Much space is devoted by economists to the subject of credit and its abuses as a cause of crises. The extensive obligations contracted during normal times to conduct business enter prises are based largely on physical assets and partly on the faith of the lender in the ability, character and integrity of the borrower. Such obligations are usually of indefinite maturity, though the loans are mostly for a short time only, and the borrower may be called upon to liquidate his indebtedness quickly. Good times may mean easy money and the unwary capital ist may loan his money to inexperienced, inca pable, oversanguine or speculative investors. One of the results of easy money is the ten dency of those in charge of business enterprises, on obtaining a loan, to divert the funds to other than immediate actual requirements. During periods of depression production is curtailed and often discontinued entirely, wherefore stocks of goods become depleted. On the re turn of confidence and the renewal of activity, through the resumption of buying by the public, the manufacturing plants experience difficulty in filling orders and their owners or managers therefore borrow money or cut down their working capital to remodel and extend their plants or to purchase extra equipment or for some other form of fixed asset. Often large sums are invested merely in anticipation of future increase in demand and production, mills and railroads being excellent examples of such preparations for future prosperity. Usually this work is carried too far; the means of produc tion outstrip the demand for goods; the ratio between current assets and liabilities is reduced; and such enterprises, with impaired working capital, are liable to insolvency when trade de pression sets in. In order to prevent the dis ruption of industry through the over-extension of credit there must be some means to safeguard the granting of short time or indefinite credits and an emergency currency that will allow a large portion of these loans to be liquidated safely within the brief period of a panic. The usual safeguards are the credit reports of the mercantile associations, the registry of com mercial paper and the demand for audits by certified public accountants. The facilities for quick liquidation have been extended by the Federal Reserve system of banks. See Caznrr; CURRENCY ; BANKS AND BANKING - FEDERAL RESERVE SYSTEM.
Crises have been confined practically to western Europe and to the more advanced American countries. In the United States the most notable crises have been those of 1819, 1837, 1854, 1857, 1873, 1884, 1893 and 1907. These were nearly coincident with crises occurring in England, and the crises of 1836-39, 1857 and 1873 may be called international in extent. Prior to and during the War of 1812 there had been much wild-cat banking and the country was launched on a paper money era, the banks being unable to secure specie sufficient to redeem even a small portion of their paper. In 1814 Congress refused a charter to a proposed national bank and people began to lose faith in banks and to withdraw their money. Banks in the South ceased to redeem their notes and on 28 Aug. 1814 the Philadelphia banks suspended specie payments, followed by others in the North and in Ohio, until every bank in the seaboard States had taken similar action. But by threats and legislation the State and Federal govern ments compelled these banks to resume specie payments which the majority had done by the latter part of 1817. Meanwhile in 1816 Con gress had established a bank of the United States to regulate the currency. On the con clusion of the war foreign trade began to re vive which required vast sums of money; in 1814, while the blockade was in force, the im ports were valued at $12,965,000 and exports at $6,927,441, but in 1815 these figures had risen to $113,041,274 and $52,557,753 respectively and in 1816 to $147,103,000 and $81,920,452. Furthermore, during the blockade, when com merce was practically at a standstill, the mer chants transferred their capital to manufactur ing establishments and when the lifting of the blockade resulted in a vast influx of foreign made goods, protection was demanded for Om industries, resulting in the enactment of a protective tariff in 1816 (amended in 1818). Meanwhile in 1815 a commercial convention had been concluded with Great Britain, under the terms of which each country was to regulate, as it saw fit, its trade with British North American and West Indian possessions. In retaliation for a supposed discrimination against them in American regulations, the merchants of Nova Scotia and New Brunswick secured the passage of the "Plaster of Paris" Act which prevented the transportation of this article in American vessels to the place of consumption. Great Britain then excluded American ships from the West Indies and as these acts ren dered idle 100,000 tons of American shipping, the shipping interests were prostrate, all allied trades languished, and thousands of mechanics were thrown out of work. In 1811 steam
boats had been introduced on Western waters and capital and enterprise turned to the task of opening the West. Owing to the ease with which people could secure paper money from the wild-cat banks, there was widespread speculation in lands, the record of public land sales being 270,000 acres in 1813, 1,120,000 in 1815, 2,160,000 in 1817, 5,470,000 in 1819 and 820,000 in 1820. Everyone hastened to plunge into debt, expecting to become rich thereby, but when the banks began to contract their dis counts and currency began to be reduced, the debtors were unable to meet their obligations and general bankruptcy followed with its attend ant hardships in all circles. There was a gen eral depression in business. Many blamed the tariff but the greatest outcry was against the banks, both State and National, and accordingly there was a wave of anti-banking excitement throughout the country. But this soon subsided, the States enacted stay laws, prohibited im prisonment for debts less than certain amounts, passed acts against usury, and conditions be came about normal in 1821.
In 1832 President Jackson became convinced that the Bank of the United States was using its funds insidiously and ordered the govern ment funds deposited therein to be withdrawn. Since $9,891,767 in public money was on deposit, the bank was compelled to curtail its loans and could not use any of the public deposits for the benefit of the commercial community. As a result money became scarce, discounts rose rapidly and in 1833 many business houses failed. Jackson's quarrel with the bank resulted, in 1834, in its failure to secure a renewal of its charter, and its career as a national institution was practically ended. Almost simultaneously the national debt was paid off and the treasury began to have a surplus, wherefore a bill was passed in 1836 providing that all but $5,000,000 of the money in the treasury on 1 Jan. 1837 should be deposited with the several States in proportion to their representation in Congress, and in order to safeguard the deposits the Secretary of the Treasury was to select the State banks for depositories. The effect of this distribution of surplus revenue among the States was the formation of new banks with nominal capital and the flooding of the country with paper money. In 1837 there were more than 600 such banks with an aggregate capital of $291,000,000, of which $149,000,000 was in cir culating notes and $127,000,000 in deposits, while their total loans and discounts amounted to $525,000,000. Wild speculation occurred, es pecially in land, millions of acres being bought and held for a rise. Prior to 1834 the annual sales of land never exceeded $4,000,000 but in 1834 the receipts were $4,887,000, in 1835, $14, 757,000 and in 1836, $24,800,000. But this con sisted not of specie but only of credit on the books of the banks that held government de posits. Early in 1837 the banks began to call their loans, to curtail their accommodations and to increase rates of interest. Owing to the crisis in England specie ceased to be imported, whereupon the price of money rose. To make matters worse the wheat crops of the eastern States had been seriously damaged by a scourge of the Hessian fly, wherefore the price of wheat and flour rose rapidly, until early in 1837 wheat brought $225 per bushel and flour $12.50 per barrel, which caused several flour riots. Furthermore an abnormally large cotton crop the previous year was accompanied by a pro portionate slump in prices and a consequent de preciation in the credit of those connected with the cotton industry. Soon three great cotton firms in New Orleans failed with liabilities of $2,500,000, to be followed immediately by three New York firms with liabilities of $9,000,000. By the first week in April the failures in New York numbered 98 with liabilities of over $60, 000,000 and two weeks later they numbered 168. Real estate, and railroad, canal and other stocks depreciated in value and thousands of workmen were deprived of employment. Prior to this time President Jackson had caused the "Specie Circular') to be issued, requiring all public land agents to accept nothing but specie in payment. This compelled the banks to redeem in specie practically their entire circulation, and as the contingency caught them unprepared, on 9 May 1837 they suspended specie payments and not until two years had passed did the last of the banks resume. Before that, however, Con had enacted a bankruptcy law and the States had passed statutes of limitations and similar measures, so that some order began to appear out of the chaos. The most important result of the suspension was the establishment of the independent treasury system in 1840. Moreover, from 1837 to 1842 the number of banks of the country was reduced by nearly 100, circulation and deposits were cut in two, and the banks in general exercised more caution.