The banking panic of 1873
The 1873 panic was a watershed in U.S. financial history whose historical significance resided in the prompt response of the New York Clearing House (NYCH)1. The NYCH had a coherent strategy for responding to the banking panics of 1860 and 1873. The strategy called for the issue of clearing house certificates to meet local reserve drains, and the pooling or equalization of reserves to meet the external drains to the interior parts of the country. To conserve the supply of legal tender reserves among the member banks, the NYCH was authorized to issue clearing house certificates during emergencies to petitioning banks who submitted the requisite collateral for the purpose of meeting their deficits at the clearing house. To meet cash withdrawals for out-of-town banks it also had the power to pool or equalize the reserves of the associated banks; that is, the reserves of the stronger banks could be put at the disposal of the weaker. By treating the reserves of the NYCH as a common pool, the NYCH was effectively converted temporarily into a central bank, like the Bank of England, with reserve power greater than that of any European central bank. It was successful in forestalling the suspension of cash payments in 1860, and as it shall be argued, suspension in 1873 was unnecessary. Just at the point that success was imminent there was a failure of will. Reserves at the Clearing House had fallen to a low that undermined the courage of officials, and cash payment was suspended. Nevertheless, the NYCH continued to pay out cash to the interior thereby moderating the anticipated effects of the panic on the interior.