CHAPTER LXXXII.
OUR GREAT AMERICAN PANICS FROM FIRST TO LAST.
The panic of 1907 naturally revived public interest in all our previous
panics, and therefore a brief historical review of these is timely. The
small one that followed the throwing overboard of the historic tea in
Boston harbor in George the Third’s time, and which was the prelude to
the War of Independence—the victorious struggle of the old Thirteen
Colonies to throw off the British yoke—was of no importance, owing to
the country’s scanty trade and banking development, and the
corresponding scarcity of credits. It was a tempest in a teapot, this
sequel to the Boston tea party.
The panic of 1812 was the first of much magnitude in the history of the
United States, and it resulted from over-trading and undue expansion in
all directions, but was precipitated by our war with England in that
year. The banking capital of the country was then only seventy millions
of dollars, yet more than ninety banks failed in the run upon their
deposits that ensued, and the Government found great difficulty in
raising a war loan. Meanwhile, trade and manufactures, which had been
very active and prosperous before the declaration of war, suddenly
became almost paralyzed.
The change from undue inflation to the undue contraction born of fear
was disastrous in its wholesale destruction of market values and
credits. But the Government war expenditures, after it had succeeded in
disposing of its securities, gradually stimulated recovery from the
worst effects of the panic, and industries that had been suspended were
resumed, thus re-employing labor that had been left idle.
Not much has been recorded of the panic of 1823, which caused trade
depression till 1825, so it was evidently much milder and less
disastrous than that of 1812. It was another instance of the reaction
that follows over-trading and an over-extension of credits, without any
war or other great event to precipitate it.
The panic of 1837 was, however, much more serious and disastrous,
because it involved far greater results owing to the growth of the
United States in extent, population, and wealth in the interval. like
its predecessor, and indeed all other panics, it was due to the
over-extension of trade, speculation and credits, but it was
precipitated by the troubles of the United States Bank, and President
Jackson’s hostility to that institution.
Speculation had been running wild, particularly in land and new railway
projects, which were then in their infancy in England. The achievements
of George Stephenson, the builder of the first locomotive engine there,
had quickly kindled the fire of railway enterprise in this country, and
promoters busied themselves in raising capital for building and
equipping railways here; and incidentally it gave a strong impulse to
the widely prevailing speculation in land.
The panic of 1857 was, of course, infinitely greater in its extent and
consequences than that of 1837, owing to the same causes that made the
latter greater than that of 1812, namely, the growth of the territory,
population, and wealth of the United States. Its main cause can be
traced to the enormous increase of speculative enterprise in this
country, especially in railway building, following the great gold
discoveries of 1849 in California. But its immediate cause was the
general alarm produced by the failure of the Ohio Life and Trust
Company, which had its principal agency in Wall Street.
There, at the corner of Nassau Street, it had long been regarded as a
pillar of financial strength, and no institution in the United States
stood in higher credit or commanded greater confidence, although without
any good reason. When it suspended payment, the news came upon the
public with the suddenness of a thunderbolt from a clear sky. The
unexpected shock filled the financial and mercantile community with
dismay, and from one end of the country to the other credit was
destroyed.
This, indeed, was panic. Bank-notes were everywhere distrusted, and
presented for redemption; whereupon the banks everywhere suspended
specie payment, except that the Chemical Bank of New York redeemed its
own notes. Business depression and thousands of failures from Maine to
California followed, and nearly three fourths of the railways, and other
large corporations, defaulted in their interest and other payments, and
went into the hands of receivers. The depression grew deeper from month
to month for more than a year after the panic, and some of the best
railway stocks declined to $3 to $5 a share, including Michigan Southern
and Harlem. Meanwhile corporate foreclosure sales and reorganizations
told the story of the financial wreckage of the time.
The country had not long recovered from the effects of this great panic
when, on the 4th of March, 1861, Lincoln was inaugurated President, and
the Civil War broke out. There was severe depression—a war crisis—then,
but it was so slow, insidious, and prolonged that it was never called a
panic. It may be said to have commenced—in anticipation of the
threatened war of the South against the North—with Lincoln’s election in
November, 1860, and to have continued till the Government began to issue
the paper money of the war era in 1861, after the suspension of specie
payments.
One feature of the panic of 1857, and the prolonged depression that
followed it, duplicated the experience of 1837, and that was the almost
universal prevalence of what were called “shinplasters.” These were
practically I O Us given as change by anyone who had received a
bank-note or check for more than the amount due him in payment for
anything. In New York the notes of solvent New York banks were never
refused in payment, while those of banks elsewhere were tabooed; but in
making change, no specie was given, the banks having suspended specie
payments. So, unless the exact amount was tendered, shinplasters were
given for the balance.
The city was flooded with these personal evidences of debt for small
amounts, issued by storekeepers, hotels, restaurants, saloons, barbers,
and the rest of mankind, and many of these were passed from hand to hand
till they became too dirty and dilapidated to be handled. They were the
worst kind of filthy lucre, and understood to be only redeemable on a
return to cash payments by the banks. But of course many of them never
were redeemed. They ranged in amount from one cent to several dollars,
and this sort of scrip was more or less extensively issued from Maine to
Texas.
The Black Friday Gold Panic was a Wall Street convulsion, and not far
reaching, like the others. It occurred on Friday, September 24, 1869,
and was the result of a conspiracy, headed by Jay Gould, to corner gold,
and force the “shorts” and importers to buy at a high premium. The Tenth
National Bank, in Nassau Street, which he, and those associated with
him, managed to control, became conspicuously involved in the corner
through over-certifying their checks to the amount of about $7,500,000
on that day, and, as a result, it was closed by the Government bank
examiner. Several scandals cropped out in connection with this
conspiracy to corner gold, one of which involved the resignation of the
New York Assistant Treasurer, and another two brokerage firms employed
by the gold cornerers to buy and receive their gold. Gold, after being
bid up by the conspirators day by day from 119½ to 162¼, broke thirty
per cent on the announcement that the Government would sell five
millions of gold. This was followed by the suspension of the Gold
Clearing House Bank, and the Stock Exchange was also closed to check the
panic in stocks that ensued. While not a commercial panic, Black Friday
was very disastrous to many in Wall Street.
Next came the tremendous panic of 1873, which, commencing in Wall
Street, on September 13, with the failure of several prominent banking
and brokerage firms, including Howes & Macy, Kenyon Cox & Co. (in which
Daniel Drew was a special partner), Fisk & Hatch, and then Jay Cooke &
Co., rapidly spread, and soon covered the entire country. Many other
failures followed these from day to day, and crowds of sightseers
besieged Wall Street from morning till night, while the Stock Exchange
was closed, and remained closed for ten days to prevent the sacrifice of
stocks.
The severity of the distress that prevailed may be inferred from the
fact that on the 19th of September twenty-two Stock Exchange firms
suspended payment. Rumors of bank and trust company troubles flew thick
and fast, and there was a heavy run on their deposits, while the Union
Trust Company was temporarily forced to close in order to raise money on
its assets to meet the run upon it. Several banks were known to be
unable to stand the general run any longer, when, on the evening of
September 20th, the New York Clearing House resolved to issue
$10,000,000 of Clearing House loan certificates, in accordance with the
resolution adopted to meet the crisis of 1860-61. It was on the same
date that the Stock Exchange was closed by its governing committee.
On the 24th of September an additional issue of $10,000,000 of
certificates was authorized, and on the 27th, so great and widespread
had the panic become that all restrictions upon their issue were
removed. The banks, instead of paying checks in cash, except for small
sums, to depositors, certified them, payable through the Clearing House,
and the weekly bank statement of the Association was suspended on
September 27th, and not resumed till December 28th. The amount of
Clearing House loan certificates attained its maximum—$22,400,000—on
October 20th. In the interval business was resumed on the New York Stock
Exchange on September 30th, after its ten days of suspension. While it
remained closed there was a curb market on Broad Street for stocks and
bonds, but sales for cash there could only be made at panic prices. The
crisis of 1873 was far more severe than that of 1907, and recovery from
it was very slow. The panic of 1884 extended far beyond Wall Street, but
was most severely felt there.
There was a stock market panic in 1890, due to the failure of Baring
Bros. & Co., in London, and heavy gold exports from this side to allay
the panic there, but it did not spread much beyond Wall Street, and was
soon over. The panic of 1893 was, however, severe and extensive, and
15,000 failures were attributed to it throughout the country. As usual,
it resulted from undue speculation and expansion in trade, stocks, and
new enterprises. But it was more immediately caused by the agitation of
the 16-to-1 silver heresy, which led to a run on the gold in the United
States Treasury till the amount of free gold held by it, at all points,
was less than twenty millions, while the amount in the Sub-Treasury in
New York was reduced to only about $8,700,000. It was then, in February,
1893, that President Cleveland made his famous gold purchase for United
States bonds from the Morgan-Belmont syndicate, namely 3,500,000 ounces
of gold for $62,312,500 of four per cent bonds. This, aided by the
syndicate’s efforts, stopped gold exports and replenished the supply of
gold in the Treasury, and so restored confidence. Therefore the run
ceased; and after that the largely increased customs duties gradually
swelled the gold belonging to the Government to a far larger amount than
it had ever held before.
Coming down to the panic of 1907, we are confronted by its causes. These
were cumulative, but, as in every preceding crisis, the main cause was
far too large a mass of credits—that is, of debts—for the amount of cash
in which they were redeemable. Trade and speculation had been long so
active, and too often recklessly expanded, that this disproportion had
become dangerous, and a menace to our safety, as I pointed out several
times months before the crisis actually came. I said that a serious
reaction, a serious revulsion, was inevitable unless we moderated our
pace and mended our ways in the matters that I have elsewhere referred
to and criticised.
From my knowledge of banking, and my personal experience of our previous
panics, dating from that of 1857, I could foresee that this vast and
growing disproportion between the volume of credits and cash would
finally lead to collapse. This disproportion is always large, and always
becomes larger in periods of activity in trade and speculation. But in
this country, and particularly among our speculative Wall Street
millionaires and promoters, it had become unwieldy, while, very largely,
liquid capital had been converted into fixed forms that were unavailable
in raising cash.
Yet the people generally did not see the danger and take alarm till, on
October 21, the New York Clearing House was notified by the Bank of
Commerce that it would not clear for the Knickerbocker Trust Company
after the following day; and simultaneously the Clearing House made an
examination of the Mercantile National Bank, and ordered all its
officers and directors to resign at once, preparatory to assisting it.
Then the public suddenly took fright, and the run upon the deposits of
the Knickerbocker Trust Company caused it to close its doors about two
hours after it had opened them the next day. This added fuel to the fire
of distrust, and the run on the Trust Company of America and its
Colonial Branch, and also on the Lincoln Trust Company, began; and six
banks and a trust company suspended in Brooklyn, and the Hamilton Bank
in Harlem, on the day following.
At the same time there was a heavy withdrawal of deposits from all the
banks and trust companies, and the money thus withdrawn was not
deposited in other institutions, but hoarded. Hence the severe monetary
stringency that ensued, which caused call loans on the Stock Exchange to
command as much as forty to fifty per cent per annum at one time, and
from fifteen to twenty-five till the end of the year.
The New York Clearing House saw the urgent need of promptly fortifying
the banks in the Association against the drain on their deposits, and,
on October 26, resolved to issue Clearing House certificates against
such satisfactory assets as they might deposit, these certificates to be
used by them instead of cash, in paying their daily balances at the
Clearing House. This gave immediate relief to the banks, and was the
signal for every other bank clearing house in the large cities to do
likewise, besides which many of the country banks issued checks of their
own, from one dollar up, in payment of checks against deposits.
The other principal features and details of the crisis I have given
elsewhere. But it must not be overlooked that, severe as it was in its
actual effects, it was very largely sentimental in the sense that it was
precipitated by fear—fear born of distrust. That is the immediate cause
of all panics, but without the superinducing causes this fear would not
exist. In our case it was the very seriously impaired credit situation,
arising from a multiplicity of contributory causes, which inspired the
fear that caused the runs on the banks and trust companies, and the
hoarding of the money withdrawn, as well as the withholding of other
money which, in the absence of distrust, would have been deposited. To
fill the vacuum caused by hoarding, we outdid all our previous efforts
by importing about a hundred millions of gold.
This hoarding, and consequent stringency, apart from the issue, in all,
of $81,000,000 of Clearing House loan certificates, was responsible for
the premium on currency, which at one time was quoted at four to five
per cent, for it practically forced the banks to a partial suspension of
payments involved in requiring checks to be made payable through the
Clearing House, except in cases where they were willing to accommodate
depositors with small amounts of currency. But fortunately the premium,
which had dwindled to ¼ @ ⅜ on the 31st of December, disappeared at the
beginning of 1908. Meanwhile, all through the crisis, large employers of
labor had found great difficulty, and incurred much expense, in
obtaining currency enough to pay wages; and in Pittsburg and other
labor-employing centers, wages were paid largely in scrip issued by the
banks or employing corporations. This scrip was so generally issued that
in Pittsburg all the street car lines accepted it for fares.
No wonder that these conditions seriously checked buying of all kinds,
and caused demoralization and semi-paralysis in industrial corporations,
and that hundreds of thousands of operatives were thrown out of
employment by the stoppage or curtailment of work in mills and other
manufacturing establishments. But the storm being over, and the money
market again easy, there is every prospect of gradual, if not rapid,
recovery to a normal standard of prosperity in our trade and
manufacturing industries. It was not till January 11, 1908, that the
Clearing House reported the deficit in the bank reserves wiped out, and
a surplus of $6,084,050 accumulated against a deficit of $11,509,550 on
January 3d, and at one time of $81,000,000.
It should not be thought, because we imported a hundred millions of gold
from Europe to relieve the monetary stress produced by the crisis, that
we thereby placed this country under obligations to any other country.
The gold we imported we bought and paid for from our own resources,
equivalent to cash, in the shape of exports of cotton, grain, petroleum,
copper, and other American produce.
These commodities were even more necessary to Europe than the gold we
purchased there was to us. So the transactions on both sides were mere
matters of bargain and sale, no favor being shown on either side.
Indeed, both England and France did all they could to restrict our
importations of gold. The extraordinary advance of the Bank of England
rate to seven per cent, and its retention there till we discontinued our
purchases of gold, furnished practical proof of this. This was
justifiable, of course, as a defensive and protective measure for the
bank, but none the less it was an obstacle placed in our path.
Its proclaimed purpose was to prevent our taking gold from Europe as
much as possible, yet in the face of this heavy handicap we bought and
paid for and imported all the gold we wanted, and it was not till after
we had stopped buying that the Bank of England lowered its rate to six
per cent. This showed that we controlled the Bank of England more than
the Bank of England controlled us. We were not assisted; we assisted
ourselves, and neither asked nor received favors.
This important fact testified to the strength and wide sweep of our
resources, both financial and commercial, and also to the solidity and
soundness of our business position, and the foundation on which it
rested. The firmness, too, with which we bore the enormous strain of the
crisis, and the good order and condition in which we emerged from it,
were equally eloquent in testifying to the same effect, and showing that
ours is indeed a great country—the greatest of all nations in its
material resources and acquired wealth.
The advantage of this is largely shared by us with the rest of the
world, both in our enormous foreign trade and the vast amount of money
spent every year by American tourists in Europe. If the hundred and
fifty millions of dollars spent by them there in 1907 had been kept at
home, it might have obviated the necessity of our importing gold to
relieve the crisis. Europe has good reason to return thanks for all it
gets from us; and what would the trade and commerce of Europe be, in
this progressive age, without the United States of America?
The strength, the resolution, and the courage with which the country, as
a whole, bore the brunt of the crisis of 1907 augurs well for a rapid
recovery from its effects, and paves the way to renewed prosperity and
progress; and there is every probability that it will recuperate more
swiftly from the great and trying ordeal than it did from the memorable
panics of 1812, 1837, 1857, 1873, 1884, and 1893, for its wealth,
population, and general resources are now so vastly greater than they
were at any of those periods that comparisons are out of the question.
The growth of our banking system alone since 1873 is indicated by the
fact that in the very severe panic of that year the New York Clearing
House issued only $16,000,000 of Clearing House certificates to the
banks belonging to it, whereas in the panic of 1884 it issued
$21,000,000, in the panic of 1893 $41,000,000, and in this last panic of
1907 no less than $81,000,000. The crisis was severe but it was
purifying, and eliminated a vast amount of unwholesome and dangerous, if
not dishonest, speculative elements from the management of many of our
banks and large railway and industrial corporations, and left in its
place the legacy of a higher standard of business morality than we had
before. Hence, perhaps we may say, with Shakespeare, all’s well that
ends well, and, with the Bible, out of evil cometh good. At least we
have plucked the flower Safety from the nettle Danger.
This view of our country, and the situation, is shared by the banking
community of the Old World, who also absolve President Roosevelt from
blame or responsibility for the crisis. In this connection a leading
London banker, Mr. H. H. Raphael, a member of Parliament and one of the
most influential and popular financial men in Great Britain, said, in
December:
“We regard President Roosevelt as not only one of the most courageous,
but one of the ablest of all your long line of distinguished Presidents.
We admire him for his courage and independence. No wonder the heart of
the American people is with him; he is giving you a good housecleaning,
and you well need it; and although you are passing through financial
storm and stress now, we know something of the wonderful recuperative
power of the United States, and it will not be long before America will
be forging ahead on the highway of economical progress, cleaner and
stronger than ever.”
This opinion is well worth quoting because of its evident sincerity.
There is no suspicion of politics or office-seeking about the allusion
to President Roosevelt, and if one man more than any other in this great
country of ours deserves the resounding applause of a national “Hip!
Hip! Hurrah!” for his public services, it is President Roosevelt.
------------------------------------------------------------------------