Lippincott's Magazine of Popular Literature and Science, Volume 12, No. 33, December, 1873

During all this week there had been a dead-lock in business in Wall street, although a crowd of persons not belonging to the Exchange gathered on Broad street daily to buy or sell stocks for cash on delivery, the sellers forced by their necessities, and the buyers eager to secure stocks at lower prices than had been known for years. But there were so few persons provided with "the sinews of war" that the aggregate of transactions was small. The usual weekly bank statement was again omitted by the Clearing-house from motives of policy, but it transpired that the whole of the New York associated banks held on the morning of the 27th only twelve millions two hundred thousand of greenbacks, an aggregate still further reduced, at one time, to a point below ten millions, against nearly thirty-five millions—bank average—on the 20th, the date of the last statement issued. Their determination to sustain each other was, however, so strong that it tended to inspire confidence in their ability to weather the storm. It was also made known that they had agreed, on the resumption of business by the Stock Exchange, not to certify cheques except against actual balances while any certificates of their own issue remained outstanding. Twenty millions of these had been issued up to this time, and the additional ten millions before referred to were ordered to be issued in like manner, as required. The Treasury paid out during that week, including the previous Saturday, in New York and elsewhere, about thirty-five millions of greenbacks—namely, twenty-two millions in exchange for $5000 and $10,000 certificates of deposit—used as legal tenders at the Clearing-house, and presented by the banks for redemption, for which there is a special reserve of notes in the Treasury—and about thirteen millions for the purchase of the twelve millions of bonds already mentioned. It also sent to the National banks in the West and South three millions of new notes, issued under the act of July, 1870, authorizing an addition of fifty-four millions to the three hundred millions of bank-note circulation previously outstanding, nearly the whole of which has now been issued.

The bank failures West and South, and the pressing requirements to move produce to the ports, led to very urgent demands for currency in Wall street, and certified bank-cheques were quoted at a discount of from two to four per cent. as compared with greenbacks, while fears were entertained that the continued suspension of business would be only productive of harm. Hence, when the governing committee decided to reopen the Stock Exchange on the morning of Tuesday, the 30th, a feeling of positive relief was experienced.

On Monday, the 29th, only two unimportant country-bank failures were reported, and encouraging accounts were received from the West, although the suspension of a wool-manufacturing company in New York and an iron-manufacturing company in Massachusetts—each employing some hundreds of men—and the discharge of more than a thousand men from the locomotive works at Paterson, N.J., showed that the crisis had already affected labor. On all sides an anxiety to retrench was shown, and large numbers, in the aggregate, were thrown out of employment all over the country. The retail trade was very unfavorably affected, the losses sustained by the crisis, combined with the scarcity of currency, causing people to expend as little as possible; and this feature, resulting from the crisis, is likely to be a marked one for a considerable time to come.

During the previous week bills on Europe had been, as a rule, unsalable, and rates of exchange were depressed to a very low point, bankers' sterling at sixty days being quoted on Friday at 103 @ 105, and merchants' bills at 101 @ 102-1/2. The difficulty or impossibility of selling exchange greatly embarrassed shippers and retarded the movement of produce from the West; but owing to a heavy reduction by the steamship lines of the rates of freight to induce shipments, strenuous efforts were made to take advantage of it, and the exports from New York for each of the two weeks noticed were valued at about six millions and a half, while for the week ending October 4 the valuation was unusually large—namely, $8,378,130. This was the most encouraging feature of the time, especially in view of the previous heavy preponderance of the exports over the imports at New York, the value of the former having increased forty-eight millions during the first nine months of 1873, as compared with the corresponding period in 1872, while the latter were twenty-seven millions less, and while our exports of specie were also seventeen and a half millions smaller. The receipts for customs duties, however, fell far short of the usual amount, and the movement of goods out of bond was correspondingly light. Under the improved feeling visible on Monday, the 29th, the foreign exchange market became less unsettled, and rates began to improve rapidly; so that on Tuesday bankers' bills on England at sixty days had risen to 106-1/2 @ 106-3/4, and mercantile to 104-1/2 @ 105-1/2. Before this, however, the Bank of England had advanced its rate of discount from three to four per cent., and again from four to five per cent., and we had received cable advices of the shipment of about eight millions of gold from England for the United States, with further shipments in anticipation, partly the proceeds of American negotiations previous to the panic, and partly to make grain payments. The shippers of cotton and general produce were cheered by this opening of a market for their bills at such a decided improvement in rates, and on the Produce Exchange the return of confidence was marked, while quotations, which had been depressed, showed an upward tendency.

Meanwhile, the Stock Exchange opened punctually at the appointed time, and the opening prices were higher than those previously current in the informal market on the street. But it would have been too much to expect a settled market after such demoralization as had prevailed and such ruinous sacrifices as had been made. The improvement was not sustained, and prices were depressed from two to eight per cent., during the next three days, chiefly under sales to make settlements between parties on the street.

Occasional failures, both among stock and banking-houses and the mercantile and manufacturing community, and in as well as out of New York, were still reported, including three large city dry-goods firms; and the pressure for greenbacks to send to the country continued to be so severe that from three to four per cent., was paid for them, as compared with certified bank-cheques, for several days, though the premium dwindled to one-half and one per cent., before the end of the week, advancing a week later, however, to one and one and a half. The difficulty of moving produce from the West also continued very great, owing to the almost total dead-lock in the domestic exchanges, but otherwise the excitement and alarm attending the crisis seemed to have passed away, leaving only its depressing effects still visible. Money became comparatively accessible to first-class borrowers on call. But the bank statement was again omitted on the following Saturday, and it was announced that none would be made until after the banks had resumed greenback payments, and till the certificates of their own creation had been withdrawn. The deposits held by the banks at the close of business on that day, October 4, had been reduced to about a hundred and fifty-three millions, against over two hundred and seven millions and a quarter on September 13.

Before the middle of the month the continued drain of gold to the United States—the shipment from England of about sixteen millions of dollars having been reported from the beginning of the crisis to the 18th of October—caused the Bank of England to further advance its discount rate to six per cent., and shortly afterward to seven per cent. But, notwithstanding, the price of gold gradually declined to 107-3/4, a lower point than it had touched since 1861. The New York banks meanwhile lost rather than gained strength, and their aggregate of greenbacks under control of the Clearing-house was reduced to less than six millions, although this fact was not published. It was, however, at the same time believed that three or four millions more were distributed among them, of which they made no return to the association. Currency during the latter half of the month began to return somewhat rapidly from the West in the shape of collections by the merchants, and this, in turn, led to remittances to the South, where it was greatly needed for the cotton crop, the movement of which had been almost entirely arrested. Affairs on the Stock Exchange were, in the interval, unsettled, and enormously heavy sacrifices were made in order to adjust differences between brokers, as well as by outside parties in pressing need of cash. On Tuesday, the 14th of October, almost another panic prevailed, and prices touched a lower point than they had before reached. New York Central sold down to 82, Lake Shore to 57-1/2, Western Union to 45, Rock Island to 80-1/2, Pacific Mail to 25, Wabash to 32-3/4, Ohio and Mississippi to 21, Union Pacific to 15-1/2, North-western to 32, St. Paul to 23, St. Paul Preferred to 50, and Harlem to 100, while the feeling of the street was worse than at any time during the crisis; but a quick recovery took place from the extreme point of depression, and the resumption of greenback payments by the Cincinnati banks, following that of the Chicago banks, led to an improved feeling in both financial and commercial circles. The National Trust Company of New York also, about the same time, resumed payment. It was noticeable, however, that little or none of the money reported by the express companies as coming from the West was received by the New York banks—a natural result of their suspension of currency payments, which virtually forced individuals and corporations to be their own bankers. The banks had ceased to perform this function: they were utterly unable to maintain their reserve, cash cheques or discount commercial paper for their customers, and so far the National banking system had failed.

Having reviewed the disastrous course of this crisis up to the date of writing, I will briefly consider its causes. It may be traced remotely, in some degree, to the distrust of American railway securities in Europe which attended the reckless administration of the Erie Railway under Fisk and Gould, and which lingered after their overthrow, indisposing capitalists, as well as small investors, to have anything to do with American railways. It is true that a market still remained there for these securities, but it was a much more limited one than it probably would have been but for the Erie scandal, and within the last year or two it was entirely glutted. Financial agents found it impossible to float a new American railway loan even where the security offered was a first mortgage bond. Thus, Jay Cooke & Co. were greatly disappointed with respect to the sale of their Northern Pacific bonds abroad, and nearly as much so in the demand for them at home; but they were pledged to the undertaking, their solvency became dependent on its success, and they were sanguine that confidence in the great enterprise would grow with every mile of new road constructed.

Mr. Jay Cooke undoubtedly looked forward to a subsidy from Congress for carrying the mails over the new line, and in all likelihood would have obtained it but for the Credit Mobilier exposé, which caused both Congress and the people to "shut down," not only on everything having the appearance of a "job," but on much besides. The ill odor into which that investigation brought the Union Pacific Railway and all who had been connected with its construction was a heavy blow at new enterprises of a similar character where government land-grants were involved; and the vexatious suit which Congress authorized against the Union Pacific Company and all concerned was another blow at confidence in the same direction.

The formation and rapid spread of the Grangers' association in the West, and its avowed design to make war upon the railway interest with a view of securing cheap transportation to the seaboard, was another disturbing element, undermining confidence in railway property. But the greatest and the immediate cause of the crisis was the over-building of railways; and hard indeed are likely to be the fortunes of the unfinished enterprises of this character arrested by its blighting influence; for capital for years to come will be very slow in finding its way into the bonds of roads to be built by the proceeds of their sale. It was a false and dangerous system—and the event has proved its unsoundness—for new companies to rely from the outset upon this source for the means of construction. It was a hand-to-mouth policy, resting upon so precarious a foundation that, in the light of experience, we can only wonder that eminent and otherwise conservative bankers should have adopted it to the extent they did, thereby not only jeopardizing their own position, but imperiling the whole financial community. About six thousand miles of new railways were constructed in the United States in 1872, of which it may be estimated that at least seven-eighths were in advance of the national requirements. Not a few of those now unfinished or just completed will, like the New York and Oswego Midland, be forced into bankruptcy, and it will be long before all the ruins left by the crisis will be cleared away. A shock has been given to the entire railway interest of the country, the full effect of which has not yet been felt; and those who expect the prices of railway securities to rule as high, for a considerable period to come, as they did before the panic, are likely to be disappointed. After all panics we have had more or less wearisome stagnation and depression, growing out of impoverishment and distrust of new ventures; and this last one will hardly prove an exception to the rule. The mercantile interest, too, will probably continue for some time to suffer in consequence of the monetary derangements resulting from it and the want of adequate banking—or rather currency—facilities for bringing forward cotton and general produce from the West and South for shipment; and here and there houses that have so far withstood the strain will break down under it. But in a rapidly growing country, with inexhaustible resources, like this, recovery from such disasters is, fortunately, far quicker than among the less progressive nations of Europe.

One eminently satisfactory feature of the panic in securities was, that it did not extend to United States bonds, greenbacks or National bank-notes. Bonds were of course depressed in sympathy with the scarcity of money and the demoralization prevailing in the general stock market, but there was not the slightest loss of confidence in them among holders, nor any pressure to sell, except to relieve urgent necessities among the banks and others having need of currency. The paper money of the country proved itself the most valuable kind of property that any one could possess; whereas under like circumstances, in former times, when banks under the State laws could practically issue as many notes as they chose, much of it would have been left worthless and the remainder depreciated. But our currency system is defective in one essential particular: it is not elastic. It is, so to speak, hide-bound at seven hundred and ten millions of paper, exclusive of fractional currency, three hundred and fifty-six millions of which are legal-tender notes, and three hundred and fifty-four millions National bank-notes. The safety-valve of a country's circulating medium is its elasticity, and the sooner Congress authorizes free National banking on the present basis of ninety per cent. of currency to the par of United States bonds deposited with the Treasury, or devises some other means of affording relief, the better for the interests of the nation. The law requiring the banks in the large cities to keep always on hand a reserve in greenbacks equal to twenty-five per cent. of their deposits and circulation, and those in the country a reserve of fifteen per cent., should also be amended, the percentage being too high by one-half. It is for the interest of every bank to keep a reserve adequate to its own requirements and safety, and the existing restriction instead of being an element of strength is a source of weakness. Then, again, as National bank-notes are guaranteed by a pledge of United States bonds at the before-mentioned rate of ninety per cent. of notes to the par of the former, the banks ought not to be required to redeem their own notes in greenbacks on demand; and each bank should be allowed to count the notes of other banks—but not its own nor specie, except on a specie basis—as a portion of its reserve. To require the banks to redeem their notes with legal tenders, on presentation, when there are only two millions more of the latter than of the former in circulation, is to demand of them what they would find it impossible to do in the remote but nevertheless possible contingency of the bank currency, or any large portion of it, being simultaneously presented for redemption.

As a measure looking to the resumption of specie payments, however, it would be well to abolish the National bank circulation altogether. This could be done by Congress authorizing the Treasury—through an amendment to the Bank act—to replace the National bank-notes with new greenbacks, and cancel an equivalent amount of the bonds pledged for the redemption of the former. After that was accomplished we should have a circulation based directly upon the undoubted credit of the United States, and the government would be saved the twenty millions (more or less) of coin per annum which it now pays to the National banks as interest on three hundred and fifty-four millions of the bonds thus deposited, for it could withdraw these, by purchase with the greenbacks thus issued in substitution for the surrendered National bank currency, as fast as the exchange of the one for the other might be made. This saving of interest alone would strengthen the government for a return to the gold standard, which could be effected without any contraction of the volume of paper money, except to the extent of the coin thrown into circulation: and the resumption of specie payments by the Treasury—greenbacks to be convertible into coin only at the Treasury and sub-treasuries—would be resumption by the entire country, for gold would no longer command a premium. The National banks thus deprived of their own notes would have to bank on greenbacks, just as the State banks—which have no circulation—do at present.

It is obvious that resumption could be accomplished in this way on a very much smaller reserve of coin than would be necessary if each individual bank had also to resume simultaneously with the Treasury, as would be the case under the present mixed currency system, for the whole of the reserve would be concentrated in the hands of the government, instead of being scattered among the banks all over the country. The credit of the government would, of course, be much stronger than that of any individual bank, and the demand for gold in exchange for greenbacks would probably be very small in comparison with the amount of coin belonging to the Treasury, even at the beginning of resumption, when the element of novelty in it, not distrust, might induce conversion. The banks would then have no more occasion for gold than they have now, greenbacks still retaining their legal-tender character unaltered.

Had the country been on a specie basis when this crisis came upon us, the twenty millions of coin held by the New York banks at that time would have been available for their relief, and have formed a part of the circulation; whereas for all practical purposes it was useless to them, and consequently to the people, as money; and in like manner all the heavy importations of gold which have since taken place, and been converted into American coin, have failed to enter into the circulation, as they would have done on the specie standard. The whole of the forty-four millions of Treasury gold-notes, convertible into coin on demand, held by the banks and the public on the 1st of September would in that event have formed a part of the active currency of the nation, instead of lying as dormant as the whole eighty-seven millions of gold—part of which they represented—in the Treasury.

That part of the currency of any country which is in specie is necessarily elastic, because it is the money of the world, embodying the value which it represents, and subject to that ebb and flow, in accordance with the laws of trade, which attends the circulation of gold and silver coin everywhere. Supply follows demand, and a nation with a specie currency inevitably attracts the precious metals by outbidding other nations in the rate of interest it offers for them. Why, therefore, should we shut ourselves out from the advantages of this form of communion with the commercial world by postponing the resumption of specie payments a day longer than we are compelled to?

K. CORNWALLIS.