Page:A History of Banking in the United States.djvu/450

 legal regulation of banks, and illustrated that dilemma of legislation in which a restriction to be effective must be intensely severe, and if it is intensely severe, proves impracticable when it is needed.

During this crisis the banks of New York City enclosed the country bank notes, of which they held about $7 millions, in packages of $5,000 each, and passed these packages to each other in the settlement of balances. This was another of the tentative steps towards the later device of clearing-house certificates. The country banks were called upon to redeem these notes November 7th.

The New York City banks resumed in the middle of December. It is said that they had never refused to redeem their notes. The other banks of the North and East generally followed them. The Pennsylvania banks did not resume until April following, and those of the West and South delayed much longer.

This crisis well illustrated the most subtle difficulty there is in the analysis of commercial crises. The rate of interest properly is governed by the supply and demand of loanable capital. At some point, which cannot be determined by analysis, in a time of crisis, that rate comes to be a rate for the money of account, whatever it may be, and it comes to depend on the supply and demand of that money. It is generally said that this results from a failure of credit; and that is true; if by credit is meant the holding open of credits for some time, until other credits on the other side are presented to cancel them. In the crisis this arrangement is suspended for various reasons. There is need and desire to touch cash. This is greatly increased by the panic element, if that comes in. A double operation is therefore performed, both parts of which are harmful. There is a holding of the currency, which is the solvent of debts, just at the time that there is a call for a greater supply than is required in ordinary times. In 1857 there was no stringency in the capital market antecedent to the crisis. The rate for capital was not high. The same was true of England. Confining our attention to New York, we note that there, as this crisis advanced, on account of the attitude adopted by the banks, the rate for current cash advanced until it could not be quoted. There was none to be had in the market.

One safety fund bank failed before 1857 when there was nothing in the fund with which to redeem its notes, and three more during the crisis.

The circulation in the State was 50.67 per cent. of the bank capital in 1850. The ratio steadily declined until 1858, when it was 22.02 per cent. In 1859 it was 24.18 per cent. The Superintendent argued from this that the note issue was declining in importance.

The New York Clearing House Association recommended its members, in March, 1858, to hold a reserve of twenty per cent. on cash liabilities, exclusive of circulation.