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equilibrium between supply and demand will attain a destructive character. The crises of the last half century have extended their influence over the civilized world, but they have grown less intense in their impairment of the resources for reconstruction and in the suffering inflicted than those of earlier times. It is not unreasonable to expect that more complete knowledge and sounder judgment will so far mitigate the severity of commercial depressions that they will contribute chiefly to weeding out incompetent producers and wasteful methods and stimulating the healthy growth of the industrial system.
The organization of the banking and credit system has already reached a point in the older civilized countries which averts the worst consequences of the earlier crises. The methods and mechanism of commercial banking, as developed in Great Britain, in France and in the leading cities of the United States, have attained a perfection which makes impossible a general collapse of banking credit except under conditions so destructive to the economic system as to be beyond the reach of any possible measures of defence and hardly within the range of possibility. The commercial banks in these countries confine their business chiefly to the discount of commercial paper offered by individuals and companies in good standing, and to advances upon first class negotiable securities. While the latter sometimes shrink in value in crises, they rarely shrink below the margin fixed when the advances are made and the losses suffered by banks are eventually trifling. There is little danger under modern conditions of credit of the failure through bad loans of a commercial bank which is conducted upon sound principles. Excessive loans to a single individual or corporation or upon security which would be rejected by conservative bankers, has often resulted in the failure of single banks, particularly in the United States, where banking responsibility is divided among many institutions, but never within the past half century have such failures destroyed confidence in the banking system and led to the general withdrawal of deposits.
This condition of confidence in the banking system is an important factor in mitigating the severity of crises. Discussion of such events in the early part of the last century was based upon the theory, even then not well founded,—that every crisis would invoke not only the withdrawal of banking deposits, but the presentation of bank notes for redemption in coin. This would have reduced a community to no other means of exchange than coin and would have contracted the medium of exchange to a small fraction of its usual amount. The creation by prudent banking methods of a banking system capable of weathering the most severe storms of modern credit has contributed to perpetuate the usual means of exchange. Private credit is often impaired in a crisis and banking credit is employed with greater caution than usual by the banks, but the great edifice built upon the metallic reserves of the banks, upon sound business transactions, and confirmed habits among business men,—the deposit and check system, the issue of circulating bank notes, and the settlement of balances between banks and different cities through the clearing houses, continues to perform its usual functions, only slightly shaken by the tendency of the crisis to correct the errors of individual judgment in investments and undue speculation on the stock exchanges.
The banks feel the pressure of increased demands for money and capital in several ways. They encounter not merely the demands of speculators and promoters, but the appeals of their mercantile customers growing out of enlarged business operations and the tendency in prosperous times for individuals to carry more currency for retail transactions than in periods of depression. The latter demand, due in part to the high prices caused by business activity, is a demand for actual money, unless the banks have an unhampered power of note issue. In the latter case, the demands upon the banks are felt by the decline in the ratio of reserves to liabilities. It is when this ratio is reduced to the danger point and the banks begin to take steps for their own protection by curtailing loans, advancing the rate of discount, and acquiring gold that the signal is given for a general arrest of the upward movement.
The operation upon the accounts of a bank of the movement of ascending business activity and speculation which leads to a crisis follows so uniform a rule that the history of crises may easily be traced by the Auctuations in the bank returns. Capital
is idle and redundant during the period of liquidation following a crisis, because those who have it to lend are afraid to make investments and those who usually employ it by entering the market as borrowers are cautious about embarking upon new enterprises. As these fears by degrees subside on both sides, a moderate movement sets in. The large supplies of capital and the low rates for it begin to tempt borrowers at the same time that the opportunity for new enterprises and for the resumption of production becomes favorable as the result of the exhaustion of old stocks of goods. The growing demand for capital gradually increases the charge for it, while the renewed demand for commodities, falling somewhat suddenly upon a denuded market, increases their price and offers tempting profits for increased production. The reviving condition of the markets makes new investments attractive and increases speculation, and every new step in expansion increases the demand for capital at the same time that it diminishes the supply.
The period of speculation and ascending prices is marked by a steadily widening separation between the amount of the cash reserves of the banks and their loans and discounts. The cash falls while the loans rise. The fall in the cash is partly due to the steadily growing domestic demand for currency and credit, to meet which the cash is put in circulation; but the decline is sharply accentuated, after speculation reaches the danger-point, by the demand for cash for settling foreign balances which have ceased to be settled in merchandise. The changed condition of the bank's accounts up to this point is brought about by the gradual operation of the expansion of credit and the rise of prices. The discovery that the danger-point has been reached, that the stock of cash and the volume of loans are too far apart,usually comes somewhat suddenly to the mass of the business community. Unusual withdrawals of gold from the bank reserves for export abroad are one of the visible signs that business is upon the eve of a crisis.
a The underlying cause of the gold movement is found in the state of trade. Goods can no longer be sold as rapidly as they are produced, -partly because domestic purchasers cease to purchase so largely at the enhanced prices, and partly because foreign purchasers can buy similar goods elsewhere at less prices,—and manufacturers and merchants are no longer able to meet their obligations at the banks at maturity. Then begins the panic, which becomes more or less acute according to the circumstances of the case and the extent to which credit has been overstrained. The demand upon the banks for loans and advances increases, while the decline of the cash reserve becomes so rapid as to compel prudent bankers to raise the rate of discount. The effect of the increase in the discount rate is to diminish the demand for credit from those who can do without it, while it attracts capital from abroad, or,—what is substantially the same thing,-induces foreign creditors to suspend the withdrawal of their credits by the attraction of their greater earning power where the high discount rates prevail. The aid extended by the banks to solvent traders enables them to weather the storm. The insolvent, who have made extreme miscalculations in production and in estimates of probable profits, are compelled to suspend, and a long period of business depression sets in.
The moment the acute danger is over, a radical change comes over the accounts of the banks as the result of the arrest in the activity of affairs. The demand for credit declines to a minimum, resulting in the reduction of loans and discounts, while the diminished demand for currency sends it back to the solvent banks and results in the rapid piling up of specie in their reserves. The movement of deposits varies somewhat, according to the degree of disturbance caused by the crisis and the banking rules by which deposits are regulated. The general tendency of the real deposits,—those which are not merely transfers of credit by the bank to its customers on account of loans,—is to follow the cash reserve. They diminish when the demand for currency is most acute and begin to accumulate again when the crisis is over. Their recovery is usually less rapid than that of the cash
reserves, and is comparatively slow where losses of capital have : been heavy and the wealth has disappeared out of which deposits
were made. The movement to withdraw deposits because of distrust of the solvency of the banks is more abnormal and in recent crises has been reduced to a comparatively minor factor. Such withdrawals, without commercial reasons, greatly cripple
the powers of a bank to assist those who need assistance and have been among the most serious dangers of financial crises, where banking was not regulated by sound laws, and among peoples where its methods were not well understood.
An illustration of the movement of bank accounts under modern conditions of credit is afforded by the consolidated accounts of the national banks of the United States from the crisis of 1893 to the maximum of business activity in 1900. The state of the leading items at selected dates, showing the volume of business and specie reserves, appears in the following table:
Loans and Discounts. May 4, 1893 -$2,161,401,858 October 3, 1893 - 1,843,634,167 May 4, 1894
1,926,686,824 October 2, 1894 2,007,122,191 May 7, 1895.- ... 1,989,411,201 September 28, 1895 -. 2,059,408,402 May 7, 1896..... 1,982,886,364 October 6, 1896 - 1,893,268,839 May 14, 1897... 1,934,151,876 October 5, 1897 2,066,776,113 May 5, 1898.... 2,109,773,386 September 20, 1898.. 2,172,519,610 April 5, 1899... 2,403,410,895 September 7, 1899... 2,496,721,251 April 26, 1900... 2,566,034.990 September 5, 1900... 2,686,759,642
These figures show a large volume of loans in May, 1893, when the inflation preceding the panic was at its maximum. The panic became acute in June, but did not seriously affect mercantile business until some time after its force had broken over the stock exchanges and the money market. Gradually, however, the curtailment of business by merchants and of credits by the banks, carried loans down more than $300,000,000 within five months, while the heavy drafts made by merchants and bankers upon their deposits reduced the deposit accounts by nearly an equal amount. These were the minimum points of the panic in respect both of loans and deposits. The specie reserves of the banks were already stronger in October than in July, because of the strenuous efforts of the bankers to curtail loans and husband cash. It was not until the next year that the reflex movement