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were little more than evasions of this duty, so that the whole
West and Northwest was overrun with a practically inconvertible
currency often circulating at a discount which made itself pain-
fully apparent when the holder sought to buy exchange for remit-
tance to the East. The banks of the South and Southwest, even
omitting the exceptionally strong ones of Louisiana, were on a
firmer basis. Indeed, in specie reserves, the South and Southwest
was stronger in proportion to its bank capital and liabilities than
the North and West, notwithstanding the large accumulation of
specie at New York. This, however, was a point of manage-
ment as to which neither section had much to boast of, outside
of one or tvv^o leading cities. In New Orleans the law required
the banks to have a reserve of specie amounting to one-third of
their cash liabilities, and they usually had more. In New York
the banks by custom since the suspension in 1857 kept on hand
an amount of specie seldom much less than one-fifth of their
cash liabilities ; and these two cities held generally about forty
per cent of the bank specie of the United States. In both the
amount of specie had declined considerably during the year 1859.
In New York, where the specie in the banks had at one time in
1858 exceeded $35,000,000, it had fallen to an average of about
;^20,ooo,ooo, as was to be expected from the increased exports
of gold and the fuller employment of capital in business.

The course which the banks had pursued in extending their
loans from the beginning of 1858 to the beginning of i860 was
the object of much unfavorable criticism. During the period of
the low money market, bank loans were increased to a degree
which exceeded the highest inflation of 1857, 3.nd while their
abundant specie made the position of the banks strong, it was
clear that their eagerness to employ their resources was stimu-
lating adventurous enterprise in advance of the real recovery of



298 ESSAYS

the country, and was exposing the community to violent fluctua-
tions in the money market, and to the chance of some dangerous
relapse. Indeed, in the fall of 1859 there had been a period of
considerable stringency, which had passed off, without, however,
inspiring much additional steadiness in the management of the
banks. The managers of the banks were stimulated to take this
course by the great accumulation of capital in their hands, a large
part of which must have been idle but for their efforts to extend
its employment in loans ; but in thus pursuing their own interests
they excited speculation, at a time when the tendency of the pubhc
was toward caution, and gave a powerful impulse toward a fresh
expansion of credit. As the year i860 advanced there was a dis-
position in some branches of trade to lengthen the terms of credit,
which had wisely been shortened after the disasters of 1857, and
to return to the old system, of high pressure.

At the close of the fiscal year ending with June, i860, it
appeared that while there had been in many quarters complaints
of irregularity and occasional dulness in affairs, foreign imports
had exceeded those of any year, not excepting 1857. The
merchandise imported had been beyond all precedent ; but there
was some diminution of imports and an increasing disposition to
send goods into warehouses in the closing months of the spring.
The immense crop of cotton had carried the exports also beyond
any previous figures ; but the deficient demand for breadstuffs had
left a large balance to be settled by the exportation of specie,
exceeding in amount the gold product of the year. This remarka-
ble recovery in the demand for foreign goods at a time when pro-
ductive enterprises were not receiving any general development
could hardly be deemed a healthy symptom. Indeed there were plain
indications of reaction to be found in the slackening of importations
already referred to, and in a considerable decline in the call for
money since the beginning of the year i860. But, as the summer
passed on, all this was changed by the appearance of a new set of
conditions in our commerce, both domestic and foreign. The year
had been favorable in the West, and it was found that that section
was sending to market the largest crop which she had then ever
raised. Her granaries were full of corn and wheat, every means
of transportation was taxed to its utmost, and in the midst of this
plenty there was an increasing probability that Europe would once



THE CRISIS OF i860 299

more be a large buyer of Western wheat and flour. The West, after
its two years of ill-requited effort, had a prospect of such prosperity
as she had never yet seen. There was a strong advance in railroad
stocks, amounting to nearly forty per cent on an average of twelve
important lines of transportation. Merchants in New York and
the East began to look with increasing favor on Western trade,
while the owners of shipping advanced their rates of freight in
expectation of a year of large business and high profits. At the
same time, while the reports as to the probable magnitude of the
cotton crop were conflicting, there was hardly any limit to the gen-
eral confidence in the elasticity of that export, and its capacity to
make good in price any shortcoming in quantity.

The horizon was obscured, however, by one cloud which became
more and more portentous as the season advanced. This was the
increasing gloom in the political situation of the country. The
canvass for the presidency then in progress had assumed a dis-
tinctly sectional character, and there was a prevailing conscious-
ness that it was based on irreconcilable differences of principle
and of interest. So far as the platforms of parties were con-
cerned it involved only the old question, more than once laid to
rest as it was supposed by our statesmen, of the extension of
slavery, and had an intensely legal and unpractical aspect.
Behind this formal discussion, however, there was deep aversion
to the system of slavery itself on the one hand and devotion to it
on the other. Indifference to the moral bearings of the subject
had indeed become impossible, long before the country in general
recognized its impossibility. Of the two great divisions, the South
was the first to comprehend this and to realize all that was implied
in the success of the party opposed to the extension of slavery ;
and thus while even after the election in November, only a mi-
nority of the Southern people were prepared for disunion, the com-
munity in general of those states had long been in a state of alarm
at the prospect before it. Without any distinct perception of the
form which the danger might take, the people of those states felt
the increasing probability of some violent convulsion at a time when
the public in the Northern states were for the most part inclined
to regard all predictions of trouble as merely a part of the election-
eering tactics by which conviction was to be overcome by fear. It
is certain that credit was affected in the South some weeks before



300 ESSAYS

it showed signs of disturbance in the North. Exchange in the North
began to be difficult of sale in the Southern cities before the end of
the summer. The banks of New Orleans, as appears from their
returns, had begun as early as the beginning of August to dimin-
ish their purchases of exchange below the usual point and to call
in their distant balances, using their funds in short loans on the
spot apparently as a precautionary measure.

We must now observe the position in which the New York
banks found themselves when the storm finally burst upon the
country. During the summer these banks had carried their loans
above $130,000,000, with a specie reserve amounting to nearly
twenty-five per cent of their liabilities. At this time stock specu-
lation, especially in Western securities, was active, prices were buoy-
ant, and it is probable that a large part of the increased facilities
then afforded by the banks was employed in this direction. The
steady decline of their specie, however, in the last few weeks of
this advance and the approach of the season when the wants of
legitimate business increase, led the banks to retrace their steps.
They contracted their loans, from the highest point for the
summer on the 25th of August, for eight weeks at the rate of
$1,000,000 per week, with a corresponding decline in deposits while
their specie reserve underwent little change. During this time the
loans of the Boston and Philadelphia banks remained almost sta-
tionary, and in New York it was a matter of remark that the busi-
ness community felt the contraction but little and that the current
rates for money were not greatly affected. The stock market felt
some reaction, however, at the beginning of October, partly by
reason of the reduction of loans and partly also from the fact
that speculation had no doubt carried prices beyond the point
which a single year of good business on the great lines would
justify. The market was weakened, therefore, and became a little
irregular early in the month from natural causes, quite distinct
from any political apprehension; but prices rallied in a few days,
the general money market becoming easier, notwithstanding the
progressive contraction of bank loans. The state election in Penn-
sylvania, which was always justly regarded as an important index
of the probable result in the national election in the following
month, occurred on the 9th of October, and the Republican party
was the victor. The chances of political disturbance now became



THE CRISIS OF i860 301

the argument most insisted upon by those who were operating for
a fall in stocks ; but still no such real alarm was felt as to affect
prices until some days later. By the middle of the month, how-
ever, a tendency to decHne was fairly visible, notwithstanding the
ease in money, the advancing prices for cotton and breadstuffs in
consequence of an active foreign demand, and the downward turn
of exchange, which had fallen below the point at which specie
could be profitably shipped. The state of feeUng now became
more uneasy every day. The stock market became unsettled and
dull, neither buyers nor sellers being as yet disposed to act decid-
edly. On the 22d of October the bids for a five per cent loan of
$10,000,000, advertised by the United States government, were
opened and were found to amount in the aggregate to $10,500,000
at an average premium of about one-half of one per cent. The rate
was fair, but still the transaction did not strengthen confidence,
the limited amount of the proposals causing much remark. The
threatening reports from the Southern commercial cities now
attracted attention, and a sharp decline in stocks began, which for
a few days had almost the character of a panic. In this movement
the bonds of Southern states were of course seriously affected, the
fall in those of Virginia, North Carohna, and Tennessee being on
the average about eight per cent for the month of October. The
fall for the month in the securities of the Western railroads was
even more serious ; but a part of it was regained by a temporary
recovery in the last few days.

At this time and down to the presidential election, the press-
ure in the money market of New York and the other Eastern
cities was not serious. Such tendency as might have been felt
in this direction was no doubt in part counteracted by an increase
of nearly $4,000,000 in loans made by the banks between the
20th of October and the election, in view of the steadiness of their
deposits and their gain in specie. In the Southern cities, how-
ever, the pressure was becoming intense, political apprehension
having there become universal, while the grounds for it were still
the subject of debate at the North. For similar reasons the strin-
gency in Baltimore was early and extreme. In the Western cities
also distress began to be felt, owing to the vicious character of the
local currency at a moment when the abundance of most forms of
material wealth had filled the public with confidence. Especially



302 ESSAYS

in Illinois and Wisconsin the evils of too free banking began to be
cruelly felt. Of ninety-four banks of Illinois issuing a circulation
amounting to over $12,000,000, one-half were at that time banks of
circulation only, engaged in no business except that of issuing
notes based upon stocks and state bonds, and of their securities
nearly two-thirds were bonds of Missouri, Virginia, North Caro-
lina, and Tennessee, all of which were then rapidly declining. In
Wisconsin, where the circulation of bank-notes was $4,500,000, the
state of things was equally bad. The local currency of Indiana
was also infected with the same disorder. To the evils of
the practical inconvertibility of this currency of the West and
Northwest, which had long since caused some depreciation, was
now added the misfortune of thorough loss of confidence in the
basis of credit on which the currency depended.

The election of Lincoln as President on the 6th of November
was followed by a slight movement of relief in the market, as if the
country breathed more freely now that the decision was made ; but
this was followed by depression, which was deepened by early news
from the South. Not only did the resignation of United States
oflficers in the South and the tone of the political press and the
politicians portend a quick development of the movement for
secession, but there was a sudden fall in the Southern cities of the
rates of exchange on New York. As this fall occurred at a time
when not only the shipments of cotton to Europe were large, but
the Northern manufacturers were laying in unusually large stocks,
it was necessarily followed by an active shipment of gold to Charles-
ton, Mobile, and New Orleans. This movement in ten days carried
off by the known channels more than $3,500,000 in specie. The
banks of course lost the greater part of this, and felt compelled to
contract their loans. Capital at once became scarce and high,
stocks fell rapidly, exchange was slow of sale and low, merchan-
dise waiting to be exported was nearly immovable, and these
results followed each other so quickly that by the 12th the
panic was complete. Business was everywhere at a stand. Col-
lections had become difficult at the East, and almost impossible at
the West, where there was now an actual deficiency of currency
having any tolerable degree of credit. The movement of produce
slackened at the time when it should be at its height in anticipa-
tion of the closing of navigation. Although existing stocks of



THE CRISIS OF i860 303

merchandise were not excessive in most branches, the impossi-
bility of moving them stopped the orders for fresh supplies, and
production diminished, thousands of workmen being thrown out
of work every day.

The terrors of this revulsion were heightened by the recognized
dangers of the political situation. The possibility of some great
convulsion in our civil order oppressed the pubHc mind and made
the future something portentous and incalculable. Actual dis-
solution of the Union was not believed to be possible, nor was the
approach of Civil War yet credited ; but what scenes of agitation
might be before us, what changes might impend, and what loss
of the great guarantees of liberty and property, what interruption
of national growth and sundering of the bonds of sectional inter-
course, — these were questions which filled every mind with fore-
boding. This general condition of alarm was in itself enough to
cut down every enterprise and to wither credit. But to this was
added the direct influence of the absolute destruction of a large
body of credit distributed through all branches of production and
of internal trade. Great numbers of jobbing houses in the Northern
cities had their entire capital at stake in the debts which were due
to them from customers in the South. Many Southern jobbing
houses were branches of firms established in the North whose
solvency depended on receiving the collections from consumers at
the South. Many Northern manufacturers, in different branches of
industry, sent their entire product to the Southern market. In-
deed, when it is remembered that the occupations of the South were
chiefly agricultural, that its supplies of hardware, dry goods, clothing,
and boots and shoes were drawn chiefly from the Northern centres
of trade, and that it habitually required and obtained long credit for
what it bought, depending on the coming crop for the means of
payment, it is clear that the mass of debts due to the North, and
all made of doubtful value by the possibility of a political overturn,
was enormous. The rapid disorganization of the South had made
it certain that payment of a large part of their debts must be
delayed, if not finally lost ; and in the modern use of credit delay
is fatal. Houses in the Southern trade, therefore, found their
credit suddenly impaired. All paper resting in any degree upon
Southern trade had upon it the taint of a rapidly increasing sus-
picion. The panic grew in intensity from this cause day by day.



304 ESSAYS

Relief which might have been possible in an ordinary crisis be-
came hopeless, for lenders were now not merely doubtful as to
their security, but had the certainty that a large part of the paper
offered them had become weak and perhaps worthless from a real
cause. The lending of money by private bankers and discount
houses came nearly to a stop from the unwillingness of lenders to
venture upon long paper of any description, while at the same
time call loans were to be had on tolerably easy terms. The banks
restricted their discounts within the narrowest possible limits, and
as they contracted their loans their deposits fell off and their specie
melted away, leaving them to press still more heavily upon borrow-
ers and to restrict their loans still farther. In short, they were once
more in the false position in which they found themselves in Octo-
ber, 1857, when they could neither discount nor refuse to discount.

By the 17th of November the drain of specie to the South had
stopped, exchange on New York in the Southern cities having
taken an upward turn, partly under the influence of the shipments
of specie which had been going on and which had given some ease
to the Southern money market. But the panic in New York was
no longer to be relieved by any single circumstance of this kind.
Foreign bills fell to a lower point than ever, and the Atlantic, which
sailed on Saturday the 17th, carried to England the news that
bankers' bills on London sold with difficulty at 1.05 (the real par
being 109^-) and commercial bills at i.oo, with few buyers even at
those rates. In this state of things the prices of merchandise were
beginning to fall rapidly.

This disastrous state of things was perhaps felt more severely
at Chicago than at any other place in the West. The block in
foreign exchange at New York prevented the possibility of reaUz-
ing on the immense crop which the West had been pouring
toward the seaboard, and thus destroyed the means of payment,
but did not remove the pressure of debt, while with the fall in
prices the wealth of the West seemed to vanish. Exchange on
New York had risen in Chicago to five to ten per cent premium
with little demand, and the local currency had so depreciated that
gold was sold at five to seven per cent premium. In Cincinnati,
exchange was scarce, but lower, the local currency being more
sound ; money was little demanded, said the papers of the day,
because it was of no use to ask for it.



THE CRISIS OF i860 305

The business of the country was, in fine, at a dead-lock : the
panic in the money market prevented the importers from buying
bills for remittance abroad ; the impossibility of selling bills drawn
against it stopped the sales of produce ; this destroyed the basis
on which the West drew its exchange on the East ; the Western
merchants being unable to sell their produce were unable to
remit ; and the falling off in collections from the West intensified
the pressure in New York. The machinery of internal circulation
had stopped, and no one wheel could move until the others started.
The case seemed hopeless unless some strong external force could
give the desired impulse. This impulse some of the banks of New
York determined to give, if possible, by making large purchases
of exchange on their own account, in the hope that the movement
of trade might thus be revived and some relief given to the general
market, while they should themselves be able to secure the returns
for the exchange in specie with only a few weeks' delay. Accord-
ingly, on the 19th it was announced that several of the largest
banks were ready to buy sterling bills to the amount altogether of
;;^5oo,ooo. The relief obtained from this measure, however, was
not immediate. The banks found it difficult to secure the amount
of first-class bills, and at the rates which they had expected, and
were reported to have finally bought only to the extent of ;C6o,ooo.
Their action caused some movement by private parties, and thus
helped the exchange market for the time, and caused a more cheer-
ful feeling on the 20th, On the next day, however, there was a
relapse, and the tone of affairs became more alarming than ever.
It became plain that without immediate relief in the way of loans
a large part of the customers of the banks must soon become in-
solvent, for it was impossible for even the most prudent merchant,
after selling his goods upon credit, to repay at short notice his
borrowed capital. And it was further urged by the merchants
that even if the banks were at any time justified in saving them-
selves by breaking their customers, there was now no occasion
requiring them to do so, for with the fall in exchange upon Eng-
land and the cessation of the Southern drain of specie there was
not only no demand which exposed them to any danger in case of
an enlargement of their liabilities for the benefit of their customers,
but there was every reason to look for an early and considerable
flow of specie from Europe. The bank managers had, perhaps,



306 ESSAYS

learned something from the experience of 1857 as to the effects of
an unrelenting contraction at such a moment. At any rate, they
were not, as then, insensible to the appeals of their customers.
Their resolution to buy exchange was an acknowledgment of a
duty toward the community and evidence of a desire to perform
it, and if they were slow in taking any more decided action, it was
rather from the difficulty of devising any course to be pursued by
fifty banks, each acting for itself, than from any indisposition on the
part of the leading managers to meet their proper responsibility.

The expedient to which the banks finally resorted for the relief
of the community and for their own protection at this frightful junc-
ture deserves careful attention. They now held in the aggregate an
amount of specie which was equal to about twenty-two per cent of
their cash liabilities. This was a scanty reserve, but still the amount
was large enough to make it probable that if credit, and especially
the credit of the banks, suffered no further shock, it might be pos-
sible to tide over the emergency. But for this purpose it was
necessary that the reserve should be treated as a genuine reserve,
that is, as something to be used in pressing necessity, and not merely
to be guarded, and that assistance should be freely extended to the
public. In short, it was necessary that loans should be liberally in-
creased, although this increase might be attended with the risk of
a still further exhaustion of resources, in case depositors or note-
holders should be led to demand specie. In the opinion of the
more sagacious managers this risk was not great. The heavy fall
of exchange had stopped the export of specie and made it certain
that the flow of gold must set in from abroad, as was seen in 1857.
The circulation of the banks was under no suspicion, and their
general credit was secure, provided the credit of the mercantile
community could be saved. There was reason, indeed, to expect
that additional loans, being used in payments falling due at the
banks, would be in substance and to a great extent a mere exchange
of obligations and postponement of the time for payment. That
this rehef might be given, however, freely enough to quell the
panic which existed and by sustaining the credit of individuals to
sustain that of the banks themselves, it was necessary that it should
be given by concerted action. Experience had shown that no
mere general understanding was sufficient for this purpose.



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 32 of 40)