The Crisis of 1893 (3)

(Part 1 ξ Part 2; 1893, India, and the USA)

There are a couple of issues that remain from my study of the 1893 Crisis.

Default, Pseudo-Money, and the Industrial Depression

My understanding of this is pretty much taken from Oliver M.W. Sprague (1910, p.171, pp.181-186, ξ pp.195-203), and what follows is a summary of his views.  For others wondering why I'm so impressed with Prof. Sprague's report for the National Monetary Commission, the answer is that he examined the actual financial composition of US banking assets in such detail that it's the closest I can (conveniently) get to a primary source. Also, the report is extraordinarily well-conceived: Prof. Sprague is intimately familiar with each controversy among bankers regarding the major events of his epoch, and avoided all the easy pitfalls.¹ 

In State I of the Crisis (10 June--12 July), there were two waves of bank failures that culminated in the loss or suspension of over 5% of the total banking institutions (by number) in the country.  This catastrophe caused a massive hemorrhage of reserves from the central reserve city banks.² As a result, by the middle of July when the Crisis had dramatically returned, the banks had reduced their loan portfolios immensely  from the beginning of the year but were nevertheless draining reserve deposits to affiliated country banks.

During Stage II (12 July--2 September 1893) the banking clearinghouses responded to a shortage of currency by resorting to clearinghouse loan certificates (CLCs), or "bridge loans" for banks awaiting delivery of gold/gold certificates. The CLCs looked like checks, with the one exception that they actually were in fixed denominations and were liabilities of the banks.

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