December, got to work again on orders at the opening of the present year, there was widespread assertion that the trade was now rapidly returning to its great activity of six or eight months ago. When, toward the end of the first month of the year, the New York drygoods market, which in the two preceding months had all but suspended business, was suddenly invaded by a host of buyers from the West and South, and when, in response to a cut of twenty per cent. or thereabouts in the price of staple goods, these visitors made substantial purchases, similar statements found their way into the press to the effect that an actual commercial boom was in the beginning. Even on the Stock Exchange, prices once more advanced with great rapidity, and with the volume of business rising again to the million share day, people began to assert that the active "bull speculation" of 1906 was about to be resumed.

Such notions were not well-grounded and the hopes encouraged by them, if any such hopes were actually encouraged, were fallacious and misleading. Nevertheless, it will be my effort to inquire just how much of legitimate basis there may have been for such expectations if extended to the longer future. When this question of the duration of after-panic depression comes up for discussion, one natural recourse is to consult the records of previous periods of the sort. Speaking in a general way, and ignoring the minor ups and downs of finance and industry on its lowered scale of activity, it may be fairly said that the panic of 1873 was followed by something over five years of virtual depression, and that four years elapsed after the panic of 1893 before the financial markets and the country's general trade began to show evidence of return of permanent activity and prosperity. In the case of 1857, depression certainly existed during the two succeeding years; after which period, all financial and economic considerations were overshadowed by the political crisis involved in the struggle for disunion.

On the basis, then, of simple precedent, it would be concluded at once that four or five years must be set as the period for which the after-panic depression must continue. When we begin to look more closely into the circumstances of the recent panic as compared with those which existed in previous panic periods, there are both favorable and unfavorable inferences to be drawn in this regard. That we have at present a sound currency system, as we did not have in any of the great preceding panics of our history; that the Treasury is in a strong and well-intrenched position, as it certainly was not in 1893; and that the West, which was almost bankrupt in 1893 and was a helpless debtor of the East in 1873 and 1857, is the strongest element of financial strength at the present time, are three facts in the situation which are not open to denial, and which are bound

to exert a very great influence in resisting the influences of financial demoralization and thereby hastening the return of normal good times. On the other hand, when comparison is made with previous outbreaks of actual panic, it cannot be denied that the violence of the shock, the duration of the period of suspension of bank payments, and the magnitude of the phenomena which marked it, were more formidable in 1907 than in any previous period of the sort. It would not be safe to discard altogether the argument that this itself may be a sign of a situation economically weaker than that of the other periods under review. Similarly, it is not open to question that the financial excesses in the use of credit, the abuses of an over-exploited prosperity, and rashness in the use of capital-which are the cause of all such financial crises were practised on the eve of the panic of 1907 as they never were before, with the possible exception of 1873. Here, then, are the elements by which the general problem already stated must be judged. It will now be in order to consider in their sequence the events of the past three months.

Resumption of
Payments

On the last day of 1907 the premium on currency at New York had fallen to one-fourth of one per cent. It had been as high as four per cent. in the crisis of November, and had continued for a period of exactly two months. Here is the first sign of a severer strain in 1907 than in preceding panic years. In 1893, the currency premium at New York lasted one month, or only one-half the period during which it prevailed last year. In 1873, the premium disappeared five weeks after it was first quoted. This seeming indication of weakness may be partly explained by circumstances which came into view at the opening of December. It is now a well-recognized fact that interior banks as a rule were ready to resume full payments at or shortly after that date, and that they hesitated merely because of their unwillingness to begin full payments until New York had set the example. It is also true that up to the very last days of November, it was the common expectation in New York itself that full cash payments to depositors would be resumed at the opening of December. Naturally, it was partial suspension of such payments which made a premium on currency possible, so that resumption of payment would of itself involve the disappearance of the currency premium.

Why was resumption so long delayed on this occasion as compared with previous panic periods? It was alleged, in New York particularly, that the trouble was caused through unjustified hoarding of cash by interior banks, and the figures of the Comptroller of the Currency, after

the call for national bank reports of December 3d, were cited as proof of this contention. These figures showed an apparently large percentage of reserves to deposits held by these inland banks. Galveston, for which a reserve ratio of 483 per cent. was reported, was one instance frequently quoted; Kansas City, Missouri, with 31, was another; Portland, Oregon, with 361, was a third. There were numerous similar instances, chiefly among what were known as the country banks. The banks of Kansas as a whole showed a reserve ratio of 32 per cent., when only 15 per cent. was required by law, and when New York City at the same time, where 25 per cent. was legally required, was able to show only 213.

This seemed a reasonably clear case. But there is this to be observed of these interior bank returns. In the first place, the ratios of reserve just given referred not alone to the actual cash on hand in the institution's vaults, but to that portion of its reserve which, under the terms of the National Bank Act, was lodged with deposit institutions in distant cities. Take, for instance, the case of banks in the State of Kansas, with their 324 per cent. ratio of reserve. The Comptroller's figures apparently stated the figures of their reserve fund at $17,438,000. But, when one looked a little further into the report, he found that the actual cash on hand in the vaults of the institutions footed up only $5,722,000. In other words, by far the greater part of the reserve which made up this seemingly large ratio was actually in the vaults of other banks and was not available for the use of the Kansas institutions. Even so, it would doubtless be contended that, since the National Bank Act stipulates only fifteen per cent. of all deposits as the ratio of reserves for such country banks, and since it allows the banks to deposit with reserve city institutions three-fifths even of that fifteen per cent., the ratio still must have been excessive.

But in regard to this contention, it must never be forgotten that these country banks, equally with the city institutions, had to prepare themselves to meet runs by their depositors. Reserves deposited by such country banks with banking institutions at St. Louis or Chicago or New York serve well enough in the ordinary course of trade, but they were a very doubtful reliance for the purpose of meeting a run of home depositors. These Western banks, it must be remembered, were the very banks which in the panic of 1893 went down in a rapid series, simply because of inability to procure the funds to meet the first applications by their frightened depositors. There were numerous cases, at that time, of banks which closed their doors when the currency was actually on the way to them from their reserve depository in another city. It arrived too late. Certainly it cannot be deemed surprising, nor, in my judgment, can it be

criticised as a mark of unwarranted fright or greed, that these institutions, when confronted last autumn with another crisis of the sort, should have fortified themselves as they did not do in 1893.

New York and Interior

Nor, when the question is more carefully examined, does it seem to me that the abnormally long duration of the period of suspension can be fairly ascribed to this action by the inland banks. I have already shown that the period might have been shortened by probably a month if the New York banks had been ready at that time to resume full payments on their own account. Why were they not thus ready? The answer, in my judgment, is that the New York banks, during the recent years of over-expanded credit and of wild exploiting of the stock market and allied enterprises in New York, had accumulated and loaned out such a mass of demand deposits belonging to the Western banks that it was flatly impossible to respond to the demands of these institutions until panic had wholly disappeared. It is an open secret that the Committee of the New York Chamber of Commerce, investigating this question of interior deposits at New York during the excited money market of 1906, found that no less than $400,000,000 was thus placed. The Comptroller's compilation of the reports of national banks in the United States in the month before last October's panic showed that out of the 6,544 national banks in the system, 6,178 were the "country banks," three-fifths of whose reserve, under the National Bank Act, may be kept with banks in other cities. Of the reserve of these 6,178 country banks, amounting to $621,000,000, no less than $420,000,000 was reported as being lodged with other institutions and only $201,000,000 kept on hand. Neither in 1893 nor in 1873 did there exist any such liability to the banks of inland cities as existed in New York last autumn.

That this condition was a powerful factor in making the restriction of cash payments inevitable and in prolonging the period of suspension, admits, I believe, of no doubt whatever. It is possible to set up a reasonable argument for the theory that but for this mutual entanglement of the banks with the reserve money of one another, neither restriction of payments to depositors nor the use of Clearing House certificates would have been necessary at all in the United States during the recent panic. The inference is inevitable that the clause of the National Bank Act, permitting such redeposit at a distant point of three-fifths of the reserve money which is supposed to guard an institution against such a run of depositors, is a dangerous and vicious law.

Whether the New York banks might not, with entire safety, have

resumed full payments to depositors before they did, is an open question ; there are many good authorities who would answer this question in the affirmative. The absence of any run of depositors on the savings banks when the "sixty day notice" clause expired in the last days of December was one indication of the fact that if the city banks had shown full confidence in themselves the country banks would equally have shown confidence in them. Similarly, the result of resumption of payments was itself a proof of what might have been expected earlier. When cash payments were resumed in full and the currency premium disappeared, the New York Associated Banks reported a deficit under their twenty-five per cent. required ratio of reserves to deposits amounting to $11,500,000. Within a week after that resumption, cash holdings of the banks had increased $18,000,000, and a surplus reserve of $6,000,000 was reported; within three weeks the cash fund had increased $68,000,000 from the opening week of January and the surplus reserve had risen to $37,000,000. This was plain evidence that immense amounts of hoarded cash were only awaiting the removal of the restriction of payments to depositors for their own redeposit in the banks. The deficit in New York bank reserves, which ended with the report of January 11th, had continued for eleven successive weeks. This was the longest consecutive deficit period in our banking history. In that respect it resembled the abnormal continuance of the premium on currency. The panic of 1873 was marked by an exactly equal deficit period, from September 13th to November 22d; the deficit following the panic of 1893 continued only for nine weeks, from July 8th to September 2d.

The
Loan

Certificates

The

A word must be added here in regard to the issues of Clearing House loan certificates. For the first time since this emergency expedient was adopted by New York banks, nearly half a century ago, the New York institutions made during the recent panic no statements regarding such issues, as to how many of such certificates were at any time outstanding. facts did not come to light until near the close of January, when the retirement of the loan certificates had already begun. The amount outstanding reached its high level in the third week of November -the week when the banks reported their maximum $54,000,000 deficit in reserves. In all, $100,000,000 of loan certificates were issued at New York during the recent panic, but the maximum outstanding at any one time was $84,000,000. This maximum compares with $38,280,000, the highest figure in the panic of 1893, and with $26,565,000 in 1873.

In the matter of loan certificates, as in the matter of the bank