Banking Panics of the Gilded Age

Published by EH.NET (March 2001)

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Elmus Wicker, Banking Panics of the Gilded Age. New York: Cambridge University Press, 2000. xvii + 160 pp. $49.95 (cloth), ISBN: 0-521-77023-8.

Reviewed for EH.NET by Frank Steindl, Department of Economics, Oklahoma State University.

Elmus Wicker’s fascinating new book on banking panics is an imaginative investigation into the 1873, 1884, 1890, 1893, and 1907 episodes. The concern follows naturally from his fundamental Banking Panics of the Great Depression (1996) and so it is not surprising that he compares banking upheavals between the two periods.

His point of reference and departure is Oliver Mitchell Wenworth Sprague’s 1910 classic History of Crises under the National Banking System. The allusion to the Gilded Age derives from the title and tenor of Mark Twain and Charles Warner’s tome of the first of the banking panics, a period of gross materialism and blatant political corruption during the 1870s. Neither materialism, as in the 1980s “decade of greed,” nor political corruption is of consequence in the narrative. Only materialism as understandable self-interest is an important player, and that principally is in the case of the New York Clearing House, the NYCH. This comes through with the subtlety of a sledgehammer in the penultimate chapter, in which Wicker asks, “Were Panics of the National Banking Era Preventable?” leaving little doubt that the answer is in the affirmative. But more on this later. First, let us tour the book, and a fascinating tour it is.

Wicker seeks to do three things. First and most prominently, he retreads the path pioneered by Sprague whose History “served its purpose so well as the principal source of our knowledge of what happened during this era that no work of comparable scale has replaced it” (p. xiv) — this being one of his several encomiums about Sprague. Secondly, there nonetheless are gaps, and these Wicker seeks to fill by going beyond Sprague in garnering evidence on the number of bank failures and the location of runs on banks, particularly outside New York. His evidence is based in large part on the financial publication, Bradstreet’s. Lastly, he concentrates on the NYCH and its vacillating and finally inept role.

Of course, there are other forays, one of which is an attempt to “test” whether the panics can best be understood in the Diamond and Dybvig (random withdrawal) hypothesis or the asymmetric information framework. He accepts neither one — the “evidence is mixed at best” (p. 145) — but does not offer an alternative suggestion, and rightfully so. Another is his attempt to detect whether the financial panics had any real effects. The Balke-Gordon and Romer GNP data are the basic materials.

The first chapter presents Wicker’s estimates of bank suspensions in each of the panics. The suspensions are by type of bank and whether in New York City or in the Interior. Included in the category of banks are private banks, which really are brokerage houses parading under the name bank. The principal assets in which they deal are speculative securities, but their liabilities are called deposits. Depositors knew full well that the redemption value of their deposits depended on the bank’s success in its speculative activities, that is, their deposits were far from fixed price. With apologies to Gertrude Stein, it is not true that a bank is a bank is a bank. Not surprisingly, failures of these private banks dominate the suspension data. The NYCH, Wicker’s bete noire, is brought into play in a useful table in which the dates of its issue of Clearing House loan certificates and suspensions (as well as resumptions) of cash payments are noted. One of the most important findings is that the number of suspensions was quite small.

The following four chapters discuss the specifics of the five banking panics, with those of 1884 and 1890 lumped together. The reason is that in retrospect neither seems like much of a problem, much less a panic. The 1873 panic, attributed to the failure of Jay Cooke’s merchant bank, saw reserve pooling by the NYCH, the only time it occurred in the five banking episodes. That reserve pooling was forsaken thereafter is one of Wicker’s central criticisms of the NYCH. Also, there was a suspension of cash payments. Of further interest, and this is original, the bank suspensions were concentrated outside New York City. Further, private banks — brokerage houses in effect — accounted for almost sixty percent of the suspensions. Unfortunately, Wicker was not able to get data on the size of the suspended deposits, much less their size relative to total deposits. As to Sprague, he “simply overlooked what was happening in the interior” (p. 22). The real effects were virtually nil, as neither the Balke-Gordon nor Romer (Christina, not Christine, as Wicker repeatedly mentions) real GNP series reported a sizeable drop.

The real effects on the 1884 and 1890 panics were even less. That output grew was not in question for either panic. Whether its growth increased or decreased is what was in dispute. Whether there really was a banking panic is less clear. Wicker basically concludes that there was a financial panic but not a banking one. In fact, he titles the chapter, The Incipient Banking Panics.

1893 is another story. This is the outlier in Wicker’s essay; the story of 1893 bears a closer relation to the panics of the Great Depression than do the others. The origin is not in New York but in the interior. Of the 503 suspensions, only three were in New York City. Because the troubles were far removed from New York, the money market banks, the members of the NYCH, were essentially unresponsive. In fact, the NYCH is virtually absent from the chapter. Of the banking panic narratives, the one in this chapter is by far the most detailed and fascinating. Here there are tales of ethnic community banks and runs. There also is specific attention to the particulars in several cities, among which are Kansas City, Louisville, and Portland, Oregon. Sprague recognized that the panic was in the interior, but was unable to get satisfactory data. Wicker fills this lacuna.

The real GNP data upon which Wicker relies exclusively argue against a depression in that year. This stands in contrast to the evidence in the Kuznets-Kendrick data, which Friedman and Schwartz used. They show an almost four percent annual rate of decline for 1893-94.

The last panic, the Trust Company Panic of 1907, is generally held to be the final straw, the one that set off the reaction that became the Federal Reserve System. The NYCH is nowhere to be seen, principally because the main difficulties were with the trust companies, no one of whom was a member. In its stead is J. P. Morgan who attempted, unsuccessfully as it turned out, to stem the tide. He failed because he “made the serious error of allowing Knickerbocker Trust to fail” (p. 84), largely on the advice of Benjamin Strong. The evidence on the real effects is mixed. Romer had continued expansion in 1907 whereas Balke-Gordon had a two percent decline. The following year, each had a sharp depression, 5.5 percent for the latter and 4.2 percent for the former.

The key to preventing panics was reserve pooling by the NYCH. As to the adequacy of reserves, Wicker’s calculations indicate that they were sufficient: “insufficient reserves were not the problem; it was the unequal distribution of those” (p. 146). Here he uses surplus reserves, which in fact are simply excess reserves as calculated from the fixed reserve requirements of the National Banking Act. Whether those excess reserves truly were surplus is of course the question. After all, the voluminous excess reserves of the middle 1930s,which were regarded almost without exception as surplus, seem not to have been surplus after all.

One of the important figures in the narrative is George S. Coe, whose 1873 report on the panic was in Sprague’s eyes “the ablest document which has ever appeared in the course of our banking history” (p. 127), an assessment seconded by Wicker. The key idea in the report was that bold leadership by the Clearinghouse, as in the “vigorous leadership [of] Coe” (p. 16) was required, if panics were to be averted. This is the central theme to which Wicker subscribes in his judgment that the NYCH failed to meet the task of averting panics because it was reduced to partisan infighting and rent seeking activities rather than “bold leadership.” The objection to pooling was not surprisingly an “equity” concern: well-managed, conservative banks should not subsidize “profligate” banks. The only red herring comes as Wicker considers the “puzzle” of the National Banking Act’s fixed reserve requirements as a measure insuring liquidity in banks (pp. 126-27). As commentators even back then realized, Morgan for instance, it simply is not a puzzle: reserve requirements do not provide liquidity.

The punch line on the question of whether the panics could have been averted thus comes down to the failure to exercise bold and effective leadership. In essence, there was no great man who alone would have pulled things through. Had the leadership of the NYCH not “bungled,” had “voluntary collective action” been executed effectively, the government via the institution of the Federal Reserve would not have “intervened to fill the vacuum” (p. 147).

I find this conclusion a distinct letdown after reading a truly first-rate study of the panics in the fifty years between the National Banking Act and the Federal Reserve System. This is a cop-out. What Wicker evidently is saying is that people should stop being human. If we rely on such counsel, if enhancing the national welfare depends on such, we are in for a rough time. Self-interest is too well ingrained to ask people to abandon it.

Frank G. Steindl is Regents Professor of Economics and Ardmore Professor of Business Administration, Oklahoma State University, Stillwater, OK. He is the author of Monetary Interpretations of the Great Depression (University of Michigan Press, 1996). His current research is on the economics of the recovery in the 1930s.