The Clearing House and Mr. J. P. Morgan, when appealed to, refused to assist the Knickerbocker on the ground that they found it was not solvent. The collapse of the Knickerbocker was immediately followed by extensive runs on small banks and trust companies in New York and Brooklyn, as well as on the savings banks, and about a dozen of the former, including seven in Brooklyn, closed their doors. But the savings banks took advantage of the sixty and ninety days’ time allowed them by law for the payment of deposits after notice.
Following these minor banking suspensions there were long-continued runs on the Trust Company of America and its Colonial Branch, and the Lincoln Trust Company, with all-night lines of waiting depositors. But, finally, after a hard struggle, these were examined by Morgan committee experts and found solvent, whereupon, in the banking conferences held for a number of days and nights at the residence of Mr. J. P. Morgan, it was agreed to provide them with all the money necessary to meet the run. To Mr. Morgan great credit is due for the arduous work he undertook to better the banking situation in this critical period of storm and stress.
New low records for stocks were made meanwhile under very heavy liquidation, Union Pacific touching 100, and Amalgamated Copper 41¾, on the 24th of October, and all others sinking to lower depths in about the same proportion, while the abnormal scarcity and high rates for money caused trading on margins to be generally suspended by brokers. Transactions were, of course, largely curtailed by being placed on a cash basis, but the buying of odd lots for investment was very heavy all through the crisis. The decline in Amalgamated was accelerated by copper selling down to 12 cents a pound. But much of the liquidation in the stock market was caused by the banks and trust companies calling in their loans on stock collaterals, and thus forcing the borrowers to sell.
The hoarding of money, and the withdrawal of deposits from the banks and trust companies, became so extensive that these institutions had little or none to lend, and for several days call loans were made on the New York Stock Exchange at rates ranging from 50 to 100 per cent per annum, and in exceptional instances as high as 125.
E. H. Harriman.
1906
The United States Treasury came to the relief of the money market by making—under the personal direction of Secretary Cortelyou—unusually heavy deposits in the National banks of the City of New York, as well as in other cities which were drawing heavily on their New York balances. But still the banks and trust companies continued to lose their ordinary deposits rapidly, and the money thus withdrawn by the timid and distrustful was taken out of circulation by being placed in safe-deposit boxes, tin boxes, wallets, and other receptacles. This hoarding was foolish, as well as harmful and un-American.
New York had to deal with a banking crisis. So, on Saturday, the 26th of October, the members of the New York Clearing House met, and resolved to issue, on and after that date, Clearing House certificates—bearing six per cent interest—to be used by the banks of the Association in paying their daily balances at the Clearing House, instead of currency. These the Clearing House at once began to issue, when called for by any bank, to the amount of 75 per cent of the value of any acceptable assets it might deposit with the Clearing House. This gave immediate relief to the banks, and especially those whose reserves of currency were most largely depleted, for they immediately availed themselves of their issue.
At the same time they saw that, in addition to the government deposits, large importations of gold were necessary to replace, at least in part, the hoarded money, and aid in restoring confidence. The Clearing House certificates, by releasing much of their gold and legal tender notes, enabled them, through “cable transfers,” to purchase gold in England for shipment to New York, and by the end of the first week in November $50,000,000 had been purchased by banks and bankers for shipment to the United States, and nearly half that amount had already reached New York. But some of the importing banks were in other cities, including Chicago, Philadelphia, Boston, Pittsburg, and San Francisco.
These heavy importations, however, disturbed the London money market, and on Thursday, the 31st of October, the Bank of England raised its minimum rate of discount from 4½ to 5½ per cent, to check the outflow of gold. This not proving sufficient, it raised it to 6 per cent on the Monday following, and to 7 per cent on Thursday, the 7th of November, a higher rate than had been reached since 1873, the year of the great panic in this country and in Germany, when the Bank of England rate was advanced to 9 per cent. But once, in 1866, it went up to 10 per cent.