J. S. (James Sloan) Gibbons.

The banks of New-York, their dealers, the clearing-house, and the panic of 1857 .. online

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Online LibraryJ. S. (James Sloan) GibbonsThe banks of New-York, their dealers, the clearing-house, and the panic of 1857 .. → online text (page 22 of 24)
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resident dealers.

The balances of the foreign bankers had accumu-
lated, in consequence of the stoppage of specie ship-
ments, and the non-sale of bills of exchange. These
were understood to be specialized by agreement with
the bank officers. That is, they were either to be
reserved in coin, or the owners were to be advised in
season, that they might withdraw .them •before the
suspension of specie payments. The tables show that
seven millions were withdrawn between the tenth and
the seventeenth of October — ^the greater part of it,
probably, on the morning of the suspension. The

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THB unal blow. 361

next week brought it all back agaiiL The restoration
of the specie line was even more remarkable than its
depletion. A single glance at the diagram will
excite astonishment at the resonrces that were fonnd
immediately available ; and still more astonishment,
that suspension could have occurred while they were
within such speedy grasp.

The relative decline in loans and deposits, from
September 26th to October 17th, covering the period
referred to by the Committee, was as follows :



>ot 8 . .

. . $1,855,934


« 10 . ,

. . 4,017,929


« ir. .

. . ■ 4,671,744


$10,546,607 $14,282,861

Besides this loss in deposits, the banks suffered
depletion in coin to the amount of $5,483,864. They
could not withstand such an onslaught. In twenty-one
days, the deposits. fell twenty-five per cent, while the
loans were reduced but eleven per cent — a complete
transposition of the movement following the 22d of
August, when they fell but eleven, while the loans
decreased twenty-nine per cent

The history of the panic is clearly divisible into
these two periods : the former, when the banks took
the initiative in forcing down their loans ; and the
latter, in which the depositors seized it and brought
on the closing act of suspension.


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The depoeitors were not alarmed, up to the 96tli of
September. For five successive weeks, preceding,
they withdrew less from the banks each week than
the banks withdrew from them by the depression of
loans. So far from exhibiting distrust, there is every
appearance of striving against it on their part, with
the hope that the storm might pass its crisis, and sub-
side. The united community will testify to the
anxiety with which the Clearing House Reports were
watched, for signs of relaxation in the forced contrae^
tion ; but no such signs were given. At length, the
third of October exhibits a sudden and marked
change. Over four millions of deposits are withdrawn
during a single week, and in twenty days, over four-
teen millions. It is probable that a much larger
amount was withdrawn up to the fourteenth (the day
of suspension) than is indicated by the statements ;
for these do not show the restoration which began on
the fifteenth, and which materially lessened the
average of withdrawal for the week ending on the
seventeenth. The report of the Clearing House Com-
mittee confirms the fact that the depositors did not
become alarmed before this period.

The gradual expansion of bank credits through the
several ^^previous years, not only on a fictitious home
basis, but on countiy deposits which had been
allured by competing rates of interest, made suffi-
cient ground for an extraordinary pressure, when a
reduction was to be effected ; and thus the banks
were doubly responsible for the pending issue. There
is no evidence, however, in the records of the Clear-
ing House, nor in the experience of past years, nor in

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any events which have transpired since the suspension,

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whole of a thing is composed of its parts — ^that public
credit is made up of the .credit of individuals — ^that
if the parts of a thing are broken and scattered, there
is no longer a whole.*

It did not occur to the managing committees of
the Clearing House to relax its destructive energy,
whilst there was yet a chance of preserving the last
stronghold and pledge of commercial integrity — specie
payments. They thought of it afterwards, and found
in it a wholesome alleviation for themselves ; but the
time had passed for it to be of any material service
to our merchants. The admission of the State debt
of New York, and of the debt of the United States,
represented by the bank currency, as a substitute for
coin in the daily settlements, was of great service in
preventing further depreciation, and in repairing the
mischief that had been done.

It is often the case, that things good in themselves
become hurtful by a change of circumstances which
destroys their fitness. This may be said of the Clear-
ing House, without detracting from its real value to
our financial interests.

There are always operating causes in conmiercial
and financial affairs, of which any violent disturbance
may be made to appear as the consequence, after the
issue is over ; but which, nevertheless, may have had
no actual share in its production. Thus, the advocates
of a protective tariff see in low duties on foreign

* ** All wmmuii^ of interett, all oonotrt of Mtlon, m the orUs approAclied, wm
tpparentlj, If not Mtaalljr abandoned.^— J7«]X>r< qfSank J3mpeHnUnd0n% p. T.

**Tb« fomMiialoii WM prooeded hj a dotpeimte atrng^ betwean all the banks
tbemaelTat ; and diatrait and foar of enrrancj waa more apparent among tliem than
with the pnbUo gcnerallj."— JMdL, p. IT.

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merchandise a primary and safflcient cause for the
panic of 1857; and the "hard currency'' theorists

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806 THE PA2aa

rent the whole from going astaray together. In
Angnst, 1855, the specie line fell below the scale, and
did not again ascend to it before the suspension in
October, 1857. The transient recovery in February,
and in June, 1856, was extraneous from the market,
being caused by the payment of a State loan at the
former, and of a city loan at the latter date. The
average of specie with respect to the deposits, sunk
from twenty-five per cent in JL854-6, to twenty-one
per cent in 1855-6, and to eighteen per cent in 1856-7,
while the loans were steadily on the increase.

It is held that a fair proportion of the resources
of a bank should be reserved in coin, to meet im-
mediate liabilities. The market is uneasy with high
loans and low specie. Tried by this measurement, the
force of our bank expansion after August, 1855, is
exhibited in a most striking manner. Hie proportion
of coin with the whole resources for the year, ending
July 81, 1855, being preserved in the subsequent
years, would have given but eighty-five millions of
loans on the actual coin of 1855-6, whereas they were
$100,488,046 ; and it would have admitted but seventy-
six millions of loans on the actual coin of 1856-7,
whereas they were $111,174,665. That is to say, that
the loans of 1855-6 were fifteen millions of doUars in
excess of the scale, and the loans of 1856-7 were
thirty-five millions in excess! These results are
astounding. K such a departure from equilibrium
does not foreshadow the suspension of specie pay-
ments as inevitable, it lessens our surprise that it
should have occurred (to borrow the words of the
Bank-Superintendttit) — ^^ with overflowing granariee.

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It is, doubtless, the examination of the whole ground
here set forth, that has induced a majority of our
bank officers to name arbitrarily a proportion of
specie, as proper to be kept in reserve from the
resources.* The Bank Superintendent, also, has recom-
mended to the Legislature, that the banks be obliged
to maintain an average of twenty per cent of their
deposits in coin ; though for want of a more practical
acquaintance with bank figures, he quotes their depos-
its in gross at $72,602,678, instead of $66,377,224,
omitting to deduct the clearings. It may rather be
doubted whether the proportion of twenty per cent
is sufficient to assure a steady equilibrium. That of
the years ending with July in 1864 and 1866, was
over twenty-five per cent of the net deposits, while
that of 1856 was but little below twenty, and that of
1867, eighteen per cent.

The circulating bilk may safely be left out of view
in this provision, as their independent security has
been abundantly tested.


A very important exception remains to be noticed,
as to a portion of our city banks, in connection with

* At ft meeting, Mareh Itth, 1858, where ftyrtj-two bfenkt were repreeented, the
lUlowing rewlntion was adopted:

jBmo2m<{, Thftt in ftirthenuiee of the end proposed bj onr agreement, to diaeon-
ttnne the payment of Interest on depoalta, and In aeoordanoe with the reoommend-
ationa of the Beport of the Oommittee on that faljeGt, we also agree, each to keep
on hand, at all times, an amount of ooin eqniralent to not less than twenty per
oent of onr net deposits of erery kind, which shall be made to indnde oerttded
checks and an other liabUltles (except circulating notssX dednfltJng the dally
soDshaagas rseslTed from th* GUntaig Hoose.

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the expansion of credit which prepared the conditions
of the panic.

From 1889 to 1860, onr banking capital was in-
creased but little over three hundred thousand dol-

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070 TSB PAHia

MetioDft were stimulated by the prospect of increased
yalne to their real estate, by the near location of a
bank. In 1861, a new bank was started for every
month in the year; in 1852, one for every two
months ; nine were added for 1858 — making twen^-
seven in three years, with an aggr^ate capital of
over sixteen millions of dollars. If this had been
real capital, the case had been better; bnt it was
mostly fictitions — merely paper capital — ^nothing, in
fact, but the creation of a book debt, ^th hypothe-
cated stock certificates as collateral secority. More
than half of it was of this character — and at least
another fbnrth was in excess of the cc»nmeroial want ;
but it was l^^y organized, Mid it attracted, or Aired
deposits, and so created a larger basis for more credit
in the shape of loans, which, in August, 1857, were
extended to over forty millions of dollars. It is safe
to say, that two-thirds of this prodigious debt was a
grievous burden, super-imposed on the legitimate
debt of the community ; and that, instead of benefit,
it brought embarrassment and injury to the trade and
labor of the city.

This was the eoopansian thai prepared the crisis qf
1857. It was an overgrowth of banks, and an over-
toppling of credit on tiie overgrowth. It does not
alter the case, that many of the new institutions have
since become entirely successful and well managed ;
but it furnishes the ground ci an important exception
in favor of the (dder banks, as to exact responsibility
for tiie panic. These, almost without an exertion,
nudntained their discount lines nearijf unchangedy
wUle the paaic wa* created by othor institutiona.

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872 THE PAjno.

ing in mercantile education, and without the ability
to conduct the simplest commercial correspondence.
It is due to some of these gentlemen to saj, that if
they were ignorant in the beginning, they have im-
proved by close attention to practical duties, and that
for general intelligence they are not far below the
average of their cotemporaries in ofSce. They have
yet to learn, however, that it is one thing to be a bill
broker and a shrewd calculator of balances, and quite
another to understand the principles of true economy
in finance.

The natural consequences of placing incompetent
men in the responsible ofSce of bank president, could
not in all cases be averted. Several instances of gross
mismanagement occurred, in which institutions were
saved from insolvency, either by a change of officers,
or by the help of the Associated Banks. Several others
maintamed a feeble existence for a short time, and
sunk into final discredit ; and in five or six cases, at
least, there were such serious deficiencies, as to justify
suspicions of dishonesty and collusion among the Di-
rectors. How the legal weekly and quarterly state-
ments could be sworn to, up to the time when the entire
stock of a bank was lost or squandered, is a question
for the parties concerned to settle with themselves.

It is not necessary to clog this sketch with the
numerous accidents that were added from day to day,
to increase the popular excitement, and to multiply
its terrors. The embarrassment of the exchanges
between different parts of the country, and the conse-
quent stoppage of remittances ; the depreciation ci

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the bank currency, which the farmer refused to take

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874 THB PAVia

The disclosores of the panic show, measurably
what was the state of things before it ccHmnenced.
Notwithstanding the appearances of prosperitj, there
existed all the conditions of extraordinary financial

A prodigious weight of insolvencj had been car-
ried along for years in the Yolume of trade. Extrav-
agance of living had already sapped the foundationa
of commercial success, in hundreds of instances where
credit supplied the place of lost capital. Mismanage-
ment and fraud had gained footing in public compa-
nies to an incredible degree. Hundreds of millions
of bonds were issued with little regard to the validity
of their basis, and pressed upon the market by dis^
honest agents, at any price, from sixty down to thirty
cents on the dollar. False quotations were obtained
by sham auction sales. The Press, in particular
instances, was bribed into silence, or became a part>
ner in the profits to be derived from the variona
schemes which it commended to general confidence.
The land grants by Congress to railway companies
gave renewed activity to speculation, and State L^is-
latures were bribed to locate roads to serve indi-
vidual interests. Public, as well as private credit,
was compromised. The example of corruption in
Government commissions and contracts, and of bad
faith with neighboring nations, was an extreme, but
a faithful expression of the tone of popular feeling
with respect to the sacredness of trusts and obligations.

The general mass of credit in the United States
rested on these facts; and the strictly commercial
part of it was involved in the common risk. There

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876 THE TMJsno.

of making promissory notes payable to the order of
the drawer, and thus negotiable without indorsement
When the seller finds that his customer has reached
the line of credit that he is willing to allow, instead
of refusing to sell more, and thus offering a prudential
restriction to the extent of his business, he goes on
selling, and disposes of the accumulating excess of
the buyer's paper in "the street" In this way he
overstocks the market with goods, and gives a credit
of thirty thousand dollars to a man whom he considers
it unsafe to trust for more than three thousand ; and
the risk of twenty-seven thousand is scattered broad-
cast in the community I The buyer knows that his
creditor gets rid of his notes, and what does he care
if strangers lose by him? This should be regarded
as a commercial offence of the gravest character. It
is impossible to have an honest money-market while
it is tolerated. What better is it, than a trick of the
manufacturer Bud wholesale merchant to reap the
profits of trade while throwing off his risks upon inno-
cent people ? It corrupts credit, and turns conmierce
into mere headlong chances.


Of all theories intended to explain our financial
fluctuations, that which attributes them to the hank
currency has least foundation in fact A confusion
of terms is probably the chief source of the misunder-
standing that prevails on this point

In common parlance, hcmk currency means circiiUU'
ing hanik notee — " paper money." Yet, it would seem

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878 TW& PANIO.

are mere accessories of the depoeit. The first me
issued bj the individual dealer in his discreti(m, and
the bank pays them out of his dq>06it ; promissory
notes are a dormant security during the continuance
of the loan, which itself is made available to the
dealer in the character of a deposit. The only quee-
tion to be answered is, therefore, whether deposits
can be called bank ctirrency. The only approach to
circulation by any document which represents the
deposit, is in the check, when it is certified and sent
abroad to pay a debt, or when it is deposited in
another bank and redeemed through the exchanges.
The ^^certificate of deposit" is the same thing in
another form. The promissory note, when it is dis-
counted, is filed away in the vault, and is rather with-
drawn from, than put into circulation.

Banks cannot govern the amount of deposit by the
dealers, otherwise than by discounting paper, and
giving them credit in account for the proceeds. They
cannot govern the issue of promissory notes in the
market, this being the act of individuals. It would
be a solecism, to apply the term lank currem^ to
documents which are issued by every merchant in
the community without the knowledge of bank

Finally : banks do not send out, for circulation, a
single document in any shape, excepting the bank
note — ^^^ paper money."

Whatever terms may be employed to distinguish
the different evidences of debt which are circulated
in the market — ^whether mdividtuxl cfwrrefMy or oonh-
fiMf^cial current — ^it seems proper to ocmfine the

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application of bank currency to bank notes. It is
certain that this is what the advocates of ^^ hard cur-
rency" aim at, when they urge their theory as the

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In one case, the circulation increased five hundred thou
sand dollars, and in another it diminished six hundred
thousand, with a coincident reduction in the loans of
eight and twenty-three millions. Only once in the
table is there an appearance of sympathy — when the
loans fell thirteen millions, and the circulation one
million six hundred thousand dollars ; and in this case,
the withdrawal of deposits fully accounted for the
reduction of loans, leaving that of the circulation to
be otherwise explained. The scarcity of exchange at
points in debt to New York will, at any time, cause
our city currency to be rapidly returned from all parts
of the country.

The annexed diagram shows the relative fluctuation
of the currency and the loans from August, 1853, to
December, 1857. The extreme range of the former
was about one and a half millions of dollars, while
that of the latter was over forty millions.

The opinion that bank loans are governed by the
currency was justified under the old laws, which
allowed an issue of bills equal to twice the amount
of capital, without a pledge of securities, and without
personal liability for the debts ; but it is groundless
under our State system. The old laws would have
given an issue of one hundred and twenty millions of
bills to our present city capital ; whereas, we have but
ten millions, and but three-fourths of that in circula*

• Th« SiiperiBt6Bd«nt of the BanldAg DepartmMit, in hU report for tsn; Im
Tlew or the ikot that the New T«rk atj bonk enrrencj wm oontraeted bvt a
mmiom and* half during the penio,ieja: **Thlt weald teem eleeriyto demon*
■tnte, that whsterer aaay lead to a loapendoa of ipecle p^fstentii the oomB^r
«r ov heakSi preperij eeoafed, la Mt aa eleoMat la ill piodaetioa.**

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A propoeitioD, that the iseue of bank bills, of a less
denomination than twenty dollars, shall be prohibited
bj law, has met with a good deal of public com-
mendation. It is not easy to see how this could add
any security to our bank currency, nor how it would
guard our financial system from die dangerous fluctu-
ations consequent on excessive commercial credit
It might restrict loans, by making it necessary for
banks to keep on hand a larger reserve of coin, and
therefore lessen the profits of the business. One of two
things must then follow : either banking capital will
be surreptitiously employed to make up the deficiency
of profit, or it will seek more productive methods of
organization. Another result might be expected:
credit suppressed in one form wiU find another, beyond
the reach of legislation. The personal check, or order,
would take the place of the bank bill in all remit-
tances under twenty dollars, involving delays and
expenses of collection that would fall most heavily
on small dealers or laborers, who can least afford them.
Men who keep no bank account, women, and minors,
would be obliged to pay a broker's commission for
the most trifling remittance. The amount of this
snudl check credit would be infinitely greater than
the decrease of bank currency, without its convenience
or security.

In the midst of the late panic, everybody felt the
necessity of doing something to prevent its recur-
rence ; and under the weight of its consequences,
various legislative restrictions have been proposed,
with a view to render our banking system less unsta-
ble in future. But it may well be questioned, whether

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more ndsdbdef is not to be apprehended from the con«
Btant tinkering of politicians than from any other
sonrce — not excepting the errors of past legislation,
which -we are gradually correcting by exp^ence, and
by Toluntary action, without the aid of law.


The diversion of bank currency from its le^timate
channels, and the establishment of a trade in it be-
tween the banks themselves, has had a share in the
general derangement of credit, and in the misapplica-
tion of banking capital.

The only proper use of currency is, drctdation — ^to
pay wages, to buy commodities in store or maiket,
and to answer the convenience of daily expenditure
by the people. The privilege of issue is given by
law for this purpose, and for no other. The advant-
age to the bank consists in the currency fulfilling this
function of circulation — ^in its passing from hand to
hand, giving life to industry, and forming the basis
of the larger operations of commerce. The bank
pays it out for notes discounted or for deposits, and
realizes interest upon it until it is returned for redemp-
tion. The more circulation, the more profit. Itig,
therefore, an object for banks to keep out their bills
as long as possible. They resort to various expedients
for this purpose, such as discounting notes, on con-
dition that the bills shall be taken to a distance, and
paid out for purchases of wool, for wages on a rail-
road, or oilier service. A large aggregate of cup-
r€tocy is thus forced out upon the country, to find its

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way back for redemption through the nsnal channelfl
of exchange. The city merchants who received this

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884 THE PAKia

admirably as a piece of machinery, with the popular
commendation that it restricted die bank currency
by enforcing prompt redemption, and saved our mer-
chants a heavy brokerage. It was a great conve-
nience in the first days of the panic, when private
capital was withdrawn from the purchase of currency,
and when our merchants, but for the redeeming banks,
would have been overburdened with unavailable

But the Eedemption System, like everything else
that was susceptible of abuse, was turned aside from
its legitimate purpose, and made to answer a mis-
chievous end. The low rate at which the bills were
taken in New York accelerated their return in Jwfifc,
as a basis of exchange, or for credit in account, and
thus their distinctive character b& .circulation was in
a great measure destroyed. This is plainly illustrated
by the diagram on the opposite page.

The natural course of the circulation is represented

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Online LibraryJ. S. (James Sloan) GibbonsThe banks of New-York, their dealers, the clearing-house, and the panic of 1857 .. → online text (page 22 of 24)