Banking panic

“ And every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons, and attacks them all more virulently than at first. All men of experience, therefore, try to "strengthen themselves," as it is called, in the early stage of a panic; they borrow money while they can; they come to their banker and offer bills for discount, which commonly they would not have offered for days or weeks to come. ”

“ Under a more natural system, no part of the banking reserve would ever be lodged at the brokers. Bankers would deposit with the brokers only their extra money, the money which they considered they could safely lend, and which they would not require during a panic. In the eye of the banker, money at the brokers would then be one of the investments of cash, it would not be a part of such cash. The deposits of bill-brokers and the profits of bill-broking are increased by our present system, just in proportion as the dangers of bill-brokers during a panic are increased by it. ”

“ As we have seen, principle requires that such advances, if made at all for the purpose of curing panic, should be made in the manner most likely to cure that panic. And for this purpose, they should be made on everything which in common times is good "banking security." The evil is that, owing to terror, what is commonly good security has ceased to be so; and the true policy is so to use the banking reserve that if possible the temporary evil may be stayed, and the common course of business be restored. And this can only be effected by advancing on all good banking securities. ”

“ Seeing the dreadful state in which the public were, we rendered every assistance in our power.' After a day or two of this treatment, the entire panic subsided, and the 'City' was quite calm.
The problem of managing a panic must not be thought of as mainly a 'banking' problem. It is primarily a mercantile one. All merchants are under liabilities; they have bills to meet soon, and they can only pay those bills by discounting bills on other merchants. In other words, all merchants are dependent on borrowing money, and large merchants are dependent on borrowing much money. ”

“ That is on the supposition that my money only increases by its banking power, which is the smallest way to look at it. In seven years I'd start with a billion preparing for the grand coup of the next panic. It always comes within a decade. The man who enters a panic with one billion dollars in cash if he had the nerve, the daring, and the brains can emerge with fifty! ”

“ It is a time for the public and the banks to come closer together. Rest assured the banks have no desire to see any firm or person fail in times of panic, or any other time. They make their largest dividends when business is brisk and everything is prosperous.
What every Clearing House Association does want to wipe out, however, is the dishonest and reckless banker. He is a menace and source of anxiety to every bank in the community. ”

“ If that alarm is not so met, it aggravates into a panic, which is an opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money. No one has enough money, or anything like enough, but the holders of the bank reserve.... ”

“ In such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. Under our present currency system no adequate method is provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. ”

“ If the banks prove able to honor both demands without flinching, the alarm quickly subsides. But if, as has happened twice in America since 1890, many solvent business men are refused accommodation at any price, and if depositors are refused payment in full, the alarm turns into panic. ”

“ How much infected meat would it take to do the harm, the damage to the American people that resulted from the panic of 1907? And yet, if we had had a wise, national financial and banking system, we need never have passed through that harrowing, wasting panic that resulted in destroying property values into the billions; in the death of thousands of the people directly and indirectly; in the ruined health of tens of thousands more; in the non-employment of hundreds of thousands ”

“ And yet some such theory as this is advanced by many well-known writers on banking and finance. Bankers, probably knowing the weak points in their system, become sadly selfish, and are quick to take fright at the first signs of a panic, which they often do much to increase. ”

“ Especially what has been advanced to merchants cannot easily be recovered; they are under immense liabilities, and they will not give back a penny which they imagine that even possibly they may need to discharge those liabilities. And bankers are in even greater terror. In a panic they will not discount a host of new bills; they are engrossed with their own liabilities and those of their own customers, and do not care for those of others. The notion that the Bank of England can stop discounting in a panic, and so obtain fresh money, is a delusion. ”

“ It is apparent that our existing misfortunes have proceeded solely from our extravagant and vicious system of paper currency and bank credits, exciting the people to wild speculations and gambling in stocks. These revulsions must continue to recur at successive intervals so long as the amount of the paper currency and bank loans and discounts of the country shall be left to the discretion of 1,400 irresponsible banking institutions, which from the very law of their nature will consult the interest of their stockholders rather than the public welfare. ”

“ For months and months dark and heavy clouds were hanging over financial circles, threatening to burst at any moment. Depositors were in a fever of excitement, they held their deposit receipts in their hands ready to withdraw at the first alarm, their excitement stood on the balance, ready to burst forth or to be smoothed down into confidence by a judicious action of some responsible parties had it been forthcoming, but, alas, the Commercial Bank of Australia was allowed to suspend payment and the panic burst forth in every direction and no amount of work could cool the excited crowds. ”

“ He doesn't sell. When he can't sell he goes to the bank to borrow money to make the payment; he finds there many more in the same condition as himself. The banks see the trouble coming and will not loan. [page 170] When the banks refuse to loan the depositors get scared and take their money out of the bank. During that great panic in the nineties three hundred millions of dollars were taken out of circulation within four months by depositors who were scared. Then the country gets flat on its back with a panic. ”

“ Unless you can stop the foreign export, you cannot allay the domestic alarm. The Bank will get poorer and poorer, and its poverty will protract or renew the apprehension. And at the rate of interest so raised, the holders—one or more—of the final Bank reserve must lend freely. Very large loans at very high rates are the best remedy for the worst malady of the Money Market when a foreign drain is added to a domestic drain. Any notion that money is not to be had, or that it may not be had at any price, only raises alarm to panic, and enhances panic to madness. ”

“ At this time, the efforts of the bank to control public opinion, through the distresses of some and the fears of others, are equally apparent, and, if possible, more objectionable. By a curtailment of its accommodations, more rapid than any emergency requires, and even while it retains specie to an almost unprecedented amount in its vaults, it is attempting to produce great embarrassment in one portion of the community, while, through presses known to have been sustained by its money, it attempts, by unfounded alarms, to create a panic in all. ”

“ Property will rise extravagantly high, and, constantly looking up, the temptation to purchase will be irresistible. Inordinate speculation will ensue, debts will be freely contracted; and, when the season of adversity comes, as come it must, the banks, acting without concert and without guide, obeying the law of self-preservation, will all at the same time call in their issues; the vast number will exaggerate the alarm, and general distress, wide-spread ruin, and an explosion of the whole banking system, or the establishment of a new bank of the United States, will be the ultimate effects. ”

“ The Bank of the United States can crush hundreds on any day that it pleases. It can send out its agents into every State of the Union, with sealed orders to be opened on a given day, like captains sent into different seas; and can break hundreds of local banks within the same hour, and over an extent of thousands of miles. It can do this with perfect ease—the more easily with resurrection notes—and thus excite a universal panic, crush the resuming banks, and then charge the whole upon the government. ”

“ If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse. ”

“ Usual prices and confidence are so disturbed that buyers either hold off, keeping their money available, or else draw unusually large amounts so as to buy stock before adverse tariff changes, thus tightening money in both ways by interfering with its accustomed circulation. This tendency towards contraction spreads and induces further withdrawal of deposits, thus requiring the banks to reduce their loans; and so runs on and on to increasing discomfort and uneasiness until panic is speedily produced. ”

“ If panic occurs, and depositors want their money, there is nowhere any power to relax the crushing force of this law, and the banks are therefore compelled to suspend payment to depositors and in order to avert general ruin at such times they have to resort to the expedient of making their cash assets available in common, thereby saving themselves and their customers outside of and in spite of the destructive tendency of the law. Of course, the danger of running into such a crisis as this creates a feverish dread in all times of special stringency in the money market. ”

“ Again, from the mode of doing business among our banks—using each other's paper to bank upon, instead of holding each other to weekly settlements, and liquidation of balances in specie, and from the fatal practice of issuing notes at one place, payable at another—our banks have all become links of one chain, the strength of the whole being dependent on the strength of each. A few govern all. Whether it is to fail, or to resume, the few govern; and not only the few, but the weak. A few weak banks fail; a panic ensues, and the rest shut up; many strong ones are ready to resume ”

“ In times of prosperity and confidence credits are safely increased to 290accommodate the increasing volume of business, and the specie basis is sufficient merely because it is not put to the test, the people preferring paper money because of its superior convenience. But at such a time a pebble may start an avalanche. A startling failure occurs somewhere, creditors press for liquidation, the banks are besieged, and, being unable to redeem their promises to pay gold, they suspend—and the panic is complete. Such is the recurrent history of finance in all civilized lands. ”

“ But they hold no cash whatever. They have of course the petty cash about the various branches necessary for daily work. But of cash in ultimate reserve—cash in reserve against a panic—the savings' banks have not a sixpence. These banks depend on being able in a panic to realise their securities. But it has been shown over and over again, that in a panic such securities can only be realised by the help of the Bank of England—that it is only the Bank with the ultimate cash reserve which has at such moments any new money, or any power to lend and act. ”

“ On the other hand, the lowest point of depression following a panic is accompanied by the converse of the symptoms just enumerated.
Bank balance sheets reflect in cold figures the result of the above influences. Prices being high, and discounts and loans large in proportion to deposits, and having steadily increased for years, danger is near; further, when discounts and loans are not only large in proportion to deposits, having increased steadily for years, and then suddenly fallen off noticeably for a considerable time, only to increase again, danger is imminent. ”

“ What is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. If people could be really convinced that they could have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. Either shut the Bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. ”