CHAPTER XVIII.

PANICS. THEIR CAUSES-HOW FAR PREVENTABLE.

NOT ACCIDENTAL FREAKS OF THE MARKET. WE ARE STILL A NATION OF PIONEERS-THE QUESTION OF PANICS PECU LIARLY AMERICAN. - VIOLENT OSCILLATIONS IN TRADE OWING TO THE GREAT MASS OF NEW AND IMMATURE UNDERTAKINGS. UNCERTAINTY ABOUT THE INTRINSIC VALUE OF PROPERTIES.-SUDDEN SHRINKAGE OF RAILROAD PROPERTIES A FRUITFUL CAUSE OF PANICS.-RISKS AND PANICS INSEPARABLE FROM PIONEERING ENTER PRISE. WE ARE BECOMING LESS DEPENDENF ON THE MONEY MARKETS OF EUROPE.-IN PANICS MUCH DEPENDS UPON THE PRUDENCE AND SELF-CONTROL OF THE MONEY LENDERS. THE LAW WHICH COMPELS A RESERVE FUND IN THE NATIONAL BANKS IS AT CERTAIN CRISES A PROVOCATIVE OF PANICS. GEORGE I. SENEY. JOHN C. ENO.FERDINAND WARD. THE CLEARING HOUSE AS A PREVENTIVE OF PANICS.

HERE are few subjects on which there is more loose theo

Trizing than that of the origin and remedy of panics.

These crises are commonly spoken of as accidental freaks of the markets, due to antecedent reckless speculations, controlled in their progress by the acts of men and banks who have lost their senses, but quite easily prevented, and as easily cured when they happen.

These are the notions of mere surface observers. They may be in a measure true, when applied to the markets of some of the older countries, whose business moves in longestablished grooves and embraces but little of the risk attendant on new enterprises. In France and Germany, for instance, the hazards of business are almost entirely confined to the accidents of political events; and such nations are comparatively exempt from panics due to purely commercial causes. In the United States, panics arise, principally, from causes from which European countries are exempt.

Notwithstanding our immense population and the large measure of well-ordered consolidation that has been effected in our various interests, we are still a nation of pioneers. In every ten years, we now add nearly fifteen millions to our population, which means that each successive decade we are piling up the equivalent of a first-class European state upon our past marvellous accumulation of empire. Inseparable from this unparalleled national growth are great ventures and great commercial and financial risks. Our new popula tion has to subdue new territory. New lands have to be cleared; new mines have to be opened; new industries have to be established; new railroads have to be built; new banks created and new corporations founded. These new ventures are necessarily in a measure experimental. Some of them fail utterly; others succeed magnificently. They require large outlays of capital in advance of obtainable results. These outlays are, in many cases, met by borrowing; the loans being secured by liens upon the uncertain undertakings, and therefore lacking the stability of value that attaches to well developed investments.

We have thus a ceaseless stream of new issues of stocks, mortgages and commercial paper, and have, therefore, at all times outstanding a large amount of obligations which, from the uncertainty of their basis, are liable to wide fluctuations in value. Besides these absolutely new investments, we have also at all times an equal or larger amount of obligations issued against enterprises which, although not properly new, are still in an unconsolidated and experimental stage, and the value of which is, therefore, subject to wide fluctuations. Issues of this character naturally appeal to the adventurous instincts of our people and elicit a vast extent of speculative activity.

It is this peculiarity in the development and trade of the United States that renders our markets more exposed to panic than those of any other nation, and which makes the question of panics a peculiarly American one. In any and

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every commercial nation, trade is subject to regular successions of prosperity and depression. This oscillation results from, or constitutes a natural law.

The action of commerce, like the motion of the sea or the atmosphere, follows an undulatory line. First comes an ascending wave of activity and rising prices; next, when prices have risen to a point that checks demand, comes a period of hesitation and caution; then, care among lenders and discounters; then comes the descending movement, in which holders simultaneously endeavor to realize, thereby accelerating a general fall in prices. Credit then becomes more sensitive and is contracted; transactions are diminished; losses are incurred through the depreciation of property, and finally the ordeal becomes so severe to the debtor class that forcible liquidation has to be adopted, and insolvent firms and institutions must be wound up. This process is a periodical experience in every country; and the extent of the destructiveness of the crisis that attends it depends chiefly on the steadiness and conservatism of the business methods in each particular community affected. In addition to this ordinary and, I would even say, natural liability to commercial crises with a greater or lesser degree of panic, we, in the United States, have to stand the far more violent oscillations so inseparable from our great mass of new and immature undertakings.

In times of crisis, the obligations issued against such enterprises suffer instantly from the uncertainty about their intrinsic value. Holders are anxious to get rid of them; banks which have advanced money on them, call in their advances; and they become virtually unavailable assets. Every panic that has happened since the beginning of the era of railroads in this country, has been intensified many-fold by the sudden shrinkage in the value of this class of assets; and it is precisely here that the aggravation and the chief danger of an American panic centres.

In view of these facts, what is the use of discussing the

possibility of averting our periodic panics? Risks and pan ics are inseparable from our vast pioneering enterprise; and all we can hope is, that they may diminish in severity in proportion as our older and more consolidated interests afford an increasing power of resistance to their operation. I am disposed to think that, in the future, the counteraction from this source will be much more effective than it has been in the past. The accumulations of financial resource available for market purposes at our monetary centres are increasing at a very rapid rate. Evidence of this is seen in the fact that, while the magnitude of our corporate undertakings is augmenting every year, we are also every year becoming less dependent on the money markets of Europe, and our large corporate loans are now made principally at home. These accumulations afford elasticity to our financial system and serve as a buffer against the violence of great financial disturbances.

I do not see how we can in any other way satisfactorily explain how it is that, while we have had two distinct waves of commercial depression since the great crisis of 1873, such as have ordinarily been attended with more or less panic, we have had no disturbance that can be regarded as a fully developed panic. The only approach to it was the disturbance brought about by the Grant & Ward failure in May, 1884, which was merely a restricted and comparatively temporary affair.

But, whilst maintaining that panics cannot be avoided in a country situated as ours is in its present incomplete development, I cannot avoid expressing the opinion that conditions are permitted to exist which needlessly aggravate the perils of these upheavals when they do occur. In every panic very much depends upon the prudence and self-control of the money lenders. If they lose their heads and indiscriminately refuse to lend, or lend only to the few unquestionably strong borrowers, the worst forms of panic ensue; if they accommodate to their fullest ability the larger and reasonably safe

UNFAIR RESTRAINTS ON NATIONAL BANKS.

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class of borrowers, then the latter may be relied upon to protect those whom the banks reject, and thus the mischief may be kept within legitimate bounds. Everything depends upon rashness being held in check by an assurance that deserving debtors will be protected. This is tantamount to saying that all depends on the calmness and wisdom of the banks. They may easily mitigate or aggravate the severity of the crisis, according as they are prudently liberal or blindly selfish. It is, perhaps, safe to say, that the banks never do all they may; but the banks of this city must be credited with having shown great sagacity under repeated derangements of this kind within the last twenty-five years. They have largely succeeded in combining self-protection with the protection of their customers; and the antecedents they have established will go far toward breaking the force of any future panic.

But, unfortunately, the law imposes restraints upon the national banks which seriously interfere with the wise discretion of those institution. As the law now stands, the banks are liable to be wound up at the order of the Government if they permit their lawful money reserves to fall below 25 per cent. of their legal deposits. This establishes a "dead line" which is so dreaded when approached that it becomes almost a panic line. When that limit is reached, the banks are compelled to contract their loans; and, in certain conditions, the contraction of loans means forcible liquidation, without regard to consequences. Thus the very contrivance designed to protect the banks becomes a source of most serious danger to their customers and therefore to the banks themselves; and, in times of monetary pressure, it is the most direct provocative of panic. Were the banks allowed to use their reserves under such circumstances, a fund would be provided for mitigating the force of the crisis, and the danger might be gradually tided over; but, as it is, the banks can legally do little or nothing to avert panic; on the contrary, the law compels them to