Evening star. [volume] (Washington, D.C.) 1854-1972, 1913-01-18
spicuous failure occurs. the orderly liqui-
dation degenerates into a pell-mell panic.
Currency Famine.

ApprehenSive depOSitOrS then increase
most their demands for repayment in
money, although at such a time deficient re-
serves render banks least able to pay. To
prevent complete exhaustion of reserves.
banks may restrict payments in money.
This, of course, intensiffes apprehension.
The people generally are 1mpelled to
hoard. and the normal flow of money out
of circulation into bank reserves and out
of bank reserves into circulation almost
ceases. A premium of from per cent
to 5 per cent was bid for currency during
the panic of 1907. payment to be made by
checks upon great banking institutions
which. while abundantly solvent, felt UNI
able to meet their contracts to pay de-
positOrs in money on demand. 1t was ar
ranged that these checks, when presented
through the clearing house, need not be
paid in money, the bank pledging its loan
assets as guaranty of payment later on.
This Is the process of issuing clearing
house certificates. 1t will be observed that
1t is a conversion of loan assets. not into
means of payment. but means OF settling
liabilities with agreements to pay at I'M
determined future dates.
During a currency famine the volume
of money in the hands of the people and
of the smaller banks is actually greater
than usual, as the reserves of banks in
the larger cities have been depleted.
Money does not leave the country. On
the contrary, the banks in centers set
about importing gold. over $100.O00,OoO
being brought in during November and
December, 1907, to the great disturbance
of the commercial serenity of the whole
world. The banks were able to get this
gold, at least in part. by promising to
pay for 1t later on. pledging their invest
ments security. This again was the
use of investments to obtain means Of
paying liabilities.
Suspicion Curtails Business.
Fear in a panic is unreasoning and
brings under suspicion the solvency of
every one. The use of credit, of promise
to-pay money is largely discontinued.
and this calls for proportionately in
creased use of money at a time when
money disappears. General business in
which normally more than 80 per cent
of the settlements are made with prom
ises-to-pay money, suffers tremendous
curtailment. Factories shut down, de-
velopment enterprises stop. labor is idle.
merchants are embarrassed. securities
find a narrow market and sell at greatly
deprecated prices. The losses are meal
culable. The poorest suffer most, as
continuity of employment is most vital
to them.
Following such confusion, order grad
ually comes with the slow re-establish-
ment of confidence. When. after the
more again the banking machinery
proves it's inefficiency and the destruc-
tive processes are repeated.
Panics Avoidable.
The experience Of other countries, with
banking mechanism based on the princi-
pie of Capitalization of reserves. proves
that such panics are entirely avoidable.
but with our system. If business becomes
very active. with the accompaniment of
large crops, the apparent evidence of
greatest prosperity. this very condition
precipitates a panic, suddenly converting
prosperity into disaster.
The chief fault, then, Of our banking
system is that panics and currency fam
ines are precipitated because it's mechan-
ism is defective in that there Is no ade-
uuate provision for converting loan as
sets into means of paying liabilities.
Pasadena, CAL