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Fourteen years had elapsed since the last serious banking disturbance in 1893. No attempt had been made in the interim to devise a strategy for preventing banking panics. The association of NYCH banks was still a loose alliance of fifty-two member banks with deposits totaling more than $1 billion. Thirty-three banks including state banks and trust companies remained outside with deposits of almost $800 million. Although prepared to act in the interest of all NYCH banks, the NYCH was not disposed to offer direct financial support to nonmembers even if withholding support increased the risk of failure to themselves. Its responsibility for preventing banking panics, well understood before 1873, had by now been mostly forgotten. The absence of strong leadership gave dissident voices in the Clearing House the opportunity to express purely self-serving interests at the expense of those who had a clear understanding of the broader role of the association of New York banks.
Three characteristics of the 1907 panic render it unique among the banking panics of the national banking era: (1) the disturbance in New York was largely confined to the trust companies; (2) leadership for restoring banking stability was assumed by J. P. Morgan and not the New York Clearing House; and (3) the instrument of voluntary money pooling was used extensively to provide financial support to troubled trust companies and the stock market, and to relieve the fiscal crisis in New York City.
Before we undertake a comprehensive narrative and analysis of the three major and two incipient banking panics of the national banking era, it may prove useful to provide a broad overview of the bank panic experience. We take bank panic experience to mean not only what happened during banking panics but also the public's perception of those events, especially outside New York where bank runs and bank failures were neither very large nor widely diffused, except in 1893.
Specific banking panics differed as to their origins, duration, the number and incidence of bank runs and bank failures, the response of the New York Clearing House (NYCH), and their real effects. Each had its own signature, as it were, differentiating it from the others. With due respect to those differences, we can still attempt to construct a general profile of what happened both in New York and the interior. Banking panics had their origins in the New York money market with the sole exception being the panic of 1893. Our knowledge of what happened in New York is on firmer ground than our knowledge of what happened outside New York. We also have a fairly clear idea about the course of each of the banking panics in the city of Chicago. But the banking panic experience in the other major cities has been unchronicled, partly from a lack of scholarly interest, and partly from the inconvenience of accessing multiple local newspaper sources.
Mark Twain (1873) coined the phrase “The Gilded Age” to dramatize the foibles and excesses of the post–Civil War generation. His portrait of Colonel Sellers was an archetype for a generation of dreamers, panglossian optimists, and tireless promoters who pinned their hopes on gaining a speedy fortune by exploiting the opportunities of an ever expanding frontier.
Twain had in mind particularly the excesses of the Grant administration, and historians were slow to perceive a wider application. The Gilded Age is now one label for the era between the Civil War and the fin de siècle, though the terminal date has remained fuzzy. I have taken the liberty to extend it even further to include the 1907 panic because of the special role financiers, especially J. P. Morgan and his banking associates, played in its containment and the adamant refusal of the New York Clearing House bankers to subordinate their individual self-interest to the public good.
Frenzied railroad building ahead of demand represented speculative excess and was an important contributing cause of the panic of 1873. However, the 1893 panic cannot so easily be identified with speculation and speculative excesses on the part of individual bankers. Nevertheless, the banking panics of the post–Civil War era were not events separate and distinct from the forces shaping the behavior of society and the economy as a whole. And the Gilded Age captures perhaps as well as any other label what some of its characteristic features were.
The banking disturbances in 1884 and 1890 do not resemble the banking panics of 1873, 1893, and 1907 in at least four important aspects. The number of bank closings excluding brokerage houses (private banks) in both New York and the interior were few, probably not more than twenty in each episode. The prompt action by the NYCH in coming to the aid of the distressed banks by authorizing the issue of clearing house loan certificates was responsible for preventing the banking difficulties in New York from worsening and from spreading to the interior. In neither episode was there a general loss of depositor confidence either in New York or in the rest of the country. Failures for the most part were bank-specific, having as their cause, real or alleged, the misappropriation of funds or careless and imprudent management practices rather than a contagion of fear overtaking solvent and insolvent banks alike. Moreover, there was no suspension of cash payment.
The action of the NYCH was able to contain the banking disturbances in 1884 and 1890 in an incipient stage and thereby halt any escalation into a full-scale banking panic. A better understanding of what happened in these two periods may provide useful insight into why the banking panics of '73, '93, and 1907 were far more serious as measured by the number and incidence of bank closings, the amount of hoarding, and the effects on the rest of the country.
The banking panic of 1893 was unique among pre–World War I financial disturbances: Its origin was in the interior, primarily in the transappalachian West rather than New York City. It therefore bears a closer resemblance to the banking panics of the Great Depression than it does to the banking disturbances of 1873, 1884, 1890, and 1907, whose origin was New York City. Moreover, the central money market banks were less responsive to disturbances originating in the interior than they had been to shocks originating in the central money market itself, just as the Federal Reserve during the Great Depression had been less responsive to bank failures in the interior than it had been to disturbances in the New York money market. For that reason alone the 1893 panic warrants serious reconsideration.
But there is even a more compelling reason for revisiting the 1893 panic, namely, the existence of an unexploited data source of all bank suspensions for the period from January to September 1893. Bradstreet's listed all individual bank suspensions by seven geographical regions and five bank classifications: national, state, private, saving, and loan and investment companies. Given were not only closure dates but also dates when and if the closed banks resumed normal operations. Estimates were given of total assets and liabilities of each bank presumably at the time of suspension, but there were no separate estimates for deposits.
For almost ninety years Sprague's classic study for the National Monetary Commission has remained the standard work on the banking disturbances of the national banking era. No other American economist had stated either more clearly or more persuasively what the responsibilities were of the NYCH banks as holders of the ultimate banking reserve for the prevention of banking panics. Sprague was simply drawing upon the inspiration he had received from having read the Coe Report, a document he rightly called one of the most important in American financial history. I know of no other that has been more neglected! He recognized immediately the significance of reserve equalization or reserve pooling as a NYCH instrument for preventing banking panics. Sprague, like Bagehot before him, was a merciless critic of the policy of suspending cash payment.
Although Sprague's contributions to our understanding what happened during pre-1914 banking panics were many, there were still some significant lacunae. He made no effort to estimate the number of bank failures, nor did he pay much attention to the location of bank runs and bank closures in the interior. A more serious shortcoming, though not due to any fault of his, was the inaccessibility of information that did not become available until many years later, including the official minutes of the NYCH and biographies and congressional testimony relating to the role of J. P. Morgan and his principal associates during the 1907 panic.
The 1873 panic was the first of the banking panics of the national banking era. The fact that it occurred after the passage of the National Banking Act in 1863 is not of as much significance as the response of the New York Clearing House. For a brief interval between 1860 and 1873 the NYCH possessed vigorous leadership. George S. Coe, President of the American Exchange Bank, understood the broader responsibilities of the NYCH as holder of the country's ultimate banking reserve and designer of the two powerful instruments for forestalling banking panics: loan certificates and the pooling of reserves of the associated banks; the loan certificate enabled the member banks to expand loans during the panic episode without the loss of reserves to local banks, and reserve pooling allowed the banks to continue to pay out cash freely to the interior banks. The significance of reserve pooling was recognized by Sprague (1910), who argued correctly that it effectively converted the NYCH into a central bank with reserve power greater than that of any European central bank. Although the NYCH suspended cash payment, it continued to pay out cash freely to interior banks, thereby moderating the effects of the panic. As we see below the suspension of cash payment was probably unnecessary, but, given the knowledge available, understandable. For reasons to be spelled out later, reserve pooling was not repeated in future panics, and by 1893 and 1907 that knowledge had completely evaporated from the collective memory of the NYCH.
In previous chapters our purpose has been to remove an information deficit about what happened both in New York and in the interior during the five banking disturbances of the national banking era. We learned that in two of the five, 1884 and 1890, the New York Clearing House responded quickly and effectively to ward off the spread of banking unrest to the interior. Cash payment was not suspended, and the number of bank runs and bank failures was negligible. However, during the banking panics of 1873, 1893, and 1907 the response of the NYCH left much to be desired, and the question naturally arises: If the Clearing House had done more, could the panics have been avoided? Surprising as it might seem, few attempts have been made to answer this question. And the reason why is that too little attention has been focused on the behavior of the NYCH and too much on the structural defects of the national banking system in conjunction with the normal seasonal flows of funds at crop moving time. According to the conventional wisdom, an inelastic stock of paper currency coupled with the pyramiding of the nations' ultimate banking reserve in New York made the central money market especially vulnerable to external shocks during the time crops were being harvested and shipped to the eastern seaboard. Little or no blame has been placed on the performance of the NYCH.
This was the first major study of post-Civil War banking panics in almost a century. The author has constructed estimates of bank closures and their incidence in each of the five separate banking disturbances. The book takes a novel approach by reconstructing the course of banking panics in the interior, where suspension of cash payment, not bank closures, was the primary effect of banking panics on the average person. The author also re-evaluates the role of the New York Clearing House in forestalling several panics and explains why it failed to do so in 1893 and 1907, concluding that structural defects of the National Banking Act were not the primary cause of the panics.
This is the first full-length study of five US banking panics of the Great Depression. Previous studies of the Depression have approached the banking panics from a macroeconomic viewpoint; Professor Wicker fills a lacuna in current knowledge by reconstructing a close historical narrative of each of the panics, investigating their origins, magnitude, and effects. He makes a detailed analysis of the geographical incidence of the disturbances using the Federal Reserve District as the basic unit, and reappraises the role of Federal Reserve officials in the panics. His findings challenge many of the commonly held assumptions about the events of 1930 and 1931, for example the belief that the increase in the discount rate in October 1931 initiated a wave of bank suspensions and hoarding. This meticulous account will be of wide interest to students of the Great Depression, monetary and financial historians, financial economists and macroeconomists.