Part 6

This speculation had already yielded $15,000,000 profit, but the market was overloaded, and quotations could not keep up. The planters had made a great deal by the advance in cotton, but the paper money remitted them lost from 15 to 25 per cent. A panic was approaching. The cotton crop, amounting to 400,000 bales, was one fifth less than was expected; they awaited an advance in price, but the contrary occurred. The high prices had brought out all the stored cotton; the factories had reduced their work. Nevertheless bale after bale was forwarded to Liverpool and to Havre. The sale in this last port in February and March, 1839, having produced a loss, they continued to store it. As soon as Mr. Biddle was aware of this stoppage he sought to hide the difficulty by extending his business. He proposed to start a new bank in New York (the other had headquarters in Philadelphia) with a capital of $50,000,000. He once more issued long-time paper, and bought with American paper canals, rail-roads, and shares which he threw upon the English market. This lasted until the long-time paper lost 18 per cent. in America, and until American exchange and investments were no longer received on the Continent.

The Parisian house of Hottinguer like its other agents, sold little until the first of July, and when it saw that the effort to monopolize cotton could not succeed, fearing to continue this gigantic operation, it declared that it employed too much capital. In the midst of all this, some new bills of exchange reached Paris without consignment of corresponding value; and the house of Hottinguer protested.

Hope of Amsterdam discontinued his connection. The London agent called upon the Bank of England for help, which was granted upon the guaranty of certain firms of that place and a deposit of good American paper.

Rothschild accepted the refused bills of exchange, after having found out that a sum of L400,000 would suffice for Mr. Biddle's agent; these L400,000 offered as a guaranty consisted of Government stock, and of shares in railroads, canals, and banks. This agreement was not given out freely, which still further increased the feeling of distrust. A crisis in which $150,000,000 of European capital were destined to be engulfed was rapidly approaching.

BREAKING OUT OF THE PANIC OF 1839.--The English papers had already warned the people to be distrustful. The _Times_ said it was impossible to have any confidence in the Bank as long as it would not resume specie payments. Mr. Biddle defended himself through papers paid for the purpose, finally in the Augsburg Gazette, while he waited for the soap bubble to burst. His retained defenders claimed that the 150,000 bales of cotton sent to Europe had not been sold, but received on commission. Advances in paper had been made which in the month of August, 1839, were to be paid in notes by the Southern banks, for a new grant made to the Bank by the State of Pennsylvania permitted it to buy the shares of other banks, and by this means to gain their management; their notes lost 20 to 50 per cent. as compared with the Northern banks.

Through his profit upon the difference of the notes, and through the payment for the cotton in paper, and through the sale of bullion exchange, Mr. Biddle had made five to six million dollars, which lay at his command in London.

The protection of his bills of exchange made a great impression in England; the rebound was felt in America, where the panic, moderated in 1837 through the intervention of the Bank, burst forth with renewed fury in 1839, and brought about the complete liquidation of that establishment.

At the same time the English market was very much pressed, for, according to a notice of the Chamber of Commerce, the number of that year's bankruptcies was greater than usual. From June 11, 1838 to June, 1839, there were 306 bankruptcies in London, and 781 in the "provinces,"--in all, 1,087. At Manchester there were 82, at Birmingham 54, at Liverpool 44, at Leeds 33. The London Exchange was flooded with unsalable paper, an occurrence which had also taken place on a smaller scale in 1837.

Such was the interruption of business that interest for money rose to 20 per cent., and the discount rate for the best paper to 15 or 18 per cent.

The various States in the Union had contracted debts with inconceivable ease, and interest payments were provided for by new loans. President Jackson declared it necessary to make a loan in order to pay interest moneys. It was deemed inexpedient to impose new taxes to provide for the cost of the public works. Great was the embarrassment in America, and as no more money came from England, it was necessary for the Americans to look for it in their own country.

Business circles were flooded with long-time paper running at a discount of one half of 1 per cent. a month. Discount rose to 25 per cent. The panic was so great that all confidence was destroyed. The Bank of the United States, in order to maintain its credit, paid its depreciated long-time paper.

The struggle between the Bank and its opponents, led by President Van Buren, re-commenced. These last declared that the Bank had erred in circulating the $4,000,000 of notes of the old bank, which should have been retired coincidently with the charter; and the Senate forbade their circulation.

The Government claimed large sums from the Bank, the statement of which showed close to $4,000,000; and, as it could not secure this amount in money, it was decided to issue $10,000,000 of Treasury bonds. The Bank party wished to push the Government into bankruptcy, in order to induce it to turn to them for help, and, through the issue of "circular specie," oblige it to adopt a system of paper money.

A bill was brought forward with this view. Biddle, who wished to increase the circulation, said he could resume specie payments, and thus forced his shares to rise; but the rejoicing of the Bank party was soon disturbed by the fact that collectors of taxes were forbidden to receive any bank note for less than $20, which was not redeemable in hard money.

After a struggle of eight years the separation became complete, and the administration of National finances was withdrawn from the Bank.

In 1836, a law was passed providing that upon the expiration of its charter, the National funds should be again deposited with it, as soon as the Bank resumed specie payment. Upon the suspension in 1837, the Government was forced to abate the law, in order to protect the specie, and imposed on its financial and postal agents some of the duties of the Treasury. In 1840, the management of the public Treasury constituted a separate and distinct department. Such was the liquidation following the panic, that Congress granted the Bank three months in which it must either resume specie payment or liquidate. To conform to this decree the State of Pennsylvania fixed the resumption of specie payments by its banks, for January 15, 1841. The shares of the Bank, which had yielded no dividend in 1839, and offered a similar outlook for the first half of 1840, fell to $61. They had been quoted as high as $1,500. General liquidation and a loss of 50 per cent. was inevitable. This occurred in 1841. Thus ceased for a time the bank mania in the United States.

We will recall here Buchanan's opinion about the Bank: "If the Bank of the United States, after ceasing to be a national bank, and obtaining a new charter in Pennsylvania, had restrained itself to legitimate banking, had used its resources to regulate the rate of home exchange, and had done everything to hasten the resumption of specie payments, it would have resurrected the National Bank.

"But this is no longer possible; it has defied Congress, violated the laws, and is mixed up in politics. The people have recognized the viciousness of its administration; the President, Mr. Biddle, has concluded the work Jackson began."

Tables indicating the banks which suspended during the panic: In 1814, 90; in 1830, 165; in 1837, 618; in 1839, 959. The last panic, from 1837 to 1839, produced, according to some pretty accurate reports of 1841, 33,000 failures, involving a loss of $440,000,000.

PANIC OF 1848.--The entire discounts, which had risen to $525,000,000 in 1837, fell to $485,000,000 in 1838, only to rise again to $492,000,000 in 1839, and the real liquidation of the panic occurred only then. Discounts fell at once to $462,000,000, then $386,000,000; the abundance of capital, and the low price at which it was offered, cleared out bank paper until it was reduced from $525,000,000 to $254,000,000 in 1843. [Footnote: We have not the outside figures, the maximum or minimum.]

The metallic reserve increased from $37,000,000 to $49,000,000 (1844); the circulation was reduced from $149,000,000 to $58,000,000.

The number of banks in 1840, from 901 fell to 691 in 1843, and the capital itself from $350,000,000 in 1840 was reduced to $200,000,000 in 1845 and to even $196,000,000 in 1846.

All these figures clearly indicate liquidation. The market, freed from its exchange, was enabled to permit affairs to resume their ordinary course.

In fact an upward movement was taking place. Discounts rose from $264,000,000 to $344,000,006 in 1848.

Banks increased from 691 in 1843 to 751 in 1848, and their capital grew from $196,000,000 in 1846 to $207,000,000. The paper circulation rose from $58,000,000 to $128,000,000 in 1848. Deposits from $62,000,000 reached $103,000,000 in 1848. The metallic reserve alone fell from $49,000,000 in 1844 to $35,000,000 in 1848.

The consequences of the European panic were felt in America, but without causing much trouble. The liquidation of the panic of 1839 was barely over, and was still too recent to have permitted sufficient extension of business.

Embarrassments were slight and brief; discounts, nevertheless, fell from $344,000,000 to $332,000,000.

The store of bullion, in spite of the surplus and the favorable balance produced by the export of grain to Europe, fell from $49,000,000 to $35,000,000; with the following year the forward movement recommenced.

PANIC IN 1857.--The stoppage in 1848 was very brief. Discounts rose regularly from $332,000,000 to $364,000,000, $413,000,000, $557,000,000, $576,000,000, $634,000,000, and finally $684,000,000 in 1857. The progression was irresistible. The circulation rose from $114,000,000 to $214,000,000. The banks increased at such a rate that, from 707 in 1846, with a capital of $196,000,000, there were in 1857 1416, whose capital had risen to $370,000,000,--a very inferior figure, in comparison to the number of banks, to that of 1840, when 901 banks only had a capital of $358,000,000.

The metallic reserve, from $35,000,000 in 1847, easily reached $59,000,000 in 1856: but it was in proportion neither with the number of the banks nor their discounts and circulation; and, after all, this is only a moderate sum. We have not the extreme maximum or minimum, and the suspension of specie payments took place notwithstanding the amount of cash on hand, which was greater in 1857 than in 1856.

Deposits accumulated from $91,000,000 to $230,000,000; they rose to their greatest height in the very year of the crisis; nevertheless, they could not be drawn out.

During the Eastern war the prosperity of the United States had been so great that the clearing-houses established in New York in 1853, and in Boston in 1855, offered only a slight opposition to the excessive issue: at least, in 1837 the Congressional report stated the cash on hand was $6,500,00--that is to say, $1.00 in metal to each $6,00 in paper.

In 1857 cash on hand was $14,300,000, or $1.00 in hard money for each $8.00 in paper.

The banks had attracted deposits by high interest, and loaned the money to wild speculators. On the 22d of August, 1857, the amount of loans had become almost $12,000,000, counting together metal, notes, and deposits.

From December, 1856, to June, 1857, they had shown great strength. Discounts had risen from $183,000,000 to $190,000,000 in June; cash on hand had risen from $11,000,000 to $14,000,000. The only evidence of weakness, so to speak, was that the withdrawal of deposits had risen from $94,000,000 to $104,000,000, while the circulation diminished $1,000,000.

In June "the position of the Bank ought not to have caused any fear, to the most far-sighted," says the report of the Committee of Inquiry.

Foreign exchange was favorable, and it is known that is the bankers' guide. June, July, and August were tranquil, except for a slight disturbance in business experienced by the country bankers through the constantly increasing amount of notes presented for redemption, and among the city bankers by requests for discount.

The collapse of the "Ohio Life," which had the best New York connection, was the first muttering of the storm, and was soon followed by the suspension of the Mechanics' Banking Association, one of the oldest banks in the country. The suspension of the Pennsylvania and Maryland banks followed. Public confidence remained unshaken--it relied upon the circulating medium.

Only one bank went to protest, and that on September 4th, on a $250 demand. Another protest followed on the 12th, a third on the 15th, both for insignificant amounts. Demands in the way of withdrawal amounted to almost nothing, and there was nothing like a panic.

The deposits at the savings banks were a little less, but this did not continue. Only at the close of September was the demand by the country banks for payment upon the Metropolitan American Exchange Bank for payment greater than it had ever been.

On the 13th of October, with exchange at par, an abundant harvest, with a premium of 1/4 to 1/2 per cent. on metal, the banks suspended specie payment, but resumed it on the 11th of December. The most critical period lasted about a month. The first step towards resumption of payments was made after the resolution adopted by the Committee of Liquidation to call upon the country banks to redeem the notes of the Metropolitan Bank, paying an allowance of 1/4 of 1 per cent. interest, running from the 20th of November.

At this time the city bankers held, in bills issued and in signed parcels of $5,000 each, about $7,000,000 due by the country banks. They were thus enabled to accomplish the payment of their notes at the rate of 20 per cent. a month by the 1st of January, 1858. The same favor of repaying their notes at the rate of 6 per cent. was granted to the city banks.

We need not inquire if, having granted this delay, the banks proved their liberality. The abundant harvest also assisted liquidation.

From 1853 to 1857 the metallic reserve fell to $7,000,000, deposits rose to $99,000,000, and discounts and loans to $122,000,000.

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.

This panic broke forth on September 18th, through the failure of Jay Cooke, after a miserable year, during which money was constantly sought for and was held at very high prices in all branches of business. As to the loans for building railroads, they followed one another so rapidly that, from the month of October, 1871, to the month of May, 1873, they could not be placed at a lower rate than 7 per cent. Bankers succumbed beneath the burden of their unsalable issues. This was a grave misfortune for the railroads. In the single year 1873 there were constructed 4,190 miles of railroad in the United States, which, at $29,000 per mile, represented the enormous sum of $121,000,000, and in the last five years $1,700,000,000.

The commercial situation was not so bad, and the number of failures did not reach the proportion that might have been feared.

After the failure of Jay Cooke came those of Fiske & Hatch, of the Union Trust Company, of the National Trust Company, and of the National Bank of the Commonwealth. On the 20th of September, for the first time, the Stock Exchange in New York City was closed for ten days, during which legal-tender notes were at a premium of 1/4 per cent. to 3 per cent. above certified cheques.