Immediately following this panic and since, various theories were and have been advanced by financial experts and political economists as to the causes which produced this crisis. Heterogeneous and contradictory financial legislation during the preceding twenty years was held by some to be responsible. The legislation of that period, it was contended, consisted of a series of compromises between a desire to maintain an honest standard of values and an effort to conciliate financial heresies, instead of a determination to combat them. Inelasticity of our currency and the consequent inability of the banks to issue circulation sufficient to meet the demands of their depositors and customers, without an investment of an equal amount in United States bonds, was held to be another cause for the panic, implying thereby that there was a scarcity of circulation at that time. Others still claimed that the inception of panics generally may be traced to currency inflation and the speculation that an inflated currency usually promotes with all its kindred evils.
While all these causes, and numerous others which have been advanced as having had an influence in bringing about the general disturbance that occurred in 1893, the primary causes which led to this panic may be looked for and found in the conditions described by Mr. Lacey in his annual report for 1891, in which he attributed the panic of 1890 to have been due to overtrading, unhealthful expansion, investments in speculative securities and in various forms of corporate enterprises and development in new and untried fields, and in undue expansion of credits by the banks.
The panic of 1893 had its inception in the financial disturbance of 1890. The temporary lull in that storm was but the harbinger of the tempest that broke over the country with cyclonic ferocity and culminated in the disastrous panic of 1893, which, while clarifying the atmosphere, scattered in its wake wreckage that required years to remove.
In commenting upon the causes which led to the panic of 1893, Mr. Eckels, in his annual report for that year, prepared only a few months after his appointment as Comptroller, stated that -
The financial situation of the past few months was not the result of either a lack in the volume of currency, of which there was a plethora, or a want of elasticity in the system of issuing it, but arose from a loss of confidence on the part of the people in the solvency of the distinctively monetary institutions of the country.
It is worthy of note and of serious consideration that at the very time the scarcity of currency for business purposes was at its height, the country's volume of currency was increasing the most rapidly, and the amount per capita was much larger than in any recent years. Under the same peculiar condition of affairs which marked the monetary situation from May to September, no system, no matter how elastic, or volume of currency however large, could afford relief. So long as confidence is destroyed and credit wanting, money hoarding will go on and additional issues but add to the hoardings and give but little, if any, actual relief. On the other hand, when confidence and credit abound there exists little need for an abundant circulating medium, because under such a condition of affairs the amount of actual money required to transact the daily business affairs of life is reduced to a minimum.
Strangely in contrast are these views with the financial theory which years later led to the enactment of what was known as "The Emergency Currency Law," which required five hundred millions of dollars to be accumulated in the Treasury of the United States for the purpose of preventing or arresting panics such as was experienced in 1893.
The panic of 1893 was not the result of faulty legislation. Neither was it due to the inelasticity of our currency, nor to an insufficiency or superabundance of its volume. It had its origin, as Mr. Eckels stated, in a loss of confidence in the solvency of the banks, and this loss of confidence was inspired by a general knowledge of the unsound conditions in private and in public life, described by Mr. Lacey in his report for 1891, and the speculative and venturesome character of the investments and loans in which the funds of many of the banks had been risked.
The five hundred millions of dollars of emergency circulation held in reserve in the Treasury of the United States, if promptly let loose at the opportune time, would no doubt have arrested a panic, as was demonstrated in later years, but it would not have prevented one. A redundancy of circulation for immediate use in an emergency is no more a guaranty against a financial panic than the existence of an effective fire department is an insurance against fire. If promptly put in operation, they may ameliorate the situation or check the conflagration, but neither will prevent the outbreak. Confidence alone in the stability of our banking institutions will prevent panics, and anything that tends toward inspiring confidence in the soundness of our banks and the integrity and conservatism of their management will minimize the liability to panics or monetary disturbances of any kind.
At a dinner given at the Union League Club in New York City on the evening of July 18, 1893, Mr. Eckels, in referring to the panic of that year, said:
In conservative business centers the failures have been few, either in banking or in other lines. Bad banking at any and all times is dangerous and must inevitably bring disaster to those who engage in it. The present strengency has simply hastened the closing of some banks because they were inherently weak. Others have been closed as a resultant effect of having kept alive the operations of speculators in the extreme west and in portions of the south. The art has not yet been discovered of making something out of nothing, and the financier who stakes his all upon an unbuilt city reaching out into the waste places of the earth must bring about the ruin of his own and kindred institutions which have trusted in him and pinned their faith in assets yet unborn.
The simile of the "unbuilt city" used by Mr. Eckels could have been applied also to speculative ventures in mining, manufacturing and various other developing schemes which the banks during that period fostered and in many instances their officers and directors were interested in promoting.
The equipment of trunk railway lines with the block system and other safety devices against accident has materially increased the security of the traveler, but has not made collisions impossible. The system will accomplish its purpose if the men who operate the machinery faithfully and diligently discharge their duties, and the engineer who runs the train observes and heeds the danger signals with which he is familiar. But when one neglects his duty by failing to set the signals, or the other by disregarding them, and plunges ahead into uncertainty, disaster is the inevitable result, although the system is not responsible.
So, too, is it with banking. If the directors of banks honestly and faithfully discharge the duties that devolve upon them by law, equip their banks with the block system of prudence and conservatism and eliminate all hazardous ventures and speculative risks, the security of the depositor will be augmented in the same degree that the safety of the traveler has been increased by the adoption of modern safety devices.
Personal equation is the basis of confidence in banking, and confidence can be inspired and maintained only through an absolute reliance upon the honesty, conservatism and good judgment of the men who direct and manage our financial institutions.