house and dwelling of the country, together with the courageous action of the New York bankers and banks in importing gold and helping institutions assailed, stopped the panic and saved the country." Secretary Cortelyou on the Banks. The following are extracts from the response of the Secretary of the Treasury, Hon. George B. Cortelyou, to a resolution of the Senate of the United States calling for information regarding the operation of the Treasury during the panic period: Extracts from Report of Secretary Cortelyou on Events of Panic. In view of the importance of the subject and the wide discussion which has occurred in regard to it, it seems proper to summarize as briefly as possible the operations of the Treasury for the past year, and to follow this by a statement more in detail of the methods and reasons for some of the steps taken during the financial panic of 1907. In March, 1907, business conditions were becoming unsettled, and there shortly developed a period of acute stringency in the money markets which called for prompt and effective measures. Various relief measures were taken, and while this stringency was quite promptly relieved, significant indications of still further financial disturbance were apparent, and the Department therefore kept in very close touch with the situation in all parts of the country. was It was decided in the latter part of August to make each week substantial deposits of public moneys in national banks, with a view to facilitating the movement of the crops in various sections of the country. The Treasury was at that time in good condition to render substantial aid in this direction. The nominal cash balance on July 31, 1907, $238,574,188. Of this amount $156,990,204 was on deposit in national bank depositaries to the credit of the Treasurer of the United States or to the credit of disbursing offices. The net excess of cash above deposits stood, therefore, before this distribution, at about $81,500,000, affording a considerable margin above the amount required for a convenient working balance. Beginning on August 28, and continuing each week until October 14, this plan of weekly deposits was followed, a total of about $28,000,000 being allotted to various banks. These banks were located in each of the 46 States, in the Territories, and in the District of Columbia. Every endeavor was made, from the information and requests at hand, so to distribute this fund that it would meet actual needs in sections where business activity was at the maximum and currency was most urgently required. About the middle of October events occurred which indicated that a monetary stringency had arisen much more severe than that which experience has shown usually occurs in the autumn in connection with the movement of the crops. Rumors were current concerning many manufacturing establishments and others interested in large projects, who were embarrassed by inability to raise ready cash to continue their operations. In New York City this condition was brought to a head by the appeal of several national banks to the clearing house committee for aid, which was quickly followed by the suspension on October 22 of the Knickerbocker Trust Company, after the payment of about $8,000,000 in cash to depositors. Almost immediately runs began upon two other large trust companies, deposits were reduced in many other institutions, money began to be hoarded by individuals, and on October 26 the New York banks decided to issue clearing house certificates. Before the decision of the New York clearing house to issue clearing house certificates, the Treasury transferred to the national banks within a few days the sum of about $35,000,000. These deposits, with the aid given to those banking institutions which were severely assailed by those which were less disturbed, tended to stay the panic which was otherwise imminent. In order to meet the demand for currency by the institutions which were subjected to pressure, the Treasury Department forwarded to New York within three days about $36,000,000 in small bills. While these were not in all cases used in making direct deposits of public moneys, they were available at the sub-treasury for any banking institution which desired to obtain them in exchange for bills of larger denomination or for coin. At a later date, gold coin was paid in many cases, at the request of certain institutions, because they found that payment of coin to depositors tended in a measure to discourage runs. It was not because the coin was preferred to notes; on the contrary, it was because depositors did not desire to be burdened with taking away the coin, and preferred notes of large denominations. It is, indeed, a source of gratification that at no period of the crisis was there the slightest suspicion of the integrity of the currency issued either by the Government or by national banks. The effect of the law of March 14, 1900, in creating an adequate gold reserve and providing necessary measures to replenish the reserve in case of need, so completely set at rest any distrust of the exchangeability of all forms of paper for gold that the subject was hardly mentioned anywhere, except as a cause of congratulation upon the effects of the gold standard act. The transfer of large amounts of gold from the Treasury to the banks made it necessary to run the mints at high pressure in order to comply with the requirements of the Act of March 14, 1900, that not more than $50,000.000 of the legal gold reserve of $150,000,000 should be kept in bullion. There was at no time any disposition to convert any form of Government paper into gold because of any question as to safety of the paper, nor was there any disposition to present gold certificates for redemption in gold coin. While the action of the Department in placing large sums in the national banks in New York was subjected to some criticism, it was amply justified by the conditions as they then existed and as they have been disclosed in the light of subsequent events. Figures given further along will show that the national banks in New York did not retain in their own keeping the public moneys received, but were enabled through their extended relations, as to reserve depositaries with banks of all classes throughout the country, to employ these moneys to meet a large proportion of the calls made upon them, An examination of the deposits made by the Treasury in the banks, from time to time, commencing in the middle of October, will show that as the stringency progressed the Treasury gave relief in every important locality where assistance seemed to be required. Some of the more important deposits were as follows: Chicago, $3,000,000; Pittsburg, $1,500,000; Cincinnati, $1,500,000; Minneapolis and St. Paul, $500,000; and in many places in the South and West, the public revenues, which ordinarily would be remitted to the various sub-treasuries, and thus taken out of circulation, were allowed to accumulate in national bank depositories. After the spectacular events in New York, however, which culminated in runs upon three important trust companies, the demand for money became so intense that the banks in the large cities were obliged to issue clearing house certificates to use in place of currency in settling balances among themselves; and in many places outside of New York certificates of small denominations printed in a form for general circulation were largely used. Thus each city endeavored to avoid the shipment of currency, and to retain for its own use such cash as might still be within its. control. It appears that in New York City alone clearing house certificates were issued in excess of $100,000,000. By the middle of November the Treasury had met the demand for relief to the extent that it had deposited with the banks all accumulated funds not needed for the immediate purposes of meeting Government expenditures, and had reduced the actual working balance to approximately $5,000,000. To allow the balance to fall below that figure was not considered prudent, as much difficulty was experienced in bringing into the Treasury public moneys actually collected at sub-treasuries and other revenue offices. The public revenues also were falling off, owing in part to the scarcity of currency, which prevented the payment in the form required by law of internal revenue taxes and of duties on imports. In the meantime, and as apparently no further deposits could safely be made from the diminished cash resources of the Treasury, national banks were notified that they would be permitted to substitute bonds suitable for savings bank investments for Government bonds which were held as security against public deposits. The purpose of this measure was to enable the banks to employ the Government bonds, which were thus released as security for additional banknote circulation, in conformity with law. To this offer the banks rsesponded promptly, and as a result many millions of additional banknotes were taken out and were employed in meeting the currency famine. As usual in emergencies, the difficulty of obtaining bonds, and other obstructions of detail, prevented the increase in circulation becoming effective to the full amount until some time after the need for it had passed. Just before the acute stage of the crisis, the national banknote circulation stood (on October 15) at $607,118,742. While strenuous efforts were made, especially by some of the large banks in New York and Chicago, to comply with the expressed wishes of the Department and of the Comptroller of the Currency to increase circulation, the amount outstanding had risen on November 1 only to $611,822,676, and on November 15 to $631,344,943. The most important increase in the circulation took place after the announcement, about to be referred to, of the Government issues of Panama bonds and one-year Treasury certificates, so that the circulation attained on December 1 the amount of $656,218,196; on December 15, $676,914,235; and finally, on December 31, $690,130,895. By the latter date the urgent pressure for currency had practically ceased and yet notes continued to be issued in compliance with orders previously received, until the outstanding circulation on June 5, 1908, last, was $698,511,588. The fact that the national banks were exerting themselves to increase circulation, and that the Treasury by these new issues placed at their command means of doing so, undoubtedly had a moral effect which tended to check the panic and reduce the premium on currency. The banks were hampered, however, before the announcement of the new Government issues, by the rapid advance in the price of 2 per cent bonds. These bonds sold as high as 110, and even at this price the supply in the market obtainable by national banks was extremely limited in quantity. It was with a view to relieving this situation, and counteracting the premium on currency, which was itself a stimulus to hoarding and which practically interrupted exchanges between different cities, that it was decided on November 17 to receive applications for subscriptions for $50,000,000 in Panama Canal bonds, under the Act of June 28. 1902, and $100,000,000 in 3 per cent certificates of indebtedness, under the Act of June 13, 1898. One of the direct effects of these issues was to afford to the banks the means of increasing their circulation. If the proceeds of these issues had been retained in entirety in the Treasury, the increase in bank circulation would have been offset by the amount paid by the banks for the bonds. By providing, however, for the transfer to the banks of a part of the purchase money as an addition to their holdings of public deposits at the time, a very considerable net increase in circulation became possible. on In order to afford this relief, the banks to which awards were made Panama bonds were allowed to retain 90 per cent of the purchase price as a deposit, and those to which allotments were made of the oneyear certificates were allowed to retain 75 per cent of the purchase price. Thus an inducement was offered for subscriptions to the new issues, as well as a means of increasing banknote circulation. It was the deliberate intent also that the offer was made more attractive in the case of the bonds than in the case of the certificates, after it became evident that the issue of the entire amount of the latter first proposed would not be required to restore confidence. Ultimately the results of these offers on the part of the Treasury were such that it was found necessary to issue only $24,631,980 in the Panama bonds and $15,436,500 in the certificates of indebtedness. Practically all of both classes of obligations, excepting $91,820 in bonds, were used as the basis for increasing the banknote circulation or securing public deposits. The Comptroller of the Currency refrained at the height of the panic from calling on the national banks for the report of condition usually required during November, but he issued such a call for reports of condition on December 3. The result of the call revealed what was expected in well-informed quarters-that much of the currency withdrawn from New York had been added to the reserves of interior banks. and that their position was execeptionally strong. The fact that the call had been made and the report submitted contributed another favorable factor to the situation immediately afterwards, by enabling the banks to release a part of this accumulated cash to meet the pressing needs of their clients, with the knowledge that they would probably be able fully to reinstate their reserves before another call was made by the Comptroller. The announcement of the issues of new securities by the Treasury, accompanied by the publication of a letter by the President to the Secretary of the Treasury, marked in some degree the turning point of the panic. The deficit in the reserves of the New York clearing house banks which on November 16 was $53,669,950, increased in the next week less than $500,000, and in the following weeks turned rapidly downward, until the amount on December 28, 1907, was only $20,170,350, and by January 18 had been converted into a surplus of $22,635,475. The cash holdings of these banks, which had touched a mininum November 23, 1907, of $215,851,100, rose on January 18, 1908, to $295,182,600. No further steps were considered necessary by the Treasury except to continue deposits of public moneys for a time where they were available, and early in December it became possible to replenish the cash in the Treasury by the withdrawal of about $6,000,000 from national banks in New York City. The premium on currency did not wholly disappear until about the beginning of the new year, but remained only nominal during the latter part of December as the panic subsided and as the funds withdrawn from banks for hoarding were gradually restored So rapidly did the money market improve after the tide had once turned that the call made by the Department upon the banks early in December for the return of $6,000,000 was followed on January 24 by another call for about $10,000,000 from New York banks, and this was followed on February 25 by a call for about $29,000,000, each bank having an available excess of $50,000 or over being called upon for the payment of 25 per cent of its holdings of public money. Voluntary payments from New York, Philadelphia, Baltimore, and Boston, in the meantime had brought nearly 10 millions back into the Treasury. On April 28, 1908, a call was issued for the payment of approximately $45,000,000, and this amount was overpaid by several hundred thousand dollars. In Europe, also, conditions began to improve rapidly with the passing of the crisis in America. The percentage of the reserve at the Bank of England rose from 35.62 per cent on January 2, 1908, to 52.69 per cent on January 16, and the directors felt justified in reducing the official discount rate from 7 per cent to 6 per cent on January 2, and two weeks later (on January 16) to 5 per cent. The gold stock of the bank, which had been reduced on November 7 to £27,725,225, rose on January 2, 1908, to £32,543,666, and on January 16 to £35,791,425. The Imperial Bank of Germany, which had been under severe pressure, benefited by an increase in its cash by about $20,000,000 in the single week of January 17, and a decrease in its note issue by $43,875,000, and under these conditions felt justified in reducing its discount rate from 7% to 62 per cent, and later (on January 25) to 6 per cent. The Bank of France also greatly increased its cash resources and reduced its discount rate early in the year. The Secretary did not feel called upon at any stage of the crisis to interfere directly with the normal movement of gold between international markets. The movement of foreign exchange was very irregular in the early stages of the crisis, because of some demand for remittances to London in settlement for maturing finance bills and in payment for American securities which were being remitted by disturbed foreign holders to the United States. The sum of $1,500,000 in gold was actually engaged for export to Germany on October 19, but was explained as being a special transaction. After a short period of uncertainty, however, exchange turned strongly in favor of imports of gold into the United States, and by the end of October engagements of over $24,000,000 were announced, which were eventually swelled during the next two months to more than $100,000,000. None of this gold arrived until November, but the moral effect of the engagements was felt as soon as they were announced. The metal was distributed, chiefly through the channel of the New York clearing house banks, to threatened points throughout the country. It is a striking proof of the energy with which the banks of New York extended aid to those of other parts of the country that the national bank returns show a reduction in specie in the national banks of New York from $173,221,007 on August 22, 1907, to $147,974,918 on December 3, 1907. Thus, not only did the entire volume of gold imported between these two dates pass through New York to other places, except so far as a part was hoarded by individuals, but the New York banks gave up $25,000,000 of their usual and normal reserves. Magnitude of the Crisis. The justification for taking vigorous action to arrest panic is found in the remarkable figures of the disapppearance of currency during the period of about six weeks from the suspension of the Knickerbocker Trust Company on October 22 until confidence was partially restored early in December. The amount of currency which disappeared from sight during this period, as nearly as can be ascertained from the national bank reports and other sources of information, was about $296,000,000, as follows: Cash absorbed in United States during the panio. 106,403,770 79,834,689 49,856,524 Reduction in cash in national banks, August 22 to December 3 $40,838,786 Total. 19,191,700 296,125,469 Of this great absorption of currency, amounting substantially to onetenth of the entire estimated money in circulation in the United States, more than two-thirds of the burden fell upon New York. This was almost inevitable from the fact that New York is the financial distributing center of the country. The figures show that more than the entire net loss in national bank reserves fell upon the national banks of New York City. The national banks outside of New York City, in spite of heavy demands upon them, were able by the aid of New York to maintain an amount of cash actually larger by a small amount on December 3 than they held at the date of the previous report to the Comptroller on August 22, when conditions were relatively tranquil. The national banks of New York City not only met the demand for currency until their reserves were reduced $54,103,600 below the legal limit, but in addition they imported and distributed $95,000,000 in gold, and distributed also, in order to meet the demands of their depositors and banking correspondents, all of the money of the Government deposited with them. The result was that of the $296,000,000 currency absorbed throughout the country, $218,275,304 was provided by the banks of New York City. The amount thus disposed of by New York banks and trust companies is shown in the following table: Currency absorbed through New York banks, Reduction in cash in national banks, August 22 to December 3 $41,692,312 94,095,481 47,576,356 15,719,455 19,191,700 218,275,304 Total. The gravity of the situation was enhanced by the fact that the pressure upon the money market was not localized in the United States. The first engagements of gold were from London and were met by a prompt increase of the Bank of England discount rate from 4 to 51⁄2 per cent on October 31, which was followed on November 4 by an advance to 6 per cent, and on Thursday, November 7, to 7 per cent-the highest rate fixed at the bank since 1873. In Germany, also, severe pressure was felt and the bank rate, after having been first advanced, on October 29, from 52 to 62 per cent, was further advanced on November 8 to 7% per cent-the highest rate charged by the Imperial Bank since its organization in 1873. The Bank of France, in spite of its immense holdings of gold, advanced its rate from 34 to 4 per cent for commercial discounts. So serious was the situation in London that aid was invoked from the Bank of France, and prudent American bankers felt it necessary to limit demands for gold upon London for fear that if they became excessive a commercial crisis would occur there which would intensify the danger of the general situation in all international markets. Arrangements for imports of gold into New York were made not only in Europe, but from the Argentine Republic, and Cuba, and the reaction of the American crisis upon Canada led to some importations into that country The energy with which the economic resources of the country were devoted to the relief of the situation is indicated by the manner in which exportation of merchandise was expedited by the railways and by dealers in foreign exchange. The figures of the movement of merchandise are among the most striking ever exhibited in the history of the country. They are briefly indicated in the following table: Foreign trade movement, August 1 to December 31, 1907. The Issue of Bonds and Treasury Certificates. The issue of new securities by the Treasury Department was influenced by the conclusion that it was advisable to take some strong and resolute step which would convince the public, both at home and abroad, that the Government was thoroughly alive to the situation and determined to give its aid in every possible legal and proper form. The most potent weapon at such times in bringing a crisis to an end is often as much one of moral effect as of the definite action taken. it has been the history of many great crises in Europe as well as in this country that the knowledge that adequate resources existed to avoid distaster was often sufficient. to obviate the necessity for employing such resources to their utmost limit. An illustration in point is the action of the Chancellor of the Exchequer in Great Britain in the panic of 1866, when the announcement that he had authorized the Bank of England to disregard the bank act and to issue its notes to any necessary limit promptly arrested pressure upon the banks. So prompt was the response of public feeling to this action in suspending the demand for discounts and the withdrawal of deposits that the bank did not find it necessary to avail itself of the authority to issue additional notes. The fear that accommodation could not be obtained by solvent business men was completely allayed and the panic almost immediately subsided. The fact that the Treasury was in a strong position in respect to its normal cash balance made the situation much more easy of control in some respects than after the panic of 1893, when the cash balance was almost completely exhausted and the reaction of this influence was felt in depleting the gold reserve. At that time the first issue of $50,000,000 in 5 per cent bonds was not announced until the cash reserve had been depleted below $50,000,000. And the same depletion took place before the second issue of bonds in the autumn of 1894. In the recent crisis it seemed advisable to the Department, in view of the much sounder condition of general business and of the Treasury than in 1894, to announce a strong measure of relief without waiting for the crisis to become more acute, It was with this view of the situation that the Secretary of the Treasury, in proposing to the President an announcement of an issue of $50,000,000 in 2 per cent bonds for the construction of the Panama Canal and $100,000,000 in 3 per cent Treasury certificates for one year, made the qualification that these amounts should be issued only "if nec essary. While the pressure upon the banks was not allayed at once by this measure, confidence was so far restored that the premium on currency fell immediately, and bids were received in such volume for both classes of issues that it was not considered necessary to allot even half of the total amount of the two issues. The Panama Canal bonds were issued under authority of the Act of June 28, 1902, as amended by the Act of December 21, 1905, authorizing the Secretary of the Treasury "to borrow on credit of the United States from time to time as the proceeds may be required to defray expenditures authorized by this act (such proceeds when received to be used only for the purpose of meeting such expenditures), the sum of $130,000,000, or as much thereof as may be necessary.' ་ It would seem to be obvious from this language that it was intended to construct the canal entirely from the proceeds of loans issued for the purpose and not to charge any part of the cost of construction upon the current ordinary receipts of the Government. As the entire proceeds of the bonds which were actually issued under this offer, amounting to $24,631,980, have been expended on the canal work, it would seem that no question of the legality or propriety of such an issue of bonds could be raised. The one-year certificates were issued under authority of the Act of June 13, 1898, authorizing such issues when necessary to meet the expenses of the Treasury. The criticism has beer. made that with a nominal cash balance of some $200,000,000 in the Treasury the occasion contemplated by the act did not arise and the power therefore did not accrue to the Secretary to make an issue of such securities to meet current expenses. From a strictly legal point of view there is probably no question that the determination of the occasion for making such an issue is within the discretion of the Secretary of the Treasury. Indeed, it is expressly made so by the statutes. From a financial point of view the Secretary felt justified in exercising this discretion with due regard to the amount of cash actually in the Treasury as well as to the amount shown upon the balance sheet, including deposits in national banks. It seemed to him that it would be a strained construction of the Act of 1898, and of his official responsibility, to hold that it was his duty, in order to meet the current needs of the Treasury, to invoke a financial disaster by attempting to withdraw funds on deposit with national banks at a time when they were subject to severe strain in meeting the business requirements of the country, and when any additional act or policy tending to subject them to further pressure might make absolutely impossible, if it were not already so, the return to the Treasury of the funds required for meeting its obligations. With a balance of only about $5,000,000 in actual cash in the Treasury, after setting off the necessary amounts against outstanding checks and other similar liabilities, Treasury operations could not be carried on with ease and safety without additional funds. If measures to obtain such funds could be taken in such a manner as to restore confidence to the financial situation as well as to perform the more direct service of keeping the Treasury balance adequate, it seemed to the Secretary that the adoption of a policy calculated to achieve these ends was not only within the strict limits of his legal powers, but was within his duty as responsible in some degree, under our existing fiscal system, for the soundness and security of the monetary situation. While the entire economic resources of the country were being devoted to the relief of the monetary stringency, not only on the part of domestic bankers, but by foreign exchange houses and by the railways in the prompt movement of |