Panic of 1884
The country enjoyed five years of prosperity following the depression ending in 1878, during which time the foundation was laid for the panic af 1884. This prosperous period produced a new crop of promoters and speculative bankers, who through the prestige of initial success and strong financial backing, were able to secure control of many of the railrmld companies and other enterprises.
As soon as control was secured the method usually followed was to greatly increase the capital stock and bonded indebtedness and to market these overvalued stock issues through widespread advertising and other promotion methods. When the day of reckoning came many of these promoters resorted to swindling schemes to cover their losses, such as issues of bogus stocks and bonds, misappropriation of funds, and defalcations. The over-capitalization of railroad companies caused the over-stimulation of railroad construction and allied enterprises-iron, steel, mining, and public improvements.
The stock market collapsed in May 1893, and a month afterwards, in June 1893, distrust of the fractional-reserve banks led to massive bank runs and bank failures throughout the country. Once again, however, many banks, national and state, especially in the West and South, were allowed to suspend specie payments.
The Panic of 1893 was on. In a few months, Eastern bank suspension occurred, beginning with New York City. The total money supply — gold coin, treasury paper, national bank notes, and national and state bank deposits — fell by 6.3 percent in one year, from June 1892 to June 1893. Suspension of specie payments resulted in deposits—which were no longer immediately redeemable in cash — going to a discount in relation to currency during the month of August. As a result, deposits became less useful, and the public tried its best to intensify its exchange of deposits for currency.
By the end of 1893, the panic was over as foreign confidence rose with the Cleveland administration's successful repeal of the Sherman Silver Purchase Act in November 1893. Grover Cleveland, a hard-money laissez-faire Democrat, was blamed for the Panic of 1893, and many leading Cleveland Democrats lost their gubernatorial and senatorial posts in the 1894 elections.
The following 1llustrates the activities of the promoters and financiers of this era: George Ingraham Seney, president of the Metropolitan Bank, organized what was known as the Seney Syndicate. He first made a fortune in the promotion of the Nickel Plate Rallroad, selling out to the Vanderbilt interests. Later he gained control of the Ohio Central, East Tennessee, Virginia & Georgia, and the Rochester & Pittsburgh Rallroads, all of which were used for speculative purposes. Huge stock issues in these railroads were floated by Seney through glowing promises and widespread advertising. Seney also used the exchange house of Nelson Robinson & Co., of which his sons were managers. in the promotion of his various projects.
Another banker who played a prominent part in the affairs of this era was John C. Eno, who, at the age of 26, through his father's influence, became president of the Second National Bank of New York. This inexperienced young man immediately saw visions of becoming the leading financial figure of the day, and plunged into all kinds of gambling and wild speculative ventures, using the great funds at his command for this purpose.
Two young men, Ulysses Grant, jr., son of ex-President Grant, and Ferdinand Ward, both inexperienced in financial a:ffalrs, organized the brokerage fi1m of Grant & Ward, with the banker, James Fish, president of the Marine Bank, as their silent partner.
Ward was intrusted with the entire management. This young man proved to be a common gambler, unscrupulous, even dishonest in his dealings. He used the prestige of the ex-President's name to further his speculations. At first Ward's ventures were apparently profitable, but disaster followed his speculations at the beginning of the depression, and in order to cover his losses he resorted to huge swindles. When his speculations came to light it forced the closing of the doors of the Marine Bank, which had advanced large sums of money on the unprotected notes of Grant & Ward.
The closing of the Marine Bank and the suspension of Grant & Ward precipitated the panic. The failure of Grant & Ward also uncovered a series of thefts and bad speculations involving the Seney Syndicate, the Eno Bank, and many other financial institutions. It was found that Eno alone had misappropriated some $4,000,000.
The Panic of 1884 began with the closure of Marine National Bank, which had made uncollectible loans to the failed brokerage house of Grant and Ward. Then a run ensued on the Metropolitan National Bank, which led to its temporary closure after rumors it was involved in fraudulent activity.
Henry W. Cannon, a Minnesota banker, was named Comptroller by President Arthur. After only a few months in office, he was confronted by the financial panic of 1884. A nationwide crisis was averted because the New York Clearing House Association quickly extended credit to threatened banks.
The structure of the U.S. banking industry during the National Banking Era makes it easy to identify systemically important banks. During this period, New York City banks functioned as the ultimate depository institutions where interior banks sent their interbank deposits to satisfy their reserve requirements. Due to the high degree of concentration of bank reserves in New York City, disturbances in New York City banks created disruptions for interior banks.
One defining characteristic of the U.S. national banking era was the concentration of country national bank funds in the cities. The National Banking Acts of 1863-64 designed a reserve pyramid with three distinct tiers. The top tier consisted of banks located in central reserve cities. New York City was designated as the only central reserve city in the original act with Chicago and St. Louis added to the list in 1887. The middle tier of banks was reserve city bank. The number of reserve cities changed over time as new cities were added and some cities were removed from the list, from 18 at the time of the original act to 15 in 1881, to 20 in 1887. The bottom tier of the pyramid was country banks.
Central reserve city banks were required to hold a 25 percent specie reserve on deposits. Central reserve city banks had to keep all their reserves in their vault. Reserve city banks were required to hold a 25 percent reserve on deposits. They were allowed to hold one-half of the 25 percent as deposits with a correspondent bank in a central reserve city with the rest in cash. Lastly, country banks were required to hold a 15 percent reserve on deposits. They could keep three-fifths of the 15 percent as deposits with a correspondent bank in a reserve or central reserve city with the rest in their vault.
The Panic of 1884 does not qualify as a full-scale banking panic. First, depositor confidence did not wane either in New York or the interior. Second, deposit runs and bank closures were bank-specific. Third, the prompt action by the New York Clearinghouse in coming to the aid of the distressed banks by authorizing the issue of clearinghouse loan certificates prevented the banking difficulties in New York from worsening and from spreading to the interior.
During these years even the most conservative financiers were drawn into moneyed conquests. Henry Morgan was caught in the slump of the Denver & Rio Grande; Russell Sage in the crisis of '84. Failures and defalcations occurred at intervals all during that summer. While the panic of 1884 was more local and less severe than that of 1873, the collapse of the prosperous era again can be traced to the same frailties of human nature, namely, the people being swept away by optimism and led into speculations in all kinds of enterprises through the promotions sponsored by professional promoters and financiers.
There was a tremendous decline in stock prices following the money panic. Commodity prices continued very low through 1885, with a gradual return to prosperity in the year 1886. The depression brought some reduction in wages, causing labor disturbances; coal strike in the autumn of 1884; anti-Chinese riots in 1885; Knights of Labor railroad strike and coal strike in March 1886; and the Haymarket anarchists massacre in Chicago in May.
Contemporaneous depressions existed in England and other countries of Europe. There was a slow recession of business in England in 1883, followed by depression in 1884, 1885, and the first part of 1886, with a slow revival in the latter part of the year.
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