The American Crisis Of 1907

THE theme I have taken as my text this evening is
perhaps too large for the limits of a single lecture.
It will hardly be possible within these limits to deal
adequately with such a colossal disturbance as the
American crisis of 1907. An American professor
has described this crisis as " the most extensive and
prolonged breakdown of the country's credit me-
chanism which has occurred since the establishment
of the National banking system [in 1863] " ; and
another writer styles it " the biggest slump in the
history of the human race." The effects have re-
sounded throughout the whole financial and com-
mercial world, which is still suffering serious depression
nearly eighteen months after the collapse, and is
likely, I fear, to suffer for many months yet.

A BANKING CRISIS.

But there is one aspect from which this crisis seems
specially interesting and instructive. It is a notable

1 A second lecture to the Institute of Secretaries, delivered on March 7
31st, 1909.

171



172 PAPERS ON CURRENT FINANCE

illustration of the importance of the question of bank-
ing reserve, upon which I had the pleasure of address-
ing you last month. I propose to-night to deal with
it mainly from this point of view. Speaking broadly,
the crisis of 1907 stands out unique among modern
crises, and especially in contrast with European crises,
|as mainly due, not so much to over-trading, or to
general over-speculation, as to defective banking. I
maintain that this crisis was emphatically a banking
crisis ; and I entirely agree with Professor Sprague,
who, in concluding an admirable account in the
Economic Journal for September, 1908, sums up the
moral of the disaster in the words, "Above all, a
more intelligent understanding of the purpose of
banking reserves is required." This view has been
traversed by high authorities in the City ; but $he
objectors would probably admit that if the American
system of banking had been as well organised as the
ordinary European system, the crisis need not have
taken place, and the liquidation required by the
somewhat unsound conditions which prevailed in
the eighteen months preceding October 1907, need
not have involved the complete paralysis of general
credit. This is my case.

To make the point more clear, we must distinguish
between financial crisis and trade depression. I am
afraid that periods of trade depression are at present
inevitable. It used to be supposed that these periods
must necessarily be connected with a collapse of



THE AMERICAN CRISIS 173

credit. Jevons, as most of you know, tried to make
out that a crisis must be expected every ten years ;
and lie attempted to find a physical connection (through
the tropical harvests) between financial crises and sun-
spots, which recur at about the same interval. Right
or wrong, it was a brilliant example of scientific ima-
gination ; and Mr. Jevons's son maintains that his
father's theory is strengthened by recent physical
research.

Now, though that theory may possibly be true
with regard to trade depression, it is certainly not
true with regard to financial collapse. In England
we still have our periods of excitement and depression
in trade ; but we have had no crisis, properly so-called
(though we have had sufficiently narrow escapes),
since 1866. Improved banking has enabled us to
pass from our booms to our slumps without any
general collapse of credit, in which the sound and
the unsound are all necessarily involved. This has
not been the case in the United States. The
financial crisis proper is a regular institution there,
and I am afraid it becomes more acute as time goes
on. This points to the inadequacy of their banking
system.

No doubt a certain strain was put upon the bank-
ing system by the abnormal activity of business and
the speculative inflation of 1906-7 ; but there was no
reason why the banks, if properly organised, should
not have easily met the strain. I do not think it



174 PAPERS ON CURRENT FINANCE

can be said that the general condition of business
was unsound. There had been remarkable develop-
ments of production, but they were in the main
justified by the demand. Nowhere had this activity
been more marked than in the railway world. But
the development of the railways can hardly be called
speculative. They were unable to carry the traffic
that was coming forward. Hundreds of miles of
sidings were blocked with cars that could not be got
through. " To this day," says Mr. Leppington, " by
far the greater portion of railroad mileage in the
States is single track. Not long ago complaints were
loud of a dearth of freight cars. The companies
were devising ambitious schemes for bringing up their
equipment to a level capable of coping with the re-
quirements of an era of unprecedented prosperity. 1
Lines were to be doubled and regraded, bridges re-
built, rolling stock renewed." In the general markets
there was no pronounced accumulation of unsold
goods, except in the case of coffee ; and the small
number of business failures arising out of the crisis
shows that there was no special commercial weakness.
Professor Sprague says, " It would be difficult to
find an equally long period of business activity, at
the close of which the relative development of different
industries would seem to have been similarly satis-
factory."

1 Even in the height of the panic, November, 1907, traffic receipts
were 3 per cent, above those of the previous year.



THE AMERICAN CRISIS 175

The financial position was much weaker. This
very activity of business, however genuine we may
consider it, had made great demands upon the loan
markets of the world. Flotations had been overdone,
and it was difficult to raise capital by normal methods.
Even New York City had to borrow at 4| per cent.,
as against London's 3 per cent. ; and the railways
had resorted to an excessive extent to the doubtful
resource of borrowing on short-term bonds. The
weakness was most pronounced in regard to Stock
Exchange operations. Certain stocks and certain
shares, notably copper shares, had been carried to
extreme points by means of bank loans; and those
loans had been very largely financed from this and
other European markets by the agency of the Finance
Bill. I admit all that, and I admit the danger of it.
Stock Exchange loans are specially liable to give way
when banks find it necessary to contract their ad-
vances. They can be more easily called in than
commercial and international loans, because they
are secured by collateral that can be easily realised
within the margins imposed on borrowers. If, then,
there is a very large amount of Stock Exchange
advances out, it is in the power of the banks to bring
about a very awkward contraction. The contraction
goes on increasing, too, because the first effect is
that securities are thrown on the market, and prices
are brought down ; and then, margins running off,
further blocks must be sold, and the position grows



176 PAPEES ON CURRENT FINANCE

steadily worse. But these Stock Exchange advances
had been considerably reduced long before September
1907, and the prices of stocks were in many cases
lower at the time when the panic set in than they
are to-day. Messrs. Henry Clews & Co., in their
circular for August 1907, while pointing out that
the bank reserves needed strengthening in view
of autumnal demands, observe that the security
market had already had a severe shrinkage, and
that, " beyond question, many good securities are
selling below intrinsic values." The Stock Exchange
position, if still artificial, ought not to have been
unmanageable.

In short, I entirely accept the judgment of
Professor Sprague, who writes that, " nothing in
the general economic conditions of the country
has been disclosed, either during the crisis or in
the subsequent months of depression, which can be
regarded as so hopelessly unsound as to have
rendered the explosion of last autumn (1907) clearly
unavoidable."

It has sometimes happened that where the con-
ditions were otherwise satisfactory, a crisis has been
caused by a sudden and unexpected withdrawal of
gold from a country. This was certainly not the
case with this particular crisis. There was no scarcity
either of monetary or purely metallic resources.
Credits had grown apace, but the monetary basis of
the credit was not unduly small. In the eleven years,



THE AMERICAN CRISIS 177

1895-1906, the American banks and Treasury com-
bined are estimated to have increased their gold
holding by about two hundred millions, and just
before the panic of October 1907, the stock of gold
was estimated at 305,000,000. Their position, both
in legal tender money and gold, was much stronger
than ours. In December 1907, the National banks
held legal tender to the extent of 16*7 per cent, of
their deposits ; the State banks, 8'28 per cent. ; the
Loan and Trust Companies, 5 per cent. an average
for the whole of about 11 "3 per cent., of course ex-
cluding Savings Banks. On the same basis, our
best showing would not be over 6 per cent. ; or, if we
are to exclude the Bank of England, as correspond-
ing in some degree with the United States Treasury,
not more than 5 per cent. If we take the monetary
stock per head of population, the United States banks
held 7^ of legal tender per head, as against our 4.
Passing to the pure gold holding, the position is still
better than our own. The United States banks held
6 per cent, of their deposit liabilities in gold, includ-
ing certificates represented by bar gold, excluding
the Treasury holding, against our 3 per cent, exclud-
ing the Bank of England, or 4 per cent, including it.
Moreover, it must be remembered that there is no
demand for gold as circulation in the United States,
the currency being almost exclusively paper. I have
only been in the United States once ; but during the
two months I was on that side of the Atlantic, I

F.C.F. M



178 PAPERS ON CURRENT FINANCE

only once saw a United States gold coin. It was
shown me as a curiosity. Such gold as they have
is, therefore, all available for banking purposes.
Further, the panic and the drain being entirely for
internal purposes, any form of legal tender would be
as serviceable as gold. In this respect our own case
is more difficult. Our difficulties are likely to arise
from a foreign drain, and could only be met by gold.
Then we must not pass over the holdings of the United
States Treasury, though the extent to which they
will be available is always uncertain. In the August
preceding the crisis, the Treasury held something like
354,000,000 of gold ; and, although that was largely
trust money, money held against various forms of
legal tender, and earmarked in fact for currency
purposes, yet much of this was not absolutely
necessary to be held, and might have been used
in case of necessity as our own issue reserve has
been drawn upon at such times. But quite apart
from this, there was a free reserve in the Treasury
of over sixty-six millions sterling, not trust money
or earmarked in any way (except that thirty millions
is held to guarantee currency parity), which the
Treasury might, if it thought proper, have used to
assist the banks.

It seems clear, then, that the weakness did not lie
in the monetary position. Their case was the reverse
of our own. We make the utmost of our little mone-
tary store, except in so far as we are obstructed by



THE AMERICAN CRISIS 179

the Act of 1844. But it is quite inadequate in
amount. They had ample monetary resources, but
could not make effective use of them. The fault lay
partly in their banking system, and partly in the
banking habits generated by that system. These
faults were matter of notoriety. They had often been
pointed out, both at home and abroad ; and the
breakdown of the system had been predicted. For
over twenty years I have been accustomed to use
the American reserve law as the classical example
of mistaken banking legislation. The Special Cur-
rency Committee of the New York Chamber, in
October 1906, pointed out the want of elasticity in
the currency, and recommended a central bank of
issue, dealing exclusively with banks, and controlled
by the Government. But Americans are like English-
men. As long as they can make money, they have
no time for anything else. Reforms have to wait
till times are bad. Mr. Secretary Shaw, in proposing
his emergency issue, September 28th, 1905, said :
" He was convinced that there would be no further
currency legislation until there was a panic occasioned
by the want of elasticity. The country did not
appreciate the danger, and until the danger was fully
understood no remedy would be applied." Mr. Shaw
was right. The panic came, and, immediately after
the panic, you had the Aldrich-Vreeland Act of 1908.
In March 1907, Mr. Rozenraad, noticing the intro-
duction of a forerunner of this Act, the Aldrich



180 PAPEES ON CUKRENT FINANCE

Currency Bill, remarked that " the measure, good as
it seemed to be, would only temporarily ease the New
York money market. In the long run it would be
found that a complete reorganisation of the existing
Banking system would be necessary." Mr. Hermann
Schmidt put the case more strongly. After criticis-
ing our own Bank Act, he said, " After all, England
is scientific compared to the United States. There
everything is topsy-turvydom, at least according to
European ideas. They have no national bank, no
central reserve fund, only the 15 to 25 per cent, of
the deposits legally prescribed. The result is periodical
crisis, when they have to go to the Treasury for
assistance the trade of the whole country dependent
upon the decision of a single individual about the
worst situation possible."

But I must describe this American system, and
you may form your own judgment as to the extent
to which it was responsible for the crisis. Some
account of it is all the more necessary, because it
differs so much from our own and from most European
systems.
As a basis for a contrast between the United States
banking system and our own, let me take the Report
of the Comptroller of the Currency, December 1907,
which gives the position up to the June preceding the
Taking round figures, there are (including savings
banks) nearly 20,000 different and independent banks
in the United States, with, say, 225 millions sterling
of currency, and 2,620 millions sterling of deposits.
Omitting savings banks, you get 18^ thousand banks,
with nearly 200 millions sterling of currency, and
1,920 millions sterling of deposits. The deposits in
the English banks are almost exactly half this amount.
But the United States population is just double our
own ; hence the deposits per head are the same.
Against these deposits the United States banks hold
12 per cent, reserve, as against our 5 per cent, or
6 per cent, (including till-money in each, and allowing
for redeposited reserves). The total resources of
these banks are put at 1,600,000,000 for the
National banks, 800,000,000 for the State banks,
and 800,000,000 for the Trust companies a total



182 PAPERS ON CURRENT FINANCE

of 3,200,000,000, against about 1,150,000,000 for
the banks of the United Kingdom. Allowing for
the difference in population, the assets are about 50
per cent, larger per head in the United States than
in the United Kingdom.

The contrast in the number of banks is very re-
markable. Mr. 1 Palgrave puts the total for the
United Kingdom at 182 ; one hundred of these have
no branches, and only the eighty-nine which publish
accounts can be regarded as important. Even in
this number are included army agents, and some
institutions which are mainly discount houses. Mr.
Boissevain puts the number of effective banks at
seventy-four. But the total number of bank offices,
including head offices, is 7,753. This works out at
about fifty per cent, fewer offices per head of popu-
lation than in the United States, where, of course,
the population is more scattered. [The 108 foreign
and colonial banks are excluded from this calculation.]
The banks of the United Kingdom are now nearly
all of them organised upon the Scottish or branch
bank type. " There are four banks in England and
Wales which alone direct more offices than all the
banks in the whole of the United Kingdom possessed
among them half a century since " (Mr. Palgrave).
Lloyds, the London City and Midland, Barclays, and
Capital and Counties control 2,070 offices. The whole
United Kingdom only had 2,008 bank offices in 1858.

[ l Now Sir Inglis Palgrave.]



THE AMERICAN CRISIS 183

Now, speaking broadly, American banks have no
branches. They are forbidden in a great many States,
and forbidden under the National Bank Act. I need
hardly add that some of the separate banks in the
United States are extremely small.

But there are many different kinds of United States
banks, and I must say a word on the different types.
You have, in the first place, some 6,500 National
Banks. These all come under the National Bank
Act, passed in 1863-4, and frequently amended. By
conforming to the provisions of this Act they obtain
the right of note issue, and certain other privileges.
Then you have nearly ten thousand State banks,
coming under the laws of the respective States, not
always the same. These banks are not allowed to issue
notes, and they are smaller, as a rule, than the National
Banks. Then you have the important group called
loan and trust companies, intimately connected, as
we shall find, with the origin of the crisis of 1907.
These must not be confused with the great commercial
trusts we are so familiar with, such as the Standard
Oil Company, the Steel Corporation, and the like.
They are rather trustee companies ; but they have
added to their trustee business the functions of bank-
ing, just as our English banks are beginning to add
the work of trustee companies to their banking busi-
ness. They have been happily described by M. Arthur
Raffalovitch as "financial maids- of-all- work," generals,
in the civilian sense of that word. Their primary



184 PAPERS ON CURRENT FINANCE

function was to take charge of securities, and to
receive deposits as savings banks ; then they under-
took the execution of trusts of all kinds, much as
our Official Trustee does ; and to this they added
the examination of titles, the care of real estate,
fidelity insurance, and lastly, the practice of limited
banking. 1 They are not subject to the regulations
imposed upon the National Banks.

As to the savings banks, I need only say that
they are entitled to demand from thirty to sixty
days' notice of withdrawal of deposits. That is a
most valuable right at a time of panic, and not an
unreasonable one when it is remembered that American
panics are constantly accompanied by a premium on
currency, so that it becomes a mere matter of interest
for depositors, whether alarmed or not, to withdraw
all the deposits they can control.

Over all these institutions, and at times in very
vital relation to them, stands the Treasury of the
United States. It is rather difficult to explain this
in terms of European institutions. There is nothing
exactly like it in Europe. But it is in the main a
currency, rather than a banking institution ; it is
more like the Issue Department of our Bank of Eng-
land than like its Banking Department, except, of
course, that it holds the Government account. In
this respect it exercises banking functions, and it is

1 See Mr. Charles E. Smith, Congress of American Bankers, 24th
September, 1907.



THE AMERICAN CRISIS 185

this side of its operations which is most disturbing
to the money market, and most open to criticism.
Its funds necessarily vary with the Government
balances. At times it becomes possessed of large
sums of money, drawn off the market by the collec-
tion of taxes, and, unless it can get rid of these surplus
reserves, its operations cause a monetary stringency.
But it has no regular and normal means of getting
rid of this money, because it is not part of the general
banking system. It can only be redistributed if the
Secretary of the Treasury thinks fit to deposit moneys
in the National banks on Government account. In
doing this, the Secretary of the Treasury acts in some-
thing like the way in which our Chancellors of Ex-
chequer have acted in times of crisis, when they have
authorised the Bank to have access to the Issue Keserve.
There is something arbitrary and artificial about this
procedure which unfits it for normal use, and has
made some persons object to resort to it in any case.
No charges, so far as I know, have ever been brought
against the absolute impartiality of the Secretaries
of the Treasury in this action ; but still it is not easy
to defend a system which puts into the hands of a
single individual the power of making money dear
or cheap, of throwing twenty millions on the market
or withholding it, as seems to him fit.

The primary business of the Treasury is to guarantee
the parity of all the various forms of money in the
United States. It is a first principle with the United



186 PAPEKS ON CUKRENT FINANCE

States, in which all parties, whatever their monetary
policies, have always agreed, that a dollar shall
always be a dollar. That is to say, whether payment
is made in silver dollars, gold coin, gold certificates,
greenbacks, or National bank notes, all are agreed
that there shall be no discount or premium as between
the different forms of legal payment. Even their
subsidiary money can be exchanged for full legal
tender money. I am bound to say that they have
been most successful in carrying this out. I have
never heard of any premium or discount on any
special form of their money. We have not been so
successful with our silver, which is often sold at a
discount. This business of keeping all the moneys
of the United States at parity is the duty of the
Treasury. Its huge reserves are maintained chiefly
for this purpose, and the redemption fund by which
it is able to guarantee payment of National bank
notes in case of the failure of any bank may be ranked
under the same head.



CHARACTER OF THE BANKS : THE RESERVE LAW.

After this sketch of the United States banking
system, I come to consider the character of the banks
and the reserve law. Here is an account from our
Bankers' Magazine, February, 1903 : " Each of the
American banks is self-centred, with its own system
of administration, its own reserve of specie and legal



THE AMERICAN CRISIS 187

tender notes, and, in the case of the National banks,
with its own note issue. These banks are estab-
lished sometimes in very small towns, it may be said,
almost in villages. It is a marvellous proof of the
natural business ability of the citizens of the United
States that such a number of banks can be success-
fully carried on." The National Bank Act of 1900,
which somewhat relaxed the limits imposed by the
original Act of 1864, permitted the establishment of
banks in places of less than three thousand inhabi-
tants, with a capital as small as 5,000. The Act
greatly stimulated the formation of National banks ;
but it is clear that many of them must be very small,
not large enough to be the principal business interest
of those who own and manage them. Of late years
there seems to have been an increasing tendency to
obtain control of banks, in order to further private
interests. Except as regards this latter point, the
system of banking in the country districts of the
United States strongly resembles the condition of
English banking before the rise of the joint-stock
banks, that is to say, in what we consider our worst
period of banking. Of course, the large National
banks in New York and the other central reserve
cities are more like our great joint-stock banks in
the magnitude of their operations, but they have
no branches, and no connecting link in a central bank.
To a European it seems obvious that it would be
better if the whole system were organised, consolidated,
and unified, and if the system of branch bank-
ing was adopted. But American public opinion
appears to be opposed to such a change.