The second general explanation was found in the unsound and reckless
banking in New York City. The dangers arising from trust companies had
been known for several years. It came to be believed that the deposits
in these trust companies were being misused by the bank officers for the
promotion of various speculating schemes. The disclosures which came
with the investigation of the insurance companies fixed these beliefs
more firmly in the minds of the people, and the first break in
confidence precipitated runs on the New York banks.
The third explanation was that the panic was due to the defects in our
American currency system.
These were the popular explanations, but there were deep-seated causes
which had worked to bring about the existing conditions. The crisis was
world-wide and was felt most in the countries where there was a gold
standard. In 1890 the world's supply of gold available for monetary use
was hardly $4,000,000,000; in 1907 it was more than $7,000,000,000.
Along with this went a rapid rise in the average price of commodities in
gold-standard countries. Bank deposits in the United States in 1907 were
three times as great as they were in 1897. Amidst all this prosperity
there were forces which were bound to bring a reaction and among the
most important of these was the demand for capital for conversion into
fixed forms. Ready capital was also lessened relatively by the great
losses experienced as a result of the Spanish-American War, the Boer
War, the Japanese-Russian War, the San Francisco earthquake, and the
Baltimore fire. These losses, which amounted to $3,000,000,000, came at
a time when the world was just entering upon a period of great
industrial activity and needed all its capital. Much capital was
absorbed in the construction of railroads, industrial plants,
development of foreign industries, etc. These conditions brought about a
tightening of money rates in Europe and American financial centres;
consequently rates of interest went up. Commercial paper which brought
three to three and one-half per cent in New York in 1897 brought seven
per cent in 1907.
[Illustration: Line of people waiting in front of the bank.]
The panic of 1907. Run on the Knickerbocker Trust Company,
34th Street and Fifth Avenue.
Closely allied to this movement was the increase in the number of
securities issued by industrial concerns. A few resourceful men, in
order to do away with the evils of unrestricted co
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