Part 9

BANKS OF NEW YORK.

Proportion of Metallic Reserve. Deposits. Discounts, the Metallic Advances. Reserve to Deposits.

1854 ... $15,000,000 $ 58,000,000 $ 80,000,000 26% 1855 ... 9,900,000 85,000,000 101,000,000 11% 1856 ... 10,000,000 100,000,000 112,000,000 10% 1857 ... 7,000,000 99,000,000 122,600,000 7%

The reduction of the metallic reserve, increase of deposits and of discounts and of advances, are here clearly indicated.

From 1853 to 1857 the bank circulation hardly varied $100,000, indicating that the demand for hard money came from abroad and from the interior. The circulation was not the cause of the suspension,--at least such was the opinion expressed by the superintendent of the New York banks in his report.

In 1856 twenty-five companies were started, and three bankers opened business with a capital of $7,500,000, of which $7,200,000, was paid in.

In 1857 there were only five of these banks and three bankers having a capital of $6,000,000, of which only $4,000,000 were paid in. The collateral deposited by the banks represented $2,500,000 in 1856, on which credit of $2,000,000 in notes was granted.

In 1857 the same collateral did not exceed $560,000 estimated value, on which a credit of $383,000 in paper was granted.

At the height of the crisis failures were so numerous that a general suspension of payments, and, in consequence, a stoppage of business was dreaded. This suspension, in place of being general, turned out to be merely partial; it occurred at a juncture when it might well be feared that it would lead on to the very greatest disasters, but, far from harming, it helped the market. The banks had suspended payment upon a common understanding among themselves and with business circles. The critical moment having passed, tranquillity reappeared as soon as the course determined on was known.

If suspension of payment hurts the credit of a bank, it does not necessarily lead to the depreciation of its bank notes.

There are a good many proofs of this: in 1796, when the Bank of England suspended, its bank notes did not depreciate; and if this state of things did not last, the blame must be laid upon the excessive issue. And in France, in 1848 as well as in 1871, the Bank of France suspended without the depreciation of its bank notes becoming very noticeable. So, in New York, bank notes passed at 2 or 3 per cent. loss at this crisis.

The crisis disappeared with the end of the year, and resumption of payments took place between New York and Hamburg, with the return of specie and a rate of 4 per cent.

It was the same in France and England. A more serious panic and a more rapid recovery had never been seen. The rigidness and not the severity of the pressure that had to be exercised shows the condition of business. There had been most blamable practices employed; but the market as a whole was sound, and had faced the storm.

Only four banks had suspended, three of which were shaky before the panic, and the fourth had already resumed payments.

At no other period could one have obtained such an amount of credit upon a simple paper circulation; fictitious paper was the source of all the wrecks. To get it into circulation the most varied contrivances were resorted to, and fraud itself was not wanting; the signatures even became fictitious, their owners could not be found. Shams and discriminations under all forms, designed to permit speculation without capital, without exchange of goods, without real transactions between the drawer and the acceptor of the bill of exchange, were rife.

In his message, President Buchanan ascribed the crisis to the vicious system of the fiduciary circulation, and to the extravagant credits granted by the banks, although he was aware that Congress had no power to curb these excesses. When there is too much paper, when the public has created an endless chain of bank notes, representing no real value, it is enough that the first ring break for the whole gear, thus no longer held together, to fall to pieces. If we mark the situation of the New York banks before and during the panic--that is to say, in 1852 and in 1857, we will ascertain as follows:

June, 1851. June, 1856. June, 1857.

Capital ............ $59,700,000 $92,300,000 $107,500,000 Circulation ........ 27,900,000 30,700,000 27,100,000 Deposits ........... 65,600,000 96,200,000 84,500,000 Paper discounted ... 127,000,000 174,100,000 170,800,000 Cash on hand ....... 13,300,000 18,500,000 14,300,000

This table demonstrates that two items show a great increase: capital increased $47,000,000 and paper discounted $43,000,000; while, in face of an increase of $1,000,000 of specie on hand, the note circulation decreased $800,000.

Far from finding a mistake, we find a proof of the Directors' prudence. If there was an error in the issuing of paper, it was not on the side of the banks; it was the public itself that was chiefly in fault.

We find the causes of the panic in the issues of railway obligations and shares, which had chiefly been placed in European markets, and whose gross amount was estimated at L1,000,000. The speculation in land and railroads had been carried on either with borrowed money or by open credits, and by accommodation notes, back of which there was no second party.

The mistake of the banks was in trying to conduct their whole business by their note circulation and to concentrate their capital in the bank offices, and meanwhile, as they refused to loan to the stockholders of the banks, discounts in New York fell off $10,000,000. Finally the capital could not be entrusted to the disposal of the banks and it was necessary to compel them to make a deposit of $100,000 for each association, and $50,000 for each banker.

Such were the final advices given by the inspector-general of the banks of New York at the close of his report, dealing with how to prevent the recurrence of panics. To have confidence in their efficacy, it was necessary to forget the past and its lessons.

The reforms already made and those still asked for in the bank system could yield no remedy for those abuses lying beyond legislative action. The American newspapers did not hesitate to demand them, well aware that they would produce no effect; however, they congratulated themselves with having drawn away from effete Europe one million sterling now realized upon the soil of the United States without any equivalent given for it to the foreign lenders.

PANIC OF 1864.--The crisis of 1864 was mixed up in the United States with the War of Secession; it was a political crisis, and is not properly to be considered here.

PANIC OF 1873.--During the last two months of 1872 the American market had been very much embarrassed; the lowest rate of discount was 7 per cent., and in December it was quoted at even 1/32 of 1 per cent. or a quarter of 1 per cent. a day!

The year 1873 was anxiously awaited in hope of better times. In the middle of January, 1873 the rate of interest declined a little to 6 or 7 per cent., but soon the rate of 1/32 of 1 per cent. per day reappeared and continued until the month of May.

In the first days of April the market was in full panic; it grew steadier in the first week of May, and in the month following. It relapsed on September 1st, and requests for accommodation redoubled until the sharpest moment of the panic. On that day there were no quoted rates; money could not be had at any price: some few loans were made at 1-1/2 per cent. per day.