Part 11

The certified checks issued by the banks did not answer, and it was necessary to have recourse to a new means of settlement. The members of the clearing house emerged from their usual passive role to intervene and to do a novel thing: they issued certificates that they accepted in the name of the most embarrassed institutions whose fall they wished to avert, in order to prevent the failure of others. Then, as everybody was making default, the Secretary of the Treasury in his turn wished to aid the common effort to sustain the credit of the situation, and, in order to accomplish this by the most regular methods, he pledged himself to prepay the debt, whose term was close at hand.

Despite these last helps it was easily seen how great must be the disorder, to induce recourse to such methods. Never had they been employed until now, which is proof enough of the enormity of the situation, whose equilibrium, had been disturbed since 1887, the year in which high prices in everything had been reached on the Stock Exchange.

To still further increase the joint responsibility of the members of the clearing house, it was agreed that a committee should be charged with receiving as collateral bills and securities in exchange for which certificates of deposit bearing 3 per cent. were issued at the rate of 75 per cent. of the amounts deposited. This agreement being adopted, a way to re-open the National Metropolitan Bank was sought. A selection made from its collection of bills showed the securities it could pledge for clearing-house certificates; and, its circulation being thus re-established, it was enabled on May 15th to take part in settlements.

Upon the announcement of a syndicate composed of the banks and the clearing house, things settled down; the general distrust diminished; there was the necessity and wish to realize, but funds were lacking.

The rise in the discount rate attracted foreign capital little by little, and exchange grew easier. With the help of the syndicate the credit circulation became re-established, and the rate of discount declined to 5 per cent. For commercial needs money was always to be had at 4-1/2 per cent. and at 5 per cent. when at the Stock Exchange it was necessary to pay 4 per cent. per day!

The panic was terrible from the 3d to the 10th of May; for two days no one wished to part with his money; it was impossible to borrow on any collateral, at any price whatever. Hence came a decline in the public securities, which fell below the low prices of 1873.

The public complained that it could not have foreseen the panic, because the loss of gold had been concealed by the oft-repeated assurance that there was a reserve of $600,000,000 in Washington.

Similar situations in 1857 and in 1873 were recalled, and it was remarked that like troubles had not occurred until after a long period of high prices, when capital was scarce and the rate of interest high, whereas this was far from being the case at this period.

It was nevertheless notorious that the decline in prices began two years back, that the advance in prices had been stopped by the breaking out of the panic of 1882 in Europe, at Paris, and that since that moment prices had begun to decline, less rapidly, however, than in Europe, because the shock had then merely disturbed a market which had not yet recovered from the panic of 1873, from which, in consequence of the Franco-Prussian war, France had escaped. The mine not being sufficiently charged in the United States the explosion had not recurred. Speculation, unable to restore a new impulse to the rise in prices, was nevertheless able to hold its own, until May, 1884, when the delayed explosion finally occurred, covering the market with ruins and bringing about a liquidation with its accustomed train, a great and lengthy decline of prices.

We may here note similar delays in the breaking out of panics, in the period of 1837, 1839, 1864-1866 in France and in England. Even an involved state of affairs may be hidden by certain conditions, and the situation, although itself exposed to the same excessive speculation, may witness the breaking out of the panic which has been delayed for a certain time, only to occur simultaneously with the beginning of a decline of prices, and when it is thought that danger has been escaped.

As in Brussels and in the United States in 1837-1839 and in England in 1864-1866, large houses and powerful institutions of credit had maintained a whole scaffolding of speculation which was already out of plumb, but still able to stand upright through the general effect of the parts which connected them, and in this unstable equilibrium it sufficed for a single one to detach itself in order to overthrow the whole edifice at a juncture at which it was hoped it would continue to stand and even grow stronger. Does not this prove that after these epochs of expansion and activity characterizing prosperous periods (and there is no prosperous period without a rise in prices) a stoppage is necessary, a panic allowing a period of rest to permit the liquidation of transactions employed in helping to make a series of exchanges at high prices, and to allow the capital and savings of countries which had been too rapidly scattered and exhausted to reconstruct themselves during these years of tranquillity and of slackening business?

Confidence had already returned in New York despite the steady demands of the country bankers upon their correspondents, which pulled down the reserve below the legal limit; nevertheless in the midst of all the failures there was no suspension of specie payments.

The crisis of 1884, according to the Comptroller of the Currency, had been less foreseen than the crisis of 1873, and this notwithstanding it was sufficient to observe the number of enterprises and schemes flung as a prey to speculation, in order to foresee that financial troubles and disasters to the country must result.

The continuation of payments in gold, the low prices, and the outlook for a fine harvest gave courage, preserved the remaining confidence, and already allowed a speedy resumption of business to be anticipated.

The panic, although spreading over the whole Union, raged especially in New York. Without wishing to expatiate upon its primary causes, the Comptroller of the Treasury could not help remarking that it had shown itself under the same circumstances as recently as in 1873; above all there were issues for new enterprises; the speculation had rushed to take them up at a premium, and people now asked their true value.

At this juncture railroad earnings, instead of increasing, showed weakness, and suffered a slight reaction; the solvency of houses interested began to be doubted; new loans were refused them, and immediately the artificially constructed edifice gave way.

To advance prices on the Stock Exchange, the banks had made immense loans on the shares and obligations of the new railway issues, and as soon as quotations, artificially maintained at the rates to which they had been carried, began to drop, everything became unsalable. Until this occurrence, led on and fascinated by the rise in prices, every one had bought; hardly was the advance arrested when every one reversed their operations at the same time. The bankers had loaned not only their capital but in addition a part of their clients' deposits; brokers had encouraged a speculation which brought them business; and thus it was that all hands had flung themselves upon a path that could only lead to ruin.

The Comptroller of the Currency remarks with pride that, in the midst of the general upheaval and numerous failures of honorable houses, only two National Banks were involved: one of them failed, the other suspended payment.

The amount of liability of the banks and bankers of New York who succumbed during the month of May was estimated at $32,000,000, whereas that of the only National Bank which shared their fate did not exceed $4,000,000, the bank which suspended not having occasioned any loss.

Unhappily the year did not pass without its being necessary to mention new misfortunes: eleven National Banks failed, and it is a fact that among the banks and private bankers more than a hundred were counted in the list.

Despite the close watch bestowed upon the banks it was surprising to uncover all the tricks to which the National Marine Bank of New York was given over, and, which until now had escaped the official examiners.

It suspended payment on May 6th, and the same day it was debited with $555,000; the books had been erased and overcharged for the benefit of one client alone to the amount of $766,000. He was a debtor to the amount of $2,400,000, six times the Bank's capital, and a portion of this debt was under a good many names of subordinate clerks. This same client had three open accounts, one as administrator, then a general account, and a special account. The whole thing was fictitious; the schemers sought to conceal irregularities, and had thus imposed on the examiners and on the Directors themselves.

The certificates issued by the clearing house, when credit had entirely disappeared, rendered a great service and sustained a great number of houses in equilibrium, which without this assistance must have succumbed. They were granted especially to the banks belonging to the Association, in order to make their daily settlements.

During the crisis of 1873 the same means had been resorted to, but too late; the panic was already at its height and the commotion general, so that nothing could re-establish confidence. This was not the case in 1884: the rapidity and decision with which the Associated Banks took steps gradually re-established confidence throughout the country. The maximum of issue did not exceed $24,900,000, of which $7,000,000 were for the National Metropolitan Bank; from the 10th of June balances at the clearing house were paid in legal money. Commercial paper, which for the most part was the collateral for these certificates, had already been redeemed. The Metropolitan National Bank alone requested time to liquidate.

The issue of these certificates was very rapid: $3,800,000 on the 15th day of May, $6,800,000 on the 16th, $6,700,000 on the 17th, or more than $17,000,000 in these first three days; then on the 19th, 20th, and 22d, $1,500,000, and that was all. The remainder of the amount was given in driblets. Payments, although slower, were made from the 1st of July to the 1st of August.

Let us now run over these occurrences: in 1873 instead of $24,900,000 in certificates $26,565,000 had been issued; $22,000,000, had been issued between the 22d and the 29th of September, the redemptions took place from the 3d of November to the 31st of December.

In both cases the same amount, so to speak, had been sufficient to answer for all needs. If so small a difference sufficed to save a disordered market, people could not understand why panics could not be provided against. It was necessary to remember that this assistance was only felt when the decline of prices had already re-established an exchange of goods, bringing about the liquidation of houses unfortunately involved.

From the month of June, owing to the bank balances or the rate of exchange, the tranquillity and steadiness which had become re-established grew daily; after the storm of the first few days no new disasters had occurred except the failures of Mathew and of Morgan.