There are two kinds of panics - the commercial or business panic, and the stock-market panic. A commercial panic affects the country as if it were stricken with paralysis. In most cases it is induced by over-expansion. A stock-market panic is an affair more localized, whose injurious influences may prove of temporary duration only.

Causes Of Panics

Some economic theorists attribute the responsibility for business panics to an excess of speculation. I am, however, inclined to the opinion that speculation is rather the symptom of it than the actual cause. It is a human trait, during prosperous periods, when money-making becomes a comparatively easy task, to keep on expanding as long as capital can be borrowed with which to spread out.

The result is an excess in speculation. The more easily profits come, the more daring is the use for which they are employed. Men who have accumulated their fortunes rapidly are anxious to double their wealth, then to triple it, and then to quadruple it. The more they make, the more they want. They blindly plunge ahead without considering that the pace they set cannot always be maintained. They raise their structures on weak foundations. Therefore, they are totally unprepared to withstand any pressure placed upon their resources by a sudden tightening in the supply of capital, of which they have been free borrowers, and they quickly find themselves financially embarrassed. Creditors demand their money; they cannot always get it. As other creditors are in turn dependent upon them, they are quickly and similarly affected. Like a prairie fire, financial embarrassment then jumps from one place to another, wiping out weak business structures and impairing sound ones. A policy of drastic curtailment is hurriedly enforced in every direction. Capital grows extremely apprehensive and is not obtainable except at usurious rates of interest and only on gilt-edged collateral. Fear also largely enters as a factor into a business panic. In fact it is from fear the name "panic" originates. There is a sudden rush of creditors for their storm cellars, and values are sacrificed and often go begging. It is then that the unprotected suffer the most. They are composed of that class of borrowers who have borrowed until they have nothing left in reserve - no other collateral to offer to protect their outstanding loans when payment is demanded without delay.

Here we find a real estate operator forced into bankruptcy because he was over-extended, there a wholesale merchant, and at another point a large retail merchant. Banks are discovered to be in a weak position, for their loans are in collateral which cannot be marketed quickly, and their reserve in cash is at such a low ebb that they cannot long withstand a run from affrighted depositors.

All this is the psychological side of a panic. While panics are largely the outcome of over-expansion, the severity of their effect is produced by fear. This is demonstrated frequently enough in the process of readjustment following, when embarrassed ventures are brought back to solvency without any loss to the creditors.

Nor do panics often throw before them the shadows of their coming. They generally burst upon us unheralded and when least expected. The first signs of the panic of 1907 appeared in March, when there occurred a sharp and sudden break in the prices of securities, for what reason few at the time were aware and others only half surmised. The immediate cause was the sudden demand for a large amount of capital from interior banks when the financial centers were unprepared to meet it.

That the stock market should furnish the first warnings of a panic, is but natural. It is here in the first place that over-speculation, the most pronounced symptom of a panic, converges, and as it is a quick market it is to this point also that lenders of capital hurriedly rush to liquidate their loans and get their money back. Months afterwards the effects begin to make themselves felt at distant points.

Signs Of Approaching Panics

If we can consider that there are any visible forerunners of panics, carrying warnings ahead of their coming, I should say that they would make themselves apparent in at least three forms, namely, an excess of land speculation, excessive interest rates, and an abnormal shrinkage in the reserves held by the banks. These reserves are the percentage of cash to the amount of deposits on hand to meet the demand from depositors. But these indications are not infallible, for it has often occurred that where there existed all the conditions pointing to a panic, a panic never occurred, correctives being applied in time.

What makes an excess in land speculation a dangerous menace, is that it is the most unliquidable form of collateral for loans in hard times. Buyers cannot be found when they are wanted. Land speculation is also the last extreme of speculation. It marks the period of speculative excesses. Therefore its progress is closely watched by keen students of financial conditions.

The tightening in interest rates denotes a growing scar-city of available capital. Money follows the law of supply and demand, as it is but a commodity in the final analysis. When there is plenty of money interest rates are low, and they increase as it becomes scarce. The difference between loans and deposits in the banks shows their available cash resources. The smaller the difference, the greater the danger to business and the weaker is the structure to withstand the assaults of a panic or fear on the part of creditors.