CHAPTER X.

CRISES.

149. Crises Defined.--A crisis, panic, or revulsion is a withdrawal of confidence, and a reign of distrust, during which business is brought to a standstill, or to a chaos, by the voluntary refusal of those who are dealing in money or goods, to let them go on the ordinary terms. It may be a refusal of the holders of gold or goods to accept bank-notes in payment, whereupon the holders of the notes present them for redemption in quantities larger than the banks can redeem. This is a run of notes for redemption. It arises from a belief in the public mind that more notes have been issued than the banks can redeem. It was one feature of the crisis of 1837, in the United States, when the volume of notes was thirty-nine times in excess of the quantity of specie held for redemption. It had no part in the crises of 1797, 1807-9, 1816 to 19, 1825, 1847, nor 1867 in England, nor in that of 1857 in the United States.

It may be a refusal of depositors to allow their deposits to remain in the custody of the banks, which were previously deemed secure. In such cases they withdraw, either to hoard privately, or to place them in some other bank. Private hoarding is very cumbersome, as a man would need a cart to carry away a very moderate sum. Removal to another bank immediately becomes a void act, if all the banks stand together. A run for deposits assumes that the bank loans have been unwisely made. But it would be necessary that it should not have loaned its money at all, if it is to pay all its deposits without breaking. A bank should be ready to redeem its notes, but solvency does not imply that it can stand a run for all its deposits, without selling out or collecting the securities on which the deposits have been loaned. But to be forced to do this instantly is liquidation, not banking. The crisis of 1857 in the United States was a run for deposits, and was met by all the banks shutting down together. The crisis of 1868 in England was a run on three or four leading banks, and the crisis or "obstruction" consisted in the fact that only the Bank of Eng

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land could issue the additional quantity of bank-notes needed, and it refused to ask permission to do so, on the ground that it did not need them itself. More than one of the twenty leading banks could have drawn a check on the Bank of England, which would have closed its doors, or compelled it to ask permission to issue bank-notes on a deposit of securities, which was all that was required to relieve the other banks. Failing to do so, the business and deposits of the banks which could not obtain the notes, were frightened into the Bank of England, generosity being thus rewarded with bankruptcy and churlishness by profit. The bank gained one-half in its deposits, and made the largest profit ever made by it in one year. There has been no general run on deposits in the United States since 1857.

All the above-mentioned are bank crises, monetary crises, or "money panics." These are a loss of faith by merchants in their banks. Where banks lose faith in merchants, by refusing ⚫ to discount notes and bills, it is a commercial crisis. This usually winds up a period of several years of ascending prices and quickened speculation, which, if they apply equally to all forms of property, are the exterior signs of a decline in the purchasing power of money, and will generally be traceable to an increase in the volume of money itself, or of some one or other of its many credit substitutes.

In the crisis of 1825-6 in England, prices of all commodities rose from 70 to 100 per cent. within one year, and fell to their former level in the next, besides the whole people engaging in wild investments in South America mines, Insurance bubbles, Mexican projects, Darien Canal companies, etc. Shares would no sooner be put out than they would be eagerly bought up at par and sent whirling up by competing bidders, as if their profits were certain, instead of impossible.

A rise in prices precedes nearly all panics, whether commercial, banking, or financial. Hence it sometimes becomes a question whether the rise in prices has caused the inflation of paper money and credit, or whether the inflation of paper money has caused the rise in prices. In the crisis of 1825-6 in England, three causes concurred to produce the inflation which began in 1821-2, and culminated in four years. These were :

1. The resumption of specie payment in 1820-1, after the business of the country had been running on paper only for nearly thirty years, had the effect to add to the effective currency the whole quantity of gold and siver coin which, during suspension, was

totally out of circulation, concealed, and selling as a commodity at a premium—and therefore exercising very little influence over prices. This great addition of coin to the circulation followed suddenly, at the close of a period which had necessarily been marked by the issue of paper enough to take the place of the coin hoarded during the war. The paper issues themselves, together with the scarcity and high profit of the war period, had maintained a high rate of prices during the period, until the collapse in prices which came with the peace. Low prices, on all home products, concurred with a large increase in the volume of effective money, to stimulate investment in foreign loans. Owing to the increase in the volume of money, something had got to go up in price. Domestic products, and means of subsistence, could not go up, because known to be so abundant. But the distant, the novel, and the unknown can always be made the theme of exaggeration.

2. In 1820 to 1822, the government reduced the rate of interest on consols, and in so doing caused many holders to desire new investments of like kind, in appearance, i. e., of loans. This caused a readiness to invest in that peculiar class of South America loans, and mines, and joint stock companies, which marked the crisis of 1825. A vivid picture of the result is given by Miss Martineau * The failure of returns from the foreign investments came first. Then a contraction of its accommodations by the bank of England. Then failure, in December, 1825, of about sixty country banks, besides several leading banks of London. Then long lists of factories closed, riots by discharged weavers, who in one day destroyed every power-loom in Blackbourn or within six miles of it. At Carlisle the weavers demanded free corn, and at Trowbridge people insisted that the gardeners and green-grocers were cornering the potatoes. In Dublin the starving silk-weavers demanded that the subscriptions raised for them be applied to clear off the manufacturers' stocks, thus creating a demand so that they might go to work again.†

Economists have not usually applied Gregory King's law of the effect of scarcity and excess of supply of commodities, to money, itself the standard of prices. Evidently, however, as in the case of wheat so in the case of money, a scarcity, or superabundance, would tend to produce a rise, or fall, of prices, in a ratio much

"History of the Peace," vol i. p. 354.

+ Martineau's "History of the Peace," vol. i. p. 367.

*

*

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greater than the actual scarcity or superabundance. Panics break out in an unexpected manner, without definite prognostication on the part of those supposed to be experts, and run in a rattling thunder of successive failures and downfalls, concerning which many will afterwards say significantly "I knew it," but of which no anterior warning could by the most inquisitive process have been obtained. The financial experts frequently predict crises, and crises frequently occur, but by some singular maladjustment of the prophetic power, or some obstinacy in finance, the crises which are predicted never occur, and those which occur are seldom predicted. Thus Cernuschi came from France, in 1878, to assure Congress that, if it should adopt the act for the limited coinage of silver, its action would immediately result in a monetary crisis, and a drain of gold. The act was adopted, and under its operation the quantity of gold in the country accumulated more rapidly than ever before, and about twice as rapidly as the silver. Yet, occasionally, monetary crises are foretold with a degree of accuracy, through some correct estimate, based upon a sound principle. Thus it appears from Adam Smith's allusion to Mr. Meggins, that that nearly unknown economist, reasoning that the annual production of silver was twenty times greater than that of gold, but that the drain of silver for India left its supply for Europe only from fifteen to sixteen times greater, inferred that it was the drain of silver to India that maintained the ratio of values between the two metals in Europe at one to fifteen and a half or sixteen; hence, that if the drain should cease the ratio would fall to that of one to twenty, or one to twenty-two-the ratio of their production. Both Smith and McCulloch combated Meggins' prediction satisfactorily to themselves, but in 1871 the drain from India ceased, and forth with the value of silver fell exactly as Meggins more than a century previously had predicted, thus producing, at least in part, that monetary crisis in the precious metals which has now prevailed throughout the world for sixteen years. The pretended ability to predict financial crises is often resorted to in practical politics as a means to the accomplishment of immediate results, or to carry an election. Thus in 1872 the chief and most effective cry raised to defeat Mr. Greeley, as a candidate for the Presidency, was that his pressure for an early resumption of specie payments would bring on a financial crisis. General Grant was elected,

*"Wealth of Nations," by McCulloch, p. 97.

and without any such pressure the financial crisis came in 1873, and lasted during his entire term.

In England there were financial or commercial crises of a marked character in 1793 to 1796, 1817 to '19, in 1824 to '26,* in 1836-7, in 1846-7, in 1857, and in 1867. In 1877 there was a widespread derangement of industry, but it did not reach the banks. In the United States there were simultaneous and sympathetic crises in the same years, except in 1827, 1847, and 1866. It is a current saying among experienced merchants, therefore, that in America a crisis is due every twenty years, and in England every ten years. The truth of this saying has been subjected to a recent crucial test by the fact that according to both maxims a crisis was due in both countries during the year just past. In the United States its recurrence at the accustomed period seemed the more probable from the fact that a long-continued process of extinguishment of national debt, which, as we have seen in a previous chapter, is a form of international credit currency, closely affiliated in its effects to paper money, was terminating in an impending extinguishment of the national bank currency through the calling in by the government of the bonds on which the notes of the banks rested, and the enforced retirement of the notes by the banks in consequence. Nevertheless, no crisis came.

150. Crises Produced by Excessive Importation of Competing Products.-The incidents of commercial crises are so much alike, and are told by all writers in so nearly the same terms, that the following description by McCullocht of the crisis of 1847 in England, which followed the repeal of the duties on the importation of corn in 1846, and the general bankruptcy of the farming interest resulting therefrom, may be taken as a sample and example of all crises. The act of 1844 had provided that no new joint-stock banks should be created, that the banks then existing should be limited to the amount of notes they had issued during the twelve months preceding the passage of that act, and that the Bank of England should issue no new notes except on the deposit of a gold sovereign for every pound note issued. This restriction was suspended to enable the Bank of England to supply, by paper, the money that could not be obtained in coin. It will be seen, in McCulloch's statement, that the "unprecedented im

* A detailed account of the exterior incidents of the commercial crisis of 1824-6 may be found in Miss Martineau's "History of the Peace." The economic incidents of the periods 1819 to 1837 are analyzed in "Carey's Harmony of Interests."

+ Note IX., on Money, to "Smith's Wealth of Nations," by McCulloch, sect. v. p. 507.