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

This panic was not the result of paper-money inflation, nor of inflated values, nor of reckless over-trading, nor of in-ordinate speculation. The trade and commerce of the country were in a sound and prosperous condition, and the prices of securities in Wall street were, on the average, hardly in excess of real values, and in some instances a little below them. It is true that the old trouble of tight money was beginning to be felt, and the bears on the Stock Exchange were trying to aggravate the natural monetary activity which invariably attends the flow of currency westward to move the crops early in the fall of the year, by "locking up" greenbacks and otherwise. On the 6th of September the weekly return of the New York banks, State and National, belonging to the Clearing-house, showed that their legal-tender reserve had fallen to a little less than half a million above the twenty-five per cent., which the National banks in the large cities are required by the "National Currency Act" to keep on hand against their deposits and notes; but this excited no apprehension, and hardly occasioned surprise among those aware of the drain of money for crop-moving purposes—the outward flow from Chicago and Cincinnati to what I may call the agricultural districts having been much larger than usual this season. After the four months of unparalleled and continuous stringency experienced in the previous winter and spring, when rates varying from a sixty-fourth to seven-eighths of one per cent., per diem were paid in addition to the legal seven per cent, per annum for call loans on first-class collaterals—during all of which time stocks were firmly supported—it is not to be supposed that Wall street or the general public felt much uneasiness about the loan market or the financial prospect generally. The deposits in the New York banks not only showed no falling off, but were over two hundred and twelve millions against two hundred and nine millions at the corresponding period in the previous year. The fall trade had opened auspiciously; the earnings of the railways were from five to fifteen per cent., larger than in 1872; the crops were abundant—the cotton crop, in particular, being estimated at four millions of bales—and it was supposed that the experience of stringency just referred to had placed the banks, the speculative community and the merchants in a conservative attitude, prepared against a recurrence of dear money, and that therefore we should escape a repetition of the painful ordeal.

The element of distrust, however, aroused by the suspension of the Brooklyn Trust Company, and subsequently that of the New York Warehouse Company, in connection with the failure of Francis Skiddy & Co, and another old-established mercantile house similarly situated, had not died out when the suspension of Kenyon Cox & Co., involving that, also, of the Chicago and Canada Southern Railway Company, fell like a thunderbolt on Wall street. This failure derived its importance from the fact of Daniel Drew being a general partner in the house, although originally he had gone into it as a special partner with $300,000 capital, and from its being the financial agent of this new but important enterprise—a line of large extent, and involving very heavy expenditures in construction and equipment. Kenyon Cox & Co., as financial agents, and Daniel Drew individually, as a director and officer of the company, had approved its contracts and endorsed its acceptances. A large amount of the latter became due on the 13th of September, and a million and a half of them in amount would have matured within thirty days afterward; but on the morning of that date the firm formally suspended, and the joint obligations of the house and the railway company went to protest. Fortunately for the bondholders, the road had just previously been completed, although much still remained to be done to put it in the condition originally designed. Here comes the rub and the cause of the whole difficulty. The company depended for its means of construction on the sale of its bonds, as so many companies before it had done. The sale of the bonds in this country fell far short of the expectations of the financial agents, and they were equally disappointed in a market for them abroad. They were thus caught in the unpleasant position of being pledged to heavy obligations with little or no money coming in to meet them with. Failing their ability to pay these out of their own pockets, or relief in some way from the company, the result was inevitable. As, however, Daniel Drew was believed to be a man of great wealth, notwithstanding his loss of nearly a million and a half by the North-western "corner" in November, 1872, the failure of his house created much surprise and distrust. All new railway undertakings and the bankers identified with them were immediately regarded with suspicion, and that suspicion was fatal.

The effect on the Stock Exchange was immediate, though less visible in the decline of prices than in a reversal of the current of speculation in favor of the bears, in a disturbance of credits and in general uneasiness. Jay Cooke & Co., who were known to be heavily involved in that colossal undertaking, the construction of the Northern Pacific Railway, and Fisk & Hatch, who had identified themselves with the Central Pacific, and subsequently the Ohio and Chesapeake Road, as financial agents, were the first to feel the shock in the shape of a run on their deposits; and on the 18th of September the former firm suspended simultaneously at its offices in New York, Philadelphia and Washington, dragging down with it the First National Bank of Washington, of which one of the partners, Ex-Governor H.D. Cooke, was president. The downfall of this great house was regarded as little less than a national misfortune, and the prevailing distrust was so aggravated by the event that Wall street went wild over the news; and "long" stocks were thrown overboard on the Exchange without regard to price, while the bears were emboldened to put out fresh "shorts" with a recklessness never before witnessed, the question of real values being entirely unheeded in the excitement and demoralization that prevailed. On the following morning the suspension of Fisk & Hatch—a house only second in prominence—sent another thrill of consternation through the street. Prices on the Stock Exchange continued to fall rapidly, and during the day twenty-one additional failures occurred among stock-houses and private bankers belonging to the Board, nearly all of whom had been of good standing and accustomed to transact a large business. Early on Saturday, the 20th, the Union Trust Company, an institution with seven millions and a half of deposits, closed its doors, and the National Trust Company, with about five millions of deposits, did likewise; while the National Bank of the Commonwealth failed, apparently with little hope of resumption, mainly in consequence of having certified cheques for a private banking and stock firm to the amount of $225,000 in excess of its balance. The Bank of North America was temporarily embarrassed from a similar cause, another stock firm having similarly defaulted to no less an amount than $400,000. Here we have two conspicuous instances of the danger attending the custom of certifying brokers' cheques for large sums beyond the amount to their credit; and no greater warnings than these should be needed by the banks to decline such risks, which are neither justified by the profits resulting therefrom, nor just to their stockholders and depositors, while they are clearly opposed to the spirit of the National Banking Law.

Following the suspensions last referred to, Wall street grew still wilder than before, and in the rush to sell securities many of the brokers abandoned themselves to a state of frenzy, while rumors of fresh failures passed from lip to lip with startling rapidity. The fact that during the morning the associated banks, in accordance with the recommendation of a committee of their own officers appointed on the previous day, had agreed to issue to each other seven per cent. certificates of deposit to the amount of ten millions, on the security of government bonds at par and approved bills receivable at seventy-five per cent. of their face value, as well as to equalize the legal-tender notes held by all for their common benefit and security, had no influence in tranquilizing the public mind, although it showed a determination on their part to stand or fall together. As these certificates were to run till the 1st of November, and to be used as the equivalent of legal tenders in making the exchanges among themselves, the importance, as well as the advisability, of the measure, under the circumstances, was apparent, although the limitation as to amount looked like the application of a standard of measurement to that which could not be measured. The legal-tender notes, when "stocked" preparatory to their equal division, amounted to a fraction less than ten per cent. of the deposits.

The pressure of sales of stock was almost entirely for cash. No money could be borrowed, either at the banks or elsewhere, on securities of any kind, and loans—which the borrowers were unable to pay off—were being called in in all directions. As compared with the quotations current on the eve of Kenyon Cox & Co.'s failure, the stock-list showed a decline of from twelve to thirty per cent.

At noon the distraction was so great, and the sacrifices being made were so enormous, that universal ruin appeared to be impending; and the seeming impossibility of doing business any longer in such a condition of affairs without bringing about a state of chaos, and involving the banks in the general destruction, made itself manifest to the president and governing committee of the Stock Exchange, who yielded to the solicitations of the banks and closed the Stock Exchange at half-past twelve until further notice.

The reeling crowd paused to take breath, and felt a sense of relief in this sudden stoppage of the course of business, although accomplished by a proceeding so unexpected and revolutionary. The usual Saturday bank statement was omitted, and men left Wall street that evening only to gather in a dense crowd at the Fifth Avenue Hotel to discuss the situation.

Meanwhile, the failure of Jay Cooke & Co. in Philadelphia was quickly followed there by the suspension of several prominent private banking and stock firms and some small ones, a panic in stocks, and a run upon the banks, involving the failure of two of their number—the Citizens' and the Union Banking Company. Advices of a few suspensions of banks and banking-houses in different parts of the country had also been received, none of much importance, but all serving to deepen the prevailing gloom, and make men fear that the worst was still to come. Representative bankers and merchants had been telegraphing to the government at Washington for some measure of relief from the moment of Jay Cooke & Co.'s suspension, but none had as yet been extended, except in the shape of an order, on Saturday, to buy ten millions of United States bonds, of which the assistant treasurer was, in consequence of the excitement, only able to buy less than two millions and a half at the equivalent of par in gold, the price to which he was limited.

The President, who had been on his way from Pittsburg to Long Branch on Saturday, was, in company with the Secretary of the Treasury, at the Fifth Avenue Hotel on Sunday, the 21st, and gave audience to a large number of leading merchants and bankers, who urged upon him the necessity of immediate action on the part of the Treasury to save the country from further disaster, the issue of the "reserve" of forty-four millions of greenbacks as a loan to, or deposit with, the banks being the remedy generally suggested. The President, however, was firmly opposed to this, and suggested that a week of Sundays would probably afford more relief than anything else, but promised to do whatever seemed advisable within the limits of the law. On the next morning the assistant treasurer gave notice that he would continue the purchase of bonds, paying for them at the average prices of the Saturday previous. This he did until Thursday morning, when he ceased buying, twelve millions in all having been bought up to that time, and the available currency balance in the Treasury, without encroaching on the forty-four millions of unissued greenbacks, being exhausted.

On Monday there was a run on most of the city savings banks, which was met by an agreement among their officers to avail themselves of their legal privilege to require thirty or sixty days' notice of the intended withdrawal of deposits; and this being announced by the respective institutions, the run, as a natural consequence, ceased, and, fortunately, without the slightest popular disturbance. On the 22d the Security Trust Company and a private banking-house in Pittsburg, Pa., suspended, as also a banking-firm at Wilmington, Del. The failure of Henry Clews & Co. on the afternoon of Tuesday, the 23d, followed by that of Clews, Habicht & Co., London, caused fresh uneasiness. This house, being the financial agent of the Burlington and Cedar Rapids Railway, a new line, had been run upon for some days previously, and it showed much strength in holding out so long. The news was almost simultaneously received that the Baltimore banks had agreed upon the issue of six per cent. certificates in the manner adopted by the New York association, and that five National banks in Petersburg, Va., had closed their doors. On the morning of the 24th Howes & Macy, known to be a very strong and conservative banking-house, suspended, and this added fuel to the flame of excitement, and wild rumors of impending failures were again afloat. The steady but quiet run which had been kept up on the banks now increased, and they decided upon the issue of another ten millions of certificates, and a third issue of a like amount, if required. They also agreed to certify cheques "payable only through the Clearing-house" until the first of November, the payment of currency for cheques, for the accommodation of their dealers, to be optional in the interval with each individual bank. This involved a suspension of currency payments by all the banks in the association. The failure of the Dollar Savings Bank and a private banking-house at Richmond, Va., was reported on the same day, as also that of a banking-firm at Baltimore, and another at Wilkesbarre, Pa. On the 25th there was no change in the situation in New York, but the banks of Cincinnati, Chicago and New Orleans suspended currency payments, as those of Baltimore had done previously, and two banks at Memphis, Tenn., three at Augusta, Ga., all those at Danville, Va., and a savings bank at Selma, Ala., closed their doors. On the 26th six National banks at Chicago suspended, and a trust company, and two banks at Charleston, S.C., in addition to a banking-house at Washington; and the last day of the week, the 27th, opened on anything but an encouraging prospect. The telegrams from Europe reported an unsettled market for American securities; gold for a short time rose to 115-1/2; seven of the Louisville banks suspended, and the Boston and Washington banks voted to suspend currency payments, and (those of each city) to issue ten millions of certificates on the New York basis. But toward the close of the day favorable rumors were circulated regarding settlements on the street; and a petition for reopening the Stock Exchange was circulated, while stocks, which had been informally quoted very low, advanced several per cent.

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.