HISTORY OF THE CRISIS.
The crisis of 1873 seems destined to be the most memorable of all the purely financial panics in the history of the United States. Certainly no panic, involving such widespread disturbance of the ordinary course of business was ever before known, either in the Old World or the New, on a paper-money basis, for the collapse of the speculative bubble at Vienna a few months earlier was a mere trifle in comparison, although it set us the example of throttling a panic by closing the avenue to the exchange of securities. I mention Vienna as a case in point, for Austrian finances are such that the nation is kept in a chronic state of suspension, and I am not aware that any prominent bourse in Europe except the one mentioned ever adopted a similar proceeding in a like emergency.
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.