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During the summer of 1902 surplus bank reserves throughout the country ran relatively very low. This is one of the surest indications of trouble in the fall. Preparatory for the crisis certain to ensue, the Secretary of the Treasury caused to be printed as much unordered national-bank circulation as the Bureau of Engraving and Printing could turn out, in addition to the ordinary demands upon it, and in September of that year offered to accept satisfactory security other than Government bonds for deposits of public money then held by the banks for which this additional circulation had been printed, on condition that the released bonds should be immediately made the basis for circulation. He also anticipated the payment of November interest due on outstanding obligations of the Government, and offered to purchase for the sinking fund any United States 4 per cent bonds of the loan of 1925 that might be offered at 1377 and interest to date of purchase. He also increased deposits in national banks in quite a considerable sum. In these several ways he restored to the channels of trade somewhat over $57,000,000 and stimulated national-bank circulation to the extent of $18,000,000. He also issued an announcement that he would not exercise the discretion given him by statute to liquidate banks which fail to maintain their reserve should they fail to maintain the same against deposits of Government money.

These operations were not begun, however, until a condition existed which in the opinion of many leading bankers of New York City justified the issuance of clearing-house certificates, and when a resort thereto was being seriously considered. Two of these methods (the acceptance of other than Government bonds as security for deposits, and the announcement that the discretion with which the Secretary of the Treasury is clothed by statute would not be exercised against banks failing to maintain reserve against Government deposits) received their full meed of criticism at the time, but no lawyer ever doubted their legality and no business man now questions their necessity. Financiers generally now recognize, and some of the best known have publicly announced, that but for what was then done a panic would have ensued rivaling in severity any in our history, and which would possibly have continued until industrial conditions were disastrously affected.


The law authorizes the Secretary of the Treasury to deposit in national banks only internal revenue and miscellaneous receipts. Having found it impracticable to relieve a monetary stringency with current internal-revenue receipts, amounting only to about $500,000

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per day, the Secretary early in 1903 ordered their segregation and the accumulation of a separate and distinct fund composed entirely of internal-revenue and miscellaneous receipts, so as to be prepared in case of an emergency to grant prompt relief by large deposits. This practice has been continued.

During the fall of 1903 there was restored to the channels of trade an aggregate of $27,000,000. This was accomplished by purchasing outstanding Government bonds for the sinking fund amounting to $13,000,000, and by direct deposits in national banks aggregating $14,000,000. National-bank circulation was also stimulated to some extent.


In the spring of 1904, by direct appropriation of Congress $10,000,000 was paid to the Government of Panama and $40,000,000 to the Panama Canal Company for the right of way on which to construct the canal across the Isthmus. Preparatory to making these payments pro rata transfers were made of Government deposits from all depositary banks outside to those within the city of New York, and the amount thus transferred distributed pro rata among depositaries in that city. The payment of $40,000,000 to the Panama Canal Company on May 9, 1904, was accomplished by the appointment of J. P. Morgan & Co. special disbursing agents for the Treasury Department, and a pay warrant for $40,000,000 was then issued to said firm, which was paid through the clearing house. Morgan & Co. at once deposited an equal amount through the same channel in the banks from which the money was drawn with which to pay the warrant.

As the transaction worked out, only a few thousand dollars actually changed hands, money rates were not affected in the slighest degree, and not a dollar of gold was shipped from this country. The transfer to France was skillfully effected by Morgan & Co. through the purchase from time to time of foreign exchange. Neither was there any expense to the Government, the disbursing agents volunteering to represent the Government gratis and look to the French Canal Company for their pay.

The Republic of Panama invested most of the purchase price of her cession in the United States, and thus shipments of money to that country were avoided.

No purchases for the sinking fund were made during the year.


For reasons which can not be fully, explained, revenues fell off during the calendar year 1904 and the early months of 1905, which, coupled with the extraordinary expenditures, caused a deficit for the

fiscal year ending June 30, 1905, of $23,000,000. To make good this deficit and to meet these expenditures, $50,000,000 was withdrawn from depositary banks. These withdrawals, however, were insufficient to inspire conservatism, and during the summer the surplus reserve of the associated banks of New York City fell below $7,000,000, while the rate on call money fluctuated from below 1 to 31 per cent, averaging for the season, perhaps, about 2 per cent.

The anticipated stringency was deferred, however, possibly in part by extensive refundings of Government bonds into consols of 1930, which, in conjunction with withdrawals of deposits, lowered the price of consols to a point where banks found the maintenance of circulation profitable, and an increase of $25,000,000 resulted. crisis inevitable came, though some months belated.


In February of 1906, $10,000,000 was deposited in national-bank depositaries in seven of the principal cities and satisfactory security other than Government bonds accepted, but with the distinct understanding that it would be recalled in July of that year. This relief was not sufficient, however. Banks everywhere, West as well as East, found themselves in the spring with surplus reserve exhausted. The foreign exchange market responded sympathetically in a very marked decline in sterling exchange sufficient to have insured the importation of gold if the banks had been in position to buy the exchange with which to secure it. The Secretary then offered to make deposits, satisfactorily secured, equal in amount to any actual engagements of gold for importation, the same to be promptly returned when the gold actually arrived. In this way approximately $50,000,000 (more than six carloads) in gold, largely in bars, was brought from abroad. Most of this came from Europe, but in part from Australia and South Africa.

This was accomplished without expense to the Government and without profit to the importing banks, but with great benefit to the business interests of the country. The various banks which imported this gold lost in the transactions several thousand dollars as established by their books; the price of exchange promptly advanced so that merchants and exporters of grain and cotton having exchange to sell were benefited in excess of $150,000, and interest rates dropped sufficiently to effect a saving to borrowers in New York City alone of more than $2,000,000. This means of relieving financial stringencies, which has been once since repeated, attracted far more attention throughout Europe than in the United States, though it has been widely commented upon in both places. It has at least demonstrated that the United States is in a position to more effectually

influence international financial conditions than is any other country, and justifies great caution lest while protecting our own interests we cause distress elsewhere, which will soon be reflected here.

The United States can ill afford to disturb financial conditions in Europe, and if necessary to prevent it, the present head of the Treasury Department would not hesitate to make deposits in national banks on condition that the banks in turn promptly deposit an equal amount abroad. The world throughout is enjoying an unprecedented period of prosperity, and no Government operations in this country must be permitted to interfere therewith either at home or abroad. The Treasury now holds (November 20) in its own vaults a working balance of $78,000,000, as much as can possibly be spared of which will be deposited if business conditions require it, though it become necessary to pay the current expenses of the Government with checks on depositary banks. The money of the country belongs to the people, and Treasury operations must be made subordinate to the business interests of the country.

Stiff rates on call money in New York, however, are not an unmixed evil, nor are they a very reliable barometer. For instance, during the forenoon of November 13, 1906, ruling rates on call money were 12 per cent, touching as high as 14, but after an announcement by the Secretary that he would in no manner relieve the situation, the rate dropped to about 5 per cent and closed at 51.

This does not indicate, however, that money is plentiful. The sure indication of world-wide money stringency is the fact that legitimate interest rates on commercial paper everywhere are higher than for many years. Universal business activity creates universal demand for money, and universal demand influences the price at which the use of money can be obtained.


By act of Congress the Secretary of the Treasury is directed to sell bonds from time to time to secure money with which to construct the Panama Canal. On July 2, 1906, $30,000,000 in these bonds were advertised to be sold to the highest bidder on July 20. When this advertisement was published the market price of Government 2 per cent consols having nineteen years to run was 1.0325. The Panama bonds, payable at the option of the Government after ten years and due in thirty years, brought 1.0436. This price was obtained by calling the $10,000,000 of special deposits made in February of that year, which was secured by other than Government bonds, and by making other and additional deposits to be secured by Government bonds. In other words, a market for Government bonds was created which stimulated their price.


The harvest of 1906 overtaxed our granaries, our warehouses, the carrying capacity of our railroads, and, in conjunction with our unprecedented industrial activity, strained well-nigh to the limit the credit possibility of the country. A cotton crop sometimes estimated at fourteen million bales, seven hundred and fifty million bushels of wheat, near three billion bushels of corn, three hundred million bushels of potatoes, garnered in a single season, required both actual money and bank credit based thereon. During the summer months grain sacks were not in use, granaries and warehouses were empty, freight cars stood on sidetracks, business men fished in mountain streams or rested at vacation resorts. Meanwhile the banks were comfortably well supplied with money, and interest rates were low. Everything seemed serene to everybody except to those who recognized that in this latitude crops mature in the fall.

Precautionary steps taken.

The Government quarantines against yellow fever; it spends millions to protect the people against unwholesome food; it inspects banks in the interest of depositors, and does a thousand other things to safeguard the people against disaster of various kinds. This policy of governmental supervision receives universal approbation. Believing it to be the duty of the Government also to protect the people against financial panics, which, in this country, have caused more mental and more physical suffering than all the plagues known to man, and recognizing that under our system no possible cooperation can be secured among banks, each independent of the other, and finding these institutions in the interior sending their money to be loaned on call in the cities, and the reserve of the country, even in the idle season, very low, the Secretary of the Treasury undertook the task of making some slight provision for the inevitable. He withdrew from the channels of trade $60,000,000 and locked it up. This was accumulated in part by excessive revenues and in part by deliberate and premeditated withdrawals. His only excuse for withdrawing the people's money when they did not need it, and when its presence invited speculation, was to have it ready to restore when they did need it, and when its absence would bring certain disaster.

A condition.

At the approach of autumn, business men returned to their desks fresh for more intense activities. Crops began to mature, granaries and warehouses began to fill, freight cars were put in commission, checks and drafts were drawn in multiplied number and in multiplied amounts, while the people naturally carried in their pockets

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