THE CHICAGO 'BAJVK.E'R
	Founded in 1898
Volume xxv	CHICAGO, OCTOBER 17, 1908 Number 16
Banking Conditions in Illinois
recovery. Many conservative bankers saw this trend of affairs, and urged large debtor clients to curtail their operations, reduce their indebtedness and collect outstandings. In other words, we began to haul in sail and would have reached the port safely had not other squalls come up.
The dangerous position in commercial affairs which I have endeavored to outline was accentuated by the two other factors referred to before—our faulty currency system, and a deplorable shock to confidence.
The evils of our present inflexible currency have been so frequently and so ably pointed out during the last few years that I need not exhaust your patience by restating them; suffice it to say that as long as the volume of our circulating notes does not respond to the demands of business; as long as there are piled up in centers, at certain seasons of the year, large sums of money which are forced into the channels of speculation and yet are subject to withdrawal either for legitimate needs or for the building up of needless reserves in country banks; as long as we cannot increase—within certain limitations, of course —and decrease—without limitation—our circulating notes, just so long will we be subject to dangerous upheavals.
But even that fault in our system, deplorable as it is, while apt to create a distressing stringency, would not have landed us in the throes of a panic had it not been for the third element —the shock to confidence.
The unrest and dissatisfaction created by developments in the management of the great insurance companies had gradually subsided when a system of financiering came to light in the leading city of the country which cannot be condemned too strongly. A set of speculators had bought the controlling interest in the stock of moderate-sized New York banks, hypothecated it in other banks, and with the proceeds bought stock in still other institutions, until they controlled a group of banks for the evident purpose of using them in the furtherance of their speculative schemes. The house of cards tumbled down when the New York Clearing House Committee demanded that the entire directorate of a national bank, and certain directors and officers of its affiliated institutions should resign; then came the wild runs on a number of New York and suburb m banks; the suspension of the Knickerbocker Trust Company with $63,000,000 deposits; the closing of a number of minor institutions—and the crash was upon us.
The foregoing is a brief and necessarily incomplete outline of the history of the crisis. But what of the lessons? 'they are quite obvious. A tyro can draw correct conclusions from the premises presented. First and foremost must be emphasized certain well-established banking principles which can never be disregarded with impunity. Every banker, deserving the name, knows that in commercial banking loans must al a ays be based upon the quick assets of the borrower in such proportion that the latter can be realized upon with a sure and ample margin over liabilities; that loans should be made for seasonal requirements. and for the purpose of affording to legitimate business the facility of making future collections presently available. If these rules are followed the undue expansion of
Retiring President August Blum reviews events in his administrative year with those under Nelson H. Greene before the Chicago convention of bankers
approaching crisis quite a number apply to our own case in 1907. He mentions: overboldness in new undertakings; wild speculation ; general extravagance in the mode of living; a sharp advance in prices of the necessaries of life, of articles of luxury, and of raw material; unusual rise of wages, attended by strikes and extravagant demands on the part of labor organizations; an advance in interest rates owing to increased demands for bank loans, and, finally, a steady, unexplained decline in the quotation of stock exchange securities.
To what extent these symptoms made themselves felt prior to October 26th, I need hardly point out to this assembly. You cannot fail to recognize a number of them. There were, however, other underlying causes which our author does not mention but which future historians will have ample occasion to dwell upon.
Authorities on political economy have divided commercial crises into three kinds, (caused respectively by,
1	1. Insufficiency of capital, or capital crises;
i! 2. Insufficiency of the circulating medium, pr monetary crises, and | 3. Want of confidence, or credit crises.
Such a division is valuable on scientific and Analytical grounds, like the knowledge of chemical elements in a given body. But these elements never appear in pure form, they always present themselves in varying combinations.
During the first nine months of last year general business had reached an unprecedented activity. Manufacturers and merchants enjoyed a prosperity which it is s..fe to say they had never enjoyed before. The demand for raw material and finished goods exceeded all previous records. Nothing was therefore more natural and in keeping with the spirit of our people than an effort to marshal all resources at command, to strain production and purchases to the utmost, and this, in turn, created an unparalleled expansion of commercial and banking credits. The expansion of commercial credits was reflected in every financial statement submitted to banks as the basis for discount accommodations. As to bank credits, the “loans and discounts” item in the published bank statements, as shown by the Comptroller’s reports in the summer of 1907, rose to figures never before attained.
Had these loans all been made for current commercial commitments, had they reappeared on the other side of the national ledger in the form of merchandise, book accounts and other convertible assets, the crisis would not have been desperate. Unfortunately, however, a large amount of money w as transferred from liquid capital to fixed capital in the form of buildings, pi nts and machinery, with the inevitable result that loanable funds became scarce, discount rates unusually high, while bank reserves suffered a material reduction. This feature of the crisis, the capital crisis as we have called it, would have been overcome by a slow adjustment involving many hardships, some failures, but ending in gradual
The honor that has fallen to my lot of opening the eighteenth annual convention of our association is accompanied by the great pleasure of welcoming you to our city, which receives you with open arms and hospitable hearts. We trust that your stay here will be full of interesting and joyful experiences and will prove a source of pleasant recollections for many years to come.
An eventful year lies behind us. Since we Last met in annual convention the country has passed through an ordeal that will make 1907 stand out in large black type like 1837, ’37, ’73 and ,93. In his address at Moline my honored predecessor summed up the financial condition of the country in the following words:
“Since our last convention our country has been making great progress in adding to its material resources and power, and ever increasing has been the nation’s wealth. There have been abundant crops, which have been safely husbanded and marketed at good prices; our factories, mills, and all other classes of manufacturing plants have been working steadily, and a good market has been found for their output; our railroads have been straining their resources to meet the increasing demand for transportation facilities; our warehouses are filled with nature s products awaiting shipment to the world’s markets; our mines have been worked to their full capacity, and their output has found ready consumption; our banks, through the varied industries so actively engaged in their various pursuits, have had a good demand for all their loanable funds at good rates of interest; in fact, there has been little, if any, slackening in the onward rush of business, and prosperity is indeed very much in evidence in all fields of business endeavor.’’
This was a truthful description of conditions as they appeared on October 9, 1907. Yet, only seventeen days thereafter the New York Clearing Blouse decided to issue loan certificates, which measure was quickly followed by clearing houses and associated banks throughout the country. Currency payments on the part of banks were restricted to narrow limits; deposits declined sharply; credit was undermined, and all the phenomena of a panic, with which we are only too familiar, confronted the community.
It is true President Greene did not fail to sound a note of warning. The signs of impending storm were seen on the distant horizon by others, but the suddenness with which the sky was overhung with black clouds as the roll of thunder broke forth was appalling.
We now look back upon that period as a matter of history. But, lest we forget, it is meet on an occasion like this that we review the event, inquire into its causes and try to draw some v. holesome lessons from it. I therefore trust that I need offer no apologies for making it the subject of my annual address.
A crisis like the one of 1907 is a complex affair. The doctors do not agree in their diagnosis; some say it was due to insufficient circul'tion; others regard it as the result of an overdose of strenuosity; others maintain that industrial vertigo u׳as the cause of •the malady. The truth is that a number of conditions affecting the entire system worked towards the consummation of the catastrophe.
Among a dozen symptoms which a noted writer points out as the sure indications of an