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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.

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"?

84. THE HOARDING OF CURRENCY IN 18931

BY J. DEWITT WARNER

Then developed the feature that will forever characterize the stringency of 1893: instructive to those who have not already learned how immaterial is any ordinary supply of legal currency when

Adapted from Sound Currency, III (1896), p. 240.

compared with credit in its various forms-the real currency of the country. Almost between morning and night the scramble for currency had begun and culminated all over the country, and the preposterous bulk of our circulating medium had been swallowed up as effectually as, in a scarcely less brief period, gold and silver had disappeared before the premium on specie a generation before. Currency was hoarded until it became so scarce that it had to be bought as merchandise at a premium of 1 to 3 per cent in checks payable through the clearing-house; and to enable their families to meet petty bills at the summer resorts the merchants and professional men of the cities were forced to purchase and send express packages of bills or coin, while savings banks hawked their government bond investments about the money centers in a vain attempt to secure currency.

85. THE STRAIN UPON NEW YORK IN TIME OF PANIC BY O. M. W. SPRAGUE

The strain upon New York banks in emergencies is not limited to the withdrawals of balances by outside banks. Like the central money markets of other countries, New York is the cheapest market for loans in the United States, and is consequently resorted to by large borrowers from all sections. For this reason and on account of stock exchange and other financial dealings the demand for loans there is indefinitely large and attracts the surplus funds of the banks of the entire country. Loans of outside banks in New York are apt to be particularly large during those periods of months or even years when conditions are ripening for a crisis, because at such times the rates for loans in money centers always reach abnormally high levels. When a crisis does come, calls from the outside banks for the liquidation of their loans and the shipment of the currency received in payment are invariably even more in evidence than the drawing down of balances. The effects are far more disturbing, because of the shifting of loans which is involved.

There has been no crisis since the establishment of the national banking system in which the New York banks would have been at all likely to have resorted to suspension had their difficulties been confined to those of purely local origin. In 1873 the situation in

Adapted from "Proposals for Strengthening the National Banking System," Quarterly Journal of Economics, XXIV, 1909-10, pp. 221-22.

New York was so far improved at the time the banks restricted payments that the necessity for it was generally questioned. It was subsequently explained in a clearing-house committee report that the measure was taken on account of the threatened exhaustion of the cash reserves of the banks in response to the demands of the interior banks for the return of their deposits. In 1893 there was nothing in the nature of a panic in New York itself when this discreditable step was again taken. The banks succumbed to the prolonged drain of money to the West and Southwest, where numerous bank failures had generally weakened public confidence. Again, in the crisis of 1907, at the end of the week in which the troubles of the New York trust companies became known, the local situation was showing such decided evidence of improvement that but for the increased demands of the outside banks it is certain that cash payments would have been maintained.

86.

SUSPENSION OF SPECIE PAYMENTS1

BY O. M. W. SPRAGUE

If the banks of the money centers refuse or even delay the shipment of funds deposited with them, the thousands of country banks will inevitably discontinue remittances upon items sent to them for collection. But is the reverse equally inevitable? If the initiative is taken by the country banks, is that sufficient reason for the discontinuance or restriction of the shipments of money to the interior by the banks of the money centers? No, because the banks in the money centers reap great advantages from their position as clearing centers and as reserve agents. They incur a responsibility for maintaining the credit situation which does not rest upon the other banks.

Finally, what has been said of money centers generally in relation to the country banks applies with even less qualification to the responsibilities of the New York banks, to the banks of other money centers, and, indeed, to the banks of the entire country? There is always a chance that the New York banks, by meeting every demand upon them for cash, may be able to re-establish the ordinary course of payments between banks in different parts of the country, while nothing that the country banks and those of the secondary money centers may do can possibly bring this about. It follows, therefore, that even though in 1873, or on later occasions, some of

'Adapted from History of Crises under the National Banking System, pp. 6169. (National Monetary Commission, 1910.)

the banks outside New York may have restricted payments before the suspension in New York, the general dislocation of the domestic exchanges is properly to be attributed to the banks of that city. A danger, therefore, which had been merely threatening became a reality at the moment the action of the clearing-house banks on Wednesday, September 24, became generally known. Similar steps were immediately taken in most of the secondary centers. In Boston, Philadelphia, Baltimore, Washington, New Orleans, Cincinnati, and St. Louis the issue of clearing-house loan certificates, and at the same time the use of certified checks, payable through the clearing-house, were sanctioned. While the use of loan certificates does not necessarily involve suspension, the fact that both measures were taken together in many places not unnaturally gave rise to the erroneous impression that suspension is an inevitable consequence of the issue of loan certificates. Moreover, in many cities, Chicago being the most important, as well as by the country banks generally, suspension of cash payments was quite as complete, even though they did not resort to the loan certificate.

When once the banks had resorted to suspension, various causes of disturbance, till then of minor importance, became serious. The amount of actual money required for a given volume of transactions was greatly increased. Uncertain whether the banks would provide the money which they might shortly need, many persons began to discontinue paying into the banks cash received in the course of their daily business. On September 30, for example, one of the Boston banks reported that many of their customers were depositing their currency in their own safes. The currency premium also tended to keep money from finding its way into banks. The premium on currency in terms of certified checks began in 1907 on October 31 at 2 (low) and 3 (high) per cent, and continued almost without interruption until December 31. The highest premium recorded was 4 per cent, on December 6, 12, and 13. Many retail shops in New York, it was said, sold to brokers their receipts in currency. Positive hoarding also seems to be increased by suspension, even though some money is brought into use by the possibility of realizing a profit from its sale at a premium. In 1873 at any rate the amount of money thus brought to light was unquestionably more than offset by the amounts which were locked up in savings banks. In New York alone the savings banks were estimated to have held from $13,000,000 to $20,000,000, and they were severely criticized for withholding this

money from the channels of trade. Such criticisms would have been well founded if the commercial banks had not resorted to suspension. The savings banks, having required thirty days' notice from depositors, were properly justified in holding themselves ready to meet the demands of those depositors who had already given notice.

87. THE NEW YORK VIEW OF INTERIOR CURRENCY
SHIPMENTS1

The clearing-house committee knew by experience that the dissipation of the New York banking reserve, upon which practically the credit volume of the nation rests, would alarm the nation, intensify the panic, and greatly prolong the period of recuperation. New York bankers have been severely criticized because they did not more fully respond to the demands of country correspondents by shipping currency against balances. To have fully honored the demands that were pouring in from all sections of the country would have dissipated our banking reserve in a fortnight. How could it be replenished? Were the interior bankers sending currency to New York? What would have been the effect upon the country if the New York banking reserve had been entirely depleted? It would have so intensified the panicky feeling that widespread commercial disaster would have resulted. The $53,000,000 deficit in our banking reserve occurred in less than ten days after the failure of the Knickerbocker Trust Company, and was caused by the shipment to interior institutions of the larger portion of that amount in that short time. We kept the door of our treasure house wide open until for the good of the country it became necessary everywhere to close it. It never was fully closed; currency shipments continued in a restricted way throughout the panic, and a larger number of our banks kept up their counter payments as usual.

88. LOANING POLICY DURING A CRISIS

By O. M. W. SPRAGUE

The "banking stage" of a crisis and the efforts made by the banks to weather the storm may best be studied in connection with the crisis of 1873, since the statistical data for this panic are far more extensive than those which we have for the later crises of 1893 and 1907.

From Commercial and Financial Chronicle, Bankers' Convention Supplement, October 10, 1908, p. 84.

Adapted from History of Crises under the National Banking System, pp. 82-84, 303-5. (National Monetary Commission, 1910.)

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