Of the twelve annual reports made to Congress by Mr. Knox during his long service as Comptroller, perhaps the most interesting, at least the one that seemed to be most in demand, is the report for 1876, in which he reviewed other systems of banking before the establishment of the national system, beginning with the Bank of North America at Philadelphia, organized in 1780. This was the first bank that had any direct fiscal relations with the Government. The First and Second Banks of the United States were briefly sketched by Mr. Knox, and the struggle which led to the dissolution of the latter.
This report also contains an interesting chapter on the First Bank of Massachusetts, incorporated in 1782, and the Suffolk system of redemption of banknotes. The Bank of New York, which began business in 1784, under articles of association drawn by Alexander Hamilton, who was one of its first directors, and other banks subsequently organized, are concisely described, together with the politics of that period, which appeared to be a controlling factor in the procurement of bank charters in the early days of the Republic. These subjects were followed by a discussion of banking in general as conducted throughout the States of the Union before the national banking system was established, and the whole question is presented in a concise and convenient form, which makes the volume a most interesting book of reference for students of banking in the United States prior to the Civil War.
The Panic of 1873
The first of the most important events that occurred during the administration of Mr. Knox was the panic of 1873.
Much has been written on the subject of panics and their causes, and various theories have been advanced as to their origin, but hardly any two writers agree in whole as to the conditions which produce such periodical outbreaks or the remedies necessary to prevent their recurrence.
The same general conditions that have preceded and culminated in panics have existed at other periods and have been successfully passed over without any material disturbance. Every panic that has occurred during the existence of the national banking system has found its precipitating cause in some bank or business failure occurring at a time when conditions throughout the country were favorable to disturbance. The same initial disturbance happening at another period would probably not have extended beyond the city in which it occurred.
The panic of 1873 was no exception to this rule. Whatever may have been the underlying conditions which made the time propitious, this disturbance started in New York City in the failure of the Warehouse Security Company, which suspended Sep-tember 8th. This company was organized for the purpose of making advances to dealers in grain and produce, but it became involved in the financing of the Missouri, Kansas and Texas Railroad. This failure was followed immediately by the suspension of the banking house of Kenyon, Cox & Company, which became similarly involved through the indorsement of paper of the Canada Southern Railroad, to the extent of about $1,500,000. Several of the smaller stock-brokerage firms suspended at the same time and were followed in quick succession by the failure of Jay Cooke & Company, Fisk & Hatch, the Union Trust Company, the National Trust Company, and the Commonwealth National Bank, of New York, and by the First National Bank of Washington, D. C, with which the Cooke family were connected. The New York Stock Exchange closed its doors for the first time in its history and remained closed for a period of ten days. The panic rapidly extended to other large cities and soon became general throughout the country. Currency payments were suspended, at first by the New York banks, and later by the banks in other large cities, and legal-tender notes commanded a premium of from one-fourth of one per cent. to three per cent. over certified checks. The New York Clearing House Association resorted to the expedient of issuing clearing-house certificates in denominations of five and ten thousand dollars, bearing interest at seven per cent. Between September 22, the date of the first issue of these certificates in 1873, and November 20, the date of the last Issue, $26,565,000 were issued, all of which were redeemed and canceled in less than four months from the date of the first issue.
These certificates took the place of cash in the settlement of balances between the clearing-house banks, and their issue had the effect of restoring confidence of the banks in each other and the resumption of currency payments, which had been suspended for about forty days.
This panic occurred in the midst of prosperity, preceded by four or five years of general activity in all lines of industry. There had been an abundant harvest. The marketable value of the products of the year were estimated to be equal to, if not greater than that of the several previous years, and there was every indication of a good fall trade which had already set in. What, then, was the cause of this panic?
In his annual report for 1873, Mr. Knox ascribed the underlying cause to be as follows:
The money market had become overloaded with debt, the cost of railroad construction for the preceding five years being estimated to have been $1,700,000,000, or about $340,000,000 annually, while debt based upon almost every species of property, state, city, town, manufacturing corporations, and mining companies, had been sold in the market. Such bonds and stocks had been disposed of to a considerable extent in foreign markets, and so long as this continued the sale of similar securities was stimulated and additional amounts offered. When the sale of such securities could no longer be effected abroad, the bonds of railroads and other enterprises of like nature which were in process of construction were thus forced upon the market, until their negotiation became almost impossible. The bankers of the City of New York, who were burdened with the loan, could not respond to the demands of their creditors, the numerous holders of similar securities became alarmed and the panic soon extended throughout the country.
The banks of New York City, Mr. Knox stated, were largely responsible for bringing about the conditions which led to this panic. Their intimate relations with the transactions of the Stock Exchange contributed in a great measure toward creating and fostering the fictitious valuations attained at home and abroad for railroad and other corporate securities, and when a foreign market could no longer be obtained for them they were unloaded upon an already surfeited home market, which collapsed under the strain and the panic followed.
While the acute stage of this crisis was of short duration, the country at large did not fully recover from the business prostration resulting therefrom for several years, and, as Mr. Knox stated, not until after the resumption of specie payments.