The Treasury was confronted for the first time in its history with a heavy drain on its gold reserve to redeem outstanding notes. During nine months Secretary Foster2 was engaged in a continuous struggle to save the redemption fund. The strain relaxed temporarily in the autumn of 1892, when interior trade was again very large. Practically no gold was imported, but, on the other hand, exports ceased almost entirely. Moreover, upward of $25,000,000 legal tenders were drawn from the New York banks to the West and South, and the Treasury obtained some gold from these institutions in exchange for notes delivered at interior points. But when the eastward flow of currency began again, at the end of the harvest season, gold exports were resumed and with them the presentation of legal tenders for redemption. In December, 1892, and January, 1893, upward of $25,000,000 gold was withdrawn by note-holders from the Treasury to provide for export needs.

By the close of January the Treasury's gold reserve had fallen to a figure barely eight millions over the legal minimum. With February's early withdrawals even larger, Secretary Foster so far lost hope of warding off the crisis that he gave orders to prepare the engraved plates for a bond-issue under the Resumption Act. As a last resort, however, he bethought himself of Secretary Manning's gold-borrowing operations of 1885. In February Mr. Foster came in person to New York to urge the banks to give up gold voluntarily in exchange for the Treasury's legal-tender surplus.

Such a situation could not continue long. The very sight of this desperate struggle going on to maintain the public credit was sufficient to alarm both home and foreign interests, and this alarm was now reflected everywhere. The feverish money market, the disordered and uneasy market for securities, and the renewed advance in foreign exchange, combined to bring matters to a head. On April 15, Secretary Carlisle3 gave notice that issue of Treasury gold certificates should be suspended. This action was taken merely in conformity with the Law of 1882, already cited. It was, however, public announcement that, for the first time since resumption of specie payments, the reserve against the legal tenders had fallen below the statutory minimum.

The news provoked immediate and uneasy inquiry as to what the Treasury's next move would be. No definite advices came from Washington, but in the following week a very unexpected and financially alarming rumor ran through the markets. Out of the $25,000,000 legal tenders redeemed in gold during March and April, 1893, nearly $11,000,000 had been Treasury notes of 1890. Under one clause of the Law of 1890 the Secretary was empowered to "redeem such notes in gold or silver coin at his discretion." The burden of the rumor of April 17th was that the Treasury, now that its gold reserve had actually fallen below the legal limit, would refuse further redemption of these notes in gold, and would tender only silver coin. During the two or three days in which this rumor circulated, general misgiving and uneasiness prevailed, the security markets fell into great disorder, foreign exchange again rose rapidly, and the money market ran up to the panicky rate of fifteen per cent. . . .

The public mind was on the verge of panic. During a year or more, it had been continuously disturbed by the undermining of the Treasury, a process visible to all observers. The financial situation in itself was vulnerable. In all probability, the crash of 1893 would have come twelve months before, had it not been for the accident of 1891's great harvest, in the face of European famine. . .

The panic of 1893, in its outbreak and in its culmination, followed the several successive steps familiar to all such episodes. One or two powerful corporations, which had been leading in the general plunge into debt, gave the first signals of distress. On February 20th, the Philadelphia and Reading Railway Company, with a capital of forty millions and a debt of more than $125,000,000, went into bankruptcy; on the 5th of May, the National Cordage Company, with twenty millions capital and ten millions liabilities, followed suit. The management of both these enterprises had been marked by the rashest sort of speculation; both had been favorites on the speculative markets. The Cordage Company in particular had kept in the race for debt up to the moment of its ruin. In the very month of the company's insolvency, its directors declared a heavy cash dividend; paid, as may be supposed, out of capital. As it turned out, the failure of this notorious undertaking was the blow that undermined the structure of speculative credit. In January, National Cordage stock had advanced twelve per cent. on the New York market, selling at 147. Sixteen weeks later, it fell below ten dollars per share, and with it, during the opening week of May, the whole stock market collapsed. The bubble of inflated credit having been thus punctured, a general movement of liquidation started. This movement immediately developed very serious symptoms. Of these symptoms the most alarming was the rapid withdrawal of cash reserves from the city banks. . . .

Panic is in its nature unreasoning; therefore, altho the financial fright of 1893 arose from fear of depreciation of the legal tenders, the first act of frightened bank depositors was to withdraw these very legal tenders from their banks. But the real motive lay back of any question between the various forms of currency. Experience had taught depositors that in a general collapse of credit the banks would probably be the first marks of disaster. Many of such depositors had lost their savings through bank failures in the panics of 1873 and 1884. Instinct led them, therefore, when the same financial weather-signs were visible in 1893, to get their money out of the banks and into their own possession with the least possible delay, and as a rule the legal tenders were the only form of money which they were in the habit of using. But when the depositors of interior banks demanded cash, and such banks had in immediate reserve a cash fund amounting to only six per cent. of their deposits, it followed that the Eastern "reserve agents" would be drawn upon in enormous sums.

On the New York banks the strain was particularly violent. During the month of June the cash reserves of banks in that city decreased nearly twenty millions; during July, they fell off twenty-one millions more. The deposits entrusted to them by interior institutions had been loaned, according to the banking practise, in the Eastern market; their sudden recall in quantity forced the Eastern banks to contract their loans immediately. But in a market already struggling to sustain itself from wreck, such wholesale impairment of resources was a disastrous blow. In the closing days of June, the New York money rate on call advanced to seventy-four per cent., time loans being wholly unobtainable. . . .

We have seen that the inflation of credit, during 1892, had been heaviest by far in the interior. The early withdrawals by depositors in the country banks were only a slight indication of what was to follow. In July, this Western panic had reached a stage which seemed to foreshadow general bankruptcy. Two classes of interior institutions went down immediately—the weaker savings banks, which in that section were largely joint-stock enterprises, and a series of private banks, distributed in various provincial towns, which had fostered speculation through the use of their combined deposits by the men who controlled them all.

In not a few instances, country banks were forced to suspend at a moment when their own cash reserves were on their way to them from depository centers. Out of the total one hundred and fifty-eight national bank failures of the year, one hundred and fifty-three were in the West and South. How wide-spread the destruction was among other interior banking institutions may be judged from the fact that the season's record of suspensions comprized 172 State banks, 177 private banks, 47 savings-banks, 13 loan and trust companies, and 16 mortgage companies. The ruin resulting in the seaboard cities from the panic of 1893 was undoubtedly less severe than that of twenty years before. But no such financial wreck had fallen upon the West since it became a factor in the financial world.

During the month of July, in the face of their own distress, the New York banks were shipping every week as much as $11,000,000 cash to these Western institutions. Ordinarily, such an enormous drain would have found compensation in in import of foreign gold, and, in fact, sterling exchange declined far below the normal gold-import point. But the blockade of credit was so complete that operations in exchange, even for the import of foreign specie, were impracticable. Banks with impaired reserves would not lend even on the collateral of drafts on London.

So large a part, indeed, of the Clearing-House debit balances were now discharged in loan certificates that a number of banks adopted the extreme measure of refusing to pay cash for the checks of their own depositors. Charged with such refusal in the press and on the floor of the United States Senate, the banks simply intimated that they had not the money to pay out. This was not far from general insolvency. Long continued, a situation of the kind must reduce a portion of the community almost to a state of barter; and in fact a number of large employers of labor actually made plans in 1893 to issue a currency of their own, redeemable when the banks had resumed cash payments. On the 25th of July, the Erie Railroad failed, the powerful Milwaukee Bank suspended, and the governors of the New York Stock Exchange seriously discust a repetition of the radical move of November, 1873, when the Exchange was closed. The very hopelessness of the situation brought its own remedy.

Relief came in two distinct and remarkable ways. Large as the volume of outstanding loan certificates already was, three New York banks combined to take out three to four millions more, and this credit fund was wholly used to facilitate gold imports. At almost the same time, the number of city banks refusing to cash depositors' checks had grown so considerable that well-known money-brokers advertised in the daily papers that they would pay in certified bank checks a premium for currency. This singular operation virtually meant the sale of bank checks for cash at a discount. Checks on banks which refused cash payments were still good for the majority of ordinary exchanges, but they were useless to depositors who had, for instance, to provide large sums of cash for the weekly pay-rolls of their employees. Being unavailable for such purposes, the certified checks were really depreciated—like paper money irredeemable in gold. Through the money-brokers, therefore, these depositors paid in checks the face value of such currency as was offered, plus an additional percentage.

This premium rose from one and a half to four per cent., and at the higher figures it attracted a mass of hoarded currency into the brokers' hands. The expedient was not entirely new; it had been tried under similar circumstances in the panic of 1873. But in 1893 it was applied on an unusually large scale, and it had the good result of helping to keep the wheels of industry moving. Its bad result was that it caused suspension of cash payments in the majority of city banks; for, of course, when a premium of four per cent. was offered in Wall Street for any kind of currency, it was out of the question for the banks to respond unhesitatingly to demands for cash by speculative depositors. Most of the banks cashed freely the checks of depositors where it was shown that the cash was needed for personal or business uses; but other applications they refused. . . .

Panic, in short, had ended, but not until the movement of liquidation had run its course. The record of business failures for the year gives some conception of the ruin involved in this forced liquidation. Commercial failures alone in 1893 were three times as numerous as those of 1873, and the aggregate liabilities involved were fully fifty per cent. greater. It was computed that nine commercial houses out of every thousand doing business in the United States failed in 1873; in 1893, the similar reckoning showed thirteen failures in every thousand.

1 From Noyes's "Forty Years of American Finance." By permission of the publishers, G. P. Putnam's Sons. Copyright, 1898-1909.
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2Charles Foster, of Ohio, Secretary of the Treasury in Harrison's Administration.
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3 John G. Carlisle, of Cleveland's second Cabinet.
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