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CHAPTER I

THE BACKWASH OF WAR

THE TREASURY HOLDS THE DIKES

HE shock of war in Europe, feared though it had

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been by the prophets reading the handwriting on the wall of bond transactions, ran through the financial world with the shuddering force of a temblor.

On Thursday, the thirtieth of July, the day when Sir Edward Grey rejected for Great Britain the proposal of the German chancellor, Von Bethmann-Hollweg, for British neutrality in the event of the invasion of Belgium, the New York Stock Exchange closed, following the action of the exchanges in London, Paris and Berlin. The suspension of communication with Europe, involving the temporary breakdown of the export trade and the collapse of the financial markets, with resultant shock to the credit system, affected the United States directly and profoundly. In the central reserve cities of New York, Chicago and St. Louis arose an anxiety which, had it not been allayed by prompt and effective action by the Secretary of the Treasury, would have culminated in general financial disorganization.

On the thirty-first of July, however, when Germany issued to Russia demand for immediate demobilization and moved three army corps close to the French border, the Secretary of the Treasury announced that his department was keeping in close touch with the situation, and would help, as far as it legitimately could, to alleviate the danger to the United States. The Aldrich-Vreeland Act, as amended by the Federal Reserve Act, was still in force. There was in the Treasury $500,000,000 of emergency currency printed

and ready for use under that law. The amending provision, which lowered the interest rate for the borrowing bank from the burdensome percentages of the original bill, made McAdoo's task, while difficult, possible. Without it and the later amendments which he secured during the hectic week which followed, the AldrichVreeland Act would have been as absurdly impotent to give relief to the country as it had been inadequate during the crop-moving times of money tightness between 1908 and 1913.

The Secretary's declaration that the Treasury stood ready to distribute $500,000,000 to the banks under the provision of the existing law was the first definite assurance of relief. Even this announcement was hampered by the provision of the original law that this amount had to be prorated among the states, and the effect in New York City was not marked. On August 1st the presidents of two of the most important banks there went to Washington to confer with McAdoo on the critical situation. With the Secretary and the Comptroller of the Currency they went over the phase, present and future, of the difficulties faced by the financial institutions of the United States, presenting, in particular, the dangers of the larger and more important banks of the metropolis.

It was the day when Germany declared war on Russia, when Great Britain called out her naval reserves, when Belgium prepared her refusal of the German demand of free passage through her territory, and the world tottered on the brink of the war which had been threatening Europe for nearly a score of years. The President of the United States, watching the conflict from the conning tower of his position, had to rise above personal sorrows to perform the duties of his

office, and charted that course of neutrality which his ship was to follow until driven out of it by German aggression. The Secretary of the Treasury held steadfastly to the work of closing down the hatches against the threatening hurricane. On that day he made immediately available the funds for crop-moving, and also directed another action which was to bear even speedier fruit.

The New York bankers returned to their own city on the evening of August 1st, the day of their conference with the Secretary. On Sunday, August 2nd, the situation had grown more serious, and they telephoned to McAdoo an urgent request to go to New York to attend a meeting on that evening of the bank and trust presidents of the city. The Secretary promised attendance, designating the Vanderbilt Hotel as the place of conference, and left for New York with John Skelton Williams, Comptroller of the Currency, and Charles S. Hamlin, then an Assistant Secretary of the Treasury, and already appointed to membership on the Federal Reserve Board, although he had not yet taken the oath of office.

The Vanderbilt Hotel conference, attended by these officers, W. P. G. Harding, who, with Hamlin, had already been confirmed by the Senate to membership on the Federal Reserve Board, and more than a score of the great bankers of New York and Philadelphia, gathered in solemn realization of the import of their meeting. For the first time since he had taken the Secretaryship of the Treasury McAdoo was facing in person the united power of the men whom he had fought and defeated by his measures of financial reform. In the emergency of national danger, however, all animosity was apparently as deeply buried by the

older powers as it was actually buried by the administration.

In gloomiest foreboding the bankers acknowledged their inability to deal with the situation, and insisted that assistance from the Treasury of the United States was essential to the salvation of American financial institutions. New York was fronting, they told him, an intensification of the danger which threatened the country as a result of the impending war in Europe. It was evident even to the unenlightened that on the morrow England would make her final demand that Germany respect the neutrality of Belgium, and equally evident that Germany would refuse the request and move her divisions as speedily as possible toward France. New York, with its great foreign-born population, keenly aware of the issues and interests involved, had already taken alarm. Nothing but the noonday closing of the banks on Saturday had prevented a run upon them, a run which would have found them unprepared, and which would unquestionably have created a more terrible panic than any the nation could recall. With the situation tightening every moment, to-morrow's panic was even more certain. Ten o'clock in the morning would find thousands of men and women clamoring for return of their savings. The banks of New York did not have currency sufficient to meet the demands of these depositors. With the refusal, bedlam would break. What, they asked, was the Secretary of the Treasury going to do?

The Secretary of the Treasury, tired by long vigils, by hasty travel, by the beginning of those responsibilities which fate was to shove upon his physically lean and morally broad shoulders, may have indulged in a Lincolnian twinkle as he looked upon the faces of

his questioners. From their point of view he must have seemed cornered into acceptance of a proposition to permit the national banks to count national bank notes as part of their reserve on the ground that this was the only measure which would save them from suspending payment or a counter-proposition to issue the equivalent of those clearing-house certificates as they had been issued, not wisely but too broadly, in the banker's panic of 1907. Such procedure would, of course, cross one raging stream, but it would only lead to another that would be, even in the emergency, not without profit to the banks. The Secretary had another solution.

The Treasury, he told the bankers, had already provided for the emergency. Under the provisions of the Aldrich-Vreeland Act, which he had caused Congress to extend until such a time as the Federal Reserve would be in working order, providing June 30, 1915, instead of June 30, 1914, as its time of expiration, the banks would secure currency equal to their needs by conforming to the terms of the measure. His hearers, admitting the truth of this, called his attention to the fact that some of them were debarred from taking advantage of this relief by a clause of the Act which he was to consider later, and by the more urgent fact that there was not time to secure the currency from the Treasury, even if they could apply for it. The banks on which a run was likely must have such currency at the time of opening the next morning. It was manifestly impossible to transport it from Washington between the time of the opening of the Treasury at nine o'clock and the time of the opening of the banks at ten.

It was, the Secretary agreed, if the amount needed were in Washington; but, foreseeing the necessity which had now arisen, he had already ordered $40,000,

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