Abstracts of the regular report of September 12 and of the two special returns for October 13 and November 1 are presented in the accompanying table. (The crisis came to a head on September 20.) The report of November 1 was after the panic, and is of importance only in showing the rapid recovery of the banks. Attention should be given chiefly to the changes which occurred between September 12 and October 13. The following table shows the changes in loans for the banks as a whole for the three groups of banks

The contraction of loans to October 13 may be taken as representing the extent of contraction which was due to and which in turn contributed to the severe financial strain of the crisis. The further contraction to November 1 represented the diminishing requirements of business owing to trade depression. By the banks as a whole loans were reduced by $58,000,000 before October 13, or slightly more than 5 per cent. This contraction was general, both the country banks and those in reserve cities showing a contraction of about 5 per cent and those in New York a more considerable contraction of 10 per cent. The most severe contraction among city banks was in Chicago, where, doubtless owing to the decision of the banks not to issue clearing-house loan certificates, loans were reduced from $25,300,000 on September 12 to $19,000,000 on October 13.

In this, as in other American crises, a somewhat exaggerated opinion became current as to the extent to which the banks required borrowers to liquidate their loans. Difficulty experienced in disposing of commercial paper through note brokers and the high rates for call loans seem to have been grounds for this erroneous impression. Under our banking system borrowers unable to dispose of their paper through note brokers in times of crisis resort more largely to the particular banks which hold their accounts than is usual at other times. This shifting of loan relationships gives rise to an impression of wholesale contraction which the statistics of the total loans of the banks show to be unfounded.

The statistical data for the crisis of 1907 are far from satisfactory. The first of the two returns made was on August 22, about two months before the crisis, and the second, on December 3, came after the worst of the panic was passed. For 1907 it is necessary to assume that no great change had taken place in the condition of the banks between the end of August and the middle of October, an assumption which, judging from the weekly bank statement in New York, Boston, and Philadelphia, is not far from the facts of the actual situation. It would, however, be somewhat hazardous to draw conclusions if it were not that the same tendencies are disclosed which were so clearly manifest both in 1873 and in 1893.

As in former periods of crisis, the reserves of the banks, taken as a whole, were not made use of to any considerable extent. On August 22 the banks held $701,600,000, and on December 3, $660,800,000-a loss of only $40,800,000. If the holding of the notes of other banks are included, this loss is reduced to only $31,400,000. This cash loss can be more than matched on many occasions when conditions were entirely normal, e.g., between August 25 and November 9, 1905, when the reserves of the banks fell off more than $43,000,000. By means of loan contraction, the loss in cash, and the diminution in indebtedness between the banks, net deposits were reduced from $5,256,000,000 to $4,629,000,000, and there was a slight increase in the proportion of cash held, which advanced from 13.35 per cent to 13.45 per cent. This slight increase in the reserve ratio was entirely in accord with the precedent, and its explanation is to be found in changes in the condition of the country banks, which are shown in the following table:

The increase of $47,600,000 in reserves of this group of banks exceeded by $6,800,000 the total loss in reserves of the banks taken as a whole. There is no reason to believe that country banks were endeavoring to hoard the money which they withdrew from their

reserve agents at the beginning of the crisis. They needed additional supplies of cash if they were to meet the demands of their own depositors. But after the New York banks suspended and suspension became general they naturally held with a tight grip all the money which they had in their possession at the moment and also very naturally endeavored to extract more from their reserve agents. The withdrawal of money was entirely in accord with what the teachings of past experience ought to have led reserve agents to expect and to be in readiness to meet.

89. POSITION OF BANKS IN TIME OF PANIC1
BY H. J. DAVENPORT

The panic cannot be controlled, once it has started, by any policy of restriction of credit, but only by generous extension. The creditors are hurrying their debtors mostly because of the danger of being themselves hurried, or because of the danger that delay may mean that some other creditor may by his promptitude make himself the sole creditor paid or the sole creditor obtaining adequate security. Were really solvent debtors sure of obtaining credit in case of serious pressure, there would be few creditors to press them.

In fact, also, if the creditors were sure of credit for themselves in case of need, there would be less occasion for pushing the debtors. And if these creditors, in turn, were not in danger of being pushed by other creditors, themselves straitened in credit and themselves fearful of the possible failure of the debtor to obtain credit under serious need, this last occasion of credit pressure would be mostly removed. The banks stimulate a call upon themselves for credit by X, Y, and Z. And if the creditors of X, Y, and Z make demands upon them, and the banks refuse to give credit to X, Y, and Z, these men are driven, in their turn, to place pressure upon still other debtors. The hurry grows with the restriction of credit, and the further restriction of credit adds to the hurry. The process is a geometrical progression. And immediately that no one can get credit to pay with there is a frightened scramble to enforce payment in money, to get money to pay with, to hoard money against possible necessities. The attempt of the banks to hold fast to their reserves is the very force which is prompting the taking them away; depositors under 'Adapted from Economics of Enterprise, pp. 285-88. (The Macmillan Co.,

pressure are withdrawing funds to meet claims in other centers, or, suspicious of the continued ability of the bank to pay upon demand, or suspicious of the ultimate solvency of the bank, are calling for cash to be hoarded. The fact is that it is not necessary that a stringency have already arisen in order to bring about the panic stringency; merely the menace of stringency is necessary.

The difficulty is not precisely in the fact that some banks purport to hold in large part, but actually do not hold, the reserves of other banks; that under our system of redepositing reserves more than three-fourths of the reserves, computed as somewhere else, are really not where they are supposed to be, but instead are still somewhere else, where, in turn, they really are not, and that, therefore, in times of stress the banks themselves are the most serious sources of pressure upon one another; that the banks are not only themselves among the very depositors whose calls are so disastrous, but are, of all the depositors, the ones likely to be first in their calls. Although all this is serious enough, the ultimate difficulty is that the very process by which all the banks at once are trying to strengthen their reserves is an altogether impossible process, a paradox, a deathblow at the very fundamental principle of banking. Any general attempt to convert banking paper or deposit credit into gold must promptly issue in a lamentable collapse of the whole credit machinery. The last people to make this attempt should be the bankers themselves. If other interests attempt it, the banker's duty is to intervene to save the situation. The attempt must in any case fail, but all sorts of calamity must attend this effort at the impossible. When the banks themselves join in the scramble, the last hope of supporting the credit fabric has vanished.

90. TREASURY AID IN TIME OF CRISIS'
BY DAVID KINLEY

I. BY DEPOSIT OF FUNDS

During the ten days from October 21 to 31, 1907, the Treasury transferred to the national banks of New York city $37,597,000, which the banks immediately advanced to the trust companies to meet the

1 Adapted from The Independent Treasury of the United States and Its Relation to the Banks of the Country, pp. 257-60. (National Monetary Commission, 1910.)

run on them. In order to aid the banks in meeting the demand of the interior for currency, the Treasury Department in three days furnished the New York banks about $36,000,000 in small bills. "As the stringency progressed the Treasurer gave relief in every important locality where assistance seemed to be required. By the middle of November the Treasury had deposited in the banks all the money it could spare; indeed, it had reduced its working surplus to about $5,000,000."

An analysis of the entire problem of treasury aid in time of crisis shows that the independent treasury exercises a beneficial influence only in the earlier stages of a crisis caused by a speculative advance of prices; that in the later stages of such an occurrence its influence is evil to a greater or less degree, according as its receipts happen to exceed or to be less than its disbursements; that in a stringency caused by a rapid but healthy increase of business its absorptive influence is wholly bad, but that in the later stage of such a crisis its disbursements are promotive of good, unless mismanaged or too long delayed.

Hence we see that the coincidence of a particular phase or stage of the progress of a crisis is necessary in order that the influence of the subtreasury may be beneficial. But such a coincidence is purely fortuitous, and this fact deprives the system of all value as a scientific mode of relief in crises.

Further to relieve the situation Secretary Cortelyou notified the national banks that they might substitute "bonds suitable for savings banks investments for government bonds which were held as securities against public deposits." The Secretary's purpose in doing this was the same as that of Secretary Shaw in resorting to the same device four years previously. He wished to increase the volume of United States bonds available for circulation. Under this stimulus the circulation of the national banks increased by December 21, 1907, to $83,012,153. Still the difficulty of obtaining bonds and the awkward machinery of administration in issuing national-bank notes had the usual result of making the increase of circulation virtually ineffective until after the need for it had passed away. The volume of national-bank currency increased by $24,000,000 between October 15 and November 15, but at the close of the year, it had risen much