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January.

The banks of the city of New York began at this point to feel
severely the effects of a practice which has more than once led
them into difficulty. They had for a long time been in the habit
of inviting the deposit of large balances, especially by the country
banks, by paying interest for such deposits. Such transactions
enabled the country banks to earn an interest of perhaps four
per cent on sums which might otherwise be unemployed, while
the city banks, obtaining funds at this moderate rate, were able
to increase their loans to several times the amount of the cash
thus secured. But as the country banks were subject to demands
from their own depositors, it was necessary for them to reserve



THE CRISIS OF 1857 277

the right of calHng upon the city banks for their balances at any
moment, and there was thus an amount of liabilities, variously esti-
mated at from ^8,000,000 to ^i 5,000,000, which an unfavorable turn
of affairs might at any time cause to be drawn from the city. In
order to be in a position to meet such withdrawals, the city banks
had fallen into the habit of making large loans upon call with
collateral security. Early in August, when the bank loans had
reached their height, the dangers of this part of the system had
begun to develop themselves. The serious fall which had already oc-
curred in the prices of railroad securities, which it would seem were
a favorite form of collateral, had made it necessary to insist upon
a larger margin of security above the amount lent, and it began
to be felt that the curtailment of loans of this kind would be
attended with some difficulty. It needed then only a strong de-
mand by the country banks to cause a pressure by the city banks
upon those who had borrowed from them upon call, and in the
necessary tightening of the money market a similar pressure upon
the regular borrowers on commercial paper.

Reviewing the condition of affairs at the beginning of August,
we find that although the money market in the cities had even
shown some temporary ease from the large payments of dividends
and interest on public and corporate securities in July, it had some
disquieting symptoms. There was as usual at this season a distinct
rise in the rates for foreign exchange, not caused, however, by any
special demand for money abroad, for the Bank of England was
able even to lower its rate of discount in July, but the effect of the
heavy importations made in the past few months, which had added
nearly 1^30,000,000 to the amount of goods ordinarily in the
government warehouses. Under this rise in exchange the exporta-
tion of specie began to increase, with the prospect of a serious
drain, from which Httle relief was to be expected in an increase of
domestic exports, since the favorable harvests in Western Europe
promised but a light demand for breadstuffs, while it was still
early for the exports of cotton and tobacco. This unfavorable
state of affairs was aggravated by the increasing difficulty in mak-
ing collections, especially in the West, and by the heavy demand
for capital which began to be made by that section where the
absorption of floating capital in unproductive enterprises was now
felt in its full intensity. The interior banks of the Eastern and



2/8 ESSAYS

Middle states had for some time found their deposits declining and
an increasing difificulty in keeping out their circulation, and in this
state of things it could not be long before the country banks must
make a serious call for their balances in New York to protect them-
selves against this demand.

That from one or both of these causes a drain had set in upon
the New York banks at the beginning of August, is evident from the
fact that although they increased their loans in the first week of
this month by $1,500,000, their deposits, so far from rising,
showed a slight decline, while their specie reserve fell off by more
than $1,000,000. Feeling their condition to be one of some dan-
ger, the New York banks in the second week of August began a
contraction of their loans. Although this contraction was at first
moderate, it was instantly followed by a large falling off in
deposits, and this in turn led the banks to protect themselves by a
still more rapid reduction of loans. On the 22d of August the
banks had reduced their loans by a little less than $2,000,000 in
two weeks, but the increasing stringency had caused their de-
posits to fall off by more than $5,000,000, a difference which
is accounted for by a loss of nearly $1,500,000 in specie re-
serve, and for the remainder by an increase of banking capital.
Of this loss in reserve a considerable part was occasioned
by the withdrawal of balances by distant banks, which found
that the demand upon them for loans was increasing, and which
no doubt were often called upon more or less directly to lend
their funds for use in New York itself. Thus the banks of
Boston, the money centre next in importance to New York,
sUghtly increased their loans during this period, but were shortly
after compelled to begin a sharp contraction to protect themselves
from an increasing drain toward New York. Prices in the stock
markets had lately shown some improvement, but the general un-
easiness and drain and the increasing stringency now made them-
selves felt, particularly in a general decline of railroad securities, ex-
hibited in an average loss of nearly eleven per cent on thirteen
leading railroad stocks on the New York Exchange, between the
7th and the 21st of August.

Thus at the beginning of the last week of August the condi-
tion of affairs had become such that it needed only some unusually
startling and alarming event to convert the general tension of feel-



THE CRISIS OF 1857 279

ing into panic. Such an event occurred on Monday the 24th, when
the Ohio Life Insurance and Trust Company suspended payments
and closed its doors. This was a company with a capital of
$2,500,000, engaged solely in the business of receiving deposits
and making loans. Its principal office was in Cincinnati, but
its agency in New York City had gradually absorbed a large
share of its business, and by a course of management which had
been at least imprudent, was found to have reduced the company
to insolvency. Whether without this occurrence the money market
could still have recovered its tone may be matter of doubt ; but its
happening was the signal for uncontrollable panic, the disastrous
course of which was inevitable in the absence of any real unity of
counsel among the banks and of any important dominating influence
like that of the Bank of England. The Trust Company was
itself a large borrower from the banks and from private bankers,
and had among its creditors small banks and depositors both in
New York and in Ohio, so that the shock and distress caused by
its suspension were immediate and widespread. One of the smaller
banks of New York City failed on the same day ; several heavy fail-
ures among bankers and merchants in New York and Boston fol-
lowed in quick succession, and a week later came the failure of an
important banking firm having connections at several points in the
West. Failures among country banks of the Middle and Western
states now began to follow each other rapidly, and in the general
alarm the notes of solvent banks began to come in for redemption
in large amounts. The banks of New York City continued to con-
tract their loans as the alarm and stringency increased, and with such
severity as compelled those in the other banking cities to adopt the
same course. In three weeks following the failure of the Trust
Company they had reduced their loans by more than $10,000,000,
and deposit liabilities were diminished nearly $13,000,000. They
had begun, however, at this point to gain in specie, their
reserve, which had fallen on August 29 to $9,000,000, having
advanced to $12,000,000 on September 12. Under the heavy
pressure of the panic exchange was difficult of sale, and rates had
fallen, so that although this caused a temporary difficulty in the
exportation of domestic produce, still the export of gold had nearly
ceased, and it promised soon to become profitable to import gold
from Europe. It was accordingly the opinion of some financiers.



280 ESSAYS

and of some of the bank managers, that the banks should avail
themselves of this turn in the exchanges and their own increasing
strength, for the purpose of at once enlarging their loans, relieving
the mercantile community, and so possibly allaying the panic.
But if this could still have been done by a combined movement, it
proved to be impossible to convince a large part of the banks, and
among these some of the largest and strongest, that they were
required to consult anything except their own safety, or that this
could be found in any other course than that of contraction.

The reduction of loans still went on, therefore, and in parallel
course the reduction of deposits. Mercantile firms of high stand-
ing began to give way in all parts of the country, and failures
became more frequent and heightened the panic which prevailed
among the depositors and note-holders of the interior banks.
Productive industry was now seriously affected by the disorder
in the money market and the consequent derangement of dis-
tribution. As early as the 20th of September many factories and
other manufacturing establishments in the Middle and Eastern
states were slackening production, or in many cases were either
closed or preparing to close until such time as the abatement of
the financial storm might enable them to dispose safely of their
stock of goods, then large for the season. Many establishments,
and some of the first magnitude, found themselves embarrassed by
the failure of commission houses or of their agents with large
liabilities for goods already delivered. The extreme pressure for
money, moreover, and the consequent difficulty of selling exchange
drawn against shipments of produce combined with the disorgani-
zation of internal exchanges to discourage the movement of the
crops, and the arrival of flour and grain at tide-water began to fall
seriously behind the receipts of the preceding year, with a corre-
sponding loss of traffic by the railroads. On the 17th of the
month the prevailing gloom was deepened by intelligence of the
loss of the steamship Central America on her way from the Isth-
mus to New York with nearly $2,000,000 in gold. On the 24th
and 25th of September the banks of Philadelphia and Baltimore
were compelled to suspend payments in specie, in consequence
of the drain upon their gold caused by the general panic in the
community ; a large part of the banks in Pennsylvania, Virginia,
and Maryland followed their example upon its announcement by



THE CRISIS OF 1857 281

telegraph, and the banks of Rhode Island also suspended on the
28th. The New York banks at once called a meeting to con-
sider this event and issued a circular declaring that " the banks of
the city of New York are in a safe and secure position " and
that they could "not only sustain' themselves as specie-paying
banks," but would soon be able to assist the mercantile community.
At that moment they had succeeded in raising their reserve of
specie so far that it amounted to sixteen per cent of their liabilities,
the latter being reduced by the cancelling of $20,000,000 of
deposits, chiefly in the payment of loans. But at how great a
cost to the public this strengthening of the banks had been accom-
plished — if indeed it were a real gain of strength — was too
plainly shown by returns of the Clearing-house, from which it
appeared that exchanges amounting in July to $728,000,000 had
fallen in August to $668,000,000 and in September to $482,000,000
— a reduction which in a great commercial centre like New York
could mean little less than the near approach of complete paralysis
of affairs.

At this time the Treasury of the United States had on hand an
unemployed balance of nearly $12,000,000; and on the 23d of
September the Secretary of the Treasury attempted to administer
some relief to the money market from this source by announcing
his readiness to buy the bonds of the United States at the current
premium. Purchases were made in this way to the extent of
nearly $4,000,000, but without producing any sensible relief, and
were finally discontinued in consequence of a threatening decline
of revenue and the rapid sinking of the Treasury balance.

That hoarding was going on at this time to some extent
appears to be beyond question. With the increasing demands
upon the banks both in the cities and in the country there was
a steady disappearance of specie, which could not longer be
accounted for by exportation, since the turn of exchange. If we
consider the specie movements of New York, by far the most
important and significant, it appears that during the month of
September the banks and the Treasury together lost $2,900,000
of specie, to which we must add $1,600,000 received during the
month from California. The net specie exports of the month
were less than $200,000, so that we have a balance of $4,300,000
which disappeared during the month from a market which was



282 ESSAYS

then attracting to itself specie from all parts of the country and
which therefore received much that does not find its place in any
record.

From the date of the suspension of the Philadelphia and Balti-
more banks, the course of the panic was marked every day by
fresh mercantile failures and bank suspensions. Confidence had
entirely disappeared and with it the chief bond of society in the
commercial world, and nothing was now seen but a desperate
struggle for self-preservation. The banks continued their harsh
measures of curtailment, — measures which were declared by them
to be defensive merely and by their half-ruined customers to be
oppressive and certain to overwhelm all in a common ruin. Early
in October another attempt was made by some of the bank
managers to secure a general agreement to increase loans both
in New York and in Boston, and resolutions were finally passed
favoring an immediate expansion of three millions, which it was
hoped might give sufficient relief to turn the current. But it
proved to be easier to resolve than to act. Forty or fifty banks,
each of which was compelled to consult its own safety, could not
move forward simultaneously in such a line of policy, without some
machinery which would insure each against the possibiUty of
finding itself abandoned by the others ; and the concerted move-
ment was accordingly 2. fiasco. Instead of the promised expansion
of $3,000,000, the bank returns for the week ending October 10
showed a reduction of $4,000,000 in loans and of more than that
amount in deposits. It was alleged and was believed by many
that the attempt to enlarge discounts had been defeated by a few
of the stronger banks which were not unwilling to drive their
weaker neighbors into Hquidation and to confine the business of
banking to fewer establishments. Whatever basis of truth this
allegation may have had, the mercantile community was now
appalled at the prospect before it of a continuance of the struggle
between the banks and itself. Every day brought some fresh
disaster. On the 9th notes of the Reading Railroad Company
went to protest; on the loth it was announced that the Erie had
suspended payment, the Illinois Central had made an assignment
of its property for the benefit of its creditors, and the Michigan
Central had asked for an extension of time on its floating debt.
No corporation or commercial house appeared to be strong enough



THE CRISIS OF 1857 283

to resist the pressure of this suddenly enforced Hquidation. To
the list of bank suspensions was now added the Bowery Bank,
which suspended on the 9th, the East River Bank on the loth,
and the Grocers* Bank on the 12th, all banks of the smaller class,
which had been left to go down without an attempt to relieve them
by their stronger neighbors. On Tuesday, the 13th, the run, of
which there had been decided premonitions on Monday, set in
with violence. The banks were all besieged from the opening
of business by an excited crowd of depositors and note holders
demanding specie. At the close of business it was found that
eighteen banks had been obUged to suspend payment in specie,
and it had become certain that none could long resist the demands
of their depositors. At a meeting of the managers late in the
afternoon it was resolved, in view of the prevailing excitement,
that all should suspend on the next day. The Chemical Bank
held out for three days, but was forced to follow the example of
the others on the i6th. The banks of Boston suspended on the
15th and with them all the New England banks, and the suspen-
sion in a few days became general throughout the North and
West. The only exceptions to it in the South were the banks of
Kentucky and some of those of New Orleans. In both cases the
sections upon which the banks relied were in a peculiarly strong
position. Kentucky had enjoyed the benefit of high prices for
tobacco and of large crops, and her banks had therefore felt less
pressure from their customers than those of almost any other
state; their specie resources were comparatively large, their
deposits small, and their circulation in excellent credit. The
banks of New Orleans also were in a community which found
its great products in good demand and with the exception of sugar
in fair supply, and at that season of the year had large credits
both at the North and in Europe. They had for some years been
strong in specie as a matter of habitual pohcy, and being, more-
over, few in number, were able when the crisis came to act in con-
cert upon a liberal plan. Their deposits showed a moderate
decline and their circulation contracted to some extent, but still
they kept up their loans and even made a slight increase of them
during the panic. Four of the New Orleans banks suspended at
the same time with those of New York, but the remaining five,
being about three-fifths of the bank capital of the city, continued



284 ESSAYS

to pay all demands in specie ; and with those of Kentucky were
the only banks in the United States which continued the full dis-
charge of their obligations.^

It should be noticed here that the banks of Canada, which
were also subjected to heavy pressure by the crisis in consequence
of the close commercial connection between Canada and the
United States, were able, nevertheless, to maintain specie payments.
The directors of the more important banks were able by concert
to establish a common policy ; considerable credits in London
strengthened their resources, and by avoiding any unnecessary
curtailment of loans they prevented any panic among their cus-
tomers and depositors, and passed through the crisis safely. It was
stated that in their efforts to prevent any embarrassment in the
export of Canadian produce they bought bills of exchange drawn
against shipments early in October at rates three or four per cent
higher than those at which they could then have bought exchange
in New York. Their efforts to sustain the community depending
on them were well rewarded, for the Commercial Bank of Canada,
one of the largest, was able to say in its next annual report that
not one of its customers who were doing a sound business had
suspended payments.

In the United States, on the other hand, it is not too much to say
that before the general suspension of specie payments business
had been reduced to complete paralysis. Exchange on England
found so few buyers that few bills could then be sold above one
hundred, the real par being about one hundred and nine and one-
half. Breadstuffs and provisions therefore could not be moved from
the West, and this section had nothing on which to draw domestic
exchange for the payment of its debts to the East. The receipts
of breadstuffs at tide-water in the six weeks before the suspension
had suddenly fallen below those of 1856 by the equivalent of one
million barrels of floor. One-half of the imports arriving at New
York went at once into the public warehouse to avoid the payment
of duties on articles which for the time were not salable, and the
withdrawals from warehouse fell to half their usual amount.
Merchandise of every kind was for the moment a drug, and an
active exportation of imported goods began as soon as the con-

1 Individual banks elsewhere are said to have maintained themselves on a specie
basis. See Bankers' Magazine, 1857-1858, pp. 505, 507, 658.



THE CRISIS OF 1857 285

dition of the exchanges would permit. The loss in prices in the
wholesale market and upon the great staple necessaries of life
was immense ; but it was observed that in sales by retail, consumers
were late in obtaining any corresponding concession, time being
necessary as usual to determine whether the reduction in prices
was transient or likely to continue, before the retail dealers could
be forced to make their own prices conform.

In stocks the fall of prices was still heavier, for in the course
of the panic some corporations had justly lost their credit, and
others suffered from bad associations in the mind of an undis-
criminating public. Taking the thirteen leading stocks before
referred to as a test, the quotations show a loss in price of forty-three
per cent in the two months ending October 9th. State bonds showed
an average decline of ten per cent in the same time. United States
six per cents alone held their old quotations, being sustained by the
purchases for the Treasury ; but after the middle of October, when
purchases were discontinued for lack of funds, these securities also
fell from one hundred and seventeen and one-half to one hundred
and eleven. To what extent the fall in stocks was increased by
the return of stocks held abroad under the influence of the panic
cannot well be determined, but it is quite probable the influence
thus exerted on the market was less than has been supposed.
Indeed, at the height of the crisis, it was stated in New York that
orders for the purchase of stocks to a considerable amount had
been received from abroad, but could not be executed on account
of the difficulty in selling the exchange which was to be drawn.

For the banks and their customers the effect of suspension
was to give immediate rehef from the heavy pressure, and to
enable them to carry through in a less ruinous fashion the Hquida-
tion and the disengagement of capital, which the revulsion ren-
dered inevitable. Individual banks could now enter upon a more
liberal pohcy, quite regardless of the action of other banks, since
an unfavorable balance at the Clearing-house involved no longer
loss of reserve, and by refusing to lend a bank could not strengthen
itself at the expense of its neighbors. The removal of this check,
however, was not followed by increased loans, but further con-
traction ceased virtually with suspension.^

1 The bank statements of the 17th and the 24th of October show some further
reduction of loans, which is probably accounted for through the elimination of failed



286 ESSAYS

The movements of specie at the height of the crisis promptly
responded to the fall and rise of foreign exchange. The turn of
exchanges " in favor of the country," as it is called, was effected by
the news carried out by the Baltic on the 28th of September, four
days after the suspension of the Philadelphia and Baltimore banks,
when the difficulty in selling bills drawn against shipments had forced
sterling exchange down to about one hundred and five. The Baltic
reached Liverpool on the 6th of October ; the Bank of England at
once raised its rate, but the Eiiropa on the loth sailed with ;^63,ooo
in specie, which reached Boston on the 22d. This was the real
beginning of the stream, some small shipments earlier in date being
made upon uncertain grounds and as a speculation. The stream
was strongest from the loth to the 29th of October, but continued
to flow until about the middle of November, when it was stopped
by the extraordinary pressure in London and by the news that
exchange had risen in New York to a point which made the ship-
ment of specie to Liverpool profitable. Indeed, the Asia, which
left Boston October 28th, carried ^100,000 a little in advance of
the general returning current of specie toward Europe, and some
of the later shipments from Liverpool crossed on their way the
early returning shipments from New York, and more than one
English steamer took back a part of the gold which it had brought
on its outward passage. The actual amount of specie sent from



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 30 of 40)