A Brief History of Panics and Their Periodical Occurrence in the United States

by Clément Juglar

It was nevertheless notorious that the decline in prices began two years back, that the advance in prices had been stopped by the breaking out of the panic of 1882 in Europe, at Paris, and that since that moment prices had begun to decline, less rapidly, however, than in Europe, because the shock had then merely disturbed a market which had not yet recovered from the panic of 1873, from which, in consequence of the Franco-Prussian war, France had escaped. The mine not being sufficiently charged in the United States the explosion had not recurred. Speculation, unable to restore a new impulse to the rise in prices, was nevertheless able to hold its own, until May, 1884, when the delayed explosion finally occurred, covering the market with ruins and bringing about a liquidation with its accustomed train, a great and lengthy decline of prices.

We may here note similar delays in the breaking out of panics, in the period of 1837, 1839, 1864-1866 in France and in England. Even an involved state of affairs may be hidden by certain conditions, and the situation, although itself exposed to the same excessive speculation, may witness the breaking out of the panic which has been delayed for a certain time, only to occur simultaneously with the beginning of a decline of prices, and when it is thought that danger has been escaped.

As in Brussels and in the United States in 1837-1839 and in England in 1864-1866, large houses and powerful institutions of credit had maintained a whole scaffolding of speculation which was already out of plumb, but still able to stand upright through the general effect of the parts which connected them, and in this unstable equilibrium it sufficed for a single one to detach itself in order to overthrow the whole edifice at a juncture at which it was hoped it would continue to stand and even grow stronger. Does not this prove that after these epochs of expansion and activity characterizing prosperous periods (and there is no prosperous period without a rise in prices) a stoppage is necessary, a panic allowing a period of rest to permit the liquidation of transactions employed in helping to make a series of exchanges at high prices, and to allow the capital and savings of countries which had been too rapidly scattered and exhausted to reconstruct themselves during these years of tranquillity and of slackening business?

Confidence had already returned in New York despite the steady demands of the country bankers upon their correspondents, which pulled down the reserve below the legal limit; nevertheless in the midst of all the failures there was no suspension of specie payments.

The crisis of 1884, according to the Comptroller of the Currency, had been less foreseen than the crisis of 1873, and this notwithstanding it was sufficient to observe the number of enterprises and schemes flung as a prey to speculation, in order to foresee that financial troubles and disasters to the country must result.

The continuation of payments in gold, the low prices, and the outlook for a fine harvest gave courage, preserved the remaining confidence, and already allowed a speedy resumption of business to be anticipated.

The panic, although spreading over the whole Union, raged especially in New York. Without wishing to expatiate upon its primary causes, the Comptroller of the Treasury could not help remarking that it had shown itself under the same circumstances as recently as in 1873; above all there were issues for new enterprises; the speculation had rushed to take them up at a premium, and people now asked their true value.

At this juncture railroad earnings, instead of increasing, showed weakness, and suffered a slight reaction; the solvency of houses interested began to be doubted; new loans were refused them, and immediately the artificially constructed edifice gave way.

To advance prices on the Stock Exchange, the banks had made immense loans on the shares and obligations of the new railway issues, and as soon as quotations, artificially maintained at the rates to which they had been carried, began to drop, everything became unsalable. Until this occurrence, led on and fascinated by the rise in prices, every one had bought; hardly was the advance arrested when every one reversed their operations at the same time. The bankers had loaned not only their capital but in addition a part of their clients' deposits; brokers had encouraged a speculation which brought them business; and thus it was that all hands had flung themselves upon a path that could only lead to ruin.

The Comptroller of the Currency remarks with pride that, in the midst of the general upheaval and numerous failures of honorable houses, only two National Banks were involved: one of them failed, the other suspended payment.