and 1875 the reserves of the San Francisco gold banks were nearly always below the required 25 per cent. of circulation and deposits, and the reserves of the interior banks were very often below. Another element of danger was the jealousy and hostility of the State and private banks. And the old prejudice of the California people against any kind of paper money was only slumbering, and was ready to be awakened by the least noise of disturbance.

A bank panic was precipitated in San Francisco in 1875 by the failure of the Bank of California on August 26, caused by the squandering of its funds by the president in mining speculation. This was the largest bank on the Pacific coast, with a capital of five million dollars, and had enjoyed an enormous business and unbounded confidence. San Francisco was the center of the financial system of the Pacific coast, and was almost independent of New York and the rest of the country. The panic of 1873 had not reached California, but this failure pricked the bubble; and the panic soon spread throughout the State. The National Gold Bank and Trust Company suffered a run on the same day as the run on the Bank of California, and other banks in the city had to sustain similar runs. The National Gold Bank and Trust Company paid out $1,400,000 in gold during the day, but did not open for business the next morning. It was in temporary suspension for about two weeks, when it opened again for regular business.

The panic placed especial strain upon the gold banks of the State; and, as might have been expected, their weakness was their circulation. At the time of the panic most of the notes were in the country, many of them at remote points. The Trust Company had $800,000 of gold

1 Most of the information in regard to the panic and its effect on the gold banks is from the San Francisco Evening Bulletin, August 26 et seq.

notes outstanding, and the total circulation of all the gold banks was over $2,500,000. The panic sent in a great flood of these notes for redemption. The supply of coin in the city was short at the time, and the other banks of the State were in difficulty also; and the run on the Trust Company made matters much worse. The State and private banks now seized this opportunity to strike a blow at the gold banks. They refused to receive or pay out the gold notes,' and the city banks refused adequate assistance to the Trust Company when its notes began to come in for redemption. This refusal might have been due to the actual scarcity of coin and to the more or less justifiable feeling that self-protection demanded such action. But there is little doubt that, if the notes had been received freely by the banks of the State, they would have continued to circulate at par. The other banks were very hostile to the national gold banks, however, and their constant effort was to discredit the gold notes. It was this attitude of the banks and bankers that did more than any other influence to discredit and depreciate the notes, and it was their activity that sent the notes in for redemption in such large numbers. The California banks were now using the same means of opposition that the New York banks had tried when the national banks were being introduced for the first time in 1863 and 1864. At that time the old State banks excluded the new national banks from the clearing houses, and refused to accept their notes or to pay checks drawn upon them. But the California banks were now

3

1 Finance Report, 1875, pp. 219 and 220; San Francisco Evening Bulletin, September 4 and November 2, 1875.

2 San Francisco Evening Bulletin, September 9, 1875.

Not only by refusing to accept the notes, but by correspondence with the country banks, by offering to take the notes at a discount on deposit, and by endeavoring to show that the gold notes were not sound. Report of United States National Bank Examiner on the panic and the gold banks, in the San Francisco Evening Bulletin, November 2, 1875.

more successful in their opposition. "During the panic the gold notes were so depreciated by the private banks and brokers that they sold for 75 cents on the dollar in some instances, and in one instance the seller took his pay in national currency bank notes at par, selling his gold notes at 90."1

The opposition of the State and private banks could be made very effective, because they represented by far the largest part of the banking capital and resources of the State. There were over one hundred of these banks in the State, with a total capital of between twenty and twenty-five million dollars; while there were only nine national gold banks, with an aggregate capital of only about $4,600,000. With these greater numbers, capital, and resources arrayed against them, it is no wonder that the national gold banks were in hard straits.

2

Promptly after its suspension in August the National Gold Bank and Trust Company sold $500,000 of its bonds in New York, and provided funds for the redemption of its notes at the Sub-treasury in San Francisco, and for the retirement of $400,000, or one-half of its circulation. As a result of this prompt action, the distrust of the notes soon began to disappear, and the bank was able to resume business. It continued to retire its notes, however, intending to reduce its circulation to a merely nominal amount. After a few weeks there was little demand for specie from the two city banks, but the notes of the interior banks were presented for redemption in San Francisco at the rate of about twenty thousand dollars a day beyond

1 San Francisco Evening Bulletin, November 2, 1875.

2 Homan gives, as of January 1, 1875, 45 State banks, with a capital of $17,758,000; 51 private banks; and 3 foreign bank agencies or branches. Homan, 1875, pp. 6-8.

Comptroller's Report gives, as of November 30, 1875, 122 State and private banks, loan and trust companies, with a capital of $22,533,565. Finance Report, 1876, p. 234.

Report of Examiner, cited above, gives total capital about $24,000,000.

the amount the redemption agents were able to pay out. The deranged condition of business and the stoppage of work in many of the mines had lessened the demand for currency, and the notes were sent in for redemption.

The National Gold Bank and Trust Company had its business well under way again when it suffered from another run on Saturday afternoon, October 30. It did not open for business the following Monday; and the directors decided to put the bank in voluntary liquidation, and wind up its affairs as speedily as possible. This decision was not carried out, however; and it was later decided to reopen and make another trial. The bank paid all of its claims with 10 per cent. interest, and reopened after a few months. It had retired practically all its circulation, and opened with only forty thousand dollars of circulating notes. Other gold banks had begun to retire their circulation at the same time. In 1875 there was deposited with the United States Treasurer for the retirement of gold notes the total of $940,000 in gold. And between June 30, 1875, and June 30, 1876, the gold note circulation was reduced from $2,459,000 to $1,408,000.

By 1877 the speculative mining booms in the State had collapsed, and business had declined to a lower stage. Many of the weaker banks of the State were closed, many others reduced their capital, and all of the banks suffered from the slack business and general depression during the latter part of the decade.

The business of the national gold banks never recovered thoroughly after 1875. Their deposits declined from over five million dollars to about two and a half million, their loans from over seven million to about four million. The

1 It is difficult to tell exactly what started this second run. Some of the brokers had withdrawn their business, and it developed later that the bank had made large loans to its own officers. Probably some report of this kind aroused the old distrust. San Francisco Bulletin, November 1, 1875.

average annual earnings of the two San Francisco gold banks for the five years following 1875 were only 6.3 per cent. of the capital and surplus, and the earnings of the other gold banks averaged about 11.3 per cent. during the same time. If we compare these ratios with those of 1874 and 1875 (14 per cent. to 18 per cent.), and if we consider the fact that the ordinary interest rate in California at the time was from 9 to 12 per cent. or over, we shall see that the national gold banks were not doing a satisfactory business. The banks outside of San Francisco do not show the same decline in business as do the city banks, but they show the same retirement of circulation. The full number of banks was not reached until the October report of 1875, and these new banks were just establishing their business in 1876 and 1877. And their deposits were always low in comparison with their capital.

IV.

But the causes of the failure of the gold bank system lie deeper than the panic and the depression, which brought hard times to all the banks. The gold banks derived little profit from circulation, because they were permitted to issue only 80 per cent. of the par value of the bonds deposited, and then were required to keep a reserve of 25 per cent. against circulation outstanding, in addition to the regular reserve against deposits. The law of June 20, 1874, relieved the other national banks from keeping a reserve against circulation, requiring a 5 per cent. redemption fund with the United States Treasurer in lieu of reserve; but this law did not apply to the gold banks.

The 80 per cent. rule was no injustice to the gold banks, if we compare their profit on circulation with that of the national currency banks, making the same allowance for