Our Financial Troubles: The Government and the Panic in America 1873

From the London Economist, Nov. 1.

In one respect the panic in the United States brings out the relations of a Government to calamities of that kind in a form exceedingly simple. In most cases Governments must interfere; at a certain stage of the calamities, more or less advanced, they must give help for their own sakes. They have deposited the proceeds of taxation with some bank, and they must preserve that bank; they would be unable to defray their ordinary expenditure, and to pay the national creditor if that bank stops. Their money is part of the money market, and therefore they must support the money market. But the American Government is not thus in the money market; it keeps its funds in the Treasury, and does not deposit them in any bank. It can, therefore, consider without bias (which most Governments cannot) whether it ought to give or withhold help in panic; it can consider the permanent interest of the nation, and not its own momentary interest. In this respect the American panic is simpler than most panics, and in another, almost as important, it is also simpler. It is essentially a deposit panic; not a note panic. There is no doubt about the currency. Greenbacks, the inconvertible paper issued by Government, are not suspected, but hoarded; the national bank notes, being secured by the deposits of undoubted securities, are also in excellent credit. We have to consider only the duty of the Government to the banks, not its duty to the currency of the people. What, then, in such a panic, ought such a Government to do?

In England we have never had this precise problem to consider. Our Government has always been so placed that at last it must support the money market. Its money was deposited in the Bank of England, and it could not permit the Bank of England to fail. It is sometimes imagined that the necessity for the intervention of Government arises from the act of 1844. But this is a mistake. It had to interfere in one way or another years before the act of 1844 was heard of; in 1797 it helped the Bank of England by suspending the specie payment of the bank notes, in 1793 it issued exchequer bills itself: in 1825 it was on the very verge of doing so again. Our Government never could "let the money market take care of itself," for it would have lost its own money if it had. And behind the banking panic there has always been in England the possibility that the convertibility of the bank-note might be endangered. Since the act of 1844 this dread, no doubt irrational, is still , it is confessed; felt. The safety of the Banking Department of the Bank of England, and the safety of the bank note are not thoroughly distinguished. The public mind but vaguely apprehends the separation of the departments, and the simple case which the American Government is considering has never been before us. What, then, in such circumstances ought a government to do? In our judgment its duty is exceedingly easy to write on paper, and exceedingly hard to effect in practice. There is the gravest danger in its giving any kind of help; if possible, it ought to give no aid whatever. Banking is a trade just like any other: the lending of money is as purely mercantile a matter as cotton-spinning or match-making. In this case, as in others, help to the bad competitor is harm to the good competitor. If you want not to have good cotton factories you have only to subsidize the bad ones; you have only to say that the Government will pay the bills of insolvent cotton spinners, and solvent ones will not exist any more. In the same way the greatest discouragement to sound banking is a help to unsound. If you always help bad banks out of the difficulties, you will hardly ever have banks which are not in difficulties. Failure is the penalty which nature imposes on bad banking; and failure gets rid of the bad bank. But if Government prevent the failure, it not only shares the penalty but continues the evil. The bad bank still exists, and is the more trusted because it has been helped. As the Government has helped it once, the public expect that the Government will help it again. Probably the bank itself thinks so also; and having been saved once from the natural penalties of incaution it will not care much about being cautious again. Caution in banking, we must remember, means present low profit; rashness means present high profit. Banks helped by Government will always tend to be rash, and take the present high profit, because they are exempt from the only reason which would make them take the low profit they are certain not to fail.

These reasons are in argument perfectly conclusive; but we admit that it is most difficult for a Government to act on them. The collapse of a large system of banking causes so much evil, and that evil affects so many persons, that it is most difficult for a Government to be passive in it. On every side it is pressed on to "do something," and it is most difficult to refuse. A "cast-iron" executive would refuse. It would say: "All help to these bad banks is so much impediment to future good banks; it is so much sacrifice of future good to avoid present pain. We are trustees for the future nation, and we must resist the cries of the present nation." But a "cast-iron" executive like this is very difficult to find, and is especially difficult in free States. For an elected Government to deny the wishes of its electors is near to an impossibility. Though sound principle commands a Government to give no aid at a great collapse of banking credit, we do not expect that principle often to be obeyed. Much too often the present evil will be cured, though at the cost of greater evil. Things will be "made pleasant" for the time, no matter how unpleasant they may be afterward. The symptom will be abated, but the disease will be uncured.

Under these difficult circumstances President Grant appears to be acting very fairly probably as well as a person so placed can be expected to act. If he is not doing absolutely nothing, he is doing as little as he can. In two respects, indeed, his position is not quite so simple as it would at first sight appear. The American Government, though it has escaped the usual aggravations of a banking panic, though its own money is safe, though the currency is unsuspected, nevertheless has difficulties of its own. Its legislation has been unusual, and that legislation has had singular results. it prescribed that the banks should keep a certain reserve, and the panic was intensified because the public saw that the limit of that reserve was approached, if not infringed. As this part of the evil was caused by the past action of the Government, there can be no objection to its being retrieved by its present action. President Grant has, therefore, very reasonably connived at a temporary evasion of the law; it has been given out that the banks will not be required to make a statement for any date during the panic, and therefore, it will not be known what is their precise reserve, but no one doubts that it is generally less than the prescribed proportion. This is most certain to be the case with the New-York banks which have also suspended, since the panic, their usual practice of publishing weekly statements. There is nothing against principle in this connivance; on the contrary, it is in accordance with principle. In another respect, too, the position of President Grant is difficult and peculiar. The principal currency of America the legal tender of the country is supplied by the Government, and the scarcity of it is an underlying cause of the present confusion. A fixed quantity of currency has been maintained in the face of a rapidly augmenting trade, and in consequence money has been dear and prices have been depressed. here again, as Government caused the difficulty, it might be said that Government should cure, or, at least, alleviate it. But this would be said i n error. This case is not on the same footing as the former one; the requirement of a fixed reserve is a questionable benefit, which might be temporarily foregone without disadvantage. But the non-increase of the inconvertible paper during an augmenting trade is the remedy, the painful but necessary remedy, by which that paper has gradually been raised much nearer to the level of gold than it was once. The application of that remedy cannot be interrupted without serious evil: its progress is necessary to the future welfare of the country. The present bad currency is at the root of the American disasters, and till it is removed the country is not safe from a recurrence of them. But every additional "greenback" issued at the present crisis is an interruption of the remedy. If President Grant were now, as he has been much urged, to issue a large number of new greenbacks, those greenbacks would remain in circulation, and would, in part, undo the beneficial work which has been already done; they would augment the premium on gold and increase the depreciation of the paper. Against such demands President Grant has in the main been firm. He has yielded only to this extent. There are in the Treasury, as we have before explained, some $44,000,000 of greenbacks, which once made part of the currency, but which were formerly withdrawn from it; a part, and only a part of these withdrawn greenbacks have been reissued at this crisis. Perhaps even this was contrary to principle, and the Government had better have abstained from it; but in such a moment, in a system of Government so popular, and after demands so urgent and prolonged few Governments would have been so firm, few would not have deviated further from the strict letter of economical teaching.

It is important also to observe that just as the American Government is in a peculiarly advantageous position to do its duty, and to refrain from making advances, it is in a peculiarly disadvantageous position if it deviate from its strict duty and make those advances. A Government like ours, or like the French Government, has a skilled agent whom it can trust to make them; the Bank of France or the Bank of England can safely lend at such junctures, while neither Government could do so without great peril. It was partly from the consciousness of this great difficulty that, in 1825__the greatest of our panics__the English Government itself refused to lend anything, but encouraged the Bank of England to lend to its last shilling. But the American Government has no similar resource; it has no skilled intermediary; it is face to face with the banks which have failed and with the naion which is distressed. it must itself lend all which has to be lent, and to give full relief to give, for example, such relief as the Bank of England gave in the panic of 1825__it must lend much, and it must lend on all sorts of securities, by the discount of bills, on the deposit of shares, and in all kinds of various ways. In most countries a Government would be much puzzled to judge of such miscellaneous securities, and at New York, it would be puzzled almost more than anywhere else, for such securities are there unusually treacherous, and the borrowers are unusually devoid of scruple.

On the whole, therefore, we consider that up to the present time the American Government has performed with great discretion the difficult duties which devolve on a Government during a great panic, and we hope that it will to the end of the panic preserve the same discretion, and be able to act upon it.


Website: The History Box.com
Article Name: Our Financial Troubles: The Government and the Panic in America 1873
Researcher/Transcriber Miriam Medina


The New York Times November 15, 1873 Page: 4
Time & Date Stamp: