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SPRECKELS

Copyright 1905

By LONGMANs, Green, and Co.

All rights reserved

First Edition, March, 1905
Second Edition, Revised, March, 1908

The Plimpton Press Norwood Mass.

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WHEN, in the early months of 1902, Mr. Shaw took the Treasury portfolio, the country was passing through a period of marvellous financial activity. Four years of commercial and industrial consolidation, four years of trading in new corporate issues, "on margin," had absorbed hundreds of millions of banking capital in speculation. Moreover, this encumbering of current funds had taken place at a time when commercial and industrial expansion was multiplying its demands on our banks for credit accommodation. True, on May 9, 1901, an unexpected corner in Northern Pacific had brought speculation' to a temporary standstill. But the quiet which followed had been utilized by the large banking interests to get together needed financial support with which to launch United States Steel and other new gigantic promotions. From two to three thousand millions of new issues had to be digested and assimilated by the investing public before our institutions of commercial credit could sufficiently relieve themselves from speculators' loans to meet the growing demands of trade.

After 1898 the financial situation was at all times pregnant with danger to business. So large was the proportion of new flotations carried on bank credit, that in the early months of 1902 conservative financiers became alarmed; serious question was raised as to what the out

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come would be. The fear expressed was that the banking capital of the country was overloaded with credit obligations of a most dangerous sort. Within six years the national banks had increased their demand obligations to individual depositors more than $1,600,000,000, while during the same period their capital (both subscribed and earned) had increased only $135,000,000. That is to say, for every additional dollar put into the national banking business during this period, $12 of credit in the form of new deposit accounts had been issued against it.

At the time that the national banks were thus extending their credit obligations, similar expansion was taking place in the deposit obligations of state banks, private banks, and loan and trust companies. They had increased their demand credit over $2,000,000,000, while the new capital added to the business was only $235,000,ooo, making a total expansion in deposit accounts of $3,600,000,000, with a total increase in capital of $370,000,000. The amount of credit expansion in bank accounts alone-i.e., expansion in the forms of cash with which business is done — was equal to about two and one-half times the total money circulation of the country outside of the reporting banks, while the total increase in banking capital was only about one-seventh of the money stock of the nation.

To the end of aiding the banks to meet increasing money demands, Secretary Gage had used the customary methods of relief. He had refunded the bonded debt on a lower investment basis; he had made numerous purchases of bonds for retirement; he had made interest payments in advance; he had added to the relief thus given

by loaning to the banks some $80,000,000 in the form of revenue deposits. Such was the situation when Mr. Shaw came to the cabinet.

Panics Averted by Government Loans

Within the next few months pressure on the banks was extraordinary. The climax was reached in September and October. Then it was that Mr. Shaw broke away from all precedents and issued his famous order that savings bank investments be received as security collateral to additional revenue deposits. This first order was soon followed by another, which relieved the banks from the necessity of holding a twenty-five per cent reserve against the secured deposits of the government. The effect of these two orders was to increase loans of the government to the banks from $113,000,000 to $166,000,ooo-producing a temporary result in financial circles much the same as if $50,000,000 of new capital had suddenly been added to the banking business.

During 1903 the financial stress of 1902 was gradually reduced. By concerted action of banks, by the continued aid of the government, by the imposition of high interest rates on bank accommodations and by demands for added collateral to margins forcing liquidation, the overencumbered capital of banks in financial centres was again somewhat relieved. These acts of conservatism were followed by months of wholesome trading, during which time speculation played the smaller part.

The latter part of 1904 and the years 1905 and 1906 was another period of dangerous credit expansion. Duṛ

ing 1904 clearing house transactions of the United States amounted to $102,000,000,000. The clearings for 1905 were $140,000,000,000. The following year, 1906, they reached $157,000,000,000. December, 1906, was a month of high tension at the financial centre, to relieve which call money sales were advanced to 36 per cent; the average of call rates for the month was about 14 per cent; thirty days money commanded from 9 per cent to 15 per cent. During a few days of the January following, as high as 50 per cent was paid for call money. This was followed by two months of comparative quiet. In March, 1907, however, speculative trading and holdings on margin had again reached such proportions that in efforts to protect themselves, the banks were forced to call, and in a single day the market price of securities dropped from 5 to 20 points. General prosperity and prompt relief from Washington alone saved our commercial and industrial institutions from distress similar to that recently experienced through the sudden contraction of bankcredit.

It was during this period of rapidly increasing business activity and rapidly expanding bank-credit, and in anticipation of a sudden need for increased support to bankcredit obligations, that Secretary Shaw rendered another signal service to the country. He saw the approaching storm and prepared for it by getting the Treasury in condition to come to the rescue of the country when the banks would be unable to meet obligations for payment without wholesale reduction of credit accommodation. In the first place, payment on the Panama Canal purchase was made by withdrawals of the deposits of the government,

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