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.

I From Hamilton, Current Economic Problems, p. 237.

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

Abstracts of the regular report of September 12 and of the two special returns for October 13 and November I are presented in the accompanying table. (The crisis came to a head on September 20.) The report of November I 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 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 deposiBut 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 PANIC
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.,