With this increase of nearly $313,000,000 in their cash reserves it would have been possible for the banks to have nearly doubled their productive investments without diminishing the ratio of cash to deposit liabilities. As a matter of fact, these investments were increased far more than this.

The following table shows the changes in loans, net deposits (not including government deposits), cash reserves, and reserve ratio at the time of the early autumn return of the condition of the national banks from 1897 to 1907:

Every year witnessed an increase in loans (that for the last year of the series being the most considerable) and also in deposit liabilities. Cash reserves showed a gain, except in 1902 and 1906, but the reserve ratio was subject to greater fluctuations. Between 1897 and 1902 the decline was continuous, with the exception of 1900, when the banks enjoyed the benefit of the change in the requirement as to note issue from 90 per cent to the full par value of the bonds deposited as security. By 1902 the banks had evidently approached as near to legal-reserve requirements as they felt was consistent with safety, and thereafter loans and deposit liabilities were kept roughly within limits determined by the amount of cash holdings. It will be noted. that in 1902 the banks were a little above and in 1906 somewhat below the ratio of reserve on August 22, 1907, the date of the last return before the crisis. That the banks were slightly stronger in cash in 1907 than in 1906 may be in part due to the earlier date of the return of 1907, nearly two weeks earlier than that for the corresponding period in 1906. It is evident, however, that the banks were at least

in, what was for them, a quite normal condition of strength just before the beginning of the crisis. But this was not on account of any exercise of restraint in making loans, since the increase during the previous twelve months was greater than for any other year of the period under review. Finally, it may be noted that the proportion of reserve to deposit liabilities which had become customary was distinctly less than it was during the years before either the crisis of 1873 or that of 1893.

Analysis of the condition of the banks by groups does not give different results in the case of the country banks and those of reserve cities. The net deposits of the country banks increased without interruption from $963,000,000 on October 3, 1897, to $2,527,000,000 on August 22, 1907. The reserve ratio, which was 11.6 per cent at the outset, declined rapidly and was constantly in the neighborhood of 7.5 per cent from 1902 onward; in 1906 it was 7.5 per cent; in 1907, 7.6 per cent. In the reserve cities also deposits increased with the exception of a single year, 1903, rising from $586,000,000 to $1,423,000,000. The reserve ratio was 17.8 per cent at the outset, but was in the neighborhood of 12 per cent from 1901 onward. In 1906 it was 12.1 per cent; in 1907 it was 13.4 per cent.

The condition of the banks in the central reserve cities presents greater individual differences. In St. Louis deposits increased regularly with the exception of 1900. The reserve ratio of the St. Louis banks was below 25 per cent even in 1897 and was above that point in only one year, 1905. In 1906 it was 24 per cent and in 1907, 23.5 per cent. In Chicago deposits fell off somewhat in two years, 1900 and 1906, but increased from $105,700,000 in 1897 to $262,900,000 in 1907. Beginning with a high reserve ratio of 36 per cent in 1897 the Chicago banks soon broke away from the traditionally ample reserve which had characterized the banks of the city. In 1899 the reserve was 25.4 per cent, in 1902 only 21.9 per cent, and thereafter every autumn return showed a deficiency until 1907, when the banks held a cash reserve equal to 25.3 per cent of their deposit liabilities.

The upward tendency of loans was not so marked in New York as in the case of the banks in general. The $408,000,000 of New York bank loans in 1897 was nearly 20 per cent of all the loans of the national banks, while the $712,000,000 of loans in 1907 was just above 15 per cent of the total. Even at the beginning of the period the New York banks were able to find borrowers for all they were prepared to lend, and throughout the period they were evidently handling their

loan account so as to keep just above the 25 per cent requirement against deposits. They did no more than maintain the reserve position which previous experience had clearly shown to be inadequate, although the burden resting upon them through the relatively greater expansion elsewhere tended to increase. New York still maintained its commanding position as a debtor of national banks. There had been no marked change in the proportion of deposits due to national banks compared with the total deposits of the New York banks. They were 30 per cent of the total in 1897, nearly as much in 1906, and 27 per cent in 1907. The New York banks were comparatively as strong as in the past and under no greater relative obligations to other national banks. They might, however, reasonably have expected somewhat greater withdrawals in an emergency, because of the smaller cash reserve ratio of all the other banks in the system, though the probable difference on this account was not remarkably great.

During this period there was a startling increase in the number of state banks and trust companies, in consequence of which the banking situation as a whole is greatly complicated. On October 2, 1897, the net amount due from national banks to state banks of all kinds was only $185,600,000; on August 22, 1907, it was $646,000,000. In particular, the increase in the deposits of state banks and trust companies held by the New York banks was most striking, and might well have been considered alarming.

From a little more than one-third the aggregate of bankers' deposits in 1897 the deposits due state institutions had become in 1907 almost equal to those due the national banks. The aggregate of bankers' deposits had also become a slightly larger part of the total deposits of the New York banks, but the real importance of this growth is due to the fact that the cash reserves of the state banks and trust companies were notoriously inadequate.

79. BANKING POLICY IMMEDIATELY PRECEDING A CRISIS1 By O. M. W. SPRAGUE

After the San Francisco earthquake on April 18, 1906, eighteen months before the crisis, there were indications in plenty that the pace was too rapid and that the equilibrium of economic forces was becoming increasingly unstable. That catastrophe destroyed an immense

1 Adapted from Crises under the National Banking System, pp. 237-45. (National Monetary Commission, 1910.)

amount of capital, a loss which, through insurance, was widely distributed; but even if it had not occurred it is certain that demand for additional capital was outstripping current savings seeking investment. Increasing difficulty was experienced in marketing securities of the very highest class. The strain upon capital was world-wide, and in the United States municipal bonds whose sale would have been stimulated by distrust of business corporations could only be marketed when offered at lower prices or a higher rate of interest.

The inability to secure capital by the sale of securities in a period of active business should have been enough in itself to inspire unusual caution in the management of banking institutions. When corporations of the highest standing are obliged to resort to short-term notes it may be assumed without question that other corporations are expanding upon an insufficient foundation of working capital, that current obligations are increasing, and that bank credits are being used to their utmost extent. This probability might well have been recognized as a certainty when it appeared that during the latter half of 1906 and the first eight months of 1907 the loans of the national banks had increased more rapidly than at any time in the history of the system.

Increasing tension in New York, whenever comparatively slight contraction in loans took place, was another indication pointing to the same condition of affairs. It suggested that there were few persons in the community with idle funds available to take over either the loans or the collateral of borrowers, and that, consequently, any considerable liquidation of loans would be difficult, and, if carried through rapidly, disastrous.

Another indication of the approach of a period of declining activity in trade was the increasing ratio of costs reported in many industries. This is probably one of the most fundamental causes of industrial reaction and the necessity for an occasional period of recuperation. During the ten years before 1907 production in many branches had more than doubled; as, for example, coal, iron, and also railroad traffic. A far more rapid increase in the number employed in such occupations was made than was compatible with the maintenance of industrial efficiency. The incompetent could hold places because there were none to fill their positions, and there was no time to acquire skill by those capable of acquiring it.

As a result of these and other causes which might be mentioned there could be no doubt that the United States, like other countries, was about to pass through a period of reaction, though the exact

moment of its beginning could not be foreseen and might largely be determined by fortuitous circumstances. It was so probable that with each month of 1906 and 1907 the exercise of increasing caution might well have been expected in all responsible circles.

Little heed seems to have been given to these warning signs, but much was made of every straw which suggested a possible further advance. On July 31, 1906, dividends were resumed on the common stock of the United States Steel Corporation, and on August 18 the Union Pacific dividend was advanced from 6 to 10 per cent, and dividends were begun at the rate of 5 per cent on the shares of the Southern Pacific Railroad. Events seem to have proved conclusively the ability of these companies to earn the dividends which were then declared, but nevertheless, coming when it did, this action exercised an unfortunate general influence. It gave encouragement to the unbridled optimism which was already too much in evidence. It was preceded and followed by a speculative movement on the stock exchange, which was made possible through credits granted by the banks upon the foundation of the usual summer inflow of funds from the interior.

Despite the numerous evidences of danger during the early autumn of 1906 and the "rich men's panic" of March, 1907, when the severest declines occurred that have been known to the New York Stock Exchange, the banks of New York made no real preparation for the crisis that was obviously due. They were in slightly better shape in August, however, than they were a year earlier. The following table shows the situation:

Until very recently no one admitted that his judgment dictated any policy of retrenchment. Gentlemen, we cannot hold the

Adapted from an address before the New York State Bankers' Association, June 27, 1907. Quoted in Bankers' Magazine, LXXV, No. I (1907), 1−3.