It had for many years been a cardinal doctrine, in American banking circles, that a panic like those of 1873 and 1893 would never again be witnessed in this country. The ground for this belief lay in the phenomenal increase of our economic strength, the "coordination of American industry" since 1899, the establishment of the gold standard of currency, and, more particularly, the great and concentrated resources of our banks. We have discovered the weak point of this argument; the strain imposed on credit had as greatly exceeded precedent as did the strength of the organism subjected to it. But there were other reasons why the idea of an American commercial crisis in 1907 had not been entertained. One was the fact that predictions of the sort, in 1901 and 1903, had failed so signally of fulfilment. Another was prevalent belief in the "twenty-year cycle" between two great panics. . . .

Even if not prepared, however, for another panic of the sort, the community found itself, as 1907 drew on, in a thickening atmosphere of apprehension. In June, an $8,000,000 iron-manufacturing house went down at New York City; in midsummer, two New York City loans, offered for public subscription, failed to find a market; in the early autumn, the $52,000,000 New York street railway combination went into receivers' hands, followed, a few weeks later, by the $34,000,000 Westinghouse Electric Company; early in October, the storm broke with the utmost suddenness and violence on the New York banks.

One of the characteristic incidents of the era of speculation, watched by conservative financiers with much uneasiness, had been what was called "chain banking." In New York City half a dozen banking institutions of the second rank had been bought up by a speculating financier. He had used his stock in one institution as collateral on which to borrow money; the proceeds he had used to buy stock in another bank, repeating the process with each new acquisition. Controling his "chain of banks" on such a tenure, he had utilized the whole of them to promote his personal speculations. This had been going on during half a dozen years. On Wednesday, October 16, 1907, one of these institutions, the Mercantile National, of New York City, a bank with $11,500,000 deposits, applied to the other banks of the Clearing-House for help.

While the Clearing-House committee was investigating the Mercantile's condition, financial uneasiness began to spread to the community at large. On Thursday, the committee announced that the crippled bank would be helped through, and an interval of relief occurred. Other events, however, which occurred at the same time, and the demand of the Clearing-House banks that, as a condition for their assistance, all the directors of the Mercantile should resign, disclosed the fact that the bank's predicament had occurred through misuse of its capital, by its president, in copper share speculation. During the two or three ensuing days, bankers were very generally employed in overhauling accounts of other institutions with which they had engagements. Late Monday afternoon, October 21st, the National Bank of Commerce suddenly announced that it would no longer accept for collection checks of the Knickerbocker Trust Company. With the next day's opening, a run began on that institution, a concern with 17,000 depositors and total deposit liabilities of $35,000,000. By noon the Knickerbocker had closed its doors; next day, nearly every trust company in the city was besieged by a line of panic-stricken depositors. Nothing like this had been seen in New York City since 1873; even in 1884 and 1893, the New York bank runs were confined to one or two crippled institutions. The extraordinary phenomena which followed the Knickerbocker failure can not be understood except by a glance at the nature and history of the institutions on which the panic of 1907 now converged. . . .

The Knickerbocker closed its doors on October 22d; that night, certain other trust companies sought aid from the banks to safeguard them against a run. Knowledge of this conference, reported next morning in the daily papers, brought the run at once; and long before business opened on October 23d, lines of depositors had formed outside the doors of other companies. The Knickerbocker had catered especially to the so-called "up-town clientage" of the shopping and residence district; its main competitor in this line of business had been the Lincoln Trust Company, with something like 8,000 depositors and demand deposits of $16,000,000. On Broadway and Wall Street, the Trust Company of America had accumulated $42,000,000 demand deposits from 12,000 separate depositors. Against these demand liabilities the Lincoln had been keeping $1,100,000 in its cash reserve and the America $3,200,000.

On these two institutions there now converged such a run as was probably never witnessed in the history of banking. It must be remembered that banks and other trust companies, to whom the beleaguered institutions were indebted, or with whom checks on the Lincoln or America were deposited, had no other way of collecting than by stationing messengers in the line of frightened depositors; this was the punishment for the events of 1903.

Recognizing the gravity of the crisis, the Secretary of the Treasury, Mr. Cortelyou, came on at once from Washington, and arranged to deposit $35,000,000 of the Government surplus with the national banks, by whom it was hurriedly advanced to the trust companies against their liquid assets. This great sum was almost instantly engulfed in the withdrawals by depositors; the Trust Company of America alone had to pay out $34,000,000 to depositors. The runs continued fourteen successive days, depositors holding their places in line by night to get a chance to withdraw their funds next day. Ten million dollars cash provided by other institutions went with the rest; the run was not stopt until, on November 6th, the older trust companies had organized in committee to assume responsibility for the two hard-prest institutions. In the meantime, during the panic week itself, six banks in Greater New York, and three trust companies other than the Knickerbocker—mostly small institutions, but with deposits aggregating $57,000,000—closed their doors, and a general run upon the savings-banks caused application of the sixty-day notice rule for withdrawal of deposits.

On Thursday, October 24th, panic swept over the Stock Exchange. The bank position being then in its most critical phase, restriction of credit occurred on a scale which, if continued, would probably have reduced the Stock Exchange community to general insolvency. This day of suspense—an unvarying incident of formidable credit panics—brought the rate for Stock Exchange demand loans up to 125 per cent.; before the day was over, however, personal intervention of the president of the Stock Exchange and of Mr. J. P. Morgan with the banks caused release of $25,000,000 which, in accordance with sound rule, was loaned out at high rates, but in such manner as to meet pressing exigencies. This averted the formidable aspect of the crisis which, in 1873, made necessary the closing of the Stock Exchange and which in 1907 forced the governments of several Western States to decree a series of special holidays.

The crisis of the banks, however, had only begun, and it followed the lines made familiar by all former crises. The New York City national banks alone held in 1907 no less than $470,000,000 deposits due to other institutions; considerably more than double what had been thus held in 1893. Banks of interior cities, most of which had three-fifths of their 15 per cent. reserve thus deposited in other hands, took natural alarm at the panic news, remembered 1893, and called for return of part of these deposits. What followed, merely repeated history—a history, however, which the country had been assured could never be repeated. The New York banks, on Saturday, October 26th, determined to take out Clearing-House loan certificates. The intent of this expedient, never adopted since the panic of 1893, was to help out hard-prest banks through loan of the cash resources of their neighbors; but its result, in 1907, as in 1893, was to bring about general suspension of cash payments in the Clearing-House. Before the panic of 1907 was over the New York banks had $88,420,000 of such loan certificates in use, as against a maximum of $38,280,000 in the panic of 1893, and the loan certificates remained in use during twenty-two weeks, as against only nineteen weeks' duration in the earlier panic.

Two days after New York had set the example, practically every clearing-house in the country took similar action—a wholly unprecedented event, which resulted in issue, throughout the whole United States, of $238,000,000 of such certificates, as against $69,000,000 during 1893. Notwithstanding this recourse, reserves of the New York banks, which had stood at a surplus of $11,182,000 in the week before the panic, fell to a deficit of $54,103,000 on November 3d, very much the largest shortage of the kind in our banking history, the maximum deficit of 1893 having been $16,545,000.

This formidable shrinkage was occasioned by an actual loss of $51,000,000 cash in the five intervening weeks, and the position thus created brought suddenly into view two other phenomena of 1893. Hoarding of cash by individuals set in; it was estimated in high quarters that, in the country as a whole, no less a sum than $296,000,000 actually disappeared from sight. This hoarding partly caused, and was partly caused by, the policy of banks in limiting the amount of cash which they would pay out to depositors, and one immediate result of such restriction being the issue of emergency currency by the banks of cities like Pittsburgh and Chicago, where manufacturers' pay-rolls created urgent need for great sums of currency. The amount of such makeshift money has been estimated at upward of $96,000,000. The next result of the bank restriction was a premium on currency, paid in checks on such institutions, which rose to 4 per cent. and which continued for two months, as against only one month's duration in the panic of 1893 . . . . .

There were left the larger after-effects, of which the panic itself was only a premonitory sympton, and which came only gradually into sight, along with assertions that they would not come at all, on this occasion as on others of the kind. The panic of 1907 was unlike the panic of 1893, which followed a period of uncertainty and misgiving, leading to acquiescence, on the part of the community at large, in the certainty of prolonged reaction and depression. It resembled far more intimately the panic of 1873, which came, like the traditional "bolt from the blue," on a situation presenting so brilliant an aspect of assured prosperity that the people—most of all the great capitalists whose schemes had come to earth—refused for many months to admit that one chapter in finance and industry had ended and that another and different one was opening.

The visible sequel to the panic of 1907 was necessarily recognized. That commercial failures in the United States should not only have increased, in the panic months of November and December, 30 per cent. in number as compared with 1906, and 125 per cent. in liabilities, but that the first nine months of 1908 should have shown increase of 55 per cent. over 1907 in number, and 120 per cent. in liabilities, was a matter of record. So was the shrinkage in the iron trade, in December, 1907, to 36 per cent. of normal, and the 50 per cent. reduction in iron production during the first half of 1908; the decrease, for the full year 1908, of $290,000,000, or 115/8 per cent., in traffic receipts of American railways; the shrinkage of nearly 17 per cent. in checks drawn on American banks; the reduction in March, 1908, of 25 per cent. in output, 10 per cent. in wages, and 25 to 50 per cent. in prices in the textile trade, and the great increase in number of unemployed.

1 From Noyes's "Forty Years of American Finances." By permission of the publishers, G. P. Putnam's Sons. Copyright, 1909.
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