01 The Hour
Saturday
26 October 1907. New York. Reconstructed to the day.
The association met that day to consider the disturbed state of financial affairs and to take such remedial action as might be possible. The committee formed a panel to handle the issuing of loan certificates.
The date of the first issue was 26 October 1907. The date of the first cancellation was 14 November 1907. Those two lines, in a report written three years later, are the span of the thing.
The same day the clearing house declared a suspension of convertibility.
02 The Sequence
Oct 1907 The trouble began among a group of associated banks, and the clearing house supported one of them, the Mercantile National Bank, before the panic spread to the trust companies, which were not clearing house members.
22 Oct 1907 The Knickerbocker Trust Company closed, its clearing agent having announced that it would no longer act for it. That day the annualised call loan rate jumped from 9.5 per cent to 70.
24 Oct 1907 The rate reached 100 per cent. At times there were no offers of credit even at that rate. Commercial paper, a less liquid market, ran above 7 per cent throughout the panic months.
26 Oct 1907 After a delay of five days from the closing of the trust company, the clearing house committee met on the Saturday and arranged for the issuing of loan certificates. The first issue was made that day, and the clearing house declared a suspension of convertibility.
From 26 Oct 1907 Payments began to be made by cheques expressly marked payable through the clearing house. The member banks substituted the certificates for currency in settling with one another, which released currency to pay depositors over the counter.
Oct 1907 to Jan 1908 Over the whole course of the panic, nearly 500 million dollars of currency substitutes circulated throughout the country as a principal means of payment.
14 Nov 1907 The first cancellation of a certificate.
Late 1907 to early 1908 A return to the conditions of before the panic came only after three things together: gold imports passing 100 million dollars, the restrictions or partial suspension of cash payments being lifted, and the great majority of the certificate issues being paid off and cancelled.
1910 The monetary commission's history of crises set out the chapter headings of what had happened: suspension in New York, clearing house loan certificates, the currency premium, suspension and hoarding, and the effect of suspension on trade. Its author judged the delay in issuing the certificates the most serious error the clearing house made.
03 The Hidden Dependency
Two things happened on 26 October. The clearing house began issuing loan certificates, and it declared a suspension of convertibility. They are usually described as separate measures.
The history written for the monetary commission says they were not. By 1907 it had become settled tradition among the New York banks, in that account, that issuing the certificates and suspending cash payments were virtually the same act.
The mechanism makes that plain enough. A bank that settles with its neighbours in certificates instead of currency keeps its currency, and the reason it needs to keep its currency is that it has stopped paying it out in full at the window. The paper that kept the banks settling with each other was the same decision that stopped the counter paying in full.
The paper that kept the banks settling with each other was the same decision that stopped the counter paying in full.
04 What Still Worked
The Settlement Between Banks
It never stopped. Members substituted the certificates for currency in their clearings and went on settling with one another through the whole period, which is the one part of the machinery that was never interrupted.
The Marked Cheque
A debt could still be paid. Cheques expressly marked payable through the clearing house did the work, and nearly 500 million dollars of such substitutes passed around the country as a principal means of payment.
The Import Finance
The certificates had a second use the member banks put them to. They enabled the borrowing banks to finance the importation of monetary metal, which the later study treats as important to the eventual recovery.
05 The Plumbing
The Plumbing 1910
What a loan certificate was, as the monetary commission's volumes set it out.
A member bank brought assets it could not quickly sell to the clearing house committee and received against them a certificate it could hand to the other members in settlement, in place of currency. The certificate was a temporary provision of credit, issued to a named bank in a stated amount on a stated date, and cancelled when repaid. The report records the first issue on 26 October 1907 and the first cancellation on 14 November 1907, and names the committee that signed for them.
06 The Pattern Library
1 When one retail withdrawal channel closes or fails, demand concentrates on whichever channel is left open, and the capacity of that channel sets what a depositor can obtain.
Observed: Northern Rock 2007, Cyprus 2013, India 2016, Greece 2015, United States 1933, Argentina 2001, Lebanon 2019, Worldpay 2026, TSB 2018, Afghanistan 2021, Nigeria 2023.
2 A currency replacement can require physical work on every unit of the estate before the new money can circulate, whether a modification to each cash dispensing machine or a stamp affixed to each note, so the changeover proceeds piece by piece rather than all at once.
Observed: India 2016, Czechoslovakia 1993.
3 Withdrawal limits imposed on a domestic banking system can be written to exempt cards issued outside it, so one machine dispenses under two rules according to where the card was issued.
Observed: Greece 2015.
4 Domestic payment and deposit channels can continue operating while cross-border payment routes fail, with the central bank standing in as the intermediary for payments to and from the country.
Observed: Iceland 2008, Germany 1931.
5 When the institutions that convert payment instruments into cash are closed, wages and checks already received cannot be spent, and merchants and carriers extend their own credit in place of the missing conversion.
Observed: United States 1933, Ireland 1966.
6 A public employer short of the national currency can pay wages in an instrument it issues itself, which then circulates alongside the currency it stands in for.
Observed: Argentina 2001, United Kingdom 1914.
7 Withdrawal restrictions can be imposed by individual institutions and their trade association rather than by statute, so the limit differs from bank to bank and no law governs it.
Observed: Lebanon 2019.
8 A cash withdrawal ceiling is paid only in the denominations the machine is permitted to hold, so a ceiling and a denomination rule set together decide how many notes a withdrawal is, and a ceiling has to be raised alongside the denominations that pay it when the existing notes no longer carry it.
Observed: Zimbabwe 2008, Nigeria 2023, Venezuela 2018.
9 A payment outage can hit card authorisation and merchant funding as separate faults, so acceptance at the terminal is restored while the money owed to the merchant arrives a day late under its own incident notice.
Observed: Worldpay 2026.
10 A retailer that loses electricity can go on trading by taking cash and rationing goods by hand, so the counter outlasts the checkout system that normally prices and settles the basket.
Observed: Texas 2021.
11 A systems migration can leave account records readable but wrong, including presenting one customer's account to another, so a working login is no guarantee that the balance on the screen belongs to the person reading it.
Observed: TSB 2018.
12 The size of a card processing failure can be counted twice, once on first attempts and once after the same card was presented again, and the second count can be about half the first, so part of the recovery runs through the cardholder at the till.
Observed: Visa Europe 2018.
13 A restriction on access to money can be written by purpose as well as by amount, so a balance that cannot be drawn in general becomes payable when it is used for wages, taxes or relief, and the test applied is what the money is for.
Observed: Germany 1931, Brazil 1990.
14 A deposit freeze can be paired with a transferable certificate issued against the frozen balance, so the deposit becomes a claim that can be sold before it is released, at a price the market sets rather than its face value.
Observed: Ecuador 1999, Argentina 2002.
15 A per head issue of a new currency can be distributed through the administration that issues food rations rather than through the banks, so the ration card is the proof of entitlement and the banks are used to collect the old money rather than to pay out the new.
Observed: Germany 1948.
16 When the persons under sanction become the governing institutions of a country, the prohibition reaches ordinary payments that merely touch the state, and access is restored by successive general licences written by activity, so what decides whether a payment can be made is which licence it falls under.
Observed: Afghanistan 2021.
17 One foreign currency can carry more than one price at the same moment inside a single country, the authority setting them by the use the money is put to or by the date a balance was credited, while another price goes on being made outside the official ones.
Observed: Lebanon 2019, Mexico 1982, Egypt 2016.
18 A payment abroad can be made conditional on prior approval by a committee working to a ceiling set for the whole country each day, so what a firm can pay turns on the capacity of the approval process rather than on the balance in its account.
Observed: Greece 2015.
19 Scarce foreign exchange can be rationed through the commercial banks under published guidelines, with the central bank selling only the net requirement at a daily auction and checking compliance through reporting after the fact rather than approving each payment in advance.
Observed: Iceland 2008.
20 A payment instrument issued by a bank in a country under strain can be valid and unusable at the same time, because the counterparty abroad requires a second bank to confirm it, so the trade stops at the confirmation rather than at the instrument.
Observed: Sri Lanka 2022.
21 Notes of a single currency can trade against one another at a discount according to denomination, so the same sum is worth more or less depending on which note it is held in.
Observed: Iraq 2003.
22 A compulsory conversion of deposits can be narrowed by further instruments after it is already in force, so what the measure finally takes is settled by the exceptions rather than by the decree that announced it.
Observed: Argentina 1990.
23 The administration that rations a currency held at an official price can be dismantled in the same announcement that frees the price, so the list of who may buy and the queue behind it end on the day the rate is let go.
Observed: Egypt 2016.
24 When the coin or note the public needs runs short, an instrument made for something else can take its place in small denominations, whether by being declared legal tender or by passing from hand to hand on an endorsement, and the counter that holds it pays it out instead of change.
Observed: United Kingdom 1914, Italy 1975.
25 When the supply of the standard payment instrument runs out during a closure, people write their own in its place, and each one has to be assessed individually by whoever is asked to take it.
Observed: Ireland 1966.
26 The decision to restrict what the counter pays out and the decision to settle between institutions in an internal instrument can be a single decision, so the wholesale machinery goes on running on paper while the retail window stops paying in full.
Observed: United States 1907.