates are low, because there is less currency in circulation and more in the bank reserves, while at the same time the demand for bank credits is diminished. It is true, also, that the willingness of the banks to make loans at low interest rates will not stimulate speculation and enterprise unless people have confidence and are ready to speculate and embark in new enterprises. But we know by experience that when people are in a mood for speculation and for business expansion low interest rates operate as a powerful stimulus to speculation and business expansion. A leading banker has said: "In the long run commerce suffers more from the

periods of overabundance [of money] than from those of scarcity. The origin of each recurring period of tight money can be traced to preceding periods of easy money. Whenever money becomes so overabundant that bankers, in order to keep it earning something, have to force it out at abnormally low rates of interest, the foundations are laid for a period of stringency in the not far distant future, for then speculation is encouraged, prices are inflated, and all sorts of securities are floated until the money market is glutted with them."

82. THE CHARACTER OF THE PANIC OF 18931

BY ALEXANDER D. NOYES

The panic of 1893, in its outbreak and in its culmination, followed the several successive steps familiar to all such episodes. One or two powerful corporations, which had been leading in the general plunge into debt, gave the first signals of distress. On February 20 the Philadelphia and Reading Railway Company, with a capital of $40,000,000 and a, debt of more than $125,000,000, went into bankruptcy; on the 5th of May the National Cordage Company, with twenty millions capital and ten millions liabilities, followed suit. The management of both these enterprises had been marked by the rashest sort of speculation; both had been favorites on the speculative markets. The Cordage Company in particular had kept in the race for debt up to the moment of its ruin. In every month of the company's insolvency its directors declared a heavy cash dividend, paid, as may be supposed, out of its capital. In January, National Cordage stock had advanced 12 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 Adapted from Forty Years of American Finance, pp. 188-93. (G. P. Putnam's Sons, 1909.)

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 as immediate reserve a cash fund amounting to only 6 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, according 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 74 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 158 national bank failures of the year, 153 were in the West and South. How widespread 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.

83. EVENTS IN THE PANIC OF 19071

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 2 to 6 per cent; time loans from 6 to 7 per cent; commercial paper from 7 to 7 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, 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.

'Adapted from Practical Banking, pp. 250-57. (Copyright by the author. Published by Houghton Mifflin Co., 1915.)