however, unusually long, and consequently the use of the certificates in quantity was more protracted than on former occasions. To this may perhaps be attributed the weakening of the disinclination of many of the banks to take them out. In 1907, on the authorization of their issue, they were immediately taken out by practically all the banks having to meet unfavorable balances. In these circumstances, as we shall see in the following chapter, immediate suspension became inevitable.


The same elements of weakness have been uniformly disclosed by the analysis of the experiences of the national banks during successive periods of financial strain. The normal condition of the banks was one of lack of preparation for emergencies. No adequate lending power or surplus cash reserve was available at any time except during periods of trade depression when the banks were unable to find borrowers for all the loans they were prepared to make. This unsatisfactory situation was, however, not clearly recognized. Minor causes of difficulty absorbed the attention both of bankers and of the public. It was felt that the banks had to work under unfavorable conditions, for the results of which they were not responsible, and the conclusion was generally drawn that no blame rested upon them. In 1873, for example, the currency was inconvertible and depreciated, and the banks could not increase their available cash reserve by the acquisition of gold. During the eighties and early nineties silver purchases weakened the monetary structure and bred distrust of American securities at home and in foreign countries. For our purposes, therefore, we are fortunate in being provided with a crisis which was preceded by no legislation or monetary conditions unfavorable to sound banking. On the contrary, these influences tended to strengthen the banks in very definite ways.


At the beginning of the ten years of business activity which culminated in 1907 the banks were in an exceedingly

strong condition, as is usually the case at the end of a long period of depression. During the four years following the crisis of 1893 the loans, deposits, and cash reserves of the banks fluctuated within narrow limits, reflecting the stagnant condition of trade. On October 5, 1897, against net deposits of $2,195,000,000 the national banks held a cash reserve of $388,900,000, giving them the tolerably high ratio of 17.7 per cent to deposit liabilities. Their loans also must have been of high average quality after four years of thoroughgoing liquidation and recuperation in the business world.

Beginning with the autumn of 1897, the cash reserves of the banks increased rapidly. At first the gain was due to gold imports secured through abnormally large grain exports to Europe, and afterwards on account of increasing gold production, of which the United States. acquired a considerable share. A further gain was secured indirectly as a result of the currency act of 1900. That measure made the issue of bank notes somewhat more profitable to the banks, and between February 13, 1900, and August 22, 1907, bank-note circulation rose from $204,900,000 to $551,900,000. By this means nearly $350,000,000 was provided to meet the hand-tohand needs of the people for money and to supply the reserve requirements of state banks and trust companies. The national banks were consequently enabled to secure and retain a larger portion of the other kinds of money in the country-those kinds which could be included as a part of their own reserves. As a result of these various influences, the cash holdings of the national banks in

creased from $388,900,000 on October 5, 1897, to $701,600,000 on October 22, 1907.

With this increase of nearly $313,000,000 in their cash reserves it would have been possible for the banks to have nearly doubled their productive investments without diminishing the ratio of cash to deposit liabilities. As a matter of fact, these investments were increased far more than this-from $2,661,000,000 to $6,334,000,000. This increase was roughly paralleled by the increase in net deposit liabilities, which advanced from $2,195,000,000 to $5,256,000,000, and the ratio of the cash reserve to deposit liabilities was reduced from 17.7 per cent to 13.3 per cent.

The following table shows the changes in loans, net deposits (not including government deposits), cash reserves, and reserve ratio at the time of the early autumn return of the condition of the national banks from 1897 to 1907:

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Every year witnessed an increase in loans (that for the last year of the series being the most considerable) and also in deposit liabilities. Cash reserves showed a gain, except in 1902 and 1906, but the reserve ratio was subject

to greater fluctuation. Between 1897 and 1902 the decline was continuous, with the exception of 1900, when the banks enjoyed the benefit of the change in the requirement as to note issue from 90 per cent to the full par value of the bonds deposited as security. By 1902 the banks had evidently approached as near to legal-reserve requirements as they felt was consistent with safety, and thereafter loans and deposit liabilities were kept roughly within limits determined by the amount of cash holdings. It will be noted that in 1902 the banks were little above, and in 1906 somewhat below the ratio of reserve on August 22, 1907, the date of the last return before the crisis. That the banks were slightly stronger in cash in 1907 than in 1906 may be in part due to the earlier date of the return of 1907, nearly two weeks earlier than that for the corresponding period in 1906. It is evident, however, that the banks were at least in, what was for them, a quite normal condition of strength just before the beginning of the crisis. But this was not on account of any exercise of restraint in making loans, since the increase during the previous twelve months was greater than for any other year of the period under review. Finally, it may be noted that the proportion of reserve to deposit liabilities which had become customary was distinctly less than it was during the years before either the crisis of 1873 or that of 1893.

Analysis of the condition of the banks by groups does not give different results in the case of the country banks and those of reserve cities. The net deposits of the country banks increased without interruption from

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