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61ST CONGRESS \

2d Session

j

SENATE

j

DOCUMENT

I

N o . 538

NATIONAL MONETARY COMMISSION

History*of Crises under the
National Banking System

BY

O. M. W . SPRAGUE
Assistant Professor of Banking and Finance in Harvard University

Washington : Government Printing Office: 1910




NATIONAL MONETARY COMMISSION.
NELSON W. ALDRICH, Rhode Island, Chairman.
EDWARD B. VREELAND, New York, Vice-Chairman.
JULIUS C. BURROWS, Michigan.
E U G E N E H A L E , Maine.
PHILANDER C. K N O X , Pennsylvania.
THEODORE E . BURTON, Ohio.
J O H N W. DANIEL, Virginia.
H E N R Y M. TELLER, Colorado.
HERNANDO "D. MONEY, Mississippi.
JOSEPH W. BAILEY, Texas.




J E S S E OVERSTREET, Indiana.
J O H N W. W E E K S , Massachusetts.
ROBERT W. BONYNGE, Colorado.
SYLVESTER C\ SMITH, California.
LEMUEL P. PADGETT, Tennessee.
GEORGE E. BURGESS, Texas.
A R S E N E P . P U J O , Louisiana.
ARTHUR B . SHELTON, Secretary.

A. PIATT ANDREW, Special Assistant to Commission.

CONTENTS.
Page.

CHAP.

I.—The crisis of 1873
Bank loans, 1869-1873
National-bank reserves, 1869-1873
The concentration of bankers' deposits
Interest on deposits
The New York money market in 1872-1873
The outbreak of the crisis
The closing of the stock exchange
Government assistance
The effect of the panic on the New York banks
Clearing-house loan certificates
Suspension in New York
The currency premium
Foreign exchange
Suspension throughout the country
Hoarding
Pay-roll difficulties
The domestic exchanges
Bank failures
Analysis of bank returns
The wise policy of the New York banks
No change in banking methods
Legislation after the crisis
II.—The panic of May, 1884
Failures and fraud
Clearing-house loan certificates
Analysis of New York bank returns
No equalizing of reserves
III.—Financial stringency in 1890
Central reserve cities
New York reserves
Government assistance
Final stage of stringency
The banks and the government surplus




in

1
2
5
15
20
24
35
38
40
43
45
53
56
58
61
68
71
75
81
82
89
103
105
108
109
113
117
120
124
124
127
135
141
149

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CHAP. IV.—The crisis of 1893
Monetary and banking movements, 1890-1893
The first stage of the crisis
The second stage of the crisis
The third stage of the crisis
Suspension of payments
The currency premium
The causes of gold imports
Suspension and hoarding
The effect of suspension on trade
The domestic exchanges
No changes in banking methods or legislation
V.—The crisis of 1907
L
Banking movements, 1897-1907
State banks and trust companies
Elements of weakness in the New York money
market
3,__
The policy of the Treasury
The ultimate reserve
,
Indications of approaching reaction
The beginning of the crisis
Trust company difficulties
Unfortunate delay of the clearing house
Explanation of the suspension of payments by the
New York banks
Resumption delayed unnecessarily
The currency premium
Foreign exchange
Suspension throughout the country
The domestic exchanges
Loan contraction
The condition of the banks
Expansion of the circulating medium
The Treasury and the panic
Conclusion
NOTE A.—Extracts from the Annual Report of the Secretary of
the Treasury (William A. Richardson) relating to
the crisis of 1873
B.—Extracts from the Annual Report of the Comptroller
of the Currency (John J a y Knox) relating to the
crisis of 1873
C.—Extracts from the Annual Report of the Comptroller of
the Currency (H. W. Cannon) relating to the panic
of 1884




IV

Page.
153
153
162
167
175
180
186
191
195
199
203
210
216
216
224
228
230
232
236
246
251
256
260
277
280
282
286
291
297
303
314
316
318

321

332

345

Contents
Page.

NOTE D.—Banking reform proposals in New York in 1894:
A. Address of George S. Coe
B. Report of the committee of the New York
Clearing-House Association
E.—Clearing-house loan certificates in 1890
F.—The Treasury and the money market in 1890
G.—Bank failures and suspensions in 1893
H.—A. Clearing-house loan certificates in 1893
B. Report of the New York clearing-house loan committee
I.—The Banks and the Panic of 1893. By A. D. Noyes
J.—Report of the New York clearing-house committee,
acting as a loan committee in 1907
K.—Substitutes for Cash in the Panic of 1907. By A. Piatt
Andrew




v

371
381
387
393
400
406
409
413
428
434




HISTORY OF CRISES UNDER THE
NATIONAL BANKING SYSTEM.
CHAPTER I.
T H E CRISIS OF 1873.

The crisis of 1873 w a s preceded by four years of general
economic activity, which was by no means confined to the
United States. In agriculture, manufactures, and transportation much real progress was made, but, as subsequent
events proved, the pace was more rapid than was consistent with healthy development. Facilities for the production of many commodities were provided beyond the limits of profitable demand, and many enterprises which were
enlarged upon a quite insufficient foundation of working
capital went to the wall when subjected to the strain of
crisis and depression.65 As in 1857, the most serious weakness was disclosed in connection with railroad building.
Bonds often sold at a heavy discount had provided the
means for building many roads which were in advance of
any considerable population, and whose traffic proved
insufficient to meet fixed charges. The situation of other
roads was even more unsatisfactory. Before the crisis,
construction had had to wait upon the slow sale of bonds
a
For the general economic situation both before and after the crisis see
" The Financial Crisis in America," by Horace White, in Fortnightly Review,
1876, pp. 810-829.




National

Monetary

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or the venturesome advances of bankers, and after the
crisis construction had to be discontinued altogether,
leaving a large mileage connecting nothing in particular. 0
A long period of depression and recuperation was inevitable, and its advent could not have been long postponed.
But, as always happens, the exact moment of collapse was
determined by particular occurrences and might have
come a little earlier or at a somewhat later date.
BANK LOANS, 1869-1873.

The extent to which the banks may be held responsible
for the unsound conditions which had developed before
the crisis of 1873 can not be determined exactly. In matters of this kind it is impossible to make a complete distinction between causes and effects. The average quality
of the loans of the banks must suffer if the general business
situation becomes unsatisfactory. On the other hand,
this condition may be in part a consequence of the failure
of the banks to exercise sufficient caution in granting
accommodation to borrowers. As will be seen later, few
ban"ks failed during the crisis or during the subsequent
months and years of depression. And of the failures
which did occur hardly any involved serious loss to creditors. 6 There was, indeed, at the beginning of the crisis
evidence of momentary loss of confidence in the banks,
but this was primarily due to the disasters which had
taken place in other branches of business, particularly
among the railroads and the private bankers and brokers
° T h e Commercial and Financial Chronicle, January 10, 1874, contains a
list of the railroads in default for nonpayment of interest on their bonds.
&Seep. 81.




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who dealt in their securities. There is, however, one
method of estimating roughly the measure of responsibility which rests upon banks for the creation of crisis conditions. If the expansion of loans has been unusually
rapid in the years just before a crisis, it must have contributed to the creation of the unhealthy situation. Moreover, the expansion of credit liabilities, which is created
by the increase of bank loans, may not be accompanied
by a parallel increase in the cash reserves in the banks.
In that case the banks may be so weakened that, though
able to withstand the shock of a crisis, they may not be
able to extend that aid to the business community which
may be reasonably expected from them. These are matters which can be analyzed statistically, and, so far as the
national banks are concerned, the periodical returns to
the Comptroller of the Currency, together with the weekly
returns of the clearing-house banks in the large cities,
provide a mass of data which is far more complete than
that in any other country. Moreover, for the particular
period under review the national-bank returns include a
larger proportion of the banking operations of the country than is the case in later crises, because of the comparatively small number of state banks and trust companies at that time. In the tables which follow comparisons will be based upon the returns of the banks in June
of each of the four years before 1873. The returns for
that season of the year happen to have been made at
almost the same date in successive years. They show the
condition of the banks at a time when they were least
influenced by special temporary circumstances, and when,




3

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it may be added, the ratio of reserves to demand liabilities was most satisfactory.
In a country with a growing population there are normally increasing requirements for banking accommodation, and these requirements become particularly large
during years of active business. Unless, therefore, the
expansion of bank loans assumes large proportions, or
unless there is direct evidence of reckless banking methods, the creation of unsound business conditions can not
be laid at the doors of the banks simply because of an
increase in bank loans. In the particular case before us
the banks can not be said to have been particularly at
fault. The following table shows for June of each year
from 1869 to 1873 ^ e number, capital, surplus and undivided profits, and the loans of the banks:
[In millions.]
June—

National
banks.
1,619
1, 612
1.723
1,853
1,968

1869
1870
1871
1872
1873

Capital.

$422
427
45o
470
49o

Surplus.

$126
134
144
155
172

Loans.

$686
7i5
789
871
926

During the four years loans were expanded at a fairly
uniform rate, the total increase of $240,000,000 being
almost exactly 35 per cent. But in the meantime there
had been an addition of $114,000,000 to the investment
of the shareholders in the business. In the second place
it is to be noted that there were 349 more banks in the
national system at the close of the interval, 313 of which
were established in the South and West, which were insuf-




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ficiently supplied with banks in 1869. For this reason t h e
relatively large increase in loans in those parts of the
country from $130,000,000 to $238,000,000 does not
necessarily imply reckless or even unhealthfully rapid expansion of credit. Both relatively and absolutely the
movement of loans in the North Atlantic States was confined within moderate limits. In the case of the country
banks of those States the increase was from $235,000,000
t o $300,000,000, while by the city banks it was from
$321,000,000 t o $388,000,000. Finally, it should be noted,
t h a t in New York, where the railroads were largely
financed and where the failures occurred which precipit a t e d the crisis, there was strikingly little loan increase,
only $21,000,000—from $174,000,000 to $195,000,000.
The conclusion seems clear t h a t the national banks can
not be held very largely responsible for creating unhealthy
conditions by an unwise policy of rapid loan expansion
during t h e years immediately preceding the crisis of 1873.
NATIONAL BANK RESERVES, 1869-1873.
Even a moderate increase in loans may,

however,

weaken t h e banks if the greater liabilities thus created do
not rest upon increasing cash reserves.

During t h e period

in question t h e operations of t h e banks were carried on
under highly exceptional circumstances as regards t h e
influences to which the reserves were subject, and a somewhat lengthy digression is necessary to explain t h e exact
situation.

The money supply of the country was not

susceptible t o any influences which might bring about an
appreciable change in its amount.

The business of the

country was being carried on upon a fixed amount of




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inconvertible paper money. This currency was redundant, as was clearly indicated by the premium on gold,
but it was at a fixed point of redundancy, aside from
variations in requirements for the use of money. There
were almost exactly $700,000,000 of paper money in the
country throughout the four years, of which $356,000,000
consisted of legal-tender United States notes, and of the
remainder there were in 1869 nearly $300,000,000 of bank
notes and $46,000,000 of 3 per cent certificates. These
certificates did not circulate as money, but were available
for bank reserves. The act of July 12, 1870, authorized
an addition of $52,000,000 of new circulation, but provided at the same time for the withdrawal of the certificates. The change was made gradually, so that at no
time did it involve any appreciable change in the available
supply of paper money."
Had the country been upon a specie basis the banks
might have increased their reserves by securing some
portion of current gold production. The banks and also
the Treasury did hold considerable amounts of specie
throughout this period, and the specie could be included
in the reserves required by law to be held by the banks,
but it could not be used to meet the ordinary requirements of depositors. It was constantly at a premium
of between 10 and 15 per cent. Like any other liquid
asset of a bank, it could be disposed of, but its sale could
not add to the money in circulation. The Pacific coast
was an exception, but the banks of that region were few
o The substitution of bank notes for certificates seems to have involved
some slight contraction, since the banks were required at t h a t time to hold
a reserve against their circulating notes.




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in number, and their transactions may be disregarded
when considering the situation of the banks as a whole.
The banks had no inducement to increase their specie
holdings, and in the country at large outside of New
York, they held but an insignificant portion of their
reserves in this form, seldom more than $6,000,000.a In
New York the case was quite different. In that city was
largely concentrated that portion of the business of the
country which continued to be carried on upon a gold
basis, such as the payment of import duties and foreign
exchange dealings. There were at all times large deposits
in the banks payable in gold, and there were regular gold
as well as currency clearings at the clearing house. The
gold holdings of the New York banks fluctuated widely,
but always formed a considerable portion of their total
reserves, varying in amount from one-third to one-half
that of their holdings of legal-tender notes. This gold
would have been a valuable resource had specie payments been resumed, but in the existing conditions it
was far less a real source of strength than would have
been an equivalent amount of legal tenders. The specie
held was required for the handling of the particular business transacted upon a gold basis, and although the
greater part of it was in the nature of a special deposit
earmarked and not available to meet the requirements
of depositors generally, it was all included in the statement of the reserves. On September 12, 1873, the deposits payable in gold were $12,101,000, and the banks
held in coin $14,586,000.b Practically the legal tenders
a See table in Comptroller's Report for 1873, p. XLIV.
& Ibid., p. XXIX.
7




National

Monetary

Commission

were the only reserve against the remaining $189,000,000
of deposit liabilities. In analyzing the reserves of the
New York banks, therefore, it will be necessary to distinguish carefully between the reserve which met the
legal requirements and the available reserve in actual fact.
As regards the legal-tender notes, it was impossible for
the banks to enlarge their holdings for several reasons.
Prices and wages were at a high level on account of the
redundancy of the currency, and consequently the requirements for money for everyday hand-to-hand use
were large and tended to increase with the growth of
population and business dealings. Moreover, a given
volume of transactions in commodities at the high level
of prices required correspondingly large credit accommodation expressed in terms of the depreciated paper.
The uses for the curency were, therefore, enlarged both
as to reserves and outside the banks and to an extent
which roughly corresponded with the high level of
prices. In these circumstances the increasing number
and capital of the banks did not tend to provide them
with more money for their operations. As the number
of banks increased the reserves became more widely
scattered, and consequently somewhat less available,
and larger capital and surplus would serve only to offset
a part of the increase in demand liabilities created by
the expansion of loans. The conclusion is clear that it
was practically impossible for the banks to strengthen
themselves during a period of active business. On the
other hand, during a period of inactive business it would
be certain that a larger proportion of the money supply




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of the country would accumulate in the banks because of the
diminished requirements for its use for everyday purposes
outside the banks. This was the situation early in 1869, at
the beginning of the period which we have taken for analysis.
Finally, it should be remembered that no distinction
was made between deposit and note liability in the national
banking law until 1874. Banks were required to hold
the same kind of reserve for both kinds of liabilities, but
even during the worst moments of the crisis of 1873 the
liability for notes was not one which caused any depletion of reserves. For this reason, and because it simplifies comparison with the condition of the banks before
later crises, the relation between reserves and deposit
liabilities will be specially emphasized in analyzing the
situation of banks. In the following table, however, the
liabilities of the banks for both notes and deposits are
presented, together with their specie and legal-tender
reserves, from June, 1869, to June, 1873:
[In millions.]

:uia3n.

Deposits.

$292

$528
575
638
656
678

291

3i5
333
338

Specie.

$18
3i

Legals.

$131
138

20

152

24

135

28

129

From this table it will be seen that in 1869 the banks
were exceedingly strong in cash reserves, holding nearly
28 per cent in proportion to their deposits. Notwithstanding the considerable increase in deposit liabilities
and the slight reduction in cash holdings, the proportion




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of reserve was reduced to only 23 per cent in 1873. Even
if the liability for notes is included, the banks held 18
per cent in 1869 and 16% per cent in 1873, proportions
which, compared with the cash held in recent years by the
banks against deposits alone, were exceptionally large.
The percentage of reserve in June, 1873, was almost exactly
that of the banks in July, 1908, when, on account of generally inactive business, the banks held far larger reserves
than is now customary. It would seem, therefore, that the
cash foundation of the credit structure had not been
seriously weakened. But the amount of cash required to
insure the smooth working of the banking machinery of
a country can not be determined by purely arithmetical
calculations. Much depends upon the requirements which
are likely to be made for money, and also upon the amount
of cash which bankers have been accustomed to regard as
a minimum, in order to avoid reducing which they would
resort to drastic loan contraction and even to suspension.
In this connection the increase in the number of banks—
from 1,619 m 1&6g to 1,968 in 1873—may be mentioned
as a factor which tended to weaken somewhat the effectiveness of the aggregate reserve. Each separate unit of
reserve was, on the average, somewhat smaller, and was,
therefore, less effective both for use and as a basis for
public confidence. Moreover, with the greater number
of banks, the difficulty was enhanced of securing that
cooperation which is required if the credit machinery is
to work smoothly in emergencies.
We must now enter upon a more detailed analysis of
the reserves of the banks, including not only the cash
held, but also the deposits with reserve agents, which




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make up so large a part of the reserves of most of the
banks in the national system. The country banks then,
as now, were required to hold in their own vaults cash
equal to at least 6 per cent of their deposit liabilities,
and also, until 1874, 6 per cent of their liabilities in the
form of bank notes. The remaining 9 per cent might be
held by approved agents in the "redemption cities," as
they were then called, a term which indicates the original
purpose of the arrangement—to provide facilities for the
regular redemption of circulation at the money centers.
The following table shows the situation of the country banks
in June of each year from 1869 to 1873:
[In millions.]
1869.

Net deposits
Circulation

1870

_ _ $209

$217

186

189

_
_

1871

1872.

1873.

_

Ratio to demand liabilities
Ratio to deposits

,
,

$292

395

406

443

490

524

82

92

IOI

102

108

43

42

45

43

Reserve
Cash

$260
230

39

Total

$231
212

49

59

57

47
61

20.8
39-2

22.6

22.8

20.6

42.4

43.8

39. 2

232

37

The reserves of the country banks were well above the
requirements of the law. They held at all times in cash
alone more than 15 per cent of their deposit liabilities,
the ratio falling from 19 per cent in 1869 to 16 per cent
in 1873. If deposits with agents are included, the country banks held a reserve of much more than one-third of
their deposit liabilities, even at the close of the period.
The country banks, therefore, would clearly seem to have
been well supplied with funds to meet emergencies. It
should, however, be noted that, although cash holdings
6158—10




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had been increased by $8,000,000, deposits with reserve
agents had increased $18,000,000. This indicated a
greater power to withdraw money from the city banks
and also a slightly greater probability that it would be exercised in case of unusual demands upon the country banks.
There were at this time, as at present, two classes of
reserve or redemption cities. Fifteen cities were designated in the national banking law the banks of which
might become the agents of country banks. The banks
of these cities were required to hold a reserve of 25 per
cent, one-half of which might be deposited in the banks
of New York, which until 1887 was the only city of central
reserve rank. Taking first the banks of the fifteen reserve
cities, the following table shows their condition during
the four years before the crisis of 1873:
[In millions.]
1869

1870-

1871.

1872.

1873.

$151
71

Cash.

69

$189
72

$199
75

$200
78

222

237

261

274

278

64
45
19

75
50
25

82

79
46
33

79
46

28.9
42.6

Total

$168

31.8

316

44-6

43-4

49
33

28.9
39-6

33
28. 2
39.5

The banks of the reserve cities, like the country banks,
held a reserve considerably above legal requirements
throughout this period. Taking liabilities for deposits
alone, the proportion of cash fell off somewhat from 29
per cent to 23 per cent, while the deposits with agents,
which increased rapidly until 1871, were thereafter prac-




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tically stationary at $33,000,000. All of this amount
was, of course, held by the banks of New York, the banks
of which also held the deposited reserves of many of the
country banks. The position of the New York banks
was even more important as reserve agents than it has
been in recent years. They held in bankers' balances
quite 60 per cent more than the amount held by all the
banks of the reserve cities. Although the country banks
and those in reserve cities were well supplied with cash,
many of the former and all of the latter possessed the
right to withdraw large sums from New York, and, therefore, the condition of the New York banks is the most
important single factor to be considered in estimating the
strength of the system as a whole. For this reason it is
advisable to make a somewhat detailed examination of the
operations of the New York banks, and the following table
therefore includes a number of items which were not included in the tables which had reference to the other banks:
Abstract of the returns of the New York national banks,

1860-1873.

[In millions.]
1869

Net deposits
Circulation

1871

1872.

1873.

$168

_ ___
_

$217
3i

$i97
28

$186

S3

203

Total

$190

35

>

Reserve held
Specie
Legal-tender notes
Due to national banks.
Due to other banks

223

248

225

214

61

76
11

65

64

20

15
50
63
18

23
41
59

14

72
18
54
53
16

30.7

32.4

30.9

29. 1

30

30.5

31-4

3i.5

273

25-a

14

_

47
43

_

Ratio to demand liabilities
Ratio of legal-tender notes to deposits
less specie held by the banks




1870

13

65
66

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In certain respects it will be noticed that the showing
of the New York banks was quite as satisfactory as that
of the other banks of the country. Demand liabilities
had increased only moderately, and since 1871 had actually
declined. The percentage of reserve to demand liabilities throughout the period was well above legal requirements. But the composition of the reserve was somewhat
less satisfactory, showing a distinct decline in the proportion of legal tenders. The specie holdings of the
banks, it will be remembered, were not at that time
available for ordinary purposes, and were largely held
to secure special deposits. The most significant indication of the strength of the banks, therefore, is gained
by taking the proportion of legal-tender notes to the
deposit liabilities less the amount of specie holdings.
Measured in this way it will be seen that there was a
serious change for the worse in the condition of the banks.
Against .a deposit liability of $206,000,000 in 1871 the
banks held $65,000,000 in legal-tender notes, while in
1873 they held but $41,000,000 against $163,000,000 of
deposit liabilities. One further test, and a most important one, of the condition of the banks is still to be made.
Bankers' deposits show a rapid increase between 1869
and 1871 from $57,000,000 to $86,000,000. From that
point there was a moderate decline to $81,000,000 in
1872, and to $76,000,000 in 1873, but in 1871 the banks
held $65,000,000 in legal-tender notes, while in 1873
they held but $41,000,000. The other banks of the
country had largely increased their credits with New York
banks, which at the same time were much less well sup-




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plied with means to meet the heavy responsibility thus
created. The efficient working of the credit system was
evidently more and more dependent upon the ability of
the New York banks to meet all the demands of their
banking depositors, and this ability was diminishing.
THE CONCENTRATION OF BANKERS' DEPOSITS.

It is necessary to carry one step further this analysis
of the reserves of the national banks. Responsibility
for bankers' deposits did not rest upon the New York
banks as a whole. There were during this period some
50 national banks in the city, but the majority of them
were not reserve agents, and their statements show only
such small amounts due to banks as would naturally
arise in the course of the ordinary business of any bank.
The business of such banks was of a purely local character,
having no more general significance than that of banks
with an equal volume of business in Maine or Kentucky. 0
During the period before the crisis of 1873 some 15
of the 50 New York banks held practically all of the
bankers' deposits acquired by the banks of the city,
and 7 of them held between 70 and 80 per cent of these
deposits. 6 These 7 banks were directly responsible for
the satisfactory working of the credit machinery of the
country, and their condition prior to the crisis must be
carefully examined.
a The statement in the text may be qualified by the further observation
that the failure of a purely local New York bank might cause loss of confidence in the New York banks generally, including those which were of
national importance.
& The 7 banks were the First, Third, Fourth, Ninth, Central, Importers
and Traders', and Park National banks.




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It has been too exclusively the practice to analyze the
condition of the banks as a whole or by localities, a
method which tends to obscure any real understanding
of the working of our system. It is of the utmost importance to locate the particular point at which the strain
of a crisis will be most directly and severely felt, and to
form an exact notion of the provision to meet it when it
does come. The returns of the condition of the individual
banks have been included in the annual reports of the
Comptroller of the Currency for only one date in each
year—the return for the early autumn. For a purely
local bank such information is ample, but it is much to
be desired that more complete information were provided
for those of the banks which are reserve agents. Such
data would be of value in following the changes which
take place in the banking situation as a whole, and would
also concentrate the attention of the public upon the
peculiar responsibilities of banks which hold bankers*
deposits. In the case of the New York banks further
information, though of a less comprehensive nature, is to
be had from the weekly clearing-house statements; but
as these statements for the individual banks were discontinued during the crisis of 1873 it is necessary to
take some other year in order to analyze the exact effects
of demands upon New York from the outside banks.
For this purpose the year 1872 has been selected. In
any case attention should be given to that year, since it
enables us to form an opinion of the power of the credit
structure to withstand financial strain of moderate
severity. Obviously, if moderate strain which can be




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foreseen can not be met easily, a banking system is in
no position to meet the severe strain of a crisis.
The following table shows the condition on October 3,
1872, of the New York banks as a whole, that of the 7
banks which held the bulk of the bankers' deposits, and
the condition of the other 43 banks:
[In millions.]
7 banks.

43 banks.

31.9
28.0
188.5
60.6
14.8

$14.5
5-4.
7-4
34. 1
44-9
6.8

#56.8
26.5

395- 1

113- 1

183.4
44-0
16.5
93-0
2. 7
6.4
390

58.2

50 banks.
Capi tal
Surplus and net profits
Circulation
Individual deposits
Due national banks
Due other banks

$7i-3

Total liabilities
Loans
Bonds
Due from other banks
Clearing-house exchanges and cash items _..
Bills of other national banks
Specie
Legal-tender notes

10. 0

6.7
17.9
.6
1. 1

154.4
15.7
8.0

125. 2
34-o
9-8
75-i
5-3

15-5

The situation disclosed by a survey of this table was
certainly extraordinary. Of the total bankers' deposits
of $75,400,000 the seven banks held $51,700,000, 72 per
cent; and if the more proper basis of net bankers' deposits
is taken, they held $45,000,000 out of a total of $58,900,000,
or nearly 76 per cent. But the accumulation of bankers'
deposits in a few banks is by no means the most striking
feature of the table. The capital and surplus of the seven
banks made up only 20 per cent that of all of the
banks, and their individual deposits were but 18 per cent
of total deposits. The bankers' deposits of the seven




17

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banks were $11,000,000 greater than their individual deposits ; and if clearing-house exchanges are deducted from
their individual deposits, liabilities to bankers were some
three times those to individuals. On the other side of
the account it will be noticed that against net deposits
(gross deposits less clearing-house exchanges, bills of
and amounts due from other banks) of $60,600,000
and a note issue of $7,400,000 the seven banks with
their reserve of $16,600,000 were six-tenths of 1 per
cent below the 25 per cent legal requirement, while the
other banks, with net deposits of $91,100,000 and circulation of $20,600,000, held a reserve of 25.8 per cent. It is
obvious that the seven banks were in no position to meet
considerable demands from their depositors without a
drastic contraction of their loans. Furthermore, the total
of their loans, $58,000,000, was exceedingly small when
one considers the nature of their deposit liability. A
demand for money spread pretty evenly among the banks,
and leading to a given amount of loan contraction, would
cause far less disturbance than the same amount of contraction confined to the restricted circle of the borrowers
of the seven banks. The conclusion seems clear that these
banks and the particular borrowers served by them were carrying on their operations almost wholly upon the unstable
basis provided by the deposits of the out-of-town banks.
It is clear, then, that with this situation in New York
an emergency would cause serious disturbance if it should
lead to the withdrawal of any considerable amount of
money by the outside banks, and there could not be the
slightest doubt that this would be done or at least
attempted. Every year furnished ample evidence that




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the outside banks had a strong preference for reducing
their balances with agents rather than their own cash
reserves whenever their depositors resorted to them for
even very moderate supplies of money. The result is disclosed in the following table, which shows the cash reserves and the deposits with agents of the country national
banks at the time of each of the five returns to the Comptroller of the Currency in 1871 and in 1872:
[In millions.]
I Cash.

$45

1871.
Mar. 18.
Apr. 29.
June 10 _
Oct. 2__
Dec. 16-

Deposits
with
agents.

$55

Cash.

1872.
Feb. 27_
Apr. 19 _
55
59 1 June 10_
55 j Oct. 3 - Dec. 27_
49

43
42

43
42

46
44
45
46

Deposits
with
agents.

$58
52
57
52
5i

From this table it will be seen that the cash reserves
of the country banks remained almost stationary, even
showing a slight tendency to increase at those times of
the year when the demand was large from depositors.
Such demands were met entirely by withdrawals of money
from reserve city agents. With this table comparison
should be made with the table which follows, showing the
fluctuations in the net amount owed by the New York
banks to other national banks at the same dates.
[In millions.]
1872.

1871.
March
April
June
October
December.




February,.
61 6
' April
66 2
June
6r 4 ! October
December .
5i 5

$64 0

!

19

$61.4
64.7
62. 9
476
50.6

National

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Commission

From this table it will be seen that bankers' deposits
were regularly large at the beginning of each year. The
early spring months witnessed a moderate decline which
was more than regained in the early summer, to be as
regularly followed by a more considerable decline in the
autumn. Then, as now, the cause which made possible
this alternate movement of funds was the seasonal differences in requirements for money for use outside the banks.
Since there was a fixed amount of currency in the country, the amount of money in the possession of the banks
varied with the seasons, but this circumstance did not
necessarily involve the accumulation of bankers' deposits
for short periods in New York. The money might have
remained diffused among the banks throughout the country. That it did not do so was primarily owing to the
interest which could be secured upon such deposits from
some of the city banks.
The practice of paying interest upon deposits and in
particular upon bankers' deposits was contrary to the
best banking opinion of the time, and was adopted by
only twelve of the sixty banks in the New York Clearing
House. Unavailing efforts, especially after the crisis of
1857, had been made to secure a unanimous agreement
among the banks to discontinue the practiced It follows,
therefore, that the seven banks, all of which paid interest
upon deposits and which had secured the bulk of the
bankers' deposits, were directly responsible for any disturbance in the New York money market, which was due
a

For the strong case against the practice presented by a special clearinghouse committee, see Bankers' Magazine, April, 1858, pp. 822-831.




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to the use of these funds, and also for any failure to meet
demands for their return to banks in the rest of the
country.
The payment of interest upon deposits had two undesirable consequences. Its most obvious result was to cause
money to be sent to New York in larger quantities than
would otherwise have been the case, though how much
more was sent on this account can not be determined.
Had no interest been offered by the New York banks, the
outside banks would doubtless have lent more largely
directly to borrowers in New York when the demand for
loans was slight at home, but it is not reasonable to think
that money thus invested would have by any means
equalled balances deposited in New York in excess of
legal reserve requirements. But the chief evil of interest
upon bankers' deposits was of a different character. The
interest-paying banks were unable to maintain large
reserves and at the same time realize a profit from the
use of the funds thus attracted. Particularly was this
the case when the accumulation of such funds was only
temporary. The extra supply of money to be lent forced
down rates, and, as rates fell, more and more had to be
lent by the banks in order even to equal the interest which
they had contracted to pay. In the years before 1873
the banks paid as much as 4 per cent for bankers' deposits,
a rate which, relative to lending rates at that time, is not
far from the 2 per cent rate of a later period. If the
banks receiving these deposits had followed the practice
of European central banks and had paid no interest, they
could have kept a large reserve and still have earned a




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satisfactory profit. But, unfortunately, this was not the
policy which was adopted, although the mere fact that a
number of banks in New York and not a single bank, as
in European countries, secured these bankers' deposits,
did not change the nature of the obligation or responsibility. New York bank loans regularly expanded with
every increase in the receipt of deposits from out of town
banks. Year after year the loans of the banks followed
the same course, advancing in the early months of the
year and undergoing some decline in the spring, then
rising to the highest level of the year in July, only to be
followed by contraction which as regularly brought loans
to their lowest level in October. The following table
shows the movement of loans, deposits, and cash of the
New York clearing-house banks at selected dates in 1872:
[In millions.]
Loans.

Jan. i_.
Mar. 4 _.
Apr. 22.
June 3 _
June 17.
July 22Aug. 12.
Aug. 19.
Sept. 2_
Sept. 23
Sept. 30
Oct. 7 - Oct. 14 _

Deposits.

Specie

Legals.

$270

$200

$25

$40

282

210

18

273

i95

18

284

226

21

288

228

20

297

247

29

299

237

18

295

235

20

288

219

16

280

201

12

272
269

i95
186

10

268

189

12

44
40
53
55
53
54
52
49
44
45
42
45

11

Since the movement of loans and of reserves was in
close correspondence with known movements of bankers'
deposits it is therefore to be.expected that changes in




Crises

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Banking

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the operations of the seven banks will account for the
bulk of these fluctuations. As an illustration the following table is presented showing the loans of the New York
banks, those of the seven banks, and those of the remaining banks on July 29 and October 7, 1872:
[In millions.]
60 banks.

7 banks

53 banks.

1872.
July 29 __ _
Oct. 7

$295
269

$90
71

$205
198

It will be observed that the loan contraction of the
seven banks makes up $19,000,000 out of a total of
$26,000,000. The seven banks reduced their loans by 21
per cent, a proportion which would be still greater if the
security holdings of the banks were not included with
loans in the weekly New York bank statement. The
bond holdings of the seven banks were set down in the
comptroller's return for October 3, 1872, at $10,000,000,
and, as a large portion of them were held for circulation,
it is reasonable to assume that the amount had not
greatly changed during the short interval covered in the
table. Upon this assumption, the loans of the seven
banks were $80,000,000 in July and $61,000,000 in
October, showing a contraction of 24 per cent. In the
case of the other banks the contraction was less than $%
per cent, and, omitting bonds, it was only slightly more
than 4 per cent. Evidently the banks holding bankers'
deposits lent to an excessive extent upon the basis of the
resources thus secured, even though it was perfectly




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Monetary

Commission

apparent that they were available but for a very short
time. It should also be noted that neither the industrial
nor commercial business which centered in New York was
of a nature to require temporarily large accommodation
at the particular time when the bankers' deposits were
large. The loans which were made, therefore, were
largely in connection with stock-exchange dealings. The
interest-paying banks were all known as Wall street
institutions. They favored stock-exchange loans, especially call loans, because they were regarded as peculiarly
liquid, and also, it may be suspected, because there is an
almost indefinite hunger for loans in that quarter. This
practice agreed with the view still commonly held, that
call loans are the only proper basis for the use of funds
subject to unexpected withdrawal. How far in emergencies this view is sound will be examined in our analysis of
successive crises. Here it may be noted that even the
seasonal requirements of normal years could not be met
without severe strain and high rates for loans. In July
and August speculation in securities flourished upon the
basis of cheap money. Prices advanced to levels which
could not be maintained, only to fall in September and
October to equally temporary low levels. Even though
the banks were able to liquidate their loans to some extent,
this system created opportunities for speculative manipulation which were a source of loss to many and which cast
not a little discredit upon American financial methods.
THE N E W YORK MONEY MARKET IN 1872-73.

At this point it will be of advantage to follow the course
of the New York money market during the summer and




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autumn of 1872. There was a slow but continuous increase in loans from $273,000,000 in April to $299,000,000
on August 12. Continued ease prevailed, and shortly
after the middle of the month it was reported that "the
money market for August has been unusually quiet, with
an ample supply of money on call and seeking investments in commercial paper and in railroad securities.
The rates for loans on call have been as low as 4 per cent,
and freely offered at 5 or 6 per cent." a
The withdrawal of money for crop-moving purposes
then began, accompanied by the usual contraction of
loans. In the course of the six weeks to September 22
the banks lost $10,000,000 in legal-tender notes, and loans
were reduced by $18,500,000. Writing on this date, it
was reported in the monthly financial review in the
Bankers' Magazine that "the quiet of summer in the
money market has been succeeded by a period of increasing activity, culminating in great excitement during the
past week. The usual demand from the West for currency to move the autumnal crops had already reduced
the deposits and the reserve of our city banks by several
millions, when an unscrupulous combination of designing
stock operators seized the opportunity to further their own
ends by the endeavor to bring about a panic, in which they
very nearly succeeded. This trickery was attempted at the
same period of last year and produced then similar results.
"The bank returns show a line of deposits some $36,000,000 less than at this time in 1871, with a reduction of
$14,000,000 of currency and legal tenders, while the crops
0 Bankers' Magazine, September, 1872, p. 236.




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Monetary

Commission

of the interior are larger this year than last. The weekly
statement exhibits a deficiency in the legal reserve of
$332,475 below the required 25 per cent. In the corresponding week of last year the banks held an excess of
$1,168,250.
" Rates for money have increased very considerably,
as high as one-half per cent having in some cases been
paid for the temporary wants of needy borrowers in
carrying stocks. On the best classes of loans 6 to 7 per
cent per annum is paid." a
The following week witnessed a further contraction of
$8,000,000 in loans. The pressure to sell on the stock
exchange became general, and complete demoralization of
the money market was threatened. At this point the
Government came to the relief of the banks by the sale of
gold and the purchase of bonds to the amount of $5,000,000
of each. This assistance was sufficient to enable the banks
to meet further demands upon them without very much
further loss in their reserves, since the crop-moving requirements were nearly at an end. Referring once more
to the monthly report in the Bankers' Magazine, we find
that "the extreme stringency which existed at this time
of last month has given place to a condition of the money
market which is comparatively one of ease. It has been
brought about by the sale of gold and purchase of government bonds by the Secretary of the Treasury to the extent of $5,000,000 of each—an action which, though affording a timely and welcome relief to banks and business
men, is a measure of doubtful expediency and likely to be




a Ibid., October, 1872, p. 316.
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but temporary in its good effects. Under a proper sense
of duty on the part of our city banks no such adventitious
aid should have been needed. They should have been
prepared for the inevitable autumnal reduction of balances
belonging to their western correspondents by holding
much larger reserves. But the pernicious practice of
allowing interest on current deposits impels their employment in the kindred evil of call loans; and these made to
stock speculators, too often reckless and unprincipled,
subject our money market to violent disturbances, deprive the business community of accommodations justly
their due, increase largely the lists of failures, and foster
that growing mania for gambling which is one of the
worst features of the day." a
This disturbance and strain in the money market was
clearly caused by the close use by the banks of the funds
which they received from outside institutions. But as
further evidence the following table is instructive:
[In millions.]
Reserve city banks.

Country banks.

Cash.

Deposits
with
agents.

Cash.

Deposits
with
agents.

New York banks.

Cash.

Due to
banks.

1872.
$44
46

Oct. 3

$57
52

$45
38

$33
28

$65
45

$78
56

The course of events in 1872 indicated clearly that the
country banks would rely entirely upon their balances
with city banks and might even strengthen their cash
o Ibid., November, 1872, p. 396.
6158—10




3

27

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Monetary

Commission

reserves in an emergency. The banks in the reserve cities
paid out $7,000,000 from their own reserves, but shifted
a considerable part of the burden to New York by reducing their deposits at that center by $5,000,000. The New
York banks paid out $20,000,000, a loss almost equaling
the reduction in the amount due to other banks. Upon
them rested the burden of finding very nearly all the cash
required for crop-moving purposes, and there was every
probability that in an emergency the other banks would
resort even more exclusively to the withdrawal of their
funds deposited in New York.
Although the stringency was considerably relieved in
October, it did not entirely disappear until after the
beginning of the following year, being prolonged beyond
the usual term. But though at length the return flow of
money from the interior became normal in volume, the
proportion of bank notes to legal tenders was unusually
large. An opportunity was thus afforded for the exercise
of a wise policy of conservatism by the banks. Most of
the money coming to the city from the interior was sent to
the seven banks, which were at the same time the redemption agents of their banking depositors. It would have
been a simple matter for the depository banks to have
required at least the redemption of the notes of those
banks for which they were the redemption agents. It
would have involved no direct payments of cash but
simply a cancellation of the deposits of their correspondents to an amount equivalent to the notes retired. But
this policy would, of course, have diminished the available
funds of the depository banks. The action taken in dis-




28

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posing of the accumulation of bank notes was of an
entirely different nature. In the Commercial and Financial Chronicle of January 18, 1873, it was reported that
"some of the city banks have been selling national bank
notes for greenbacks to the brokers at one-fourth per
cent discount, and these brokers sell them again at
one-eighth per cent to supply country banks." In his
annual report for 1872 the Secretary of the Treasury had
observed that the " redemption of the national currency is
too formidable and expensive to be adopted by any bank
or association of banks." It would, however, seem that
the New York banks might have been reasonably expected
to resort to occasional redemption rather than to the sale
of surplus notes at a discount. This episode affords
striking confirmation of the opinion of a banking authority
that where thousands of banks issue notes no effective
redemption can be secured unless each bank is forbidden
to pay out the notes of other banks. 0
The customary midwinter ease in the money market
was cut short at an unusually early date in 1873. The
withdrawal of funds by interior banks was large and so
also was the resulting contraction of loans in New York
City. During March and April loans were reduced by
$21,000,000, and then stood very nearly at the level at
which they had been in the previous October. Both the
unsatisfactory situation and remedies therefor were
clearly set forth in the Bankers' Magazine for May and
June, 1873, from which the following extracts are taken:
The month has been remarkably stringent in its money features, producing heavy losses to borrowers, and resulting in the failures of several
a C. F. Dunbar, Theory and History of Banking, p. 73.




29

National

Monetary

Commission

firms heretofore possessing large capital and good credit. Among these
suspensions are Messrs. Barton & Allen, on the 16th instant; Brownell &
Bro. on the 17th, and Lockwood & Co. on the 18th. The rates prevailing
for money in April have been quite as severe in Wall street as at any previous period. The enlarged volume of stocks and bonds on the market,
rapidly increasing during the last two years, has demanded fresh capital to
sustain prices and the market. This capital has been liberally supplied
from foreign and domestic sources, thereby creating higher prices. At the
same time the stock exchange and its members have absorbed a large
portion of the capital which is demanded for the legitimate wants of trade
and commerce. The country bankers, far and near, have been importuned to place their cash balances in Wall street, instead of keeping them
at home, the promise of high rates of interest creating inducements for the
transfer of capital to New York. Country bankers in former days kept from
$10,000 to $100,000 on hand in their vaults to meet the ordinary cash
demands of the day. Gradually, this " r e a d y cash," instead of being kept
dead in their vaults, has been largely transferred to New York, where 4, 5,
or 6 per cent interest paid to the owners, would make these funds " a c t i v e "
instead of " dead." The principle is a vicious one, because the same money
serves a double purpose, but at great risk. The exchange transactions
with New York are so heavy and so constant, t h a t balances in Wall street,
are by the country banker considered as cash in hand. The result has
been t h a t these immense accumulations of capital owned in the South and
West, instead of being "cash on hand," are loaned out " o n call" by the
city banker, thereby contributing to a fatal inflation of prices. The country banks thereby contribute indirectly to the stock gambling in New
York in order to realize interest on their daily balances here. * * *
The obvious necessity prevailing to place these accumulated country funds
in "loans on call" (loans on stock), instead of commercial paper, so as to
be ready at a moment's warning, for the country drafts, acts doubly. I t
encourages stock gambling and carries prices above real values, at the
same time the legitimate demands of trade are denied, and the merchant
and manufacturer suffer because they can not compete with the stock
operator in the rates for money. The merchant can afford to pay 6 per
cent, rarely more, per annum. The stock operator who bids for a rise in
market values, offers 6 per cent per month in many instances. Even this
is not a maximum in Wall street. In the month of April current, millions
have been loaned at one-eighth to one-half per cent per day for carrying
loans, and money was scarce (or not attainable) at that. One of the firms
recently suspended announced that they had paid, between March 1 and
April 16, $50,000 in extra interest.
Is it surprising, with such prospects for money, t h a t capital concentrates
here from the wilds of Maine, the recesses of Connecticut, the prairies of
the West, or the tobacco fields of the South to be used a t 1 or 2 per cent
per month, instead of 6 per cent at home?




30

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Is it surprising that the bubble will burst occasionally and drive into
common ruin the speculators for a rise in stocks or for a corner in some
great staple of commerce?
We caution our country bankers to keep a healthy reserve at home, and
not to trust too large a fund in Wall street " o n call." a
The month of April was among the most stringent in its money features,
and has been followed by more moderate rates for money in Wall street.
The terms to borrowers remain severe to those who are compelled to resort
to brokers. The banks have apparently increased their loans to the
extent of nine millions since the close of April, but are yet several millions
below the loan column of January and February. There were some indications, at the first of the month, of a panic in New York, brought on by
the failure of one of the national banks and by rumors of weakness in
others. There have been several heavy mercantile failures during the
month, showing recklessness in credits and overtrading on limited capitals.
The banking movement at New York indicates expansion, prompted
by the pressing demand for money from merchants and brokers. Now,
that the pressure is over, it would be well for the banks to curtail their
loan column at the rate of $1,000,000 per week for three months, in order
to strengthen their legal tenders, which are now $20,000,000 too low, or
$43,000,000 instead of $63,000,000.^

That caution and even a reversal of the customary
policy of the banks was to be desired was clearly perceived. In the Chronicle for June 7, 1873, it w a s observed that the "summer torpor has fairly taken possession of Wall street, and some of the banks are yielding
to the temptation to make time loans running into October
and November and even longer. The leading institutions have made such large profits during the past half
year that they ought to be content to adopt a conservative
policy, even if they thereby sacrifice some future gain,
and one of the evident requirements of a conservative, safe
policy is the strengthening of reserves. Our bank officers
will do well to look over some of their old reports and
observe how much more ample a few years ago were the




o Bankers' Magazine, May, 1873, p. 916.
&Ibid., June, 1873, p. 996.
3i

National

Monetary

Commission

reserves which they used to keep than those of more
recent times."
The usual return of money from the interior set in at
the end of April and again the banks were afforded an
opportunity to exhibit caution, but little heed was paid
to the warnings of recent experience. Legal-tender
holdings increased until on August 4 they stood at
$50,000,000, contrasted with $55,000,000 at the same
time in the previous year. Specie holdings were, however, larger than in 1872, so that the total reserves of
the banks were nearly the same in the two years. As to
loans, no appreciable change in the policy of the banks is to
be observed, and on August 4 they stood at $290,000,000,
an increase of $21,000,000 from the low point in April.
Deposit liabilities were then $3,000,000 less than in the
previous year, but when account is taken of the larger
amount of gold in the total reserves of the banks, it will
be seen that they were by no means in a stronger position. Had nothing unusual happened there would unquestionably have been a repetition of the high rates and
general financial disturbance which had characterized the
autumn of 1872.
During the winter and spring of 1873 fears had been
frequently expressed that a crisis was imminent, but
from the end of June there seems to have been a general
feeling that the situation was improving. The excess
of imports over exports was considerably less than at the
same time in the previous year. Gold exports were
upon a reduced scale, and, though more discrimination
was being exercised, the sale of American railway bonds




32

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in Europe had improved. The corn and wheat crops
of the year were abundant, and a large European demand
was assured. Grain began to move in volume at an
unusually early date—by the beginning of September—
and though the consequent withdrawals of money from
New York in the first two weeks of the month were unusually large, it was believed that this was a favorable
influence, as it would probably mean that the crop movement would be spread over a longer interval than in the
previous year.
It seems to be invariably the case that the outbreak of
a crisis comes as a surprise to the business community,
- and the crisis of 1873 was no exception to this rule, but
the astonishing suddenness of the explosion, which came
in the third week of September, can not be urged as a
sufficient excuse for the inability of the banks to cope
with its banking consequences.. They had had ample
experience that the reserves which they were accustomed
to hold were insufficient to meet even ordinary requirements, yet there was only too much truth in the caustic
observation in the monthly review in the Bankers'
Magazine for July " t h a t the ordinary course of events
will doubtless prevail; full sail will be carried as if summer were to last forever; when the now plethoric accounts
are diminished by their owners, sharp and sudden calls
will derange not merely stock speculation, but legitimate
business throughout the country." a
More than a month before the outbreak of the crisis the
first shipments of currency to the interior for crop-moving




a Bankers' Magazine, August, 1873, p. 156.
33

National

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Commission

purposes began, and, as in other years, they were the
signal for loan contraction. The following table shows
the condition of the clearing-house banks as a whole,
the 53 banks, and the 7 banks, for August 16 and September 13, 1873:
[In millions.]
The 60 clearing-house
banks.

53 banks.

7 banks.

Aug. 16.
Loans
Legal tenders _ _
Circulation
Deposits
Surplus reserve.

Sept. 13.

Aug. 16.

Sept. 13.

Aug. 16.

$292.6
27. 6
47-6

$284.5

$206.4

$202.4

20. 4

21. 1

15-2

36-7
27.4
207.3
— 1.6

28.1
19.8
146.9
7-5

23.8
131- 2

$86.2
6.5
19.5
7-4
88. 0

1. 2

2. 2

27. 2

234-9
9-7

20. 0

Sept. 13.
$82. T
5- 2
12.9
7-4
76. 1
— 2.8

A reduction in loans of $8,000,000 was distributed
equally between the two groups of banks, but relative to
their total loans it was more than twice as great in the case
of the 7 banks. The loss in specie was said to have been
due to payments to the Government in connection with
the Geneva Award, and the contribution of the seven
banks did not exceed their proportion of the total specie
holdings of the banks. On August 16, before the cropmoving period began, it will be noted that the surplus
reserve of the 7 banks was somewhat less in proportion to
their liabilities than was the case with the other banks.
On September 13 the banks as a whole were below the 25
per cent requirement, showing a deficiency of $1,600,000,
but the 53 banks still had a surplus of $1,200,000, while
the deficiency of the 7 banks was $2,800,000. From the
returns to the Comptroller of the Currency, which happen




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to have been made on September 12, we find t h a t t h e 7
banks held net bankers' deposits of $53,500,000, with b u t
$12,000,000 of legal tenders and $4,600,000 in specie, while
the other banks, with net bankers' deposits of $20,000,000,
had almost t h e same amount of legal tenders and $10,000,000 in specie. I t will thus be seen t h a t in mid-August,
before the withdrawals of money to the interior began,
the banks which were certain to experience the greatest
loss on t h a t account were somewhat weaker t h a n t h e other
banks. A m o n t h later, t h e eve of t h e crisis, found these
banks, which were chiefly responsible for the maintenance
of the credit machinery of t h e country, distinctly less well
supplied with cash t h a n those banks whose operations
were of a purely local character. I t is not surprising,
therefore, t h a t the shock of t h e crisis soon forced t h e
interest - paying banks to resort for aid t o their more
conservative neighbors.
THE OUTBREAK OF THE CRISIS.
Two failures which preceded t h e crisis deserve mention
because they were due t o t h e same causes as those of more
importance which came a little later. The New York
Warehouse and Security Company was forced t o suspend
on September 8. Organized to make advances on grain
and produce, it had been induced t o finance t h e Missouri,
Kansas and Texas Railroad. On Saturday, September 13,
came t h e failure of the important banking house of Kenyon, Cox & Co., owing t o indorsements on $1,500,000 of
the paper of t h e Canada Southern Railroad. These failures, while causing considerable disturbance in t h e stock




35

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Monetary

Commission

market, were not regarded as of far-reaching importance.
The disasters and panic of the last three days of the following week have been described by many later writers,
but a contemporary account will best serve to picture
the situation which had to be faced by those responsible
for the working of the credit machinery of the country.
For this reason copious extracts from the weekly money
market summary of the Commercial and Financial Chronicle are appended:
The disturbances of last week on the annoucement of the failure of the
New York Warehouse and Security Company, which were not regarded at
the time as having any general significance, have this week been followed
by one of the most serious financial crises ever known in our market. For
the prime cause of these difficulties it is necessary to go back a few months
and bring to mind the excessive tightness of our money market, which prevailed without interruption from September, 1872, to May, 1873, a t times
almost prohibiting the sale of new railroad bonds, and requiring the issue
of large amounts of railroad paper for the prosecution of the several enterprises. Together with this, and partly connected with it, came the failures
of quite a number of smaller railroad companies to pay their interest, causing a feeling of distrust and aversion toward new railroad bonds, which has
been quite perceptible for some months past. Under these circumstances
several of the banking houses negotiating large railroad loans, or intimately
connected with the building of the roads, became heavily responsible to
their respective companies by the indorsement of notes, or by borrowing
largely on call loans secured by pledge of the railroad securities as collateral. In this delicate situation the equilibrium was liable to be violently
disturbed, as subsequent events have most unfortunately proved.
The first shock came with the suspension on Saturday, 13th instant, of the
well-known stock-brokerage house of Kenyon, Cox & Co., in which Daniel
Drew is a general partner, the cause being t h a t the firm were indorsers on
about $1,500,000 of Canada Southern Railway paper, a part of which fell due
on the 15th, and they were either unable or unwilling to assume the sole
responsibility of paying it. This suspension, although important in stock
circles, was of far less general influence than t h a t of Messrs. J a y Cooke &
Co., which occurred on Thursday, and of Fisk & Hatch, which was announced
on Friday morning, and followed by the failures of a number of
smaller stock-brokerage firms during the day. The immediate cause of
Messrs. J a y Cooke & Co.'s suspension was the large advances made b y the
Philadelphia house to the Northern Pacific Railroad, which together with
a heavy drain of late from their depositors so reduced their cash resources




36

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System

that they were unable to continue. The excitement and general distrust
which followed this suspension caused a general and rapid calling in of loans,
and precipitated the misfortune of Messrs. Fisk & Hatch, and with the great
fall in stocks produced the other disasters. It seems much more proper to
refer to these disasters as temporary suspensions rather than failures, and
there is scarcely a doubt that most of the firms will be able to settle their
affairs and resume business in a short time, their resources and those of
their individual partners being known in many cases to be very large.
The excitement in Wall street and vicinity was intense, and was heightened by a run on the Fourth National Bank and the Union Trust Company,
the bank remaining open after its usual hours and meeting every demand,
and the trust company paying depositors during the day, and being reported abundantly able to meet its liabilities, provided money could be
obtained on first-class securities.
The bank officers have been in council, and will take measures to furnish
every possible relief to the market, and it is expected that the Secretary of
the Treasury will, if possible, use a part of his currency reserve to purchase
5-20 bonds, or will otherwise give assistance to the banks. At the close of
business there was a more hopeful feeling and a belief on the part of many
that the worst of the panic had been seen.o
Amidst the great confusion and excitement which has been prevalent in
financial circles since the date of our last report, and the occurrence of
important events crowding one upon another in rapid succession, it is
somewhat difficult to give a review of the past week which shall be at all
satisfactory.
On Saturday morning, 20th instant, the markets opened with wild excitement, in consequence of the numerous suspensions of banking and
brokerage firms on the previous day, and the closing of the Union Trust
Company and the National Bank of the Commonwealth that (Saturday)
morning. The suspension of the trust company was alleged to be caused
by its inability to get call loans paid in, or of realizing or borrowing on
securities, but in addition to its other troubles a defalcation of its secretary,
Mr. Carleton, was discovered to the extent of about $500,000, and the
company was placed in the hands of Mr. E. B. Wesley as receiver, who has
not yet made a report, but promises a favorable one soon. Among the
most important loans of the company was one to the Lake Shore and
Michigan Southern Railroad for $1,750,000, and which falls due, we believe,
in January next.
The failure of the Commonwealth Bank was occasioned by permitting a
banking firm to overdraw their account some $200,000, and the bank has
also gone into a receiver's hands. If the accounts be true, it appears t h a t
the depositors both in the bank and trust company will be almost or
<*Commercial and Financial Chronicle, September 20, 1873, p. 382.




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Commission

wholly free from loss whenever the market becomes settled so that securities can be sold at a fair price.
At the Stock Exchange excitement was so high and prices were declining
so rapidly that the governing committee met about n o'clock a. m. and
decided to close the exchange immediately until further notice, which was
accordingly done. This was a coup d'etat, and a t the time was considered
by some members to be rather a high-handed proceeding, though under the
light of subsequent events it has met the unqualified approval of the whole
business community. a
T H E CLOSING OE T H E STOCK EXCHANGE.

The Stock Exchange remained closed for ten days, until
September 30, an event which was wholly unprecedented
and which was not found necessary in later crises. Not
unnaturally the impression has been drawn that the situation in 1873 was peculiarly desperate, but such a conclusion, so far as it is based upon the closing of the Stock
Exchange, rests upon a misunderstanding of the real occasion for that drastic measure. It was a result of a cumbersome mode of transacting business, which required the cooperation of the banks in ways which were often illegal
and which absorbed a disproportionate share of their
credit facilities. The method of daily stock delivery peculiar to American exchanges always causes trouble in
time of crisis, though this difficulty has been greatly
diminished since the establishment of the Stock Exchange
clearing house in 1892. In 1873 every transaction on the
exchange involved a payment with a certified check.
The method of business was thus described in a contemporary journal:
From the comments made upon the cases which the panic has brought
to light of brokers' "overdrafts" it is evident t h a t the public knows very
little of the system upon which Wall street houses transact business and
•




a Ibid., September 27, p. 410.
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effect daily "clearances" of an enormous amount of stock. * * *
Temporary "overdrafts" are the rule and not the exception with most of
the banks in the vicinity of the Stock Exchange. No other way has yet
been devised through which a broker's "clearances" can be effected.
Most houses with an "average deposit" of from $10,000 to $20,000 in
bank have to receive and deliver from $100,000 to $500,000 worth of stock
or gold per diem; larger houses, proportionately larger values. * * *
Almost every banker or broker in good credit has an arrangement, definite
or implied, with his bank, by which he is allowed to largely overdraw his
balance—in payment for blocks of stock—with the understanding that
before 3 p. m. of the same day he shall deposit the certified checks of other
people in amount sufficient for the redemption of his own checks and the
maintenance of a respectable " balance." On the latter the bank makes its
profit. Large houses often open accounts of this sort with several banks
at once. * * * The whole system is perilous and illegal. * * *
When, as now, they suspend this usage, all business has to stop. 0

On September 24 the stock exchange committee sent
the following communication to the committee of the
clearing house:
The great obstacle we have to deal with in resuming the operations of
the Stock Exchange is * * * the mode of settling our transactions.
As long as the banks on whom checks are drawn are distrustful of each
other, so long will a condition of unreasoning panic continue, and the
demand on all sides will be for "greenbacks" rather than for "certified
checks," which may turn out worthless within twenty-four hours after
they have been accepted in payment. To reopen the Stock Exchange
under this condition of affairs would simply, therefore, be the inauguration
of a run upon the banks for legal tenders, with what results you are better
qualified to judge than ourselves. * * * The true plan, in the present
emergency, in our opinion, is t h a t those banks who are content to make
clearances with each other, should, to the extent of their associated capital,
guarantee the payment of checks certified by the banks allowed to enter
the clearing house. * * * I t is necessary to have the moral courage to
sacrifice the weak members of your present association, rather than to have
all the banks of New York suffer the disgrace of a suspension of payments.^

With reference to this proposal, it was observed by the
Times:
This, we submit, is neither reasonable nor, under the trying circumstances of the day, to be expected. The banks cleared last week an average




a

New York Tribune, September 24, 1873.
& New York Times, September 25, 1873.
39

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Commission

of $109,000,000 per day. The last of the brokers' checks were cleared on
Monday of this week, when the total clearings fell to $83,000,000. On
yesterday (Tuesday) the total fell to $49,000,000; this morning to
$45,000,000. The question, therefore, recurs, Is it right that, after the
Stock Exchange is reopened, the associated banks should (in violation of
law, so far as the national banks are concerned) certify for $50,000,000
or $60,000,000 a day? The mere statement of the case supplies the
answer. * * * The sooner the clearing house stops clearing and certifying for the Stock Exchange the better; forcing the exchange to provide
other means of clearing among themselves. a

The reply of the clearing-house committee was equally
unfavorable. They refused the request with the laconic
observation that it was too exclusively to the convenience
and safety of the exchange. b
The disturbing consequences of our system of dealings
on the Stock Exchange will be seen in the course of later
crises. Here it may be noted that it tends to create an
exaggerated idea both in other countries as well as at
home of the seriousness of American crises. The Stock
Exchange was at length reopened on September 30, though
at first only a moderate business could be carried on, as
the banks refused to overcertify checks for the brokers,
but with the resumption of monetary ease the banks
resumed their former relations with them.
GOVERNMENT ASSISTANCE.

The Secretary of the Treasury was strongly urged to
intervene to relieve both the foreign and the domestic
exchange situation, but he wisely refused to strain if not
exceed his lawful authority/ Government assistance was
limited to the redemption of bonds in currency, offers
being accepted at prices not exceeding par in gold.
During the week beginning Saturday, September 20,
o Ibid., September 25.




& Ibid., September 28.
40

^See p. 322.

Crises

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National

Banking

System

more than $27,000,000 in excess of receipts was paid out
at the subtreasury in New York, but not all of this
amount was a net addition to the available supply of
money. Rather more than $17,000,000 was in exchange
for certificates of deposit which by the act of June 8,
1872, were issued to national banks in denominations
of not less than $5,000 upon the deposit in the Treasury
of an equivalent amount of legal tender notes. The
purchases of bonds, including the premium paid, set free
$12,966,000 in currency, while ordinary receipts and
disbursements very nearly balanced.**
Further assistance was beyond the power of the Treasury, unless the $34,000,000 of legal-tender notes retired
in 1866 and 1867 were to be reissued, as its currency hold« The receipts and payments on all accounts at the subtreasury in New
York between September 20 and September 27, 1873, were—
Receipts:
Transfers from depositary banks (currency)
$1, 249, 985. 80
Transfers from treasury offices—
Currency
730, 000. 00
Coin._
1,513,615.39
Duties on imports, etc. (coin)
2, 535, 458. 12
Miscellaneous collections (currency)
139, 617. 28
Total receipts
.
Payments:
Treasury warrants paid—
Currency
Coin
Certificates of deposit redeemed (currency)
Bonds purchased—
Principal (currency)
Premium (currency)
Interest (coin)
Total payments

6, 168, 676. 59

1, 356, 741. 92
1, 822, 763.47
17, 475, 000. 00
11, 708, 100. 00
1, 255, 582. 93
200, 922. 31
33, 819, n o . 63

This statement was prepared by the Treasury Department at the
request of the writer.




4i

National

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Commission

ings, not including those held for the redemption of certificates, were exhausted. This expedient had been
resorted to earlier in the year to meet a temporary
deficiency in funds, but, though strongly urged by
some of the distressed financiers in New York, the President and the Secretary of the Treasury refused their
consent. In the second week of October, however, the
Treasury, again on account of the deficiency in revenue,
began to entrench upon the so-called " currency reserve,''
but the payments at that time were not large and had no
influence upon the monetary situation.
Even the $i 3,000,000 of currency paid out by the Treasury were of slight service in relieving the situation. The
purchased bonds came almost entirely from the savings
banks, and they were not willing to deposit the proceeds
with the clearing-house banks. It would have been far
more satisfactory had the money been deposited with the
banks by the Treasury, but at this period such deposits
were not customary beyond the amount required to facilitate government business. It is somewhat surprising to
find that the United States bonds on hand, held by the New
York national banks, amounting to about $3,500,000,
were not returned to the Government in exchange for
currency. These bonds, however, were widely scattered
among the 50 national banks. Only two of the banks
held any considerable amount of them, and as they were
perhaps the two strongest banks in the city it may be
presumed that they felt that they had contributed sufficiently to the relief of the general situation in joining the
currency pool described on a subsequent page.




42

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THE EFFECT OF THE PANIC ON THE N E W YORK BANKS.

We now return to our subject proper and follow the
effects of the panic upon the banks. On Saturday, September 20, two trust companies, after withstanding runs
for a short time, were obliged to close their doors. One
national bank also failed. The two trust companies were
able to resume—one on October 15 and the other early
in December. The bank was liquidated with no loss to
creditors. Its solvency had been long in question, and
its business was of small proportions, with loans in the
neighborhood of $2,000,000. Its failure, therefore, was
not one of the serious factors in the situation. The
trouble of the trust companies had more important immediate consequences. Their reserves were principally in
the form of deposits with New York national banks, and in
their unavailing effort to meet the runs upon themselves
they had drawn out considerable amounts of money
from the banks. Reports of withdrawals by individual
depositors from the banks generally are also found in the
newspapers of the day, but in the case of but one bank,
the Fourth National, were these withdrawals sufficient in
size to reach the proportions of a run. Distrust of this
bank was excited because of its large dealings with brokers,
the numerous failures and suspensions among whom gave
rise to a fear that the bank must have been compromised.
The Fourth National Bank was at that time one of the
largest banks in the city, having deposits of $30,000,000,
almost equally divided between individual and bankers'
deposits. Distrust of this bank was, therefore, a most
serious matter. Finally, the banks were receiving urgent
demands for funds by telegraph from their banking cor6158—10




4

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Commission

respondents in all parts of the country. Private bankers,
such as Jay Cooke & Co., seem to have held at least relatively larger deposits payable on demand both from individuals and banks than is now customary. 0 Moreover, outside banks seem to have lent considerable sums
in New York directly to brokers, as well as through the
medium of their reserve agents. The failures and suspensions of bankers and brokers therefore weakened
the out of town banks directly, to say nothing of the
alarm which was excited among their own depositors.
Recourse to deposits with their reserve agents was therefore in some instances necessary and in others was far
from being a product of unnecessary fear.
The effects of these various demands upon the banks in
New York can not be exactly determined since the weekly
bank statement shows only the average condition of the
banks for the week ending with Friday night. The statement for September 20, therefore, probably shows something like the actual condition of the banks on Tuesday or
Wednesday, just before the panic began. It is, however,
inserted here as better than no statement whatever:
Changes from previous
week.
Amount.
Increase.
Loans
Deposits
Circulation
Specie
_.
Legal tenders
Reserve percentage _
Reserve deficit




$278,421,700
198,040,100

$6, 114,550
9, 277,400

27,414,200
18, 844, 800
34.307.900

$30,800
1.597. 7oo
2,409.300

23.03
$3, 211,075

a Bankers' Magazine, November, 1873, p. 320.

44

1.695,050

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Banking

System

CLEARING-HOUSE LOAN CERTIFICATES.
There can be no doubt t h a t the very considerable contraction of $6,114,000 in loans was far less t h a n t h a t
which h a d actually taken place, and this is also t r u e regarding changes in other important items in the statement.
B u t to allay t h e panic it was absolutely necessary to
secure t h e cessation of further contraction. Nothing
could be more certain t h a n t h a t t h e continuance of loans
was necessary, not only to prevent the spread of failure
to other branches of trade b u t also to save t h e banks
themselves from loss and even bankruptcy. T h e stockexchange situation was such t h a t it would have been
worse t h a n useless to a t t e m p t to reduce appreciably the
a m o u n t of call loans. Outside bankers might follow t h a t
course, b u t for t h e banks of the city it was b o t h their
d u t y a n d their interest t o sustain the local situation and,
so far as possible, t o prevent further failures. T h e necessity for t h e adoption of this policy was clearly recognized,
and on Saturday, September 20, the following arrangements were adopted t o meet the situation b y the New
York banks in t h e Clearing House Association:
That in order to enable the banks of the association to afford additional
assistance to the financial community, and also for the purpose of facilitating the settlement of the exchanges between the banks, it is proposed
that any bank in the Clearing House Association may, at its option, deposit
with a committee of five persons, to be appointed for that purpose, an
amount of bills receivable or other securities, to be approved by said committee, who shall be authorized to issue thereupon to said depositing bank
certificates of deposit bearing interest at 7 per cent per annum, in denominations of $5,000 and $10,000, such as may be desired, to an amount not
in excess of 75 per cent of the securities in bills renewable so deposited;
except t h a t when the securities deposited shall consist of either United States
stock or gold certificates the certificates of deposit may be issued upon




45

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Monetary

Commission

the par value of such securities. These certificates may be used in settlement of balances at the clearing house for a period not to extend beyond
November i, and they shall be received by creditor banks during t h a t
period daily in the same proportion as they bear to the aggregate amount
of the debtor balance paid at the clearing house. The interest which may
accrue upon these certificates shall, on November i or sooner, should the
certificates be all redeemed, be refunded and apportioned among the
banks which shall have held them during that time. The securities
deposited with the committee as above named shall be held by them as a
special deposit, pledged for the redemption of the certificates issued thereon.
The committee shall be authorized to exchange any portion of the said
securities for an equal amount of others, to be approved by them, at the
request of the depositing bank, and shall have power to demand additional
security, either by an exchange or an increased amount, at their discretion.
The amount of certificates which this committee may issue, as above, shall
not exceed $10,000,000. The banks shall report to the manager of the
clearing house every morning at 10 a. m. the amount of certificates issued
by them. This arrangement shall be binding upon the clearing house
Association when assented to by three-fourths of its members.
T h a t in order to accomplish the purposes set forth in this agreement the
legal tender belonging to the associated banks shall be considered and
treated as a common fund, held for mutual aid and protection, and the
committee appointed shall have power to equalize the same by assessment
or otherwise, at their discretion. For this purpose a statement shall be
made to the committee of the condition of such bank on the morning of
every day, before the opening of business, which shall be sent with the
exchanges to the manager of the clearing house, specifying the following
items:
"(1) Loans and discounts; (2) amount of loan certificates; (3) amount
of United States certificates of deposit and legal-tender notes; (4) amount
of deposit, deducting therefrom the amount of special gold deposits.
" T h a t the bank to which loan certificates may be issued be charged, in
addition to 7 per cent interest, one-quarter of 1 per cent to defray the
expenses consequent upon carrying out this plan.
"F.

D. T A P P E N ,

"President of Clearing

House.''a

These arrangements were virtually the same as those
which had been adopted and which had proved strikingly
successful in i860 and again in I 8 6 I . & It will be oba Commercial and Financial Chronicle, September 27, 1873.
& Loan certificates were also issued in 1863 and in 1864, but apparently
for special purposes of no general importance.




46

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served that two fairly distinct powers were given the
clearing-house committee: The right to issue clearinghouse loan certificates, and control over the currency
portion of the reserves of the banks. The loan certificates could be used solely in settling balances between
the banks, though of course no obstacle was placed in
the way of a bank which might choose to meet its unfavorable balances in the usual way by cash payments. This
arrangement was devised after the crisis of 1857,a according to tradition by George S. Coe, of whom we shall hear
much a little later. The purpose of the certificate was
to remove certain serious difficulties which had become
generally recognized during that crisis. The banks had
pursued a policy of loan contraction which ultimately
led to general suspension, because it had proved impossible to secure any agreement among them. b The banks
which were prepared to assist the business community
with loans could not do so because they would be certain
to be found with unfavorable clearing-house balances in
favor of the banks which followed a more selfish course.
The loan certificate provided a means of payment other
than cash, and what was more important, it took away
the temptation from any single bank to seek to strengthen
itself at the expense of its fellows, and rendered each bank
willing to assist the community with loans to the extent
of its power.
The use of certificates did not diminish in the slightest
degree the obligation to pay cash to depositors on demand.
On previous occasions its use had not led to the suspen«See note, p. 419.




&C. F. Dunbar, Economic Essays, pp. 278-83.
47

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Commission

sion of cash payments, and although suspension followed
within a few days after the issue of the certificates in
1873, it can not be too strongly insisted that their use
had no direct bearing upon that unfortunate step. a
In addition to the arrangement for the use of loan certificates, provision was also made for what was called the
equalization of reserves. This provision was an essential
part of the arrangement devised in i860 to meet crisis
conditions, and it requires especial attention because this
is the only crisis since the organization of the national
banking system during which it was adopted along with
the issue of the clearing-house loan certificates.
The banks were not, of course, equally strong in reserve
at the time the loan certificates were authorized. From
that moment they would be unable to strengthen themselves aside from the receipt of money from depositors
except in so far as the other banks should choose to meet
unfavorable balances in cash. Moreover, the withdrawals
of cash by depositors would not fall evenly upon the banks.
Some would find their reserves falling away rapidly with
no adequate means of replenishing them. The enforced
suspension of individual banks would pretty certainly
involve the other banks in its train. Finally, it would
not be impossible for a bank to induce friendly depositors
to present checks on other banks directly for cash payment, instead of depositing them for collection through
the clearing house and probable payment in loan certificates. The arrangement for equalizing reserves therefore
a In the later crises of 1893 and 1907 there was, as we shall see, a close
connection between the issue of the certificates and suspension. See pp.
182 and 272.




48

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diminished the likelihood of the banks' working at cross
purposes—a danger which the use of clearing-house certificates alone can not entirely remove.
These arrangements had enabled the banks to pass
through periods of severe strain in i860 and in 1861 without suspension. In both instances the use of the loan
certificate was followed immediately by an increase in the
loans of the banks, and in no short time by an increase in
their reserves. The situation in 1873 was more serious,
and as events proved, the reserve strength of the banks,
while sufficient to carry them through the worst of the
storm, was not enough to enable them to avoid the resort
to suspension.
The opinion has been expressed by a high authority
that these arrangements should have been adopted on
Thursday, and that the delay of two days involved serious
consequences which might have been averted. 0 The impending failure of Jay Cooke & Co. seems to have been
disclosed to certain New York bankers on Wednesday, b
and it is difficult to see how its seriousness can have been
underestimated. But the Clearing House Association's
officers were entirely from the more conservative mercantile
banks, and very likely they did not at first perceive the
gravity of the situation, and probably knew nothing of
the Cooke failure until it occurred.
Let us consider once more the condition of the banks
on September 20, the day when the clearing-house loan
certificates were authorized. They held $18,800,000 in
specie, but this specie was useless in meeting the requirea Dunbar, Theory and History of Banking, p. 84.
&F. Oberholtzer, Life of Jay Cooke, Vol. II, p. 422.




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ments of ordinary depositors. From the total of 198
millions of deposits we may offset the specie holdings,
leaving 180 millions of deposits payable in legal-tender
notes. Against this liability the banks held $34,300,000
in greenbacks, or 19.1 per cent. But as the return was
for the average condition for the week the banks must have
been in a considerably less satisfactory condition than is
indicated by this statement. In conclusion, it should be
remembered that the banks entered upon this struggle
with panic conditions with no means of adding to their cash
resources. They could not increase their note issues; the
money paid out by the Treasury in the purchase of bonds
did not reach the banks; and gold imports were of slight
service, because gold was not the medium of the ordinary
business of the country.
On Monday, September 22, the first business day
under the regime of clearing-house loan certificates and
of the greenback pooling agreement, it soon became
evident that the worst stage of the panic had been passed.
Notwithstanding temporary relapses upon the announcement of further failures on this and the two following days,
improvement was reasonably steady and unquestioned.
The banks took out loan certificates freely, and on Wednesday the ten millions authorized were entirely exhausted.
The drastic contraction of loans which had taken place
during the previous week was over. Runs upon particular
banks in the Clearing House Association ceased, since now
the reserves of all the banks were at the disposal of any
threatened institution. The banks in general, however,
experienced some further loss of cash from individual




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depositors whose alarm was too extreme to be allayed
by the clearest evidence of the continuance of normal
banking operations. More considerable withdrawals, in
some instances reaching the proportions of runs, were
reported by the savings banks. These banks, of course,
carried little or no cash reserves, and the withdrawal by
them of money to their credit with the clearing-house
banks must have been an important factor in the depletion of their stores of cash. By resorting to their legal
privilege of requiring notice from depositors, the savings
banks were soon able to remove themselves as a disturbing
force from the field of action.
Had all the New York banks been purely local institutions, with no responsibilities to the rest of the country,
there can be little doubt that they would have been able
to weather the storm without further difficulty. But the
most considerable withdrawals of currency which they
had to meet came from the out-of-town banks, and demands from that quarter showed no signs of diminishing,
but rather increased day by day. During the turmoil
of Friday and Saturday reports were current that money
was not being shipped to interior banks. a Amid the
rush of business during those two days it may well have
happened that shipments of currency were delayed, but
at the beginning of the following week it is entirely
reasonable to conclude that the New York banks were
fully meeting their obligations to their banking correspondents when we find Chicago papers mentioning
liberal remittances from New York to that city and to
a See Chicago Tribune, September 24, 1873.




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other centers. a Unfortunately, the New York banks
were unable to continue this wise and salutary policy for
many days. Meeting every demand from their depositors, they had already during the first three days of this
week done much to restore confidence, but at the close
of business on Wednesday, September 24, they were left
with a supply of greenbacks so scanty that they could
hardly hope to maintain payments until with the restoration of confidence the normal course of currency movements would bring money to their depleted reserves.
The actual condition of the banks at this time (Wednesday, September 24) is fairly well indicated by taking
the bank statement showing average conditions for the
week ending Friday, September 26, though, if anything,
it probably presents a stronger condition than was actually
the case. The following table shows the condition of the
New York banks for the week ending September 26, 1873:
Changes from
previous week
(decrease).
Loans
Specie
Legals
Deposits
Circulation
Reserve deficit
Reserve percentage

$266,811,800
i2.937.3oo
21,229,100
174,527,800
27,327,600
16,297,450
16.97

$11,609,900
5,907,500
13,078,800
23. 5 1 2 , 3 0 0
86,600
a 13,076,375

a Increase.

In analyzing the changes shown by this table, account
must be taken of the elimination of the failed Commonwealth Bank. The contraction of loans shown by the
a See Chicago Tribune, September 24, and also New York Tribune, September 23.




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table should be reduced by $1,900,000, but the net contraction of $9,700,000 is large, though most if not all of it
belonged properly to the previous week. All reports agree
that the banks resumed lending operations upon the issue
of clearing-house loan certificates. The absence of the
Commonwealth Bank doubtless accounts for the reduction
of $86,000 in circulation, as the circulation of that bank
was $230,000. It was not a time when the banks would
be likely to keep any of their notes out of circulation.
The deposits of the Commonwealth Bank were $1,692,000,
specie holdings $15,800, and their legal tenders $476,600—
amounts which do not appreciably affect conclusions
drawn from the bank statement of the week. The reduction of more than one-third in reserves, especially in legal
tenders, may be looked at from two points of view. It
shows the enormous extent of the demands which had been
met by the banks, and credit should certainly be given
the clearing-house committee for the brave effort which
was made to meet every obligation of the members of the
Clearing-House Association. But the proportion of reserve was reduced in one week from 23 per cent to 16.97
per cent, and if we take the proportion of currency to deposits, less the amount of specie, it was reduced from 19.1
per cent to 13.1 per cent.
SUSPENSION IN NEW YORK.
It is reasonable to believe that success would have
crowned the efforts of the clearing-house committee to
handle the situation if the reserves at their disposal had
been somewhat greater at the beginning of the disturbance.
If they had been able to draw upon any outside funds, it




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is probable that they would have persisted in the policy
of unrestricted payments. Had the Treasury deposited
the $13,000,000 which was used in the purchase of bonds,
something would have been gained. The relief which had
been experienced at the beginning of the week, when the
banks proved able to continue payments, was so great
that the public, unaware of the depletion of the reserve
did not see the necessity of resorting to further measures—
measures which could not fail to disturb trade and weaken
confidence. But the banks were clearly at the end of
their resources, and the step taken on Wednesday, September 24, seems amply justified. Another issue of
$10,000,000 of clearing-house loan certificates was authorized—a measure which introduced no change in the policy
hitherto followed.0 In addition the following momentous
resolution was adopted:
That all checks when certified by a n y bank shall be first stamped or
written " P a y a b l e through the Clearing House."

The adoption of this resolution involved the partial
suspension of cash payments by the banks. I t did not
signify that no money whatever would be paid out to
depositors, but it placed the dwindling supply of currency
more absolutely within the control of the clearing-house
committee. In later crises this restriction of cash payments has been carried to extremes, and the banks have
not thereafter allowed their reserves to fall away, but have
even greatly increased them with little regard to or pera Another issue must have been authorized later, as the maximum amount
outstanding, on October 3, was $22,410,000. This was equal to 8.35 per
cent of the loans of the banks, and may b e compared with the maximum
issue of $88,420,000 on Dec. 16, 1907, which was 7.52 per cent of loans a t
that time.




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haps better realization of the effect on the business community. In 1873 money continued to be paid out by the
banks—indeed almost as freely as before—especially to
the banking depositors of the banks. That the reserves
were used freely is shown by the following table which
contains the bank statement from September 27 to November 8, the entire period during which its publication
was discontinued: a
\

Sept. 27
Oct. 4
O c t . 11
O c t . 18
O c t . 25
Nov. 1
Nov. 8

Loans.

Legal
tenders.

Specie.

Deposits.

Circulation.

$266,811,800 $12,937,300 $21,229,100 $174,527,800 $27,327,600
268,408,700
12,012,700
10,635,500
156, 4 0 2 , 3 0 0
27,425,900
265,593,900
10,178,800
11,919,900
24, 4 5 1 , 600
156,004,600
261,366,100
6,280,500
13,388,500
27,453,400
i53,794,9oo
254, 8 9 6 , 200
8 , 7 7 7 , 700
27, 422, 300
13, 2 7 0 , 6 0 0
150, 3 9 7 , 700
253, 2 3 2 , 4 0 0
14,724,900
27,413,700
14, 972, 600
1 5 5 , 8 4 4 , 200
249, 2 7 7 , 3 0 0
21,040,200
27,434,800
16,878,000
157, 967, 500

The bank statement of October 4 showed a loss of
$9,000,000 of currency and of some $2,000,000 in specie.
During the following two weeks there was a further loss of
currency to the amount of $6,000,000, the statement of
October 18 showing only $6,280,500 of legal tenders.
Owing to gold imports, the specie holdings had somewhat
increased and amounted to $13,338,000. There was then
a reserve deficit of $25,648,000, exceeding by nearly
$6,000,000 the actual reserve of $19,664,000. The proportion of the total reserve to liabilities was only 10.85
per cent, to deposits alone 12.79 per cent, and the proportion of greenbacks to deposits, less specie held, was
only 4.47 per cent. On October 14 the legal-tender reserve was at the lowest point, at $5,800,000, having been
<*This table is taken from the Bankers' Magazine for May, 1875, P- 857.




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reduced from $34,000,000 on September 20.° The currency movement then turned in favor of the banks, a t
first slowly, but by the end of the month rapidly, and by
the middle of November the banks were again above their
reserve requirements.
In the subsequent crises of 1893 and 1907 the banks
followed an entirely different course after cash payments
were restricted, and bent every energy to the immediate
strengthening of their reserves. It is this difference in
policy that gives importance to the study of the crisis in
1873. I*1 making free use of their reserves the clearinghouse committee exhibited a determination and strength
of purpose which can not be too highly praised. As will
be seen in our study of the course of later crises, the banks,
when they suspended in 1873, were far less well supplied
with funds and were also unable to secure additional
currency from any source. In 1907 suspension was more
complete and continued for a longer period than in 1873,
and its disturbing effects upon the trade of the country
seem to have been far more serious. Further comparison
must be deferred to a later stage in this investigation,
but with this end in view it will be seen that a detailed
analysis of the course of the crisis of 1873 after suspension
is of the utmost importance.
THE CURRENCY PREMIUM.

The first and most immediate consequence of partial
suspension by the New York banks was the appearance
of a premium upon currency in terms of certified checks.




a

See p. 94.

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The rumor that this action was under discussion by the
clearing-house authorities is said to have caused the premium to appear late on Wednesday, but the first quotation which found its way into the daily journals was for
Thursday, September 25, when the premium was reported
as ranging from one-half to 3 ^ per cent. The following
table presents the currency premium for each day during its
continuance, showing the highest and lowest quotations:
Date.

K-3K
l^a-4
2-4
Sunday.

26
27_
28

Date.

Quotations.
Oct.

Quotations.

9

--

K-i

n

__

y-y
y-H
16

•h-y*
Sunday.

15

2-3
A
1-3
%-iV*

__

_

_ ..

y$-y

Sunday.
K-i

6

l
A-i
Close at ^y

18
19

l

1

l

A~%

20

Nominal.

21

8

%-H

Sunday.

2-5
2-4

Oct.

M-iK

K-i %

i

A-y*>

22
b

°> In Philadelphia 3-4.

Bank notes at par.

[This table is taken in the main from reports in the New
York Tribune and Times; these failing, from telegraphic
reports in the Boston Advertiser and the Chicago Tribune.]
The fluctuation in rates on some days was often considerable. It is possible that the lower rate may refer to the
price paid by brokers for currency and the higher rate to
the price at which they sold it to customers. There were,
however, wide differences both in supply and demand
from hour to hour, and especially high rates were regularly paid for currency in quantity. It will be observed




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that the premium ruled at a fairly high rate for some ten
days, followed by a week during which rates were in the
neighborhood of i per cent and then by another week
when the rates were nominal. As a positive factor in the
situation the currency premium had a duration of less than
three weeks.
FOREIGN EXCHANGE.

The course of both the foreign and domestic exchanges
during crises is exceedingly difficult to follow and to
explain. Their derangement has an immediate and farreaching effect upon the movement of commodities
between different parts of the country and for export,
and if continued for any length of time leads to the
serious interruption of the ordinary productive activities
of the people. In the case of the crisis of 1873, unlike
that in 1857, the disturbance of the foreign exchange
market was of short duration. On Friday, September 19,
it was reported that the market was demoralized, and on
Saturday that foreign exchange was blocked, and for
several days during the following week newspaper reports
agree that mercantile bills were practically unsaleable.
It was stated that foreign exchange dealers could not
dispose of their own drafts on London, and that they
were unwilling to take the risk of purchasing bills in the
disturbed state of affairs. By the end of the week, however, conditions became more satisfactory, and on Friday,
September 25, $2,500,000 was taken from the Bank of
England for export to the United States. This was the
beginning of a considerable movement which continued
until the end of October, a total of $15,000,000 being sent




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to the United States from Europe. This inflow of gold in
itself was of less importance than upon other occasions of
crisis, because the business of the country was being
carried on upon an inconvertible paper basis, but it is an
indication that the blockade in the foreign exchanges had
been effectively broken.
It remains, however, to determine just what had
brought about this improvement in the foreign exchange
situation. The view has gained ground in recent years
that the currency premium which has appeared in our
successive crises has been a chief factor in stimulating
gold imports, and consequently in bringing about the
continuance of dealings in foreign exchange. In 1873 no
expression of this opinion has been discovered, and it
may be asserted with confidence that at no time has the
currency premium exerted more than a secondary influence on the course of foreign exchange dealings.
Comparatively little capital has been employed in this
business by American foreign exchange houses, and until
recently the banks did not engage directly in such operations at all. Commercial bills drawn against American
exports are regularly discounted at once in Europe, and
against the credits thus secured abroad drafts are drawn
and sold here so far as the demand allows. The banks
appear as a factor in these dealings when the funds of the
exchange dealers are not sufficient to meet the temporary
excess of bills purchased over drafts sold, or in the case of
gold imports during the time the gold is in transit. At
the outbreak of a crisis, due to domestic causes, the
demand for drafts is certain to fall off, and if the exchange
6158—10




5

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houses are to purchase bills and import gold the banks
must supply the funds during the period of shipment.
It has already been pointed out that the banks were
probably not making any new loans during the latter part
of the week ending September 20, and those of the first
part of the following week probably served only to satisfy
the most urgent needs of their customers and check
liquidation. But the issue of a second ten millions of
clearing-house loan certificates, authorized on Wednesday,
September 24, seems to have enabled the banks to do
more than that, since the bank statement of October 4
shows an increase in loans of some $2,000,000. The
advances of the banks enabled the exchange houses to
resume the purchase of bills, thus preventing the threatened cessation of commodity exports. The currency premium had no direct bearing on the matter; exchange
rates and the gold premium moved up and down with
changes in the currency premium, since they were both
expressed in terms of depreciated certified checks.a
The temporary blockade in foreign exchange was
chiefly felt in the grain and produce markets. From
Chicago, on Friday, September 19, it was reported that
" t h e shipping movement was partially paralyzed by the
news from New York that sterling exchange was unnegotiable." 6 Through the following week the situation remained serious. The movement of wheat to the Atlantic
ports fell off, and in consequence the elevators and stock
yards became crowded to their utmost capacity, and
0

For a further discussion of this matter, see pp. 191 and 282.
& Chicago Tribune, September 20, 1875.




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shipments from primary markets were necessarily refused by the railroads.® The price of wheat fell off
sharply—from $1.13 on September 19 to 90 cents on
September 24. With the resumption of foreign-exchange
dealings at the end of the week shipments were renewed,
and the wheat quotation was again above $1 on September 29. Cotton was not affected so seriously by the foreign-exchange situation, other causes contributing to the
sharp decline in its price from 1 9 ^ to 1 7 ^ cents per
pound. The movement of the crop was only just beginning, and of course difficulties of storage were absent.
SUSPENSION THROUGHOUT T H E COUNTRY.

The maintenance of the usual system of payments
between different parts of the country is a problem
wholly unlike that of the foreign exchanges. Continuance of cash payments by the New York banks, rather
than the continuance of loans, is the essential requirement. Local business can be carried on after a fashion
with certified checks payable only through the clearing
house, and foreign-exchange transactions, except when
gold is being exported, may be characterized as a local
business. If, however, the banks of the money centers
refuse or even delay the shipment of funds deposited
with them, the thousands of country banks will inevitably discontinue remittances upon items sent to them
for collection. But is the reverse equally inevitable?
If the initiative is taken by the country banks, is that
sufficient reason for the discontinuance or restriction of
the shipments of money to the interior by the banks of




a

Chicago

Tribune, September 25, 1875.
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the money centers? The answer is most certainly and
decidedly in the negative. The banks in the money
centers reap great advantages from their position as
clearing centers and as reserve agents. They incur a
responsibility for maintaining the credit situation which
does not rest upon the other banks.
Finally, what has been said of money centers generally
in relation to the country banks applies with even less
qualification to the responsibilities of the New York
banks, to the banks of other money centers, and, indeed,
to the banks of the entire country. There is always a
chance that the New York banks, by meeting every
demand upon them for cash, may be able to reestablish
the ordinary course of payments between banks in different parts of the country, while nothing that the country banks and those of the secondary money centers
may do can possibly bring this about. It follows, therefore, that even though in 1873, o r o n later occasions,
some of the banks outside New York may have restricted
payments before the suspension in New York, the general
dislocation of the domestic exchanges is properly to be
attributed to the banks of that city. A danger, therefore, which had been merely threatening became a reality at the moment the action of the clearing-house banks
on Wednesday, September 24, became generally known.
Similar steps were immediately taken in most of the secondary money centers. In Boston, Philadelphia, Baltimore, Washington, New Orleans, Cincinnati, and St.
Louis the issue of clearing-house loan certificates, and at
the same time the use of certified checks, payable through




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the clearing house, were sanctioned.** We have already
seen that the use of loan certificates does not necessarily
involve suspension, but the fact that both measures
were taken together in many places not unnaturally
gave rise to the erroneous impression that suspension is
an inevitable consequence of the issue of loan certificates.
Moreover in many cities, Chicago being the most important,
as well as by the country banks generally, suspension of cash
payments was quite as complete, even though they did
not resort to the loan certificate. In many instances the
banks made public the reasons which led them to restrict
payments, and as they afford a clear idea of the situation
as it presented itself in different parts of the country
they are here given in some detail:
SAVANNAH.—The Chamber of Commerce, September 26, held an adjourned meeting at 10 o'clock at night to receive the report of its committee, who presented the following:
Resolved, That the banks and banking houses of Savannah will only
meet demands of depositors by certification of checks, to be used as the
necessities of the holders may require, until the temporary difficulties are
removed, and until exchange can be negotiated or currency be received
to move the crops.
The banks are acting according to this resolution.
N E W ORLEANS.—At a meeting of all the bank presidents in New Orleans,
September 25, it was resolved to pay no check for more than $100. All
larger checks are to be certified, and the arrangement to continue thirty
days. This action is considered precautionary to prevent a drain. The
merchants generally approve of the course the banks have taken.
The following address was issued by the banks of this city:
The undersigned, incorporated banks and bankers of the city of New
Orleans, desire to inform the community of the motives which actuate
them in partially suspending payment of currency upon their demand
o For resolutions and statistical d a t a regarding the issue of loan certificates in all these cities except Washington see James G. Cannon, ClearingHouses pp. 91-7. For Washington the return to the Comptroller for
October 13, gives an issue of $28,000. I t is in the case of t h a t city the
only reference I have found.




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obligations, owing to a partial suspension of currency payments by t h e
associated banks of New York and other northern cities, and t h e consequent refusal of the western and other banks to receive checks on New
York, as is the regular course in the settlement of collections made here
for their account. I t is ascertained t h a t a very large remittance of currency hence has been made upon peremptory orders within the past five days.
To such an extent indeed has this prevailed that a t the same rate only a
few days must elapse before our vaults and the community would be
entirely depleted of the means essential to the ordinary movement of trade.
At the present moment foreign exchange is unsalable in New York, and as
we derive from this source our main supply of currency we are now thus
deprived of the only means of restoring the amounts lost by shipments
to the West and the interior. We have therefore taken this step as a
means of self-protection, and for the benefit of the agricultural as well
as the commercial interests, and as the only means through which the
incoming crops can be moved without ruinous sacrifice in prices. T h e
duration of this protective policy is limited to a period of t h i r t y days,
during which time we are confident t h a t the daily receipts of cotton and
sugar will afford us a prompt and ready relief, and compel currency to
seek this market.
MARYLAND.—Officers of the associated banks of Baltimore met September 25, and resolved, in view of the present financial situation, not to
pay out money on checks except what may be required for legitimate
business purposes, the banks to certify all good checks which can be used
in business transactions. I t is confidently believed here t h a t the banks
in the city were never in a sounder condition than at present, and their
action this afternoon is recognized as a prudent precaution against any
panic. The president of the German Savings Bank states t h a t deposits
are in excess of the amounts drawn from the bank. Mercantile and commercial interests of the city, while experiencing to some degree the general
pressure and tightness in money, are regarded as being on a safe and sound
basis, no failures being at present anticipated. As elsewhere, trade is
very limited, no heavy transactions taking place. The feeling to-day,
sympathizing with the favorable dispatches from New York, is much
better than for several days previous, and it is confidently expected t h a t
business will soon revive.
S T . LOUIS, Mo., September 25.—A slight run having been made on the
banks of St. Louis on the 25th of September, it was decided a t a meeting of
bankers to suspend the payment of checks or drafts, either in currency or
exchange, until the excitement in the E a s t subsides and the former condition of the markets is restored. Shipments of flour to the East having been
virtually suspended by the recent advance in railroad freights, the board of
directors of the Merchants' Exchange have petitioned railroad companies
to restore the old rate during the present financial troubles.
O H I O . — T h e Cincinnati Clearing-House Association has adopted the
following resolution:




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" Resolved, That for the protection of our commercial interests, and for
the purpose of preventing a drain of currency from the banks and bankers
of this city, we do hereby agree to adopt substantially the plan adopted
in New York, viz: They will not pay out currency on checks except for
small sums, to be optional with the banks upon whom they are drawn,
but they will certify checks drawn on balances in their hands, payable
through the clearing house only."
Each member of the Clearing-House Association is required to deposit
such sum, in approved securities, as will at all times cover the amount
of his clearings. Government bonds are received at their par value.
Railroad and other stock and bonds and bills receivable are received at
75 per cent of the value fixed on them by the committee. Loan certificates
are issued by the committee, which can only be used in the settlement of
balances between the banks, and are not negotiable. The banks have
since resumed currency payments as usual.
R H O D E ISLAND.—An adjourned meeting of the Providence banks,
September 30, received and adopted the report of a committee recommending a liberal policy on the part of banks toward each other and
customers; t h a t each bank should request its depositors to draw checks
payable through the clearing house, and should certify checks payable
through the clearing house; that deposits made in banks in currency be
paid out to such depositors in currency, and that deposits made in certified
checks be paid in kind. The Providence banks are in a generally sound
and strong condition.
NASHVILLE.—The national banks of Nashville, four in number, in view
of the present state of financial affairs, have agreed to suspend currency
payments on all balances exceeding $200. The board of trade, at a
large and full meeting, unanimously approved of the course of the banks,
and adopted a resolution that merchants and business men would continue
to deposit with and aid the banks by every means in their power. A
general good feeling prevails among business men, and there are no symptoms of a panic.a

The following news items are taken from the Boston
Advertiser and the Chicago Tribune:
INDIANAPOLIS, September 26.—The clearing house adopts suspension of
currency payments for two days.
PHILADELPHIA, September 26.—The clearing house resolves that the banks
will not pay out any more currency except what is actually needed for the
payment of wages.
DUBUQUE, IOWA, September 27.—Only one national bank is meeting its
demands in full in currency; one other has suspended payment entirely;
a third pays in bills receivable, and small amounts in currency.
a

Bankers' Magazine, November, 1873, pp. 383-393.




65

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KNOXVILLE, T E N N . , September 27.—Banks here suspended currency
payments.
NEWPORT, September 29.—All the banks suspend currency payments.
LOWELL, September 29.—Decision to limit currency payments to $50,
unless in cases of strong necessity. The $200,000 due on pay rolls this
week will be amply provided for.
CONCORD, N. H., September 29.—Banks limit currency payments to
small amounts.
CAIRO, I I I . , September 29.—Adopts Cincinnati plan of suspension.
WORCESTER, MASS., September 29.—No concerted action, b u t banks
"will avoid any obvious attempt to draw away greenbacks to New York,
by paying large demands from out of town in cashiers' checks on Boston
or New York."
HARRISBURG, PA., September 28.—Banks and savings institutions agree
to suspend currency payments.
LOUISVILLE, September 29.—A clearing house formed and a majority of the
banks resolve to limit currency payments to small amounts.
ALBANY, September 29.—Banks working under New York plan.
KANSAS CITY, September 25.—Banks resolve that " w e decline payments
of checks or debts over our counters either in money or exchange; second,
t h a t clearing-house balances shall be carried to the extent of 75 per cent of
approved collaterals.
DAVENPORT, IOWA, September 26.—Banks limit currency payments to
$100.

LEAVENWORTH, KANS., September
currency payments.

26.—Six

banks agree to suspend

Finally attention is called to the following reports of the
action of the Chicago banks:
The clearing-house association has voted [September 24] to recommend
the suspension of currency payments on any large demands made upon
them either from the country banks or over their counters.**
Since Monday (September 22) or Tuesday last some of the banks of this
city which have large deposits from country banks have been unable to
return those balances in currency as fast as they were drawn for. * * *
Other banks, and by far the larger number, having to deal only with city
depositors, have been paying all demands tipon them, both over the counter
and at the clearing house.
The banks vary largely as to what is a " small check;'' some pay $25, some
$1,000, some 25 or 30 per cent of depositor's account. The great difficulty is
that the Chicago banks are not united, but rather are trying to get the advantage of each other, b
< Chicago Tribune, September 25.
*




66

& Ibid, September 26.

Crises

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Banking

System

Chicago bankers, on the evening of September 26, met and refused to issue
clearing-house certificates; b u t appointed a committee on the question.^

The action taken by the Boston banks is particularly
instructive. The banks of that city were not subject to
such heavy demands for crop-moving purposes from their
banking correspondents as were those of New York and
of the western and southern cities. They were also in a
fairly strong position at the beginning of the crisis, having
some $10,000,000 in cash against $62,000,000 of deposits.
Payments were continued after suspension in New York,
with the consequence that Boston exchange at once commanded a premium in New York, and was being eagerly
purchased. On this account the banks on September
27 adopted a plan similar to that which had been adopted
in New York, but with no provision for the equalization
of reserves.
With the close of the week ending September 27 partial
suspension had taken place throughout the country, aside
from the Pacific coast, where the banks were upon a gold
basis, and where general business was largely independent
of that in the rest of the country. Up to the time of suspension there had been no failures of consequence in
general business, and no failures of banks outside of New
York, except those in Philadelphia and Washington, in connection with the failure of Jay Cooke & Co. Confidence
in the banks had not been seriously weakened, and there
were few reports of runs and of hoarding by individuals
outside of New York. The course of trade had not as yet
been seriously disturbed except in the grain and produce




a

Ibid, September 27.

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markets in Chicago. With the beginning of the following
week newspapers began to refer to "the late panic,'' and
with reason; there was no further panic during 1873,
though the crisis had only begun and although the effects
of suspension which had been brought about by the panic
had yet to be experienced. There is every reason therefore to accept the explanation put forward by the banks
that suspension was due to the action of the New York
banks, action which, as we have already seen, was due to
the lack of any adequate reserve in New York at the
beginning of the crisis.
HOARDING.

When once the banks had resorted to suspension, various causes of disturbance, till then of minor importance,
became serious. The amount of actual money required
for a given volume of transactions was greatly increased.
Uncertain whether the banks would provide the money
which they might shortly need, many persons began to
discontinue paying into the banks cash received in the
course of their daily business. On September 30, for
example, one of the Boston banks reported that many of
their customers were depositing their currency in their
own safest The currency premium also tended to keep
money from finding its way into banks. Many retail
shops in New York, it was said, sold to brokers their
receipts in currency. Positive hoarding also seems to be
increased by suspension, even though some money is
brought into use by the possibility of realizing a profit
from its sale at a premium. In 1873 a t any rate the




«Boston Advertiser, September 30, 1873.
68

Crises

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amount of money thus brought to light was unquestionably
more than offset by the amounts which were locked up in
savings banks. In New York alone the savings banks were
estimated to have held from $13,000,000 to $20,000,000,
and they were severely criticised for withholding this
money from the channels of trade. 0 Such criticisms
would have been well founded if the commercial banks
had not resorted to suspension. The savings banks, having required thirty days' notice from depositors, were
properly justified in holding themselves ready to meet the
demands of those depositors who had already given notice.
Aside from the savings banks, very little was said about
the hoarding of currency, but there is direct evidence that
as in later crises it threatened to assume alarming proportions. Fortunately the banks, at least those at New
York, adopted the only wise and effective remedy:
Money was paid out freely, and the hoarding propensity
vanished. On October 13 and on November 1 the Comptroller of the Currency asked for special reports of the condition of the national banks, and thus secured a mass of
statistical data showing the monetary effects of the crisis
which is unique in banking history. It is much to be regretted that this precedent was not followed in later crises.
On September 12, the date of the regular returns of the
national banks, they held $112,958,000 in legal-tender
notes. On October 13 they held $86,435,000, a loss of
$26,523,000, or more than 23 per cent. On November
1 they held $100,722,000, a gain of $14,287,000. More
0 Commercial and Financial Chronicle, October 18; New York Tribune,
October 20 and 21; Boston Advertiser, October 15.




69

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Monetary

Commission

than half the loss had been recovered. When it is remembered that this was the crop-moving period, it will
be seen that no considerable amount of money lost by
the banks was then being hoarded by depositors.
The date of the first of these special reports, October
13, happened to have been at the moment when the banks
were at the lowest point in reserves. From about the
middle of October money began to flow back into the
banks, and by the close of the month the resumption of
normal relations between banks and depositors was almost
completely reestablished throughout the country. As a
seriously disturbing influence, suspension continued for
less than three weeks.
The return of money to the banks and the resumption
of cash payments may be due to influences quite opposite
in nature. The complete prostration of business may
diminish the use for money outside the banks, and also
the requirements of borrowers for loans. This is the
undesirable avenue of escape from suspension when it is
prolonged over a considerable period of time, so that the
dislocation of the domestic exchanges places a serious
check upon the movement of commodities between different parts of the country. An instance of this nature
will be afforded in the case of the crisis of 1907. In 1873
it is not unlikely that suspension would have been thus
prolonged had not the New York banks continued to meet
their obligations to the utmost limit of their reserves. As
has already been stated, money was shipped to the banks
of the interior in large quantities after the resort to partial
suspension, and this action had the most reassuring effects




70

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on the banks and the people elsewhere. Currency began to
be sent to New York by banks in other parts of the country
as early as the first week in October. On October 3 it was
even reported that receipts had exceeded the amount
which was required for the needs of the out-of-town banks.
Resumption came gradually and not at the same moment
throughout the country, but by the end of October it was
virtually complete except in a few Southern cities.
PAY ROLL DIFFICULTIES.

The most immediate effect of partial suspension is the
difficulty of securing money for various purposes, especially for pay rolls. In 1873 there were numerous reports from different parts of the country of inability to
secure money for this purpose, though trouble on this
account was probably much less than in later crises,
because of the custom of paying wages monthly, which
generally prevailed at that time. It is, however, a
cause of trouble which may be largely removed by means
of substitutes for money, such as certified checks and
local script of various kinds. Were trade purely local it
is probable that it would take but a short time for a community to adjust itself to suspension, if not without inconvenience, at least sufficiently well to permit the continuance of ordinary business payments.
The following news items will serve to illustrate the difficulties which arose from the refusal of the banks to supply currency to their depositors, though it should be noted
that in many instances of the shutting down of factories
other causes were also potent. It is not always certain




71

National

Mon etary

Commission

that the lack of currency was due to the suspension of the
banks. Inability to secure loans or to make collections
may in many cases have deprived producers of the expected bank balances which would have given them the
right to demand currency.
In the Boston Advertiser for September 30 it was reported that:
B. Howard & Co. (watch and clock makers) had closed part of their
works. Unable to make New York collections or to obtain Boston accommodations without great difficulty, " a n d being unwilling to swerve from
the long-established practice of meeting their heavy pay-roll obligations
weekly, they have decided to give a portion of their hands a fortnight
release from labor." The American Watch Company, of Waltham, also
discharged one-sixth of its force (150 in all) on September 29, " o n account
of the unsettled condition of the money market." J. P. Squire & Co.
discharged 100 men on Saturday (September 27), "because of the general
troubles in financial matters." At Taunton banks have suspended temporarily. " T h e firms having large pay rolls feel the contraction the most."

The following dispatches from a number of widely
separated cities are taken from the Chicago Tribune:
TOLEDO, September 2g.—The various manufacturing establishments
about town report some embarrassment caused by the crisis, such as
difficulty in obtaining money to pay their hands, and the large tobacco
factories have not been able to ship for four or five days on account of
their inability to procure currency to purchase stamps. It may be necessary to dress up the stock again before shipping, as it will not sell readily
after a prolonged stay at the factory in packages. About 40,000 pounds
of "fine c u t " has accumulated.—Chicago Tribune, September 30.
ST. LOUIS, September 30.—On account of the scarcity of currency, one
prominent lumber firm suspended operations to-day, and discharged their
men, and one or two other establishments will do the same if money is not
easier within two days.—Chicago Tribune, October 1.
PITTSBURG, October 3.—A meeting of manufacturers resolved, " T h a t in
order that the employee and employer may each contribute to the best
interests of this community, and relieve our moneyed institutions from the
excessive drain of currency, we commend that the manufacturers only
make payment not to exceed one-half of the amount to our employees on
each pay day on and after this date until the currency and exchange of
the country assume their normal condition."—Chicago Tribune, October 4.




72

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CLEVELAND, October 5.—No manufacturers are embarrassed so far as
can be seen. All the heaviest ones are paying in full in cash; a few paying
half and two-thirds in cash, the balance in orders on stores—Chicago
Tribune, October 6.
BALTIMORE, October 6.—Some factories discharged a portion of their
hands; others paid half wages in cash and rest in due bills. The bills
have been generally paid.—Chicago Tribune, October 7.

Finally, attention is called to a number of items of a
somewhat later date from the New York Tribune:
PHILADELPHIA, October 11.—A number of Frankford cotton mills are
running on half time in consequence of falling off of orders and difficulty
of -orocuring currency to pay wages.—New York Tribune, October 13.
PITTSBURG, October 14.—Report from Brady's Bend to effect t h a t extensive ironworks had closed; also the cotton mills in Allegheny, ostensibly for repairs. " It is feared that unless the banks resume their discount
business many business interests will be seriously crippled."—New York
Tribune, October 75.
At Johnstown, Pa., the Cambria Iron Works has given notice to employees that the company finds it impossible to make collections or to sell
for cash or to raise money in any other way to make the usual monthly cash
payments, and gives notice of intention to pay as soon as possible. " While
the company will guarantee to employees all necessary supplies to the
extent of their earnings, no regular cash payments need be expected until
cash can be obtained for products of the works."
On Monday of last week (October 20) the Pittston and Elmira Coal
Company suspended because of lack of money to pay its workmen. On
Thursday arrangements were made, and work was resumed to-day (October 27).
At Newburgh the "steam mills" have stopped (October 25), owing to
the money stringency. Four hundred persons are thrown out of work.—
New York Tribune, October 27.
UTICA, October 27.—The Remington gun factory at Ilion has been seriously embarrassed in obtaining currency to pay off its hands. " T h e r e
has been very little trouble of that kind in this city (Utica), as the banks
have done all that lay in their power to accommodate business men, and
have been materially aided by the Savings Bank of Utica, which has
deposits exceeding $3,000,000 and supplies large amounts of currency to
the banks of discount.—New York Tribune, October 28, 1873.
ROCHESTER, October 28.—There has been some difficulty among Rochester manufacturers on one or two occasions in getting currency to pay their
help, but in no case has there been more than two or three days' delay in
payment. The banks discount very little, but in other ways have done
all they could to facilitate business.




73

National

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Commission

At Auburn there is great complaint of scarcity of money, " b u t , with
the exception of one or two instances a t the beginning of the panic, t h e
banks have been able to furnish currency enough to pay off the operators
employed in the workshops." The Frisbie steam fire-engine works
are running on short time. Plenty of orders, but no collections, " a n d
the company finds it difficult to get money to pay off their hands.
The engines are sold on long credit to corporations, and, while the securities are ample, it is impossible to negotiate them for money.'' Other
manufactories closed or curtailed for same reason.—New York
Tribune,
October 30, 1873.
PROVIDENCE, October 28.—J. Y. Smith, ex-governor and leading cotton
manufacturer, said t h a t " t h e r e has been a good deal of difficulty—now in
part past—in getting currency to pay wages, but our mills have paid fully
in cash, and promptly."—New York Tribune, October 31.

Taken together these reports seem to indicate a serious
state of affairs, but it must be remembered that they are
the most definite examples of pay-roll trouble which have
been found in two New York newspapers and in one Boston and one Chicago journal. The impression left upon the
mind from the examination of contemporary newspapers
is that upon the whole the banks generally supplied at
least the more urgent requirements of their depositors.
Pay-roll difficulties were certainly of short duration, disappearing shortly after the middle of October. Their
place was taken by far more serious causes of trouble,
which were not, however, of a banking nature. It would
seem fairly certain that the following statement from the
Boston Advertiser of October 22 was true for the country
generally:
"The financial disturbances have but just reached the
large New England manufactories. Great concerns that
had to pay out thousands of dollars to hundreds of employees found it difficult then to get the money with
which to cancel their pay-rolls, but most of them, in one
way or another, did it. But now stock has piled up, and
curtailment has become necessary."




74

Crises

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It is not possible at this distant date to make any
estimate of the extent to which various local substitutes
for money were made use of. Scattered references to
such devices, especially to those issued by municipalities,
appear here and there in the newspapers, but they do
not seem to have been so generally issued as in 1893 or
1907.°
THE DOMESTIC EXCHANGES.

A far more serious cause of disturbance from the suspension of payments is the dislocation of the domestic
exchanges. In making payments at a distance local
substitutes for money will not serve. When the banks in
one locality refuse to remit to banks elsewhere upon
drafts and checks sent to them for payment business
must soon come to a standstill. The sudden and general
trade prostration which can be brought about by this
means is within the recollection of all from recent experience. In 1873 the dislocation of the domestic exchanges
could not have had so serious effects as at present because
of the much less complete development of economic
interdependence between different parts of the country.
But after making every allowance on this account, there
can be no question that the dislocation of the domestic
exchanges, with its resulting trade consequences, was far
less complete than in later crises. The exchanges were
indeed deranged for a time, but they were never completely blocked, except in Chicago, and serious derangement continued for but a few days at the end of September
® See Chicago Tribune September 30, October 3 and 24; also New York
Times, October 1.
6158—10




6

75

National

Monetary

Commission

and the beginning of October. There were very few
references to the matter in the newspapers of the time, and
still more seldom is it mentioned among the chief causes
of difficulty. The following are the most definite
references to the effect of the dislocation of the exchanges
which I have found:
We learn that one effect of the present trouble has been to put a considerable check on the remittances of country tradesmen to the centers of
wholesale trade. This is probably not because there is less money in the
country to send, or because the retail merchants are unable to remit. T h e
result of the practice, however, is detrimental to business, and checks the
recovery from the panic, without helping those who cease remitting. a
" T h e effect of the financial panic on the transportation business has been
very serious. Railroad freight on all the principal lines from New York to
the West has fallen off since the beginning of the panic from 25 to 50 per
cent." Especially the west-bound freight: " T h e eastern-bound freight,
which consists mainly of grain, has not been so seriously affected as yet, but
unless western buyers, who are compelled to pay greenbacks for grain, are
supplied by the banks with something besides certified checks, they say
that the movement of produce eastward will soon cease. &

In reducing to a minimum both the period and the
effects of the suspension, all credit should be given to
the clearing-house committee and to the more conservative New York banks, which upheld it in its policy of
meeting from the combined reserves of the members of
the association the demands made upon the interestpaying banks by their banking depositors. Restrictions
on cash payments in New York were confined chiefly, if
not entirely, to dealings with local individual depositors;
the banks elsewhere, finding that their requirements
were being met, soon began to resume the ordinary
course of business.0




a

Boston Advertiser, October 1, 1873.
& New York Tribune, October 16, 1873.
c See p. 71.
76

Crises

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As in the case of pay rolls, the impression which is
derived from the examination of the newspapers of the
time is, that though the dislocation of the domestic
exchanges caused much inconvenience it did not lead
to the serious interruption of business activities. It was
not until nearly the end of October, when the suspension of payments was already a thing of the past, that
reports of the actual curtailment of production became a
subject of daily report in the newspapers. At that time
the more permanent causes of business depression were
beginning to make themselves felt. The transition from
business activity was gradual and seems to have extended
beyond the close of the year. There was no sudden and
universal trade prostration such as occurred in November
and December, 1907, lasting during the period of suspension and then followed by considerable recovery to a
condition of less severe though more prolonged depression.
It is, therefore, reasonable to conclude that the temporary
suspension of payments in 1873 had relatively little
influence upon the course of trade. The weekly review of
the dry goods trade in the Commercial and Financial
Chronicle illustrates both the effects of suspension upon
trade and the gradual appearance of trade depression,
owing to the generally unsound condition of affairs
throughout the country. As the course of events is not
within the recollection of many readers, copious extracts
have been taken from it:
REVIEW OF THE DRY ~GOODS TRADE).
FRIDAY, P . M., September 26,

1873.

There has been a fair jobbing trade in progress during the past week
despite the unfavorable condition of affairs in Wall street. It was not




77

National

Monetary

Commission

expected that the monetary disturbances would have much effect upon
trade in this branch, but as the panic continues and becomes more widespread, the difficulty in effecting exchanges with the country is acting as a
check upon further operations. There is a large indebtedness on the part
of the country merchants to this market just now, and some fears are
entertained for the safety of collections which should be coming in largely
during the next thirty days. Some of our largest dry goods houses have
asked their customers to ship currency instead of exchange, to relieve the
city banks, and if this request be granted it will prove beneficial to the
trade in a very marked degree.
FRIDAY, P . M., October 3, 1873.

The week opened with comparatively little business doing, owing to the
prolonged financial disturbances. Dealers from the interior were distrustful of the future, and limited their purchases to actual wants, which
prevented the jobbing houses from doing a very heavy business and
restricted the aggregate movement of the week. There was no feeling of
insecurity on the part of the trade here until Wednesday, when the suspension of the house of Paton & Co. was announced, and the news came so
unexpectedly as to create a very doubtful feeling among many of the
trade regarding what might follow. This firm has been long established,
and had a reputation for financial stability second to none in the market.
It seems, from a statement by the firm, that their suspension was due
solely to the monetary stringency, which prevented them from negotiating
their paper for the last thirty days, and although such assistance was
offered them by outside parties as would, under ordinary circumstances,
have enabled them to weather the storm, they were unable to avail themselves of it now, and were, therefore, forced to suspend temporarily. I t is
generally believed, however, that they will be able to resume business
within a very brief time. We hear of no other failures, nor do the trade
anticipate any.
FRIDAY, P . M., October 10, 1873.

Closely following our last report came the suspension of Messrs. Peake,
Opdycke & Co., jobbers, and although this suspension was not entirely
unlooked for, its announcement did not 'fail to produce some effect upon
the market, and to cause a slight feeling of distrust in the trade as to the
stability of other houses. There has been an improvement of the exchanges
with the interior since our last, and this fact helps the feeling at the close.
The dullness and depression are looked upon by the trade as b u t temporary,
and in view of the activity of our export trade and the liberal demand
existing in the interior for all classes of goods, the probabilities are t h a t
there will be a liberal movement later on in the season. Settlements
between agents and jobbers are reported as being promptly made.
FRIDAY, P . M., October 17, 1873.

The financial condition of the dry goods trade seems to have improved
somewhat during the past week, and there is a steadier feeling than at the




78

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System

time of our last report. Jobbers, as a rule, are meeting their paper with
a good degree of promptness, and where they ask for accommodations the
commission houses generally show a disposition to accommodate them.
The banks are rather more liberal with these houses, and are thus relieving
the pressure considerably. Remittances from the interior, which are
pretty liberal at this season of the year, are coming forward promptly, and
many of the country merchants are discounting their bills to aid jobbers
through the trying period.
FRIDAY, P. M., October 24,

1873.

The current week has been about the dullest of the season in the dry
goods market, and there is very little news to note in connection with any
line of fabrics. The jobbing trade has been for the most part restricted to
the requirements of retailers in near-by localities, the merchants in more
distant sections having already laid in pretty full supplies for their early
trade. I t is greatly to be regretted that the season which opened so auspiciously, and with such brilliant prospects, should have been interrupted
as this has been, but a very hopeful feature is the present reduced condition
of stocks, which results from the liberal sales effected early in the season.
Prices are now held pretty steadily, and the reduced production of nearly
all classes of goods is likely to prove beneficial to the trade by preventing
an accumulation of stock and a break in prices. Reports from the manufacturing centers show that nearly all the mills, both cotton and woolen,
are running on reduced time, while some of the largest corporations are
preparing to stop entirely. Collections are fair, but, while the stringency
is somewhat relieved, there is far from being an easy feeling in the market.
FRIDAY, P. M., October 31,

1873.

There has been no general improvement in trade during the past week,
but a steady jobbing distribution was effected, and the indebtedness of
buyers being met, as the rule with a good deal of promptness, the feeling
and prospects were becoming rather more encouraging. On Tuesday the
trade were excited over the rumored suspension of the Messrs. A. & W.
Sprague, of Rhode Island, and their agents here, Messrs. Hoyt, Sprague &
Co. Confidence was somewhat restored on Wednesday by the authoritative denial of the rumor, but was lost again on Thursday, when it became
known that Messrs. Hoyt, Sprague & Co. had notified their bank to pay no
more of their paper. The Messrs. Sprague, of Providence, have not, up
to the hour of this writing, suspended, but are waiting the action of the
Providence banks, which have promised to come to their aid with $1,000,000.
Should they be thus assisted, they will probably be able to weather the
storm, b u t otherwise their suspension seems likely. The Messrs. Sprague
control some 280,000 spindles in Rhode Island and other States, and employ in the manufacture of textiles probably not less than 10,000 men.
Their interests are very extended, and are not confined to dry goods alone,
although the bulk of their assets are probably in cotton mills and machinery.
The suspension of Messrs. Hoyt, Sprague & Co. was not a thorough surprise,




79

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Commission

but its occurrence has a generally depressing effect, and destroys confidence
in the stability of other houses. There seems to be no immediate prospects
of other suspensions, payments being met with a fair degree of promptness
by both retailers and jobbers.
FRIDAY, P M., November 7, 1873.

Trade has been stagnant for a week past, the attention of all classes of
dealers being given more to the financial position of the market than to
the transaction of business. At the opening nothing definite was known
relative to the A. & W. Sprague Manufacturing Company, of Providence,
or to their agents here, Messrs. Hoyt, Sprague & Co. The suspension of
these concerns having become a settled fact, however, and their statements
showing a large excess of good substantial assets over their liabilities, the
uneasiness caused by their suspension was gradually decreased toward the
close, and the interest now mainly centers upon the action of their creditors,
who are endeavoring to devise some satisfactory means of settling up the
affairs, so as to allow the concerns to proceed with their business. There
has been considerable excitement during the week over the rumors regarding Messrs. H. B. Claflin & Co., but as this firm showed assets about 40
per cent in excess of their liabilities, and only asked their creditors for an
average extension of four and one-half months on open accounts, which
was promptly granted, the excitement has subsided. Messrs. Peake, Opdycke & Co. have resumed business, and while the position of finances
generally is liable to render temporary suspension necessary with any of
our dry-goods houses, it seems to be the prevailing opinion that the trade,
as the rule, are entirely solvent, and that no serious panic in this branch
need be feared.
The liberal auction offerings of last week, and the fact that importers
as well as domestic houses were pressing goods upon the market at public
sale, had the effect of drawing a large attendance of buyers from the interior
into this market, but their presence has not been marked by any increase
in the distribution through regular channels, and the week has been one
of extreme dullness, with prices somewhat unsettled and rather favoring
buyers.

It does not fall within the scope of this investigation
to follow the industrial history of either this or later crises,
except in so far as may be necessary for the proper understanding of banking problems. After the beginning of
November the course of the crisis was determined by
influences entirely outside the field of banking operations.
The return flow of money to the banks, which began in
the third week of October, was accelerated by the depres-




80

Name and location of bank.

Date of organization.

Capital
stock.

Receiver appointed.

Total assets.

July 16.1863
1,1865
July
1,1865
Sept.
1,1865
July
May 24.1864
May 27,1871
July
7,1863
July 31,1863
Aug. 23,r866
Feb. 23,1864

$500,000
750,000
400,000
200,000
100,000
600,000
50,000

Sept. 1 9 , 1 8 7 3
Sept. 2 2 , 1 8 7 3
Sept. 2 5 , 1 8 7 3
do
Oct. 1 8 , 1 8 7 3
Oct. 2 3 . 1 8 7 3
Oct. 2 4 , 1 8 7 3
Nov. 2 3 . 1 8 7 3
Dec. 1 6 , 1 8 7 3
3.1874
June

$2, 493,414
2, 7 6 6 , 5 0 9
1,019,841
272,634

Offsets
allowed
and
settled.

Loss on assets compounded or
sold under
order of
court.

Collected
from assets.

Collected
from assess- Total collections from
ment upon
shareholders, all sources.

Dividends
paid.

Amount of
assessment
upon shareholders.

Interest
Dividends. dividends. Finally closed.

Per cent.
First National Bank, Washington, D C
National Bank of the Commonwealth, New York, N. Y
Merchants' National Bank, Petersburg, Va
First National Bank, Petersburg, Va
First National Bank, Mansfield, Ohio
New Orleans National Banking Association, New Orleans, La
First National Bank, Carlisle, Pa
First National Bank, Anderson, Ind
First National Bank, Topeka, Kans
First National Bank, Norfolk, Va

6158—10

(To face page 81.)




50,000
100,000
TOO,OOO

296,910
1,431,05s
115,304
335,433
203,098
217, 912

£280,955
368,992
103,842
3 , 225
5,735
8,964
7,068
10,410

26,951
2, 191

$765,356
589,213
616,642
146,764

,452,303
,808,304

299,357
122,645

19,675

$1,374,339
747,428

299,357

,447,103
,808,304

259,487
125,667
107,258
862,263
46,634
72,089
31,668

400,000

101,545

142,320

182,231

108,944

11,400

120,344

715.584

706,507

303,813

,oio,320

5 1 . 294
235,127
118,083
55,917

56,942
89,896
58,064

2, 250

91,969

3 7,595

56,942
89,896
60,314
129,566

IOO
IOO •

50,000
IOO,OOO
600,000

34
76
57-5
62

50,000

73- 5
50

45,000

58.3

IOO,OOO

57-5

600,000

Per cent.
July
Mar.
May
May
Nov.
Mar.
Dec.
May
Sept.
June

24
31
1
15
30
21
6
31
11
2

1876
1883
1876
1876
1883
1887
1882
1904
1878
1883

Crises

Under

National

Banking

System

sion in general business, which diminished requirements
for its use in general circulation. The returns to the
Comptroller of the Currency of the condition of the
banks on December 26 found them with a reserve
$28,000,000 above that held on September 12, and greater
than they had held at any time since June, 1871. There
were* also few banking failures either during or after the
first outbreak of the crisis, and none of them were of great
importance.
The accompanying table, taken from the more comprehensive tables which regularly appear in the reports of
the Comptroller of the Currency, shows the results of the
liquidation of the banks which failed during the panic
and the year which followed.
All of the failures which occurred during the crisis were,
as was observed by the Comptroller of the Currency, due
to "the criminal mismanagement of their officers or to
the neglect or violation of the national-bank act on the
part of their directors." a
It would not be difficult to find many quite normal
periods during which both the number of failures and
the losses of creditors were far more considerable than in
1873. The solvency of the banks was at no time in
question. The defects in the banking system which
were disclosed were in its organization. It was made
painfully evident that there was nowhere any reserve
power with which to meet an emergency. Moreover,
the banks were in what was for them a normal condition
of strength at the time. The breakdown of the credit
a Report of the Comptroller of the Currency, 1873, p. xxxv.




81

National

Monetary

Commission

machinery of the country could not be attributed to any
unaccustomed lack of preparation. The defects which
appeared were characteristic of the system, and they
have reappeared with similar consequences upon every
occasion of severe financial strain down to the present.
The purely banking aspects of the crisis of 1873 may,
therefore, be regarded as having practical significance,
similar to that which may be derived from more recent
experience.
ANALYSIS OF BANK RETURNS.

In order to avoid an interruption of the narrative of
the course of the crisis during what may be called its
"banking stage," detailed analysis of the condition of
the banks has been deferred for separate treatment. It
is a matter which deserves particular attention, since, as
has already been stated, the statistical data is far more
extensive than that which we have for the later crises of
1893 and 1907, and influences affecting the position of
the banks were sufficiently similar in the three instances
to render any conclusions at which we may arrive from
a study of the earlier crisis of something more than merely
antiquarian interest. Abstracts of the regular return of
September 12 and the two special returns for October 13
and November 1 are presented in the accompanying
table. The special reports included only the more important items of bank reserves and liabilities, and consequently the statements do not balance. That of November 1 is of importance because it shows the rapid
recovery of the banks, but requires no special analysis.
Attention will be given chiefly to the changes which




82

Abstracts of the reports of condition of national banks on September 12, October ijt and November it 1873, arranged by classes.
S E P T E M B E R 13.

SEPTEMBER is.

SEPTEMBER

RESOURCES.

$199.160 ,887.79
182 , 4 5 9 . 0 4
33.870, 100.00
650, 0 0 0 . 0 0
3.33a. 4 0 0 . 0 0
4.553, 797.00
Z5.740, 765-99
3.077, 386.04
8.469. 9 8 4 . 3 3
905, 6 3 3 . Z Z
766, Z79.69
3 . 0 5 8 . 769-53
6 7 . 8 9 7 . 740. 69
3.6x8, 583.00
338, 3 9 4 - 3 3
14.585. 810.55
31.468 5 3 0 . 0 0
10,8x0, 0 0 0 . 0 0
389,486,3x0.48

Total .
LIABILITIES.

70.335,000.
3x,933,3x1.45
11,3x0,470.03
37,483,343,00
146,535.00
305,979-60

Capital stock
Surplus fund
..
Undivided profits
National-bank notes outstanding
State-bank notes outstanding
Dividends unpaid
Individual deposits
United States deposits
Deposits of United States disbursing officers.
D u e t o national banks
.
Due t o other banks and bankers
Bills payable

167,5x3,663.74
396,877.39
40,397-13
73,357,769.35
18,1x3,050.50
63,135.39
389.486.3zo.48

Total.

RESOURCES.
Loans a n d discounts
Overdrafts
United States bonds to secure circulation
United States bonds to secure deposits
United States bonds and securities on h a n d .
Other stocks, bonds, and mortgages
D u e from redeeming and reserve agents
Due from other national banks
Due from other banks a n d bankers
Real estate, furniture, and fixtures.
Current expenses
Premiums
Checks and other cash items
Exchanges for clearing house
Bills of other national banks
_
Bills of state banks
Fractional currency
-Specie
Legal-tender notes
•United States certificates of deposit
Clearing-house certificates

$363,533, 070.83
594, 439- 05
89.591. 050. 0 0
3.026, 000. 0 0
1.707, 400.00
4.736, 037.68
33.379, 436.51
10,976, 896. 48
3.335- 738.30
8.6oi, 538.75
3,380, 410.80
1,629. 890. 56
1,908,
3Z,038,

3.3IO, 970.07

X75. 000.00
489.356,698.65

LIABILITIES.
Capital stock
Surplus fund
*.
Undivided profits
National-bank notes outstanding
State-bank notes outstanding
Dividends unpaid
,
Individual deposits
»
United States deposits
Deposits of United States disbursing officers.
D u e t o national banks
D u e t o other banks a n d bankers
N o t e s a n d bills rediscounted
Bills payable
—

RESOURCES.
Loans and discounts
Overdrafts
United States bonds t o secure circulation
United States bonds t o secure deposits
United States bonds and securities on h a n d .
Other stocks, bonds, a n d mortgages
Due from redeeming and reserve agents
Due from other national b a n k s .
D u e from other banks and bankers
Real estate, furniture, and fixtures
Current expenses
Premiums
Checks and other cash items
Bills of other national banks
B ills of state banks
Fractional currency
.
Specie
Legal-tender notes
United States certificates of deposit

5iX7.554.5o3.34
5x.6xo.957.x4
3*388,900.00

1,387.410.33
8,744,060.00
6,347.350.00
z70.000.00
16, 3 3 0 , 0 0 0 . 0 0

1*353.657-00
10,145,800.00
14,638,453.00
1 , 0 4 0 , 0 0 0 . 00
15,860,000.00

383,663,354.53

Total

366,953.37

4.7I7.65X-37
X7.365,913.65
56,735.347-xo
5*460,589.00
3 9 6 , 8 3 5 . 31

300,058,604.81

41*365.334.55
4,080,373.00

LIABILITIES.
70,335,000.00
37,851,306.00
131,030,182.54

137,164, 985.00
33,470. 5x6.75
13.764, 473. *x
77,800, 560.00
307, 137.00
330, 700.03
173,06s, 103. 39
1.496, 333.71

1,326, 753-51
43.649. 018.ax
15.469, 378.38
1,349, 053.58

55.430.674.55
_

384.547*063.09

30x.547.433.40

Loans and discounts
D e m a n d loans
U n i t e d States bonds on h a n d
-•
Other stocks, bonds, and mortgages
*
D u e from approved redeeming a n d reserve
agents
D u e from all other banks a n d bankers
E x c h a n g e s for clearing house
National-banknotes
„
Fractional currency
SpecieCoin
Gold treasury notes
Legal-tender notes
U n i t e d States certificates of deposit
Clearing-house loan certificates

63. 854,684.15
14. 696,017.59
6, 609,859.07
17.
3.
5.

590.310.13
699,404.08
356.773-63

466,300.80
7.
8, 503,644-00
15,836.00
438,841.04
071,688.83
379, 738.00
350,000.00

393,673, 631.00

RESOURCSS.
Loans and discounts
Overdrafts
.
United States bonds t o secure circulation
.
United States bonds t o secure deposits
.
United States bonds and securities on hand _ _.
Other stocks, bonds, and mortgages
Due from redeeming and reserve agents
Due from other national banks
Due from other banks and bankers
Real estate, furniture, and fixtures
Current expenses
.
„
.
Premiums

30,540, 189.53
333.798, 897.00
835. 30X.00
875. 868. 36
383,xo7, 798.36
6,036, 117.63

5333,351,704.47
35.183,338.44
1.695.650.00
4.959, 7X4.s6

53x8,374.649-64
33.983,356.53
1,736,300.00

x6, x i 8 , 681.03
13,578,347.p6
1 7 , 0 6 6 , 3 8 9 . 39
4.I99.3O3.00
585,016.61

15.784.507.65
X4, O30.834- 53
30,798,045-37
4.576,513.00
486,531.06

1,7x4.696.68
1,566,340.00
38,343,165.00
3*150*000.00
9.547.477-37

3,374.750.71
x . 7 7 4 . xoo.oo
33.z68.439.OO
4,030,000,00
zi,4i6,z35.59
356.390,336.6o

136,173,565.00
78,090,059.00

126,189.365.00
78,320^298.00
zso,797.5X4-68
49.936.547.70

i48,o8x,974.39
46.0z7.750.49
398,363.348.88

405.143.635.38

5940,333.304.33
3 , 9 8 6 , 8 1 3 . x3
388.330.400.00
14.805,000.00
8,834,850.00

.

..

33.709,034.53
9 6 , 1 3 4 , x3o. 66
4t.413.680.06
i s , 033,873.41
34. 661, 833.31

.

6.985,436.99
7.753.843.87
I I , 433.9X3. 33
88,936,003.53
16,076.806.00
37,037.00
3,303.774.36
Z9.868*469.45
93,347.663.00

_

z75.ooo.oo

Total...,.

1.830.637.845-53
LIABILITIES.

Capital stock
Surplus fund
Undivided profits
"
National-bank notes outstanding
State-bank notes outstanding
Dividends unpaid

!

_

17.765. 945-68
5.715. 8x9.36
4.638. 458.78
2.145. 639.43
951.784.836.40

.

633,685,563.39
United States deposits
_
Deposits of United States disbursing officers
D u e t o national banks
.
D u e t o other banks and bankers
N o t e s and bills rediscounted
Bills payable
..

7.839,337.73
8,098,560.13
133.673.733.94
3 9 . 3 9 8 , 1 4 8 . X4
5.987.513.36
5.480,554.09

Total

1.830.637,845-53

OCTOBER 13 A N D N O V E M B E R 1.1873.

Country banks.
Oct. Z3
(1,746 banks).

Loans and d i s c o u n t s .
United States bonds o n hand
Other stocks, bonds, and m o r t g a g e s . .
D u e from approved redeeming and reserve
agents
D u e from all other banks and bankers
National-banknotes
Fractional currency
Specie:
Coin
Gold treasury notes
Legal-tender n o t e s . .
_
__
United States ccrtiScales of deposit
_.
Total
LIABILITIES.
Capital stock
Circulating n o t e s outstanding
Deposits of all kinds
D u e to all banks and bankers
Total

491*073,6x6.00
I30.3Z4.499-3O
34.5X5. I3X- 76
339,081,799.00
1,188,853.00
z,403,547.89

6,731. 509.49

Nov. x
(z.748 banks).

5455*757.763.56
3.977.9oo.oo
15.419.961.86

$443,049,040.86
4.105,500.00
1 5 . 3 5 3 . 8 a a . 94

38,145.133.59
16,825,387.79
9 , 8 1 2 , s86. 00
1,463, 5 6 1 . 0 8

35,668,022.38

1.739.300.50
147,880.00
46,930, 787.00
z, 6 0 5 , 0 0 0 . 0 0

1.754.33i.69
153,660.00
47.35o»34o.oo
1,615,000.00

59x.814.860.38

576.433.689,40

394,370,803.37

18,836,375-04

294,615.591.75
336, 3 9 4 . 9 3 4 . o o
339.305.463.38
1 5 , 3 9 9 . 0 9 6 . xx

799.656,344.83

785.415.085.x4

Aggregate.
Oct. x3
( i , 9 7 3 banks).

RESOURCES.

5,087,384.53

.

Checks and other cash items
Exchanges for clearing house
Bills of other national banks
Bills of state banks
Fractional currency
Specie
__
Legal-tender notes
United States certificates of deposit
Clearing-house certificates

65,930, 771.00

Total

Nov. t
(z79 banks).

348,957*634.91

Capital s t o c k . .
Circulating notes o u t s t a n d i n g . .
Deposits of all kinds
D u e t o all banks and b a n k e r s .

Aggregate (1,976
banks).

O C T O B E R Z3 A N D N O V E M B E R z 1873.
,

LIABIUTIBS.

Total

(To face page 83.)

3. 785.050.00
14. 430,199.45

3.373, 799.38

Oct. 13
inks).
(179 b a

70,335,000.00
37.835.6x3.00
149.399.344.14
54.177.476.36

XI, 1s9.000.00

951.784.836.40

Other redemption cities.

Total.

Capital stock
Circulating notes outstanding. .
Deposits of all kinds
D u e t o all banks a n d bankers

364. 869.350.00

Capital stock
-.
Surplus fund
Undivided profits
:
National-bank notes outstanding
State-bank notes outstanding
Dividends unpaid
Individual deposits
United States deposits
Deposits of United States disbursing officers
Due to national banks
Due t o other banks and bankers
N o t e s and bills rediscounted
Bills payable

RESOURCES.

D u e from all other banks and bankers
Exchanges for clearing house . .
National-bank notes
*
Fractional currency
Specie:
Coin
.,
Gold treasury notes
. . _._.-____..
Legal-tender notes
.
. .........
United States certificates of deposit
Clearing-house loan certificates
.........

3. 309,9x4.03

489*356*698.65

Nov. z
(48 banks).

5x33.957.564.35
56.z77.465.56
3.359.750.oo
5*045.638.46
z6.640.556.90

$478. 549,345-61

Total

O C T O B E R Z3 A N D N O V E M B E R z, 1873.

RESOURCES.
Loans and d i s c o u n t s . . _ . _ _ . _ _ . . . _ _ _ _ . . . . . . .
Demand l o a n s . . .
........
United States bonds o n h a n d .




262. 84

38,599. 405.OO
7.550, OOO. OO

Total.

National ba | s In N e w Y o r k City.

.

Country banks
(r.747 banks).

LIABILITIES.

OCTOBER Z3 A N D N O V E M B E R 1. Z873.

Total

843.89

579.00
4.955.
XX, 3XX.0O
535. 538.90

Total.

Oct. 13 (48 banks).

S E P T E M B E R X3.

Other redemption
cities (181 banks).

N e w York City
(48 banks).

Loans and discounts
--Overdrafts.
*
United States bonds to secure c i r c u l a t i o n —
United States bonds to secure deposits
United States bonds and securities on h a n d .
Other stocks, bonds, and mortgages
D u e from other national banks
D u e from other banks and bankers
Real estate, furniture, and fixtures
Current expenses
-Premiums
Checks and other cash items
Exchanges for clearing house
Bills of other national banks
Fractional currency
,.
Specie
Legal-tender notes
United States certificates of deposit

is.

Nov 1
(1,975 banks).

580z.067.033.38
81*359.704.00
9.033.300.00
35.435.314.58

5777.878,193.84
75.593.313.66
9, 3 3 0 , 6 0 0 . 0 0

54.363,8x4.53
46,044.393.65
58,431,633.84
18,091,961.00
3,315,530.06

5 1 . 4 5 3 , 5 3 o . 03
49,578,307.70
77.533.393.47
18,770,953.00
3,343,037.38

4.74X.30S.5X
zo,458,180.00
8z,5xo, 303.00
4,935,000.00

5.383,739.40
13,073,560.00
94,047.33Z.00
6,675,000.00

35,767,477.37

3 7 . 3 7 6 , Z35.59

i. 333,434,739.81

i , 3 3 3 , 8 8 1 , 6 s o . 8x

490.678,367.37
341,583,601.00
530,019.988.34
Z30, 384,700.08

49i.039.856.75
343.35O.844.OO
5 3 9 . 3 o 3 , 3 3 3 . xo

1,483,565.656.79

i,493,106,143-93

RESOURCES.

335.641.336.00
350,907,831.41

18,291,459.53
8, 733.85r. 00
1,459.671.01

Loans a n d discounts
Demand l o a n s . . .
United States bonds on hand
Other stocks, bonds, and mortgages
Due from approved, redeeming, and reserve
agents.....
.
Due from all other banks a n d bankers
Exchanges for clearing house
National-bank notes..,
Fractional currency
Specie:
Coin.
_
Gold treasury notes
Legal-tender notes
,.
United States certificates of deposit
Clearing-house loan certificates
Total.
LIABILITIES.
Capital stock
Circulating notes outstanding..
Deposits of all kinds
D u e t o all banks and bankers.
Total

35.157.758.84

119*413.130.07

Crises

Under

National

Banking

System

occurred between September 12 and October 13. The
following table shows the changes in loans for the banks
as a whole for the three groups of banks:
[In millions.]
Countrybanks.
Sept. 12, 1873
Oct. 13, 1873Nov. 1, 1873 _

$478.5
455-8
442. o

Banks in
Reserve
city banks. New York.
$262.5
247-5
242. 2

£i99.2
179. 1
169. 1

Total.

$940.2
882.4
853.4

The contraction of loans to October 13 may be taken as
representing the extent of contraction which was due to
and which in turn contributed to the severe financial
strain of the crisis. The further contraction to November 1 represented the diminishing requirements of business owing to trade depressions By the banks as a
whole loans were reduced by $58,000,000 before October
13, or slightly more than 5 per cent. This contraction
was general, both the country banks and those in reserve
cities showing a contraction of about 5 per cent and
those in New York a more considerable contraction of
10 per cent. The most severe contraction among city
banks was in Chicago, where, doubtless owing to the decision of the banks not to issue clearing-house loan certificates, loans were reduced from $25,300,000 on September 12 to $19,000,000 on October 13,
In this, as in other American crises, a somewhat exaggerated opinion became current as to the extent to which
the banks required borrowers to liquidate their loans.
°> During the last two weeks of October there were many newspaper reports of a more liberal loan policy being adopted by the banks.




83

National

'Monetary

Commission

Difficulty experienced in disposing of commercial paper
through note brokers and the high rates for call loans seem
to have been the grounds for this erroneous impression.
Under our banking system borrowers unable to dispose of
their paper through note brokers in times of crisis resort
more largely to the particular banks which hold their
accounts t h a n is usual a t other times. This shifting of
loan relationships gives rise to an impression of wholesale
contraction which the statistics of t h e total loans of t h e
banks show to be unfounded.
In t h e particular case of call loans also contraction is
more apparent t h a n real. On September 12 of t h e total
loans of $199,000,000 of t h e New York banks, $60,800,000
were demand loans. On October 13 these loans h a d
been reduced only $4,600,000, about ^y2 per cent; while
the $139,000,000 of other loans h a d been reduced t o
$123,000,000, nearly 12 per cent. These figures would
seem to show t h a t call loans are even less liquid t h a n other
classes of loans in an emergency, a view which, though
wholly at variance with generally accepted banking opinion, will be borne out b y our experience in later crises. 0
Explanation is simple. When a few banks demand t h e
p a y m e n t of call loans, the brokers to whom they are
principally made secure loans elsewhere, a n d t h e b a n k s
calling the loans are paid. The total volume of call loans
is not much changed. Within narrow limits it m a y b e
possible to reduce the aggregate of such loans b y t h e sale
of securities to persons able to p a y for t h e m outright. I t
is also possible to secure additional margins from customers




a See p. 301.

84

Crises

Under

National

Banking

System

for whom brokers are carrying securities. B u t when all
banks call their loans, they cease to be convertible to any
considerable extent into money. Purchasers who might
be able to pay for securities outright become frightened,
and little or no contraction takes place, while panic and
alarm are generally increased. The contraction of call
loans is indeed wholly incommensurate with the commotion in the stock market which characterizes our crises.
There are only two kinds of loans which can be regarded
as in any considerable measure liquid during an emergency. Loans m a d e to those engaged in t h e final stages
of production of commodities which are required for
individual consumption may be reduced, as such producers
curtail production and dispose of their supplies of the
finished product. Such curtailment in production, however, is likely to make it necessary for producers at the
earlier stages to increase loans on account of inability to
make expected sales. Holdings of foreign bills are probably the only asset which m a y be liquidated without
serious inconvenience to the country involved in the
throes of a crisis; b u t this is a kind of investment which
has not been held b y our banks. After all, it should be
remembered t h a t the primary object of liquid assets is to
enable particular banks to meet unusual requirements in
ordinary times, not to provide the banks as a whole with
money in emergencies. I t is then the business of the
banks to continue and even to increase their loans to the
business community, and to rely upon their reserves of
cash t o meet money requirements.




85

National

Monetary

Commission

From this point it will be of advantage to study the
operations of the banks by groups, and attention is first
called to the condition of the country banks as shown in
the following table:
RESOURCES.
[In millions.]
S e p t . 12.

Nov. i.

$478.0

$455-0

$442.

2. 0

2. 0

2.

45-0

48.0

49.

8.5
64. 0

9-8
38.0

936.

21. 0

Loans
Specie
Legals
Bank notes
Due from reserve agents _
Due from other banks

Oct. 13.

17. 0

18.

$233-0
296. 0
13-0

$235.0
251.0
19. 0

LIABILITIES.
Circulation
Deposits

__ _
_
_______

__
_

_ .

15-0

General deposits of the country banks between September 12 and October 13 were reduced by $45,000,000, of
which $23,000,000 are accounted for by loan contraction
and $8,000,000 by the increase in circulation and the
amounts due to other banks. At the same time the banks
had actually increased their cash holdings by $3,000,000
in the form of legal-tender notes and $1,000,000 in the
notes of other banks. They had shifted more than the
entire burden of supplying the demands of their depositors for cash, as far as they were met at all, upon the
other banks. Deposits with reserve agents were reduced
from $64,000,000 to $38,000,000, and amounts due from
other banks had also been reduced by $4,000,000. The
country banks can not be held guiltless of unnecessarily




86

Crises

Under

National

Banking

System

strengthening themselves and causing needless strain in
the money centers. 0 On the other hand, the experience
of previous years afforded ample evidence that the country banks would adopt this policy, and the city banks
should have held themselves in readiness to meet the obligations which they had incurred in becoming reserve
agents.
The following table shows the condition of the reserve
city banks, not including those of New York:
RESOURCES.
[In millions.]
Oct. 13.

Loans
Specie
Legals
Bank notes
Due from reserve agents
Due from other banks
Clearing-house exchanges
Clearing-house loan certificates..

N o v , 1.

£245
3
3i
4
16

$244

12

14

3
36
5
16,

17
9

LIABILITIES.
Circulation
_
Deposits
Due to other banks _ _ _

_

_
_
__ _

_

____
_ __

_.

$78.0
i75-o
59.o

$78.0
148. 0
46. 0

$78. 0
151-0

The reduction in deposits, amounting to $40,000,000
($27,000,000 in the case of general deposits and $13,000,000
in the case of bankers' deposits), was due in part to loan
contraction of $17,000,000, to a reduction of $4,000,000
in clearing-house exchanges, and of $2,000,000 in the
amount due other banks, a^total of $23,000,000. In cash
and bank notes these banks suffered a loss of only




a But see what is said on the subject on p. 305.
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$5,000,000, while they drew on their reserve agents in
New York for one-half of their deposits, which fell from
$32,000,000 to $16,000,000. In cash reserves the reserve
city banks slightly increased the ratio to their demand
liabilities. Hardly more than the country banks did
these banks rely on their own stores of cash to meet the
emergency. There were, of course, wide differences among
the banks of the different cities as to the extent to which
they used their own reserves and reduced deposits in New
York. The most serious offender was Chicago, the banks
of which positively increased their cash and bank-note
holdings from $5,700,000 to $6,300,000 and reduced their
New York balances from $3,500,000 to $1,600,000.
From the preceding tables the extent to which the
New York banks alone were required to meet the emergency has been evident enough, but it will be even more
clearly seen from the following statement of the condition
of the New York banks:
RESOURCES.
[In millions.]
S e p t . 12.

Loans
Specie
Legals
Bank notes
Due from other banks
Clearing-house exchanges
Clearing-house loan certificates.

$199
14
32

Oct. 13.

N o v . 1.

$179.0
10. o

$168.0

6.5

IS-6

4.0
16.6
41. o
16. 2

11. o
5-5
17.3
57-o
15.9

LIABILITIES.
$27.0
149.0
54-2

Circulation
Deposits
Due to other b a n t s .




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General deposits were reduced by $37,000,000 and
bankers' deposits by $35,000,000. Of this total of
$72,000,000 some $27,000,000 are accounted for by
the smaller clearing-house exchanges and $20,000,000
by the contraction of loans. The remaining $25,000,000
are rather more than accounted for by the loss of $4,500,000
in specie and of some $25,000,000 in legal-tender notes.
The reduction in general deposits may be reasonably
supposed to be explained by the loan contraction and
the smaller clearing-house exchanges; that of bankers'
balances was due to the shipment of currency, a conclusion which is in accord with the statements of the
clearing-house loan committee regarding the matter. 0
THE WISE POLICY OF THE N E W YORK BANKS.

In comparison with the banks in the reserve cities, the
New York banks responded remarkably well to the
demands made upon them, and if comparison be .made
with the hoarding policy pursued by the New York
banks themselves during the crises of 1893 and 1907,
the contrast is both astonishing and disheartening. The
explanation of the difference is simple. It was due to
the adoption of the provision for equalizing reserves and
to the bold and fearless fashion in which the clearinghouse committee exercised the power which was placed
in its hands. In consenting to the arrangement the
conservatively managed banks exhibited a praiseworthy
willingness to act for the common good, inasmuch as
the demands for money were almost wholly upon the




a See p. 93.
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banks which had accumulated bankers' deposits by
the offer of interest, and which were at the same time the
greatest lenders on the stock exchange. The clearinghouse committee determined to meet the obligation of
a few of their members to the banks of the country, and
to accomplish this purpose took money from the reserves
of the banks whose business was of a purely local character.
From about the middle of October proposals to bring
the arrangement to an end were urged by some of the
banks, but the committee manfully opposed such action
until the beginning of November, when a common policy
was no longer necessary. During the continuance of the
arrangement the banks were converted, to all intents
and purposes, into a central bank, which, although without
power to issue notes, was in other respects more powerful
than a European central bank, because it included virtually
all the banking power of the city.
The situation which confronted the New York banks
at the beginning of the crisis and the methods of handling
it are clearly set forth in the report of a special committee
of the clearing house which was appointed during the
crisis to consider reforms in banking methods. It is
hardly too much to say that this report is the ablest
document which has ever appeared in the course of our
banking history. It was largely, if not wholly, the work
of the chairman of the committee, George S. Coe, who
for more than forty years was a leading figure in the
financial world of New York. He is said to have devised
the clearing-house loan certificate, and he took a leading
part in the formation of the banking syndicate which




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took successive blocks of government bonds in the latter
part of 1861. The report is so important, both in its
narrative of certain aspects of the crisis and on account
of the reforms suggested, that it has seemed proper to
insert it in the text rather than to relegate it to an appendix.
N E W Y O R K C L E A R I N G - H O U S E R E P O R T , NOVEMBER I I ,

1873.

The committee appointed by the New York Clearing-House Association " t o carefully consider and report what reforms are required in the
practical operations of banks with each other and with the public to
increase the security of their business," respectfully reports:
That in order to reach the object sought by the resolution it is necessary
briefly to review the condition and practical working of the banking system
in this city before the commencement of the late panic.
Banks are the natural depositories of the current capital of the nation,
passing into and out of active industry and commerce. The balances
held by them are for the time specially reserved by their owners from
permanent investment and kept subject to immediate command. They
constitute a main portion of the wealth of the community which is not
yet ready to be consolidated into fixed capital or immovable forms. The
custodians of such funds are consequently bound by the very nature of
their trust to preserve them in their integrity and to apply them only in
such ways as will prevent them from falling into inactivity, and also to
hold such proportion in ready cash in hand as long experience has proved
to be necessary to meet immediate demands in every possible emergency.
And it may be confidently affirmed that a bank or banker who faithfully
meets all these obligations renders a full equivalent for any benefits which
can be honorably derived from the custody of such a trust.
No institution can, in the long run, purchase deposits of money payable
on demand of the owners and at the same time secure to itself a just and
proper compensation for the business without violating some of the conditions indispensable to the public safety. I t must either use them in ways
that are illegitimate and perilous or use them in excess. This has been
abundantly proved by innumerable instances in years past, and the
practice of paying interest for such deposits was unanimously condemned
by the bank officers in 1857 as one of the principal causes of the panic
at that period, for the reasons given in a printed report, of which a copy
is annexed hereto, and to which, with the consequent* resolutions of the
associated banks then adopted, your committee most respectfully invite
attention.
The creation of many new institutions, since the late civil war began,
which have considered it expedient to purchase public favor, and thus
divert to themselves business from established channels, has revived the
6158—10




7

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custom of paying interest upon deposits, and has also led some of the older
banks, in self-defense, to yield more or less to the pressure in the same
direction, while it has induced others to adopt newer methods of obtaining
patronage equally pernicious.
And thus a sharp and degrading competition has not only prevailed
among banks in this city, but has been excited, as a necessary consequence,
in other places, where the far-reaching enterprise of some of our associates
has led them in pursuit of business, not only from institutions, b u t from
all classes of society. Banks throughout the country have been aroused
to enlist in the same destructive practices toward each other and in defense
of their various localities. A premium has been Unnecessarily given for
business which, left to itself, would fall without cost into its natural channels and adjust itself to such localities as the convenience of the people
and the best interests of the country require.
Without such rivalry the resources of the nation would be so diffused
among the banks as to give increased financial strength and stability
to every part, and not only remove a great cause of irritation, b u t add to
the comfort, efficiency, and profit of all.
The evil results of paying interest upon current deposits, avowed when
the internal commerce of the nation was conducted upon a specie basis,
are greatly aggravated when it is carried on by an irredeemable currency,
which has a fixed and invariable volume, and which flows to and from the
commercial center with the changes of the seasons. Such a currency is
superabundant in summer, and instead of being then naturally absorbed
and diminished by redemption, it accumulates in banks, which can not
keep it idle without loss of the interest paid to its owners. Legitimate
commerce does not then demand it. I t is still subject to instant call.
There is consequently no resource but to loan it in Wall street upon stocks
and bonds, in doing which so much of the nation's movable capital passes
for the time into fixed and immovable forms of investment and its essential
character is instantly changed. Loans are made with facility upon securities which have no strictly commercial quality, new and unnecessary
enterprises are encouraged, wild speculations are stimulated, and the
thoughtless and unwary are betrayed into ruinous operations. The
autumnal demand finds the resources of the nation unnaturally diverted
from their legitimate channels, and they can only be turned back with
difficulty and public embarrassment. Such has been our well-known
experience year after year. Interest upon money has, as a consequence,
fluctuated widely from 3 and 4 per cent per annum in summer to 15 and
20 per cent in the fall and winter upon commercial paper, and upon stocks
at times to one-half and even 1 per cent a day. Vicissitudes like these
are utterly destructive to all legitimate commerce, and institutions whose
operations tend to such results are enemies to the public welfare.
Deposits which are derived from strictly commercial operations can not
fluctuate so widely from time to time as to produce disturbance in the




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community; and banks which confine their business to them as they
naturally arise are always reliable and regular in their treatment of their
dealers and can be conducted with ease and comfort to their managers
and safety to the public. On the contrary, deposits which are purchased
by payment of interest or otherwise, and which must, therefore, of necessity be largely loaned " o n demand," are the cause of continual agitation
and solicitude to those who hold them in charge. They are certain to be
withdrawn at the season of the year and at the moment most inconvenient
to the banks and to their dealers. This fact is best illustrated by the
following figures:
The average deposits of the 60 clearing-house banks for ten
weeks from July 5 to September 6 were
$232, 228, 000
The lowest amount reached since the panic was
143, 170, 000
Showing a total reduction of
Of the above amount during the ten weeks,
12 interest-paying banks held
$111, 5 85, 000
The lowest total reached by them since the
panic
52, 669, 000
Showing a loss in 12 banks of

89, 058, 000

58, 916, 000

In the other 48 banks

30, 142, 000

and were it not for the fact that several of the 48 banks are more or less
involved in the same practice, this disparity would be still more apparent.
When t h e late panic commenced, the sixty banks composing the New
York clearing house were indebted for about $200,000,000 of deposits.
Of this amount three institutions (paying interest to their country depositors) owed about $50,000,000, and including these, 12 banks of similar
character owed obout $100,000,000; t h a t is to say, 12 institutions held
one-half of the aggregate deposits, and the other 48, their associates, the
other half. The proportionate reserve of legal-tender notes in the associated banks was also greatly in favor of the latter number, for the obvious
reason, t h a t banks which pay interest upon money can least bear to have
any amount of it idle. The active demand first came, as it usually comes,
for t h a t portion of deposits due to country banks, who, in addition to their
annual necessities, had been disturbed by failures of several city bankers,
holding large balances of money due to the interior. These deposits were
to a great extent loaned upon stocks and bonds in Wall street, payable
" o n call," with the confident belief that they were there earning more than
the interest paid for securing them, and were available as promised. But,
from the very nature of the case, the rapid withdrawal of deposits from
the banks made the " c a l l " from every direction simultaneous, and closed
every resource from which the " s t r e e t " derived its power to respond.
Borrowers upon stocks were deprived both of their facilities of borrowing




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and of all power to sell their securities. The necessary result occurred.
Banks which found themselves in this dilemma had no alternative b u t to
ask the assistance of their associates, and the conflagration was so rapid
and violent that every consideration of fraternal sympathy, self-preservation, and public safety compelled a general and earnest cooperation; and
the majority, who had for long years conducted their business upon sound
principles, and who had patiently submitted to the loss of valuable accounts,
drawn from them by their associates, by practices against which they had
continually protested, instantly responded to the call by placing their
resources at command of those who had done so much toward producing
the calamity; making common cause, the weak with the strong, to avert
a universal catastrophe.
An expedient was found by which the stronger banks placed themselves
under the unequal burden and equalized the pressure by gathering in their
resources and placing them at the disposal of the weaker, who were thus
furnished with means to meet the demands of their depositors and to save
themselves from public exposure and their dealers in city and country
from disaster and ruin. Meanwhile the public confidence in institutions
had become so greatly impaired that the "legal-tender reserve" was
reduced from $34,000,000, on September 20, to $5,800,000 on October 14—
an amount of ready money never before paid out in the same time. Interior banks, whose ready means in hand had always been merely nominal,
b u t whose resources consisted chiefly of credits upon the books of interestpaying banks in the principal cities, were under the necessity of callirfg
back their deposits in a medium never before required, and to these the
associated banks were asked to respond, as well as to the demands of
timid dealers at home.
Your committee take this occasion to congratulate the associated banks
upon the liberal and excellent spirit in which this crisis has been met, and
upon the happy escape from a most imminent danger which threatened
them, and with them the country at large. I t is not too much to say that,
had it been less boldly, promptly, or unanimously encountered, the results
must have been more disastrous and widespread than any that have
occurred during the present generation.
While the banks have intelligently recognized the errors of their associates, by which the late financial complications were aggravated and the
community imperiled, there has been no disposition whatever to deal in
harsh reproaches. On the contrary, the magnitude of the trust is deeply
felt, and the utmost good feeling prevails; an earnest desire and a unanimous determination are expressed on every side to reform existing abuses
and to reorganize the clearing house upon a basis of mutual support and
uniformity of business.
Late experience has again demonstrated the fact that the banks in the
association are necessarily dependent one upon the other in times of peril,




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as well as in the trusts which the large operations of the clearing house
daily impose, and that the entire body inevitably suffers from the errors
and indiscretions of a single member. No institution, therefore, has a
moral right to conduct its affairs with the public in defiance of the general
conviction of its associates, or to introduce private terms of dealing with its
customers which are in conflict with the best interests of all. Bank officers
have no right to be sharp personal competitors for public patronage, nor
merely laborers for dividends on behalf of a limited constituency. They are
in a most important sense trustees for the whole community, and public
administrators of great interests, which forbid the least departure from
principles which long experience has sanctified.
With these general considerations, your committee proceed to the more
practical question submitted to them, viz: " W h a t reforms are required in
the operations of banks with each other and the public to increase the
security of their business;" and, first, and most prominent, they recommend that the banks entirely discontinue the payment of interest upon
deposits, whether directly or indirectly.
THE RESERVE.

The requirement of a "legal reserve" is now engaging special public
attention, and much impatience is expressed at the law which compels banks
to hold a definite ratio of legal-tender notes to liabilities. The practical
difficulty consists in attaching a rigid and inflexible rule of law to a mobile
fund, which is held for the purpose of meeting sudden contingencies, and
which is, therefore, in its very nature, a variable quantity. I t is impossible
clearly to prescribe by statute the circumstances or the exact periods during
which the reserve should be increased or diminished. There seems an
intrinsic absurdity in a law requiring that a " r e s e r v e " must be always
kept, which was created on purpose to be used, or that a bank officer who
draws upon his reserve, under circumstances for which it was intended, is
false to the oath which he takes to obey the law. But the fact t h a t a military commander can not be definitely instructed when he may employ his
reserve force, is not regarded as a reason why that important portion of an
army organization should be abandoned, or be reduced in number or
efficiency. So long as bank debts are subject to cash payments, so long
must the obligation be either imposed or assumed of keeping sufficient cash
in hand to pay whatever portion can possibly be presented. I t must
always be remembered that in the absence of any important central institution, such as exists in other commercial nations, the associated banks are
the last resort in this country; in times of financial extremity, and upon their
stability and sound conduct the national prosperity greatly depends. In
claiming for them that in taking faithful care of the active capital of the
nation with which they are intrusted they render a full and equitable
compensation for its proper use, your committee point to the consequent




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and paramount duty of the banks to hold such proportion of t h a t fund in
actual possession in cash as the extremest needs may demand.
I t has been suggested t h a t the federal principle which our association has
applied to banking, through the use of "loan certificates" in two important
crises, might be used effectively in regular business, by keeping two separate accounts, viz, " c a s h " and " b a n k credit," each payable in kind, to
avoid a " r u n " upon banks in times of panic; and much speculative study
throughout the world is given to the question how the idea of " clearing,"
as used through banks, may be indefinitely extended to effect the smaller
exchanges of the community, so as to dispense in a great measure with large
reserves of ready money. But in the present condition of economic
science, and especially in this important exigency, your committee recommend that we accept the teachings of practical experience, and pursue the
well-beaten track which trade and commerce universally recognize.
Experience of older commercial nations has shown t h a t the volume of
" r e s e r v e " should be in the proportion of one-fourth to one-third the direct
liabilities of a bank, and whenever it is there found receding from this
amount restrictive measures are taken to replenish it. Our own association in 1857 established a minimum ratio of 20 per cent in coin, which was
for the time carefully observed, and again in i860 increased this minimum
to 25 per cent. The present abnormal condition of the currency increases
the difficulty inherent in this subject. The law permits the reserve to
consist of coin and legal-tender notes, and at the same time compels banks
to receive as money the notes of national banks, which in legal payments
are not money; so that for practical uses as "reserve," we are troubled by
a species of money which is above, and by another which is below, the
standard quality. And it affords a striking commentary upon our present
anomalous condition that the money of the world, which is now freely
coming into the country from legitimate commerce, can not be absorbed
into our banking system, but is necessarily repelled as a cause of serious
embarrassment. The opinion t h a t has largely prevailed t h a t because the
business of this country is now conducted upon a basis of irredeemable
paper, that therefore there can be no suspension of payments, has been
most effectually dispelled, and the contrary is established; t h a t a currency,
from its nature, limited in volume, is subject to sudden and special dangers,
and therefore requires special protection. Recent experience has shown
how rapidly $34,000,000 may be withdrawn from our associated institutions, and for practical uses how inadequate is the reserve held by country
banks. That reserve, as fixed by law, is 15 per cent of liabilities, and threefifths of it may consist of deposits in banks in the larger cities, who may
subdivide it by placing one-half their own reserves in banks in the city of
New York, where again it is subject to a further reduction, from the fact
that these last are only required to hold 25 per cent of their own liabilities,
of which these deposits form part. The aggregate held by all the national




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banks of the United States does not finally much exceed 10 per cent of their
direct liabilities, without reference to the large amount of debt which is
otherwise dependent upon the same reserves. When we consider that a
portion of this final reserve may consist of coin, which, under present circumstances, has no practical power in an extremity, and a further fact that
the interest-paying banks, which have always held the larger part of those
reserves, have been forced by their position continually to disregard the
law, it is manifest t h a t the requirement, in its real operation, has not
worked against the public welfare, or against the true interests of the banks
themselves.
The abandonment of the practice of paying interest upon deposits will
remove a great inducement to divide these reserves between cash in hand
and deposits in cities, and make the banks throughout the country what
they should always be, financial outposts to strengthen the general situation.
The associated banks of New York, the ultimate resource in financial
emergencies, are deprived by usury laws of the power, which is so effectively used by the principal banks in Europe, of protecting or augmenting
their resources by adjusting the rate of interest to the necessities of the
occasion—a power which, if practicable, Congress might safely confer upon
the clearing-house committee, in consultation with the Secretary of the
Treasury, with great advantage to the country; as also the power of
deciding when the time or the emergency has arisen in which the public
• interest requires a relaxation of a rigid legal requirement in respect to the
reserve to be held by banks in New York City.
If the legal or financial necessity exists to maintain a certain reserve, it is
manifestly the duty of every institution to carry its just proportion, and no
bank, whether incorporated under national or state law, can honorably
evade its full share of this burden.
Your committee therefore recommend that all the associated banks,
while they strictly follow the requirements of the national currency act, by
keeping on hand, either in coin or legal-tender notes, an amount not less
than 25 per cent of their total liabilities to the public, be required always to
hold a t least 15 per cent in legal-tender notes, subject only to such
modifications as the clearing-house committee may, from time to time,
unanimously determine.
A suggestion has been made, which your committee consider worthy of
notice, because it has heretofore proved an important restriction to excessive expansion, and because it may assist in preventing many of the evils
referred to, that no institution be allowed to loan more than two and a half
times its capital and surplus.
CERTIFICATION OF CHECKS.

The practice of certifying checks upon banks as "good" has proved a
great public convenience, and has for that reason grown into extensive use.




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Your committee approach its consideration with some embarrassment.
The custom originated in the natural inquiry of bank tellers respecting the
standing and credit of their dealers, and for many years it had little significance, otherwise than as giving clerical information. Checks so marked
were not regarded as binding upon institutions in the nature of an official
acceptance, and were, therefore, not entered upon their books. I t was only
since about the year 1850 t h a t a new and influential institution deemed it
expedient to define the character of an act then vague and uncertain, b y
charging such checks to the accounts of their drawers; since when they
have been legally regarded as formal obligations, and have become the
medium of the most important transactions. If such writing certified to a
real fact, t h a t the bank actually had in possession, and due from it to the
drawer of the check, the stated sum which it thus agreed to transfer to
another party, no possible injury, but great good, would ensue. But when
a bank binds itself to transfer what it has not, but only expects to have, i t
assumes for its dealers, without reason, all the contingencies incident to
human transactions, and places its shareholders under perils which they
never intended to assume.
The power of certifying checks is necessarily intrusted to clerks or subordinate officers, who are employed to perform the ordinary and more
mechanical duties of the bank, and who are supposed to be strictly limited
in giving to every dealer only what has before been received from him.
And the power of bestowing credit is reserved for abler and more experienced men, themselves personally identified with the interests they administer, who gravely deliberate upon every transaction, and decide with t h e
light of their united wisdom. But the practice of certifying uncovered
checks, as pursued in some institutions, entirely reverses this established
order, and while the responsible council is carefully deliberating over
smaller credits, a noncommissioned officer is freely bestowing them in
larger volumes, without security, upon comparatively irresponsible men.
So extensively has this practice been pursued by several institutions t h a t
the amount'of such checks, which have passed daily through the clearing
house, has reached in some instances to twTice and three times, and in one or
two, to four and five times their capital stock, and this through long periods
of time.
Every bank in the association is directly involved in the risks attending
this practice. I t multiplies excessively the sums which such institutions
pass through the clearing house, and the consequent balances of the exchanges with their associates, which the capital of such banks can never
adequately guarantee.
The most striking commentary upon the danger of this practice was
afforded during the late panic by the dealer of a bank who had largely
received such favors and who, seeing by its application to others that
his own checks were in peril, declined, under advice of counsel, to cover




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them by a deposit until otherwise assured that the bank could respond
to these very obligations.
No sufficient reason, in the opinion of your committee, can be given
why a corporation should place itself without compensation and special
security between two parties dealing with each other and become the
guarantor of either in transactions entirely personal to themselves simply
because one or the other is a depositor in the institution. We have
already stated that the safe custody of money payable " o n d e m a n d " is
full compensation for its legitimate use, and the risks attending such a
business are all that properly appertain to the profession of a banker.
And if the rule be invariably observed of certifying checks only when the
drawer has the full amount at his credit in the bank no one can be injured
or offended when he is treated in all respects like every other of his fellow
dealers. The restriction suggested will work favorably to every interest—
to the banks, their shareholders, and their associates—by diminishing the
risks now so widely incurred, and it also conforms to and confirms the law
which Congress has established upon this subject in respect to national
banks.
Your committee therefore recommend that in no case shall a check or
other obligation be certified by a bank unless the amount of it is first
found regularly entered to the credit of the dealer upon the books of the
institution
INDIRECT EXCHANGES.

A custom has grown up among the associated banks, and has greatly
increased within the last few years, of engrafting upon themselves and
thus admitting to the benefits of the clearing house, other institutions and
individuals who, while not eligible to regular membership, participate in
all its advantages without sharing its expenses, incurring its responsibilities, or submitting to its regulations. Over all these the association has
no possible control. They consist of banks and corporations of various
character and objects in this city and vicinity, many of whom attract to
themselves deposits of active capital from the commercial community by
extraordinary rewards and use it for purposes and enterprises which are
illegitimate in regular banking. The associated banks thus find themselves surrounded by diligent competitors in their proper business, which
increase their risks, while they lean upon them for support. By keeping
a satisfactory balance in bank, for which interest is frequently paid, these
institutions avoid the necessity of any money reserve whatever and not
only invest all the resources at their command in profitable or unprofitable enterprises, but have a claim upon their patron bank for assistance
in time of need. The banks are thus deprived of a large portion of commercial deposits that would naturally come to them and incur increased




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and indefinite risks, and the public are unconsciously placing their ready
means where they are subject to unusual hazards.
Any bank in the city worthy of public confidence may become a regular
member of the Clearing-House Association, and the banks which compose
it are bound, in duty to themselves and to the public, to withhold the special support of this body from any who can not submit to or safely pass
through the necessary examination which entitles them to credit. And
your committee can see no valid reason why banks outside this city should
receive the benefit of the New York clearing house when they share none
of its burdens and submit to none of its regulations.
They therefore recommend that no bank shall receive upon deposit from
its city dealers checks or drafts other than upon banks members of this
association.
R E C E I V I N G O U T - O F - T O W N C H E C K S AS CASH D E P O S I T S .

Among the various devices introduced to attract mercantile accounts
and to secure deposits of country banks is that of receiving and crediting
immediately as cash checks "and drafts upon places outside this city, a practice which was commenced as a special inducement by one institution, but
which, as the natural consequence of unfair competition, has been followed
and extended by others until it embraces points far and near throughout
the whole country. I t has been carried on with such utter disregard of
the laws of exchange and of the time necessary to effect returns t h a t the
former and regular methods of making payments in and remittances to
this city is greatly changed. Interior merchants finding that checks upon
their own localities are readily accepted as cash in New York prefer t h a t
mode of payment, and they are naturally encouraged to do so by their
banks at home, who receive the benefit; so that our own institutions are
not only deprived of deposits which by the laws of trade naturally belong
to them, but they are daily encumbered by a miscellaneous mass of checks,
which occasion serious embarrassment, loss of time, great risk, clerical
labor, and expense of collecting, entirely caused by this unnecessary diversion of business from its natural courses. Some of the interest-paying
institutions which have by this expedient enlarged their correspondence
with interior banks have, with them, adopted peculiar methods of facilitating such collections, which they regard as advantageous to themselves,
but by which they are continually extending this evil. City merchants,
whose business is chiefly with the country, now accept such checks freely
from their customers, because their banks will accept them from them, and
many of the accounts which, from their amount, dealers regard as very
valuable to their banks the latter find by experience to result in actual loss.
Instead of being the natural depositories of country banks for the business
of legitimate commercial exchanges in the city, such banks are thus made




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ours. The subject is the cause of continual irritation and discord between
banks and their customers and between the banks themselves.
Your committee, in considering this evil, can perceive no remedy but
by its total abolition; and they therefore recommend that the clearinghouse committee be required to establish monthly a schedule of minimum
rates at which the associated banks shall receive on deposit checks and
drafts upon places out of this city, and to which every bank shall be bound
strictly to adhere.
Having now considered the prominent evils which exist, the removal
of which your committee consider as indispensable to the harmonious
intercourse between banks bound together by common interests, and having
recommended for their removal—
i. T h a t payment of interest upon deposits, either directly or indirectly,
be entirely prohibited.
2. That each bank, while it observes the requirements of the law of
Congress respecting a reserve fund, be required to carry at all times an
amount of legal-tender notes equal to at least 15 per cent of its liabilities
to the public.
3. That no bank shall certify a check as good until the full amount
of it shall appear upon its books from a deposit, regularly entered to the
credit of the drawer.
4. That no check or draft shall be received by a bank upon deposit at
par as cash, drawn otherwise than upon one of the banks composing the
Clearing-House Association.
5. That all checks and drafts upon places out of the city of New York
shall only be taken at rates of discount established monthly by the clearinghouse committee.
They now proceed to state how the observance of these rules may be
effectively secured. It is wTell known that in some of these the sentiment
of the association has been repeatedly expressed and resolutions of reform
have been adopted, but which have gradually fallen into neglect.
Your committee believe that late occurrences have produced a deeper
conviction, both in the association and in the public mind, of the interdependence of the banks upon each other, and of the wrong which any one
member imposes upon the entire body, by unsound or irregular rJractices.
They, however, recommend as an effectual security for the future:
That the constitution of the clearing house be changed into articles
of association, which shall be signed by the officers of every bank, or
member, and ratified by its board of directors. And your committee
respectfully submit for consideration the accompanying instrument, which
has been compiled from the present constitution of the Clearing-House
Association, with such changes and amendments as present circumstances
have suggested.
Your committee also recommend that the clearing-house committee
shall procure a tablet, containing in large and very legible impressions,




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the rules which are to be observed by each member in dealing with the
public, as follows:

RULES
OF T H E

ASSOCIATED BANKS
OF THE CITY OF N E W YORK
WITH THEIR

DEALERS.

I . No bank shall pay, or procure to be paid, interest upon
deposits.
2. No check shall be certified until the full amount is first
deposited.
3. Checks upon associated banks only received on deposit.
4. Checks upon places out of New York City received at rates
of discount fixed by clearing-house committee.
5. Checks will be taken at depositor's risk and collected
through the clearing house.
6. Checks not good will be returned to the depositor the day
following.
BANKS NOT STRICTLY O B S E R V I N G T H E S E R U L E S WILL B E E X C L U D E D
FROM T H E C L E A R I N G - H O U S E ASSOCIATION.

These shall be appropriately framed and always kept conspicuously
suspended in the banking room of each institution for public information.
With these regulations the public are always informed of the terms
upon which alone they may conduct their business uniformly with every
bank that has the facilities and the support of the Clearing-House Association.
With these always in view, no person worthy of credit at a bank can ever ask
a deviation from them, and no institution can retain the confidence of any
respectable dealer after it is thus known to have compromised its integrity.
By these important changes many of the evils which have grown up in
the business community and which have their origin in the vicious practices of banks will expire, the banks will resume their rightful position
as safe and substantial supports of legitimate commerce, and their officers
will be relieved from the anxieties which, in the present unnecessary
competition, continually pursue them.




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All which is respectfully submitted by—
C GEORGE S. COE, President American Exchange National Bank.
W. L. JENKINS, President Bank of America.
J. M. MORRISON, President Manhattan Bank.
Mos^s TAYLOR, President National City Bank.
Committee.{ F . D. TAPPEN, President Gallatin National Bank.
JOHN E. W I I ^ I A M S , President Metropolitan National Bank.
J. L. EvERETT, Cashier National Broadway Bank.
ROBERT BUCK, Cashier Pacific Bank.
JOHN Q. JONES, President Chemical National Bank.
NO CHANGE I N BANKING METHODS.

In emphasizing the inadequacy of the reserves of the
banks this report was in accord with the best opinion of
the time. Comparatively little reference was made to the
currency system as a cause of trouble, or to its modification as a possible remedy. It seems to have been felt that
the banking system as it was was essentially workable if
the banks were prepared to conduct their affairs in a conservative way. It is also significant that this committee
did not seek to shift the responsibility upon the banks
outside New York, as has been attempted in some explanations of later crises. We have seen that the country banks
and those of the reserve cities might have shown more
moderation in their withdrawals from New York. Doubtless the framer of the report perceived that no other course
could be expected, since united action is out of the question among hundreds of banks widely separated from each
other both by distance and circumstances. The report
clearly recognized that the New York banks are the center
of our banking system, and that the obligation rests upon
them to be constantly in position to meet emergencies.
However important the results which may be expected




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from changes in our system of note issue, it may be suggested that this remedy has been given too exclusive attention in recent years. The older view of 1873, that our
reserve system is unsatisfactory, may well receive careful
consideration.
The report of the clearing-house committee seems to
have been received with general approval, both by bankers and by the public, 0 but it led to no immediate change
in banking methods. It was considered at a meeting of
the banks on Thursday, November 21, and the adoption
of its principal recommendation, that interest on deposits
be prohibited, was favored by about three-fourths of the
banks. It was felt, however, that a unanimous agreement
was necessary to secure its effective adoption. At a subsequent meeting, on November 28, the committee was discharged at its own request, and a second committee was
appointed representing views opposed to those advocated
in the report. This action was rightly assumed to mean
the indefinite postponement of the question, and in fact
no report was ever presented by the second committee.
Of the various reforms urged in the report all except that
regarding interest upon deposits have been embodied more
or less completely in general banking practice. A specific
penalty for the overcertification of checks in the national
banking law of 1882 did something to check that dangerous practice; the organization of the stock exchange clearing* house in 1892 did more; and for many years overcertification has ceased to be a serious menace to the credit
structure. The recommendation of the committee that
a Commercial and Financial Chronicle, November 22, 1873, p. 677.




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collection charges be imposed upon the checks and drafts
of out-of-town institutions was adopted in 1899—a proposal unlike the others, in that it was likely to be a source
of profit to the banks. The matter of clearing for institutions not members of the clearing house was taken up
in 1902 in the case of the trust companies. But so far
as the banks were concerned, no change in methods followed directly as a result of the experience gained during
the crisis of 1873.
LEGISLATION AFTER THE CRISIS.

Both the Secretary of the Treasury and the Comptroller
of the Currency in their reports for 1873 commented adversely upon the practice of paying interest upon deposits and upon the insufficiency of the reserves of the banks. a
The long session of Congress which followed the crisis was
largely devoted to banking and currency problems, but
with results on the banking side which were of slight practical importance. The redemption system through reserve agents in the money centers had not even served to
remove from circulation notes which were no longer fit for
use. Redemption at Washington by means of a 5 per
cent fund deposited with the Treasury therefore met with
general favor. In connection with this change it was also
agreed without much opposition that the banks should
be relieved from the requirement of holding reserves
against their circulation. This change in itself, however,
would have reduced the total reserves of the banks, and
after the recent experience of the crisis no one was pre&See Appendix, Notes A and B, pp. 321 and 332.




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pared to contend that the reserves were too large. It was
therefore proposed that the banks be required to hold the
same proportion of reserve as formerly against deposits,
but that it should be held entirely in their own vaults. By
this change the required cash reserve of all the banks
except those in New York would have been increased considerably more than the amount set free by the removal of
the requirement of a reserve against circulation. As a
slight concession to the banks it was also provided that
the 5 per cent fund should be counted as a part of the
required reserve. These purely banking provisions were
accepted without much discussion both in the House, in
which the bill originated, and also in the Senate. In both
branches attention was almost wholly concentrated upon
those provisions of the bill which related to the amount of
bank notes and of greenbacks which should be issued.
The House bill was an inflation measure, pure and simple.
It restored the limit of $400,000,000 for the greenbacks,
the limit which in a separate measure was vetoed by President Grant. It also provided for "free banking," as it
was then generally designated; that is, it removed the
limit upon the total amount of circulation which the banks
might issued In the Senate the bill was radically modified.
The issue of greenbacks was fixed at $382,000,000, the
amount then in circulation; and in connection with the
provision for free banking the requirement was added
that greenbacks should be retired automatically to the
a See Congressional Record, 1873-74, p. 1007, for the bill as reported
to the House by the Committee on Banking; and p. 3023 for its form as
passed by the House.




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amount of 25 per cent of any future increase in bank notes. 0
In conference the provision requiring the banks to hold
their reserves entirely in their own vaults was sacrificed
in order to conciliate the opponents of contraction; but
the proportion of greenbacks to be retired was increased
to 37X per cent. h This conference report was not accepted
by the House, and a second conference was ordered. It
was apparent that no measure looking toward resumption
through the gradual retirement of a portion of the greenbacks could be passed. But, apparently in order to show
some results for their months of effort, the second conference committee brought in a report in which free banking
was given up and in which the only provision regarding
greenbacks was to fix their amount at $382,000,000. The
only change affecting circulation was to increase the amount
to be withdrawn from banks issuing more than their
proper quota from $25,000,000 to $55,000,000. The provision requiring the reserves of the banks against deposits
to be held in their own vaults was not restored.0 In this
form the bill was passed and became law on June 10,1874.
Whether the provision requiring banks to hold their entire
reserve was desirable may be open to question; but it
has seemed advisable to place on record the peculiar set
of circumstances which brought about a reduction in
the reserves required by the banks so shortly after their
inadequacy had been made evident by the crisis of 1873.
aSee Congressional Record, 1873-74, p. 3835. The Finance Committee proposed a retirement of 50 per cent, but an amendment was passed
reducing this to 25 per cent (p. 3806.)
t> Congressional Record, pp. 4852-4853.
cSee Congressional Record, p. 5310.

6158—10




8

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CHAPTER

II.

THE PANIC OF MAY, 1884.

It will not be necessary to devote much space to the
panic of 1884, inasmuch as the financial disturbance was
wholly confined to New York, and in its banking aspects
was of an unusually simple and definite nature. The
events which preceded the panic were quite unlike those
which preceded the crisis of 1873, or indeed crises in general. A period of economic activity began in 1879 a n d
culminated in 1882. During much of 1883 and the early
part of 1884 there was a slow but general decline in most
branches of trade, marked by some curtailment in production, and an increase in the number of failures, including
a number of railroad receiverships; but more strikingly
by a fall in prices of commodities and securities. The
price of steel rails, for example, dropped from $71 at the
beginning of 1880 to $35 at the close of 1883. The price
of standard railway stocks in 1883 declined from 10 to 20
per cent. But the apparent strength of the banks was not
weakened by these unfavorable business conditions. The
expansion of loans which had been rapid from the beginning of 1879 continued, but at a much less rapid rate.
In cash reserves the banks, especially those in New York,
improved their condition, and the crop-moving requirements of 1883 were met with little or none of the usual
advance in rates for loans.
The strength of the banks in cash reserves, however,
was due to an artificial cause—the monthly addition of
two million silver dollars under the provisions of the




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Bland-Allison Act. This increment was hardly observed
while business was active, though it doubtless prevented
the country from retaining so large a proportion of gold in
circulation as would otherwise have been the case. But
when business became depressed, the effects of the silver
issues became more marked. The outflow of gold being offset by the silver, the banks did not experience that reduction in reserves which would have led to an advance in the
rates for loans in the money centers. Moreover, the silver
issues were at least a contributing cause of the distrust of
American securities in Europe which led to their return
to this country in considerable quantities for some months
before the panic.
To these sales were attributed the enormous exports
of gold in March and April, 1884, which amounted to
nearly $30,000,000. Notwithstanding this loss from gold
exports, it was not until the beginning of May that the
reserves of the New York banks were reduced to a point
below that at the same time in the previous year. The
statement for May 3 showed a surplus reserve of only
$806,000 compared with $1,604,000 on May 5, 1883.
Money was, however, flowing into the banks from the
country, and it was thought that the loss from gold
exports was nearly at an end. There had been no appreciable advance in rates for loans or contraction in their
volume during the winter and early spring. The continued fall in security values, therefore, must be ascribed
to other than banking causes.
At length the strain of successive breaks in prices on
the stock exchange brought about the downfall of a num-




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ber of speculators whose plans might have proved successful if general conditions had been such as to lead to a
rise in security values. Within little more than a week
an astonishing series of instances of fraud and defalcation, unexampled in our history, were brought to light.
On Thursday, May 8, the failure of the brokerage firm
of Grant & Ward was announced—a firm better known
for its personnel than for the scope of its business operations with the public. The failure was unusually disastrous, the firm having assets of less than $700,000
against liabilities of more than $16,000,000, and was
highly discreditable to all concerned except the senior
partner. This failure involved the Marine National
Bank, whose president was a partner in Grant & Ward.
The direct cause of failure of the bank was the illegal
certification of a check for $750,000 for the above-named
firm. The bank was of secondary importance, however,
having a capital of $400,000 and deposits of about
$5,000,000. It had little or no business as a reserve
agent, since its bankers' deposits amounted to less than
$400,000. In liquidation, its creditors ultimately received 83.465 per cent of their claims. This failure,
together with various unfavorable influences of a more
general nature, caused a considerable further decline in
the stock market. The banks, however, were not affected,
and the rates for the various classes of loans were advanced but slightly, those for call loans being from 3 to
4 per cent, for time loans from 4 to 4^2 per cent, and 5 to
5,K per cent on commercial paper. The following week
opened with rumors of impending failures, which shortly
became realities. On Wednesday, May 13, it became




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known that the president of the Second National Bank
had stolen over' $3,000,000 of securities from its vaults,
and a little later the suspension of the Metropolitan
Bank was also announced. 0 As in the case of the crisis
of 1873, ^ e narrative of the events at the height of the
panic is taken from the Commercial and Financial
Chronicle:
THB MONEY MARKET AND FINANCIAL SITUATION.

Financial circles have passed through an excited week, marked by many
disasters and full of disturbing features. The failure last week of the
Marine Bank and of Grant & Ward, together with the developments to
which this gave rise, created serious distrust, which was deepened when it
was announced Saturday afternoon that the Northwestern Car Company,
in which Senator Sabin, of Minnesota, was the controlling spirit, had been
placed in the hands of a receiver. Consequently, an uneasy feeling prevailed on our stock exchange at the opening of business on Monday, and
the fear was freely expressed t h a t other institutions and firms would be
found to be in an equally precarious condition. Prices reflected this fear
in a pretty general decline through the day. The uneasiness increased
rather than diminished during Tuesday, and when it appeared on Wednesday morning that a defalcation of three millions had been detected in the
Second National Bank, confidence entirely disappeared. It was apparent
then—even before the opening of the exchange—that only very little more
was needed to precipitate a panic and a wholesale destruction of values.
The final shock came in the failure of several brokerage and banking firms
and in the suspension of the Metropolitan National Bank. Then the
wildest kind of a panic raged, and securities were thrown overboard
regardless of price.
To add further to the discomfiture of dealers, money became exceedingly
stringent, and at one time commanded as much as 4 per cent for 24 hours'
use. This caused a further sacrifice of stocks, since few could afford to pay
the high rate asked. The exorbitant charge was, of course, the direct
result of the distrust prevailing, since there was no actual scarcity. There
was no improvement until it was understood in the afternoon that the
banks had taken action similar to that of 1873, and that no further bank
suspensions were therefore likely. At the close of the business on that day
the disasters included Metropolitan Bank, Atlantic State Bank (Brooklyn),
Hotchkiss, Burnham & Co., Hatch & Foote, Nelson Robinson & Co., O. M.
Bogart & Co., Donnell, Lawson & Simpson, Goffe & Randle, J. C. Williams.
a See Appendix, Note C, pp. 345-350, for an account of the causes of the
difficulties of these New York banks taken from the Report of the Comptroller of the Currency for 1884.




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The improvement noted at t h e close on Wednesday made headway on
Thursday, when it appeared t h a t the Metropolitan Bank, through the aid
of the clearing house, would be enabled to resume at once, and t h a t the
Second National Bank was experiencing no difficulty whatever in meeting
all payments, the deficit having been made good in full by the father of the
president of the bank. The failure in the morning of A. W. Dimock & Co.
had comparatively little effect upon the market (though it caused a fall of
64 per cent in Bankers' and Merchants' Telegraph stock), but the unexpected suspension of Messrs. Fisk & Hatch late in the afternoon was a complete setback, and again threw things into confusion. Friday morning
the closing of the Newark Savings Institution was another unfavorable
feature, b u t it was soon seen t h a t this was connected with the suspension
of Fisk & Hatch, and a more hopeful view of the situation prevailed. No
further failures occurring, the market improved in tone, and late in the day
a pretty substantial recovery took place, which was furthered by the
relaxation in the rates for money.
We have thus briefly reviewed each day's events, because of their great
importance and because of the bearing they have had upon the general
commercial and financial situation. To state briefly the causes of the
disturbance in the market, it may be said that they were strictly due to a
complete loss of confidence, not so much in the market prices of securities
as in the stability and soundness of various institutions and firms. The
difficulty of obtaining ready cash, as a result of disquietude prevailing, also
contributed to intensify the troubles t h a t had developed. I t is to this
latter fact, namely, the desire to realize and obtain cash, that the large
decline on Thursday and Friday of nearly 7 per cent on United States
Government bonds is to be attributed. There was no loss of confidence in
the value of these, nor was there in good railroad bonds and stocks.
One result of the phenomenal and temporary rise in the rates for money
was to bring a vast amount of foreign capital promptly to the market.
Some of it was sent here to buy stocks at their depressed prices, and more
to loan on stocks or any other good securities at the high rates of interest.
The effect of this was to completely turn the foreign exchanges which had
been running so heavily against us for the last three months. Large
amounts of loan bills and bankers' demand bills on London came on to the
market, and on Thursday rates for sterling dropped 1 cent on the pound
and on Friday 2 cents more. The supplies of available funds furnished by
this means, together with relief afforded by the banks in the Clearing House
Association adopting the same plan of issuing clearing-house certificates
for use in the settlement of their clearings as in 1873, already alluded to,
had the effect to overcome the pinch for money, and the result was t h a t at
the close of business on Friday money on call had dropped to 5 and 6 per
cent per annum. a
a Commercial and Financial Chronicle, May 16, 1884, p. 589.




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In the temporary squeeze for money, resulting from the above causes t
there was of course less business done in other classes of loans than those
on stocks, but the evidence that there was no loss of confidence in values
of other kinds of collateral nor in mercantile credit at large was shown by
the fact that while money was loaning at 3 and even 4 per cent per day
for use in connection with stock speculations, the rates for mercantile discounts remained nominally unchanged at 4 ^ and 5 per cent per annum
on first-class indorsed paper for two and four months, and 5^2 and 6 per
cent for single-name p a p e r s

It will be seen that the steps taken to allay alarm were
immediate and effective. During the following week the
panic entirely subsided. A good detailed account of the
action taken by the clearing house in assisting the Metropolitan Bank, as well as of the use made of loan certificates, is given in the following extracts taken from the
annual report for 1884 of the Comptroller of the Currency,
Henry W. Cannon:
The suspension of the Metropolitan National Bank on May 14 caused
great excitement. All stocks and securities called upon the New York
Stock Exchange were greatly depreciated under the pressure to sell, and it
was practically impossible for the banks to collect their call loans, as their
borrowers could not obtain money by sale of their securities except at
ruinous rates; neither could they borrow elsewhere; and it was impracticable and impolitic to throw the mass of securities held as collateral to the
call loans of the associated banks upon the market. If it had been done, it
is probable that a suspension of gold and currency payments by the banks
throughout the country would have followed the general panic that would
have ensued. In this emergency the members of the New York Clearing
House Association, realizing that an immediate demand for deposits would
be made by their country correspondents, called a meeting at the clearing
house on the afternoon of May 14, and the following plan for settling
balances at the clearing house was unanimously adopted:
"Resolved, "That, in view of the present crisis, the banks in this association, for the purpose of sustaining each other and the business community,
resolve that a committee x>i five be appointed by the chair to receive
from banks members of the association bills receivable and other securities
to be approved by said committee, who shall be authorized to issue therefor
to such depositing banks certificates of deposit bearing interest at 6 per
cent per annum not in excess of 75 per cent of the securities or bills receivable so deposited, except in case of United States bonds, and said certificates
shall be received in settlement of balances at the clearing house."
« Commercial and Financial Chronicle, May 16, 1884, p. 582.




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After consultation with the officers and directors of the Metropolitan
National Bank a committee of examination was appointed to visit the bank
and to ascertain if some plan could not be arranged to permit it to open
again for business. The greater part of the securities of the bank were
found to be of such a character that loan certificates could safely be issued
upon them, and in this way the Metropolitan National was enabled to
resume business on May 15 and settle its balances at the clearing house.
The prompt action of the members of the associated banks and the resumption of the Metropolitan National Bank greatly assisted in allaying excitement and staying the panic, and although confidence was not immediately
restored, and although the banks in the city of New York were largely
drawn upon by their country correspondents, reducing their reserve for a
time below the 25 per cent limit prescribed by law, and although, on account
of the great depreciation of values and the stringency of the money market
occasioned by the want of confidence, other failures of state banks, private
bankers, and mercantile firms occurred in New York and throughout the
country, there was no suspension of gold and currency payments at any
point, and the issue of loan certificates was confined to the banks of New
York City, which were soon enabled to collect their loans and make good
their reserves. a
Upon learning of the defalcation a t the Second National Bank on May
14, and when it was apparent that a financial crisis was imminent in the
city of New York, the Comptroller ordered expert and reliable examiners
to the assistance of the national-bank examiner stationed at New York in
order to protect the public. The examiners were instructed to exercise
the utmost caution and vigilance, and to visit any of the national banks
that appeared to be in trouble or where violations of law or irregularities
were suspected. They were especially instructed to report any criminal
irregularities or violations of section 5209. Before permitting the Second
National Bank, whose president had misappropriated over three millions
of its funds, to open for business, the defalcation was made good under
the supervision of the examiner. The plan of resumption for the Metropolitan National Bank, by obtaining loan certificates of the New York
Clearing House Association upon its securities, was also submitted by the
examiner in charge of the bank to the Comptroller, the examiner remaining
in charge until the plan was carried into effect and the bank permitted to
resume. &

The success which crowned the ejforts of the banks in
dealing with this crisis affords convincing evidence that
if clearing-house loan certificates are to be issued at all,
they should be issued at the beginning of a disturbance.
Local runs on the banks did not become severe, because
« Report of the Comptroller of the Currency, 1884, p. 33.




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announcement was made that assistance would be granted
at the moment when the disasters which might have weakened general confidence became known to the public. It
was also a favorable circumstance that the panic came in
the spring rather than in the autumn. Crop-moving requirements were months away and the normal movement
of money was in favor of New York. The danger which
confronted the banks was therefore confined to withdrawals which might be made on account of the loss of confidence. Having made arrangements which reduced that
danger to a minimum, the banks endured calmly a moderate loss of cash from their reserves and were able to go
through the disturbance without suspending payments.
Looking below the surface, we shall discover in a mild
form the same elements of weakness which caused suspension in 1873. The Second National Bank was a purely
local institution, having no bankers' deposits whatever.
On the other hand, about $7,000,000, nearly two-thirds of
the total deposits of the Metropolitan Bank, were due to
other banks. Had the clearing house not acted with admirable promptness in coming to its assistance there is
little question that out-of-town banks would have become
alarmed for their deposits, not only in this bank but for
those in the banks generally. Even as it was, the customary inflow of funds from the interior, which had been
going on for some weeks, was instantly reversed during
the panic week. According to the returns collected from
the banks by the Financial Chronicle regarding the movements of money to and from the interior, there was a gain
of nearly $3,800,000 for the week ending Friday, May 9.
In the following week it was reported that " the exchanges




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at interior points have been deranged by the existing condition of affairs, St. Louis falling to par against 90 cents
per $1,000 premium, and Chicago being nominally 80 cents
per $1,000 discount against 60 cents premium. These rates
indicate the calling of balances from New York, due to the
bank failures and the disturbed credit/' ° The loss of the
banks as reported for the week ending May 16 was
$1,107,000, and in the following week there was a further
loss of $2,300,000. After that date, with the renewal of
confidence, the normal movement in favor of New York
was resumed. The actual loss of cash by the New York
banks was, however, far greater than the amount of the
reported withdrawals by country banks. Between May
10 and May 24 the reserve of the banks fell from $86,000,000 to $67,000,000; and although deposits were reduced
by considerable contraction in loans, a surplus reserve of
$4,400,000 was converted into a deficit of $6,600,000.
The comparatively slight reserves of the New York banks,
and hence their small resisting power, could not be disguised,
even though they succeeded in passing through the strain
of this panic. Had there been numerous failures among
country banks (the failure of the Pennsylvania Bank in
Pittsburg, owing to dishonesty, disclosed by the collapse
of a speculative movement in oil, was the only important
banking failure outside of New York), or had the disasters
in New York occurred during the crop-moving period,
there is every probability that the banks would have
drifted into suspension.
Notwithstanding the liberal issue of loan certificates,
the banks contracted their loans to a noticeable extent,
a See Commercial and Financial Chronicle, May 31, 1884, p. 583.




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from $333,000,000 on May 10 to $313,000,000 on May
24. That this contraction was not accompanied by
extraordinarily high rates for loans except during the very
height of the panic may be explained by the entrance of
country banks into the market for commercial paper from
which the New York banks had virtually withdrawn. 0
Further evidence of the strain upon New York banks
is afforded by the two returns of the national banks to
the Comptroller of the Currency on April 24 and June
20. As the first of these returns was made before the
crisis, while money was coming to New York from the
country, and as the second was made after withdrawals
had ceased and money had begun to be sent back to
New York, they may be taken to represent, at least
roughly, the changes in the amount of bankers' balances
due to the crisis. The following table shows the principal items of reserves and liabilities of the New York
national banks on the dates mentioned above:
[In million dollars.]
A p r i l 24.

J u n e 20.

RESOURCES.

Loans__
Due from banks.
__
Clearing-house loan certificates
Cash reserve

__ _
__ _

_ _
__ _

__ __ •
_____

$250
20

$209

64
74

__

19

67

LIABILITIES.

Individual deposits
Due to national banks
Due to other banks. __
Clearing-house loan certificates _

231

_ __

95
37

71
28

11. 9

This table shows changes which are unlike in many
respects those which occurred in the crisis of 1873 a n d ,
a See Commercial and Financial Chronicle, May 31, 1884, p. 632.




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as we shall see, unlike those in later crises. In the first
place, it will be observed that while the reduction in
bankers' deposits was large, amounting to $33,000,000,
on the other side of the account the banks experienced
a loss of cash of only $7,000,000. This seeming contradiction of the view so frequently expressed in these pages
that bankers' deposits are reduced primarily by withdrawals of cash requires explanation. In this particular
instance the out-of-town banks lent largely in the New
York market, and the credits thus secured by borrowers
would serve to diminish bankers' deposits and increase
individual deposits, which would then be canceled by
the liquidation of New York bank loans. That this was
the case is evident from the slight change in the amount
of individual deposits, there being a reduction of only
$28,000,000, while the diminution in loans and clearinghouse exchanges amounted to $52,000,000. The shifting of loans from the New York banks to the out-of-town
banks would result in large unfavorable balances for
those banks holding large bankers' deposits, unless the
borrowers from the country banks also happened to be
depositors with them. The disturbance due to the
shifting of loans would, however, be much less than when
the country banks actually withdrew funds, since the
unfavorable clearing-house balance could be met by the
resort to clearing-house loan certificates. After this explanation, it will cause no surprise to find that the greater
part of the certificates taken out, aside from those issued
for the Metropolitan Bank, were taken out by the banks
having large bankers' deposits. Only 20 of the 82 clearing-




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house banks took out certificates, and several of the banks
did not use them. a It was because the strain remained
purely local that the use of loan certificates alone proved
sufficient to meet the emergency.
The experience derived from this panic directed attention once more to plans for strengthening permanently
the credit fabric through clearing-house action. George
S. Coe in a notable address reaffirmed the suggestions
made in the clearing-house report of 1873, a n d a committee was appointed which reported favorably upon the
proposal to prohibit interest upon deposits, the representative of only one bank dissenting. Both the address
and the report of the committee will be found in the
appendix. 5 The opposition of a few banks was, however,
again effective, though the interest-paying banks seem to
have agreed upon a uniform rate of 2 per cent upon
country balances. 0
As in the case of the crisis of 1873, the Comptroller of
the Currency formulated a number of suggestions based
upon the experience of the banks during the panic.
Those portions of his report bearing on this subject will
be found included in the appendix. The danger of overcertification was emphasized, and the creation of a stockexchange clearing house urged.d Difficulties in securing
adequate information through examination were pointed
a See Appendix, Note C, pp. 350-353, for details, including forms and
statistical information, regarding the issue of clearing-house certificates
in 1884.
b Appendix, Note D, pp. 371-386, and also Commercial and Financial
Chronicle, May 31, 1884, pp. 632-633.
cSee Banker's Magazine, November, 1884, p. 390.
tf See Appendix, Note C, pp. 353-359.




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out, and, finally, the evil effects of interest on bankers'
deposits were indicated; but the difficulty of securing effective action seemed insurmountable to the Comptrollers
Finally, it may be noted that little or no reference was
made by anyone to changes in the system of note issue.
The discontinuance of the silver purchases was the one
currency matter to which much attention was given.
It remains to call attention to a precedent which was
made, if not established, during this crisis, a precedent
which was to have far-reaching consequences, although
its significance was not perceived at the time or subsequently. The arrangements of the clearing house, when
clearing-house loan certificates were issued, were unlike
in one most important respect those adopted in 1873 and
on earlier occasions. No provision was included for the
equalization of the reserves of the banks. Opposition to
this measure was so widespread that it does not appear
that it was even formally considered. The ground of
this opposition can be readily understood. In 1873 the
noninterest-paying banks entered into the arrangement in
expectation of securing a clearing-house rule against the
practice of paying interest on deposits, but their efforts
had resulted in failure. Some of them had employed
their reserves for the common good most reluctantly in
1873, and the feeling against a similar proposal in 1884
was naturally far stronger and more general. Moreover,
the working of the pooling agreement in 1873 had occasioned heartburnings which had not entirely disappeared
with the lapse of time. It was believed, and doubtless




a See Appendix, Note C, pp. 359-370.
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with reason, that some of the banks had evaded the obligations of the pooling agreement. It was said that some
of the banks had encouraged special currency deposits,
so as not to be obliged to turn money into the common
fund. Further, as the arrangement had not included
bank notes, banks exchanged greenbacks for notes in
order either to increase their holdings of cash or to secure
money for payment over the counter. Here we come
upon an objection to the pooling arrangement which
doubtless had much weight with the specially strong
banks, although it was more apparent than real. In
order to supply the pressing requirements of some banks,
others who believed that they would have been able to
meet all the demands of their depositors were obliged to
restrict payments. That such an expectation would
have proved illusory later experience affords ample
proof. When a large number of the banks in any locality suspend, the others can not escape adopting the same
course.0 But in 1884 it was a belief the erroneousness
of which had not been made evident by recent experience.
The following news items regarding the pooling arrangement in 1873 a r e instructive, though they go too far in
attributing the restriction of payments to that device:
When the question of "pooling" the greenbacks came up, one or more of
the banks strongest in legal tenders, especially the Chemical, demurred, and
substantially refused to enter into what they regarded as an inequitable
arrangement. The solemn assurance that they would be expelled from the
association if they persisted in that position brought them to terms, and they
will now all stand or fall together.—New York Tribune, September 26,1873.
There is a very early prospect of putting an end to the " pooling'' arrangement for greenbacks. Many of the old and prudently managed banks
down, and nearly all the small banks up town, are restive under the arrangement and desire the liberty of managing their own greenbacks, as well as
national bank notes, in their own way, and to receive and pay them out




a See p. 181.
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across their counters. Their receipts, they very properly urge, can not be
made free, as before the suspension, so long as there is a discount on bank
checks in Wall street, and while they have no anxiety about breaking up
the arrangement for certifying checks payable through the clearing house,
and settling daily balances in relief certificates * * * they do insist
on the resumption in notes * * * across their own counters. I t is
further urged t h a t this license need not necessarily create embarrassing
discriminations among the different banks in the clearing house. All will
be left to settle the order of business with their own dealers. If any of
them are unable to send currency to their country bank correspondents
where such correspondents have a claim upon them for notes in place of
certified checks to pay debts in New York, they will have to buy the notes
or sell their gold reserve for notes. Should the Gold Room persist in buying
and selling and settling daily balances exclusively in certified checks, the
gold can be sold for notes to * * * any other responsible bullion and
bank-note broker on the street. The belief now prevails, however, t h a t
currency, on the resumption of currency payments in New York, will come
from the West as rapidly as it will go to the South, and large sums of greenbacks now withheld in New York and the East will soon return to the
general banking employment.—New York Times, October 10, 1873.
The banking movement is reported better from the clearing house, b u t
the precise position of the Associated Banks is withheld from the public.
The clearing house, it is rumored, has under control only $6,605,000 greenbacks to-day, but the belief is t h a t double this sum in greenbacks and
national bank notes is actually held in bank, in one way or another. The
circumstance t h a t pains are taken by certain of the well-to-do and strong
banks to keep down the scaling process, to the support of their less prudent
neighbors, is only another argument in favor with doing away with the
pooling and scaling order at the clearing house, to which we may add the
additional and very forcible argument t h a t bank checks have fallen to
one-fourth to one-half per cent for currency, owing to the accession of
greenbacks and nationals by express and the appearance of numerous and
very considerable Treasury warrants * * * in the mails from Washington and the West.—New York Times, October 18, 1873.
There is less difficulty about paying out currency when wanted for pay
rolls at home, or remittances to the country banks near by, and while the
majority of the clearing-house banks persist in what is known as the pooling
and scaling process in the matter of greenbacks, these notes have been
freely thrown upon the street, and sold for bank checks, not only by outside
parties, receiving them by express or otherwise, but by some of the stronger
banks themselves; the latter having vainly protested against the folly as
well as injustice of the process referred to, to the support of the weaker
banks, none of which would be suffered to fail, b u t some of which fear the
liquidation of their deposits, in case greenback payments become the rule
in place of the exception among the other banks.—New York
Times,
October 20, 1873.




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One of the reasons given [for dissolving the pooling agreement] is that
some of the banks evade the obligation. * * * For example, * * *
[some banks] which receive greenbacks in the ordinary course of business
* * * instead of placing them in the "pool," enter them in their respective books as "special deposits," sacred to the exclusive draft of the depositor, when in reality they are used as the banks deem most convenient.
Again, these latter banks secure greenbacks * * * and exchange them
for national-bank notes, and pay these over the counter. * * * Up to
the present time checks for the pay rolls of manufacturers have been the
only large sums cashed by a certain class of banks, but it is expected that
the banks will take some action this week to effect a formal resumption
of payments. * * * Some feeling exists on the subject of these payments, inasmuch as a number of the banks in Western cities have resumed,
while New York has not formally done so as yet.—New York
Tribune,
October 21, 1873.
I t m a y b e assumed t h a t the question of general currency payments * * *
is about to solve itself. Most of the banks are paying on all demands,
when preferred to the certification of checks, and the difference against the
checks of other banks that, from their position, decline to pay out large
sums in currency is only one-fourth to one-eighth per cent in exchange for
greenbacks or nationals. Some of the first-class of banks are not only helping their neighbors to greenbacks and sending currency to their country
correspondents, but they are paying their debtor balances at the clearing
house, as a matter of choice, in greenbacks in place of relief certificates.—
New York Times, October 23, 1873.

If the emergency in 1884 had been more serious or prolonged the need of some arrangement for equalizing reserves when loan certificates were issued would probably
have been made apparent. But as the banks were able
to handle the situation successfully both in 1884 and in
1890 with the loan certificate alone, the original complementary device of equalization came in the course of time
to be not only disregarded, but entirely forgotten. The
result has been, as we shall see, to convert the clearinghouse loan certificate into an instrument which inevitably
and immediately leads to the suspension of payments by
the banks. But this is a matter which can only be explained at a later stage in this investigation.
6158—10




9

123

CHAPTER

III.

FINANCIAL STRINGENCY IN 1890.

No changes in banking methods or in legislation were
made as a consequence of the experience afforded by the
panic in 1884. In 1887, however, the provisions of the
national banking law a regarding reserve cities were
somewhat modified, but it was a change which does not
seem to have been made so much for banking reasons as to
satisfy the ambitious desires of the bankers and people of
certain cities. Instead of designating the cities by name
it was provided that cities with a minimum population of
50,000 6 might upon the application of three-fourths of the
banks established in them, become reserve cities, and that
cities with a minimum population of 200,000 might similarly become central reserve cities.
Chicago and St. Louis at once elected to become central
reserve cities, but no other cities have followed their
example. The number of reserve cities has slowly
increased until at present there are 46, contrasted with the
13 (not including Chicago and St. Louis) reserve cities
before 1887. This change in the law did not involve any
essential modification in the national banking system.
The increased number of reserve cities has simply kept
pace with the growth of population in different sections.
As regards the two additional central reserve cities, the
a Act of March 3, 1887.
bReduced to 25,000 by the act of March 3, 1903.




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immediate effects at any rate, were much less important
t h a n has been generally supposed. At t h a t time the Chicago
and St. Louis banks controlled only 5 per cent of t h e total
resources of t h e national banks of t h e country and their
bankers' deposits amounted t o only $34,000,000, compared with $145,000,000 held b y the New York banks.
Moreover, the Chicago and St. Louis banks did not discontinue t h e practice of keeping large balances in New
York even though they could no longer be included as a
part of their required reserves. In the case of t h e Chicago
banks, for example, in March, 1887, just before they
ceased to be reserve cities, t h e amount due from reserve
agents was nearly $7,000,000, and t h e amount due from
other banks was nearly $5,000,000. I n t h e following
return for May the a m o u n t due Chicago banks from other
banks had increased t o $10,000,000. Evidently the considerable addition to this item was due to t h e continuance
of balances in New York which could no longer appear
under t h e rubric " Due from reserve a g e n t s / '
I n the course of time t h e banks of Chicago and St. Louis
have largely increased the amount of their bankers'
deposits and also its proportion contrasted with New York.
In May, 1890, the New York banks owed other national
banks $124,000,000, those of Chicago and St. Louis $35,000,000. In May, 1908, these deposits of t h e New York
banks had increased to $294,000,000, those of t h e two
other central reserve cities t o $178,000,000. The central
position of t h e New York banks has not, however, been
greatly changed in consequence of t h e increasing importance of t h e Chicago and St. Louis banks as reserve




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agents. Their balances in New York continue to be large
and are drawn down in every emergency.a In May, 1908,
for example, the amount due to the banks of Chicago and
St. Louis from other national banks was $79,000,000,
while the similar item for the New York banks was but
$44,000,000, although their total resources were then two
and one half times as large as those of the Chicago and
St. Louis banks. That a large portion of the amount due
to the banks of the two western central reserve cities
consists of balances with the New York banks is well
known, though no figures of its exact amount are available.
Large New York balances are necessary because New
York remains the clearing house of the country. In this
connection certain statistics gathered by the Comptroller
of the Currency in 1889, 1890, and 1891 are of interest.
From information provided by 3,329 of the 3,438 national banks, it was found that in 1890 all but three
drew drafts upon New York, and that the total amount
of such drafts was 61.31 per cent of all the drafts drawn
upon all the banks of the country. The amount drawn
upon the Chicago banks was but 9.82 per cent of the
total. The Chicago banks drew upon New York for
$222,000,000, and were drawn upon in return for but
$82,000.b These figures show very clearly how indispensable is the maintenance of cash payments by the New
York banks if the dislocation of the domestic exchanges
o In recent years investments in the New York call-loan
banks of other cities have become large; they are reduced
to an even greater extent than balances. The effect on
banks is similar. See p. 229.
&See Report of the Comptroller of the Currency, 1891,
ibid., 1892, pp. 24-31.




126

market by t h e
in emergencies
the New York
pp. 16-23, and

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is to be avoided. Even if every bank were required to
keep its entire reserve in its own vaults, though the likelihood of suspension in New York might be diminished,
the certainty that general suspension would follow suspension in New York would remain.
One further matter regarding the relative position of the
New York, Chicago, and St. Louis banks may be noticed.
With few exceptions all our crises, panics, and periods
of less severe monetary stringency have occurred in the
autumn, when the western banks, through the sale of the
cereal crops, were in a position to withdraw large sums
of money from the East. In normal course credits from
the sale of agricultural products will serve to meet purchases of eastern and imported manufactures, which will
be spread over the autumn and winter months. But for
a short period in October and November the western
banks are in position to draw for more money than the
course of trade will permit them to retain permanently,
and this power they have been disposed to exercise in
emergencies.
In both the instances of financial strain which have
been examined, the causes of the disturbance were primarily of domestic origin. In 1873 the unwillingness
of Europe to take indefinite quantities of our securities
was after all a minor factor, and in 1884 the return of
American securities before the May panic was the result
of developments which had taken place in this country.
We have now to consider a crisis in which the United
States participated, to a somewhat greater extent at
least, as a passive sharer in a disturbance the causes of
which were in other parts of the world.




127

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C ommis

s ion

It became evident in 1893 that the beginnings of much
unsound business activity were of long standing, but in
1890 the condition of affairs had not reached that unstable
condition which renders a transition to depression inevitable. The painful consequences of an even more unstable
business situation would probably have been delayed as a
result of the abundant harvests of 1889, which, as the yield
elsewhere was below the average, made it possible for the
United States to increase exports very materially over the
amount in the years immediately preceding. For the
year ending June 30, 1889, merchandise imports of $742,000,000 exceeded exports by nearly $3,000,000, while in
the following year exports of $857,000,000 exceeded imports by $68,000,000, and gold exports fell from $49,000,000
to $4,000,000. The yield of the crops of 1890 was less
satisfactory, but the prices at which they were marketed
were appreciably better. It is probable that nothing
more than the usual monetary stringency would have
occurred in the autumn of 1890 had this country been able
to escape from the effects of the collapse of the speculative
movement in England which culminated in the Baring
failure in November. Sufficient reason for this belief is
afforded by the continuance of business activity without
serious interruption and the speedy return to normal
banking conditions which was reached before the end of
the year. There was no accumulation of money in the
banks or decline in the demand for loans such as marks a
period of general business reaction and trade depression.
Aside from the stock exchange and the banks of the eastern
money centers the disturbance did not reach an acute
stage.




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From about the beginning of 1886 there was a steady
increase in the volume of bank loans extending pretty
generally throughout the country. In New York this
upward movement was never very rapid and it did not
continue beyond the spring of 1889. Further increase
in that center was checked by declining cash reserves.
During the first half of 1890 the banks were regularly
from ten to fifteen million dollars below the reserve at the
same time in the previous year. Explanation of this
uncomfortable situation is simple. It was due to the
smaller amount of bankers' deposits which provide so large
a proportion of the resources of the New York banks.
The amount due to the banks reached its highest point in
February, 1889, at $145,000,000. At the same time in the
following year it was only $132,000,000, and there was
about the same relative difference at corresponding dates
in other seasons of the two years.
Declining bankers' balances in New York maybe due to
either one of two causes which are quite different in nature.
At times out-of-town banks lend largely in New York, a
condition which has been very common in recent years.
In that case the amount of money in the possession of the
New York banks is not appreciably affected. Bankers'
deposits are reduced, but individual deposits become correspondingly greater. It may happen, however, that
interior banks find full employment for their funds at
home. This was the situation of affairs in 1889 and 1890,
when active business in the West and South taxed the
banking resources of those sections, leaving no surplus for
deposit in New York bevond the amount which could be




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included as a part of the required reserve. The reduction
in bankers' deposits, therefore, tended to reduce to an
equivalent extent the amount of money in the New York
banks. It did not, however, tend to diminish the probable
requirements of the interior banks for a supply of money
for crop-moving purposes. On the contrary, such dertiands
were likely to increase on account of the greater activity
in the West and South as far as it led to an increase
in agricultural production.
Only one course was open to the New York banks if
they were to maintain themselves in a position at least
as strong as in 1887 or 1888. By reducing the average
volume of loans by an amount several times greater than
the loss in reserves deposits would have been canceled
sufficiently to give them the same surplus reserve which
they had had in previous years. The average volume of
loans was indeed some $10,000,000 less in the first half
of 1890 than at the same time in 1889, but this contraction was not sufficient to offset in deposits the amount
of the loss in reserve. Consequently the surplus reserve
in New York was in general distinctly less than in the
previous year. In lieu of adequate contraction the banks
seem to have adopted the illusory policy of increasing
the amount of their call loans relative to the total of
their loans. In the absence of statistical evidence it
can not be positively asserted that the amount of call
loans was actually increased, but this is a matter of secondary importance. It is certain that the banks were
lending more nearly to the limit set by reserve requirements and that whenever their reserve fell off even slightly




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they resorted to call-loan contraction. Rates for these
loans consequently became subject to increasingly violent
fluctuations.
Between July, 1889, and July, 1890, the
loans of the clearing-house banks were continually in
the neighborhood of $400,000,000. When they were a
few million dollars above t h a t amount call-loan rates
were moderate; when a few million dollars below, they
were advanced to painfully high levels.
Notwithstanding smaller reserves and more frequent
fluctuations in rates, the course of t h e securitjy markets
during t h e winter and spring of 1890 was not unlike
t h a t in previous years. The m o n t h of May, as usual,
found quotations at the highest level since t h e beginning
of t h e year, though not at so high a point as in 1889.
This was probably because of t h e comparative scarcity
of loanable funds. The normal June increase in the
reserves of the banks was accompanied by a downward
tendency in the rates for loans, b u t although there were
almost no unfavorable railway or trade developments,
there was a distinct pause in the upward movement on
the stock exchange. There was almost no change in the
volume of loans during the month, and the speculative
movement seemed to be subsiding. The cessation of t h e
foreign demand for American securities rather t h a n any
positively unfavorable development in this country
seems to have been t h e occasion of this change in speculative feeling, and before the beginning of July t h e sale
of American securities by London became t h e controlling
factor in t h e situation. For a number of years English
capitalists and banking houses had been indulging in




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venturesome foreign investments, especially in South
America. During the summer of 1890 London was
selling good securities in order to carry the load of
investments of a less desirable description. These sales
caused foreign exchange rates to turn persistently against
the United States, and between the middle of June and
the second week of .August gold was exported to the
amount of $15,250,000, equal to about one-seventh of
the reserve of the New York banks at that time. As a
result of this gold movement the reserves of the banks
were somewhat less at the beginning of the crop-moving
period in August than they had been at the end of June,
a quite exceptional condition.
The following table shows the changes in the condition of the New York banks from June 28 till August 9,
1890, and also the weekly fluctuations in call-loan rates:
New York

bank

statement.

[In millions.]
1890.

June 28.
July s__
I2_
1926.
A u g . 2__
9--

Loans.

Cash.

Net
deposit.

$397- 1
404. 6
403.0

$108.0
106. s

402.3
400. 0

109. 2
108.3

4i5 9
414 3
408 9

401. 4
406. 1

112. 9
103.3

no. 3

$405-5
414

3

Surplus 1 Call-loan
rates.
reserve.
$6.6
3 8
6 4

4K-10
2 - 9
3

~ 8

2 - 6

A 1.5 0

5 7
6 1
8 9

2

-

407

1 3

3

-20

9

x

z A-

6
6

On June 28, with a reserve of $108,000,000, the banks
had a surplus reserve of $6,600,000, while on August 9
their reserve was reduced to $103,000,000 and the surplus
was only $1,300,000. During July the Treasury had
paid out $4,000,000 in excess of its receipts, and the re-




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ported movement of money between New York banks
and the interior showed a net balance of nearly $4,000,000
in favor of the metropolis. It should be added that there
was no appreciable change in the reserves of the banks
until the week ending August 9. This was because
$8,500,000 of the $15,250,000 of gold exports were taken
during the last week of July and the first week of August.
While London sales of American securities were the
fundamental cause of this movement, the banks might
probably have prevented some of the outflow had they
pursued a more conservative lending policy. Low rates
for call loans during July and the increase in loans at the
beginning of August facilitated the transfer of securities
to this country. A declining stock market was prevented
in July (indeed the quotation for some securities then
reached the highest level of the year) with the result of
making inevitable a vastly more serious collapse in August
and September. Moreover, then as now it was customary
for foreign exchange dealers to draw anticipatory bills of
exchange to be met with cotton and grain bills later in the
season. In the summer of 1890 such bills were not drawn
because interest rates were higher in London than in
New York. In this connection it is worthy of note that
gold shipments came to an end as soon as there was an
advance in the rates for loans in New York.
It is indeed true that the bank statement for August 2
showed that the banks had a considerable surplus reserve,
but that alone was not sufficient ground for the policy
pursued. The necessity of sending large amounts of
money to the interior was realized, but instead of declining




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to increase loans altogether the banks simply discriminated in favor of call loans. The policy of the banks was
thus described in the Chronicle for August 2:
Another element of uncertainty has affected our money market this
week. The large export of gold with the prospect before us of more to
follow disturbs all calculations. Gold exports are, of course, a material
loss even if regarded simply as a question of the quantity of our currency
for early fall requirements, for evidently it is no gain in exchanging
$5,000,000 of silver certificates a month for $10,000,000 of gold. I t may be
said that the flow of gold is not likely to continue long, but in the meantime
the loss is sufficiently large to make an impression upon the bank reserves,
Hence it is that money on time is firmer this week (although a large amount
of currency has been paid out by the Treasury on account of bond purchases), while on call it is easier. The most liberal lenders for from day to
day money are the banks. As their reserves are low, as they are being
drawn upon for the gold exports, and as they are liable to be further
drawn upon for crop purposes, the officers prefer to keep their money
within control, which they could not do if loaned on time. Some of our
largest trust companies also refuse to put out their money otherwise than
on call, but they are companies that do not disturb call money except when
there is some material change in the market.
As already stated, the rates for call money have for the reasons mentioned
been easier this week. So far as reported for bankers' balances the extremes
have been 6 per cent and 2 per cent, the average being 4 per cent. The
banks and trust companies have loaned at 4 per cent as the minimum,
many, however, getting ^% per cent. 0

Within less than three weeks from the date of the report
quoted above call loans were advanced to 186 per cent
and the stock market was in a turmoil. Not a single
failure had occurred. Nothing had happened except that
the reserves of the New York banks had been reduced by
entirely normal causes from $103,000,000 on August 9 to
$95,000,000 on August 23, and the banks were below
reserve requirements, $2,800,000. To meet this situation
the banks were resorting to call-loan contraction, or at
least t h e y were a t t e m p t i n g such contraction.

Not with-

er The Commercial and Financial Chronicle, August 2, 1890, p. 124.




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standing the efforts made by the banks to secure the
"money " which they fancied they had "kept within control/ ' they were only able to reduce their loans by $8,300,000
during the two weeks after August 9, when they were at
their highest point. Aside from the gold exports, the
movements of money had not been at all unusual. The
reported shipments to the interior between August 1 and
August 22, accounted for a net loss of $4,100,000, contrasted with $4,200,000, the year before. The disappearance of the surplus reserve was the signal for an attempt
to liquidate call loans—loans which should not have been
made. Even the contraction which was brought about
was probably in no small degree due to the diminution in
the amount of time loans, since the banks almost entirely
ceased making loans on time and many of those made in
previous months must have come to maturity. The commotion in the money market and on the stock exchange
was wholly unnecessary. It indicated on the part of the
banks and the public an increasing tendency to regard
the 25 per cent reserve as an irreducible minimum and
not as a resource to be held in ordinary times for use
in emergencies. Moreover, although crop-moving requirements were only beginning, and although it was certain
that a large amount of money must be sent away from
New York in the course of succeeding weeks, every one
was aware that there were ample funds available in the
United States Treasury and that they would be placed at
the disposal of the banks.
As early as 1882 surplus revenue became a factor in
the finances of the Government, but at that time there




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was an ample amount of bonds outstanding which were
redeemable at par. Momentarily reduced after the panic
of 1884', the revenues of the Government soon reached
even more formidable proportions than ever before. In
1887 there were no more bonds outstanding which were
redeemable at par, and further liquidation of the debt
involved purchases at a premium in the open market.
After some hesitation this policy was adopted, but, as was
proper, the Treasury endeavored to secure the bonds upon
terms as favorable as possible to the Government. The
bulk of the bond purchases, therefore, were made at times
when the money market was in a stringent condition,
when holders were most willing to dispose of their bonds,
or further delay was inexpedient. During the seven
months from July, 1889, to February, 1890, the Treasury
paid out some $42,000,000 more than it received, having
purchased bonds to the amount of more than $70,000,000.
In the succeeding five months to July the Treasury
increased its cash holdings by more than $18,000,000, its
moderate bond purchases being largely offset by the
withdrawal of government deposits from the banks. It
then held some $250,000,000, including the gold reserve of
$100,000,000 and some $21,000,000 of more or less unavailable fractional silver coin. About $54,000,000 of the remainder consisted of the bank-note redemption fund which
had been transferred to the general fund of the Treasury
by the act of July 14, 1890. This money was not a recent
accumulation and, in fact, had been much greater in
previous years. It will be seen, then, that aside from the
$18,000,000 withdrawn between February and July, the




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Treasury surplus was not a fund the building up of which
had had any influence in bringing about the actual moneymarket conditions which prevailed in the summer of 1890.
Moreover, any payments by the Treasury in excess of the
$18,000,000 would be in the nature of a windfall for the
banks.
The relief which the market expected from the Treasury
was slow in making its appearance, though not on account
of any unwillingness or delay on the part of the Secretary
of the Treasury to make use of the government funds.
On Tuesday, August 18, the Treasury offered to redeem
$15,000,000 4 K P e r c e t l t bonds with interest to May 31,
1891. This offer not proving attractive to holders of
bonds, on Thursday it was announced that the Treasury
would redeem $20,000,000 of the 4.% per cents, prepaying
the entire interest to the maturity of the bonds on August
31, 1891. It was on this day that call loans had advanced
to one-half of 1 per cent a day, and the stock market was
threatened with complete demoralization. Upon the
announcement of this liberal offer of the Treasury trouble
was largely allayed, the banks discontinued their efforts
at wholesale contraction, and quotations on the stock
exchange regained some of their loss. The whole episode
illustrates the groundlessness of the disturbance, since
the amount of money actually secured from the Treasury
by the New York banks was inconsiderable. Only
$9,000,000 of bonds were presented for payment up to
the end of the month, and the amount actually received
by the New York banks was by no means so large as this,
as many holders were scattered throughout the country.




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Treasury operations for the month as a whole set free
only $7,500,000. Further efforts were evidently required,
and on August 30 the Treasury offered to take another
$20,000,000 of the ^y2 per cent bonds on the same terms
as before. On September 6 the Treasury offered also to
prepay the interest of the 4 per cent bonds up to and
including July 1, 1891, amounting to $23,000,000. It is
worthy of note, however, that not all of the holders made
the necessary application for the interest upon these bonds.
Notwithstanding these various devices, the Treasury was
not paying out money rapidly enough to prevent further
reduction in the reserves of the New York banks. The
following table shows the course of events as reflected by
the bank statement and call-loan rates for the period
under review, and carries on the record to the close of
September:
New York Bank

Statement.

[In millions.]
Loans

Reserve.

Net
deposits.

Surplus
reserve.

Call-loan
rates.

1890

Aug. 9

$406.1

16
23

402

$103.2

99

2

2

397 7
392 5

94 9
95 8

395

0

95 7

20

393 2
392 6

27

394

5
99 4
"5 8

30

Sept. 6
13

0

92

$407.9
3995
389.5
385. 1
388.4
388.3
39o.o
406.8

$1.3 '

6

—

2 5

-

5

— 1 4

-

3 3
1

9

14

1

3-20
3-25
3-189
2-15
3-12
3-189
2-96
2-6

For two weeks after the stringency in August the reserves remained almost stationary, but in the week ending September 13-there was a loss of $3,500,000, and the




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reserve deficit of $3,300,000 was the most considerable
of the year up to that time. The banks again resorted
to loan contraction, and the high rates of August once
more became a factor in the situation. As one writer
expressed it, "The stock market was almost strangled
by the restriction in the money market." The fall in
security quotations was even greater and more general
than in August. At length the hand of the Secretary
of the Treasury was clearly forced. Four per cent bonds
had been purchased for the sinking fund in July at prices
ranging from 122.26 to 124. On Monday, September 17,
the Treasury invited offers of bonds to the amount of
$16,000,000, and accepted nearly $17,000,000 at prices
ranging from 125 to 126^, calling for a disbursement of
more than $21,000,000. These bonds were largely supplied by a New York syndicate, and the money received
in payment went directly into the banks, accounting
for the enormous increase in the reserves from $92,000,000
on September 13 to $115,000,000 on September 27.0
The net addition to the money in circulation secured from
the Treasury during September reached the enormous
total of $57,887,000, and for the three months from July
1 nearly $70,000,000 had been secured from that source.
Upon the basis of the money thus secured the loans
of the banks began to increase and ease was restored.
Between September 20 and October 11 the loans of the New
York banks increased from $394,000,000 to $407,000,000,
« For a circumstantial statement from a generally conservative source
to the effect that the bonds were held by a group of operators engaged in
manipulating the market, see Bankers' Magazine for October, 1890,
p. 248.
6158—10




10

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and stocks recovered some of their September loss. Cropmoving requirements were, however, causing the reserve to
fall away once more, and on October 15 it was $15,000,000
below the figure for September 27, and again the banks
were below the required reserve by $349,000.
Loan contraction once more became the order of the
day, but on this occasion pressure upon borrowers was not
carried to the extremes which had characterized August
and September. During the three weeks ending November 8, loans were reduced a little more than $7,000,000, and
the highest rate quoted on any one day for call loans was
30 per cent. There was a further decline on the stock
exchange, but at no time was panic threatened. London
sales of American securities were an important factor
during these weeks and contributed largely to the fall in
quotations which was particularly severe in standard
stocks, many of which reached the lowest level of the year.
These recurring periods of monetary stringency were
due almost wholly to domestic causes, only indirectly
and to a relatively small extent were they the result of
the European situation. Even the fall in the prices
of securities was probably quite as largely due to loan
contraction as to London sales. Gold exports of the
early summer had to some extent depleted the reserves
of the banks, but the loss from withdrawals for crop
moving purposes was of much greater magnitude. But
these withdrawals, it should be noted, were not by any
means of an unusual character. Between July 1 and
November 8, 1889, the reported net shipments of currency
to the interior from New York were $35,500,000. For




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the same period in 1890 they amounted to $34,900,000.
T h e conclusion can not be escaped t h a t an insufficient
reserve in New York during the first half of the year was
the inevitable cause of the disturbance in the summer
and a u t u m n months.
We now enter upon the final stage of the monetary
disturbance of this eventful year. Up to the second week
of November there had been no important failures, either
banking or mercantile. But the decline on the stock
exchange had carried quotations below the level reached
during the panic of 1884. I t was evident t h a t further
decline could hardly fail to bring about extensive failures
and undermine general confidence. This was the general
situation on Friday, November 7, when the Bank of England advanced its rate of discount from 5 per cent to 6
per cent. An advance of 1 per cent in the Bank of
England rate is according to custom, b u t as t h e rate is
seldom changed, except at the regular meeting of the
directors on Thursday, this action naturally gave rise to
a general feeling of apprehension and alarm. On the
following day t h e New York bank statement showed a
decrease of $4,254,000 in the reserve and a reserve deficit
of $3,544,000. F r o m this point the narrative of the course
of events is taken from the annual review of the Commercial and Financial Chronicle for 1890.
During t h e week of t h e crisis t h e record was substantially as follows:
On Monday, November 10, there was heavy London selling and great
depression, and the death of Mr. James Struthers occurred at the stock board
and caused an adjournment for half an hour about noon; money was onehalf per cent a day plus interest. On Tuesday, the n t h , London advices
were strong, as the Bank of England obtained a loan of £3,000,000 gold




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from the Bank of France; but the Villard stocks broke badly, and Decker,
Howell & Co.'s failure wras announced about 2 p. m., the Bank of North
America being also involved. The clearing-house committee then met and
resolved to issue clearing-house certificates, and this relieved the banks,
though the news of this issue was not known till after business hours.
Messrs. Charles M. Whitney & Co., bankers, failed, and also Mr. David
Richmond, an old member of the stock exchange. On Wednesday, the
12th, the tone was much improved; money relaxed with the knowledge
that clearing-house certificates were issued. Messrs. J. C. Walcott & Co.,
stock brokers, suspended; the North River Bank closed. On Thursday,
the 13th, the feeling was still better, but the North American Company's
stock fell from 16 to 7, recovering slightly afterwards, and the market
resisted very well; the Bank of England rate remained at 6 per cent, which
was encouraging. On Friday, the 14th, the market was weak and sensitive,
but without special features. On Saturday, the 15 th, early cables from
Londoxi announced the embarrassment of Baring Brothers & Co., and this
led to a feeling of panic at the stock board, and the sales in two hours of
business reached 424,000 shares. On Monday, the 17th, the failure of
Mills, Robeson & Smith was announced, occasioned by the forgeries of
A. H. Smith, carried on for some years by raising the face value of stock
certificates; Messrs. Randall & Wierum and Gregory & Ballou suspended;
the Bank of Commerce passed its resolution against the contraction of loans
and took out $500,000 in clearing-house certificates—the resolution said:
" In the opinion of this board expansion is the heroic remedy for present
ills rather t h a n unceasing contraction;" money was at one-half per cent a
day and the depression was great. On Tuesday, the 18th, Messrs. P. W.
Gallaudet & Co. failed, and it was made known also that the North River
Bank could not open, but must go to receiver. On Thursday, the 20th,
Barker Brothers & Co. failed in Philadelphia, but this did not affect the
market greatly, although they were involved in large financial operations
with several railroads; the Bank of England rate remained unchanged at 6
per cent and the tone in stocks was getting perceptibly stronger. On
Friday there was a very sharp improvement, and many stocks rebounded
from the depression, which had been severe until Wednesday; the tone
was almost buoyant, and although the feeling was not fully maintained
the general market in the next week ending November 29 was very strong
and leading stocks advanced from 5 to 8 points.^

The disturbance, it will be noted, was of short duration
and did not at any time get beyond control. The prompt
action taken by the clearing-house authorities did much
to prevent the spread of panic. It is not improbable that
a Commercial and Financial Chronicle, January 3, 1891, p. 16.




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some intimation of impending trpuble in London may have
been conveyed to bankers in New York. As in 1884, no
provision for equalizing reserves was adopted. When the
issue of loan certificates was authorized on both occasions
they were intended to meet the requirements of particular
institutions rather than a general situation. In spite of
the issue of certificates, loans which had been reduced by
$5,500,000 for the week ending November 15 were reduced
still further in the two following weeks by $8,700,000.
There seems to have been some hesitation among the
banks to take out certificates from the fear that such
action would be regarded as a confession of weakness.
A striking example of a more far-seeing view was afforded
by the Bank of Commerce, one of the strongest banks in
the city at that time. On Monday, November 17, the
following resolution, presented by Mr. A. A. Low and
seconded by Mr. J. P. Morgan, was passed by the directors:
Resolved, T h a t the directors of this bank desire to express their entire
approval of the action of the Clearing House Association in so promptly
providing for the issue of the clearing-house certificates against satisfactory
collateral.
Resolved, That the officers of this bank are directed to invite the consideration of the national and state banks, associated as members of the
clearing house, to a policy of forbearance in respect to all loans with parties
in good standing, extending such indulgence as circumstances may warrant,
to the end t h a t all the banks and trust companies in the city may not be
simultaneously calling on their customers for money at a moment when
all are reluctant to lend.
In the opinion of this board, expansion is the heroic remedy for present ills,
rather than unceasing contraction—necessary alike for the promotion of
confidence and the maintenance of the value of all assets in possession of
our moneyed institutions.
Resolved, T h a t in furtherance of the above, the officers be and are hereby
directed to apply for clearing-house certificates to such an extent as may
from time to time be deemed advisable. a




a

Bankers' Magazine, May, 1891, p. 417.
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These resolutions emphasize one of the two specifics for
the proper treatment of a panic—the continuance of loans
to solvent borrowers. A second equally important specific
is the prompt payment by the banks of every demand by
depositors for cash. In this particular instance the banks
were not subjected to a severe test of their ability and
willingness to apply this remedy. Withdrawals by no
class of depositors went beyond normal requirements and
the reserves of the banks did not undergo any material
change. The contraction in loans did not occasion any
such degree of stock-market strain as had occurred in
August and September. Rates went to the same high
level of 186 per cent, but the period of high rates was
somewhat shorter than in September. Within a week
after the announcement of the Baring failure on November 15, call-loan rates were quoted between 2 per cent and 5
per cent. Large purchases were being made by investors,
and the stock market was reported as steady, strong, and
almost buoyant. Although call-loan rates were not constantly maintained at this extremely low level, it is still
within the truth to say that after November 20 the
monetary situation ceased to be a serious factor in the
stock market or elsewhere.a
The following table shows the course of events as
reflected by the bank statement and call-loan rates
between November 1 and December 15, 1890:
a
There was a flurry in the money market on December 8, and call loans,
largely through manipulation, again rose to 186 per cent, but in the course
of the day fell again to 6 per cent.




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New York bank statement.
[In millions.]
Loans.

Reserve.

Deposits

Surplus
reserve.

Call-loan
rates.

1090
Nov.

$399- 8
398. 9
393-•3
387.•3
384.•5
386.•5
386.. 0
386.• 4

1
8
15
22
29

Dec. s

$9995-

$396

95-

94

386
381
' 378
376
376

99

f

380

9595
91

392,

$0

3 - 30
3 - 25
2y2- 186
2 - 186
2 - 8
3 - 1 5
2 - 186
2

-

6

The banks of Philadelphia and Boston also resorted to
the issue of clearing-house certificates. In these cities, as
well as in New York, the primary object was to meet the
requirements of particular banks. A detailed account of
the issue of loan certificates in 1890 appeared in the report
of the Comptroller of the Currency for 1891 and will be
found in the appendix. 0
As in 1884, the issue of loan certificates was not followed
by the suspension of payments by the banks. One episode
which occurred early in December, however, affords evidence of the danger of suspension if no provision is adopted
for. the equalizing of reserves when loan certificates are
issued. The course of the later crises gives significance
to the following account taken from the Commercial
and Financial Chronicle:
A feature which has caused some remark this week has been the payment
at the subtreasury over the counter in gold coin and notes of about twothirds of the disbursement made by the Government on account of bond
purchases, instead of the checks taking the usual course and being collected
through the clearing house. This change is thought by some to indicate




a

Appendix, Note B, pp. 387-392.
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t h a t the money received is to be hoarded by the people and companies who
sold the bonds, and not to go into banks. T h a t may be true in a measure.
But as a further explanation, we would state t h a t this method of collecting
government checks has for a number of weeks been in operation, it having
been practiced by our clearing-house banks. Indeed, this practice explains
in part the recent large increase in loan certificates. These certificates are
used, of course, to pay debtor balances at the clearing house. These balances are not perfectly natural; that is to say, they occur through a withholding of all subtreasury checks from the clearings and collecting them,
as stated, in gold over the subtreasury counter. The result is t h a t the
banks show an adverse balance at the clearing house, to pay which it uses
a small amount of loan certificates; the receipts from the Treasury, however, reenforce its gold reserve. This process, to be sure, makes no one
richer or poorer, b u t it affords currency for the supply of the demand from
the interior without exhausting the banks which ship \t.a

By the means above described weak banks could gain
cash and meet unfavorable clearing-house balances, which
would otherwise have been smaller, by issues of certificates, and strong banks could diminish favorable balances which might only be met with certificates from
other banks. The cashing of checks by depositors
over the counters of banks of which they were not depositors at the instance of their own banks would be simply another step in the same direction. Working at cross
purposes among the banks might easily become almost
as serious as if loan certificates had not been issued, and
the banks would soon inevitably drift into suspension.
Foreign exchange rates followed the normal autumn
course, illustrating the strength of the American position
during that season of the year. Notwithstanding the
sales of American securities in London, there was no gold
export movement after the middle of August. The advance of the Bank of England rate to 6 per cent on November 5 and the Baring disclosures caused rates to rise,
a Commercial and Financial Chronicle, December 13, 1890, p. 808.




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but not to the export point. The advance was but
momentary; rates soon fell below par, and in the second
week of December nearly $5,000,000 was taken from
the Bank of England for export to the United States.
The ordinary money requirements of this year were,
as we have seen, entirely provided by the Treasury.
Between July and December the cash reserves of the
national banks were reduced by less than $3,000,000,
from $280,900,000 to $278,000,000. As in other years,
this slight loss was more than shifted to the city institutions. The reserves of the New York banks were reduced $4,600,000, those of Chicago and St. Louis
$2,500,000, and those of other reserve cities $1,500,000,
a total of $8,600,000, while the reserves of the country
banks were increased $6,700,000. Again, the fundamental characteristic of our banking system was illustrated, that for any extraordinary cash requirements the
reserves of the country banks are an unused asset. Evidence was again given which should have brought home
to city institutions the heavy responsibility which they
incurred in attracting the reserves of other banks.
During the same months of 1889, there was comparatively little financial disturbance, although the reserves of
the banks fell off more than $24,000,000. Explanation of
the difference is to be found in the loan and deposit
situation. In 1889 the ratio between deposits and the
reserve was such as to make it possible for the banks to
increase loans. In 1890 loan expansion had gone beyond
the permanently available resources of the banks. The
difficulty which was encountered in carrying through a




147

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very moderate amount of loan contraction was evidence,
not that the community needed additional credit, but that
business was already extended beyond the limits of safety
set by adequate supplies of working capital.
Although the reported net shipments of the New York
banks to the interior between July and the end of December were more than $50,000,000, the amount of bankers'
deposits held by them was reduced but slightly, from
$170,000,000 to $153,000,000, between July 18 and December 19. A number of possible explanations of this unusual
result may be mentioned. The trade relations of the rest of
the country with the East may have given western and
southern banks a favorable balance of payments, and
the investment of eastern capital in the West may have
contributed to this result. In the second place, the
bonds purchased by the Government were to some extent
held outside of New York, though the immediate payments made by the Treasury may have been made
through the New York banks. Again, loans of outside
banks in New York, if liquidated, would provide the means
for drawing funds from that city. This last factor has
become of enormous importance in quite recent years. It
was not mentioned in 1890, and was not probably important, as the western and southern banks were then hardly
able to satisfy the requirements of local borrowers.
Finally, the banks seem to have rediscounted freely at
the eastern money centers. The amount of rediscounts
and bills payable increased from $22,000,000 to $37,000,000
between July and December, the most considerable increase which had occurred at any time since the organi-




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zation of the national banks. In 1873 there was no
increase whatever in these items, and in 1884 there was
an increase of only $4,000,000.
The assistance afforded the money market by the
Treasury was a subject which was much discussed, and
upon which quite opposite opinions were expressed.
That it was proper for the Treasury to restore to general
circulation money which it had recently withdrawn was
not questioned. From this position many, including the
Secretary of the Treasury, went on to the conclusion that
a treasury surplus was a desirable means for safeguarding the credit structure of the country. This view was
expressed in the annual report of the Secretary of the
Treasury for 1890, extracts from which containing the
account of the Treasury operations during the year will
be found in the Appendix. 0 It is unquestionable that
a supply of money, whatever its source, is of the
very greatest utility in an emergency, but it is a far
cry to the conclusion that the Government rather than
the banks is the organ which should provide this resource. The unfavorable effects of treasury assistance
were thus set forth in the Chronicle.
The time was when our banks provided beforehand for the fall trade,
and so trimmed their sails, if we may be permitted to use the expression,
through the summer months as to avert a storm by preparing themselves
for the crop demand. Of late years they have looked to the Treasury
wholly, and have gone through the summer trenching on their reserves
regardless of any increased drain sure to come later on. 6

New York bankers denied strenuously the justice of
this criticism. The president of the Park Bank, one of
o Appendix, Note F , pp. 393-399.
& Commercial and Financial Chronicle, December 6, 1890, p. 754.




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the largest holders of bankers' deposits, asserted that,
" we always prepare ourselves carefully for the fall demand
for money for the movement of the crops * * * and
keep our loans and reserves throughout the summer for
this purpose." The cashier of another almost equally
important bank observed "that as far as we know the
banks of this city do not intend to make their calculations relying on the Treasurer of the United States for
assistance in perfecting the same, nor do we consider
they should or that it would be wise to do so." °
We may accept the contention of the bankers that the
Treasury surplus had had no influence upon their reserve
policy, but for a reason less complimentary to their
sagacity than those which they put forward. In years
when there was no available surplus in the Treasury we
have seen that the New York banks failed to carry an
adequate reserve, and there is every reason to suppose
that had there been no surplus in 1890 the banks would
have carried a full line of credit, and that their reserves
would not have been more adequate. We may therefore
accept the view of the Secretary of the Treasury that
the government surplus would serve to supply means for
crop-moving purposes which the New York banks would
not have been able to supply without general financial
disturbance. On the other hand, the Treasury surplus
was by no means a solid foundation for the credit structure. It could not be expected that there would always be
a government surplus, but while it continued the necessity
0

For these and other similar opinions expressed by various New York
bankers, see David Kinley, The Independent Treasury of1 the United
States, p. 293.




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of making provision for emergencies was far removed from
t h e banks. Very likely t h e banks might not have provided
these means at once, b u t the likelihood t h a t they would
ever come to a proper understanding of their responsibilities was distant so long as the surplus remained.
In only one direction did the experience of t h e year
bring about a change in banking practice, and t h a t was
of secondary importance. I t will be remembered t h a t
the three banks which became involved in difficulties in
November were all state institutions. The clearinghouse rule requiring all members to hold a 25 per cent
cash reserve had not been strictly adhered to for m a n y
years by a large number of the state banks in t h e association. Since more t h a n three-fourths of the clearinghouse banks were national banks, it was not a difficult
m a t t e r to secure action looking toward a more rigorous
rule. a This, however, did not in itself serve to increase
greatly the power of t h e New York banks in an emergency.
The resources of t h e state banks were less t h a n one-sixth
those of the national banks, and they were engaged in a
purely local business. This action of the clearing house
was probably a result of the increasing tendency to regard t h e 25 per cent reserve as a permanent requirement,
not to be reduced in any circumstances. The acceptance
of such a belief was certain t o involve trouble in an emergency if it did not lead t h e banks to maintain considerably
more t h a n t h e minimum requirement in ordinary times,
so as to have a large amount of free cash to meet
extraordinary occasions.




0 Bankers' Magazine, March, 1891, p. 673.
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A much more fundamental change in the organization
in the New York money market came with the establishment of the stock-exchange clearing house in May,
1892. It led to a very considerable reduction in the
clearing-house exchanges of the banks and also, and more
important, in the volume of certified checks. Overcertification ceased to be a factor of the first magnitude ^
in the banking methods of the city. Had not this arrangement for stock-exchange dealings been set up, it is
probable that it would have been necessary to close the
stock exchange in 1893 a n ( i m I9°7> a n d it is also probable that the volume of business transacted in the years
after 1897 could not have been handled.




152

CHAPTER

IV.

T H E CRISIS OF 1893.

I n previous chapters attention has been centered upon
t h e New York banks because their operations were t h e
most important banking factors b o t h before and during
the emergencies which have been analyzed. We have
seen t h a t the New York banks did not normally maintain
t h e large reserves which t h e responsibilities of their position demanded. We have also seen t h a t t h e methods of
handling difficult situations were^upon t h e whole wise and
adequate for t h e purposes in view, so far as t h e means of
the banks allowed. We now approach a crisis which, so
far as it was due t o banking causes, was a result of banking
operations in other parts of the country. The strain upon
the New York banks was not on t h a t account less severe;
but, though they were not as strong in cash reserves at
t h e time as the responsibilities of their position demanded,
they were far more amply provided with cash t h a n has
been customary in periods of active business either before
or since. On t h e other hand, we shall find t h a t in handling
t h e situation there was an absence of t h e intelligent and
bold action which did so much t o extricate t h e banks from
a situation of equal if not greater seriousness in 1873.
MONETARY AND BANKING MOVEMENTS, 1 8 9 0 - 1 8 9 3 .

The course of events between t h e panic of 1890 and t h e
crisis of 1893 centers about t h e monetary history of the
period. The crisis itself was a result of complex causes,




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among which the monetary situation was by no means
certainly the most important. This is especially true of
the causes of the long years of depression which followed
its outbreak. Among these causes may be mentioned
unremunerative prices for agricultural staples, and the
heavy load of farm-mortgage indebtedness; also railway
receiverships, which were due to the oversanguine estimates of the future and reckless financing of the wildest
sort. Even the unsatisfactory banking position at the
time of the crisis seems to have been far less a product of
monetary conditions than has been usually supposed. At
the risk of exaggerating the importance of the monetary
influences it will, nevertheless, be convenient to make that
history the point of departure in the study of the course
of events which preceded the crisis of 1893.
Almost exactly $100,000,000 had been added to the
money supply of the country during the last six months of
1890, and all of this increment was, as we have seen, outside the banks at the time of the December return to the
Comptroller of the Currency. With the end of the cropmoving period there came the usual return flow of money
to the banks—a movement which was accelerated by the
moderate decline in business activity during the winter and
spring of 1891. The strengthening of bank reserves which
would have been thus brought about was in a measure offset
by gold exports to the unusual amount of $53,000,000 during
the first six months of the year. This outflow was due to
a number of causes and not a simple result of the silverpurchase law, as some zealous advocates of the gold standard were inclined to argue.




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Depression and credit contraction had gone much
further in Europe than in this country, and as a natural
consequence there was a considerable decline in merchandise exports relative to imports. Between January
and July, 1891, there was an excess of merchandise imports of $14,000,000, which, together with the course of
foreign dealings in our securities, affords adequate explanation of the movement of gold. If the currency situation
exerted any influence, it was indirect and remote. Had
the currency been susceptible to contraction through
internal causes it does not follow that gold would not have
gone out, since the banks could have endured a considerable
additional loss of cash without such a contraction of credit
and advance in rates as might have influenced appreciably the course of business dealings.
In itself the loss of the gold would not have been a
serious matter if it had involved an equivalent contraction
in the amount of money in the country, since business requirements were upon a smaller scale than at the same time
in the previous year. A part of the loss, however, was
offset by issues of treasury notes in payment for silver
bullion. Moreover, Treasury operations, far from taking
money from circulation as in previous years, added
about $9,000,000 to the amount afloat in the country.
Government expenditure had at length overtaken revenue
and even gone beyond it a little, and this remained the
constant situation of the Treasury throughout the period
to the crisis. As a result of all these various influences,
there was a net contraction of only $29,000,000 in the
money in circulation between January and July, 1891.
6158—10




11

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For the banks the immediate consequence of the partial
failure of the currency to contract was favorable. Between December and July their cash reserve increased
about $32,000,000, and as there was only a moderate increase in loans the proportion of cash to deposit liabilities
was somewhat improved. But the price which was paid
for the temporary ease thus secured was a heavy one—the
weakening of the gold foundation of the monetary system
of the country. Contraction, always painful, would have
been comparatively easy during a period of moderate
decline in business activities. As it was, the deterioration
in the quality of the money in the country through the
loss of gold was intensified by additional amounts of every
other kind of money of which the circulating medium was
composed.
Fears of the possible effects of continued gold exports
were soon removed in consequence of the bumper crops of
1891, which were sold in unexampled quantity and at high
prices in Europe, where there had been a complete failure
of harvests in south Russia and less than an average crop
elsewhere. During the six months to January, 1892, net
gold imports were $34,000,000 and, together with various
other influences affecting different elements of the money
supply, brought about an increase of $89,000,000 in the
amount of money in circulation. It is not surprising in
these circumstances that no trouble was experienced in
New York during the crop-moving months.
The foreign demand for wheat stimulated a renewal of
business and speculative activity, which continued to the
outbreak of the crisis of 1893. In the stock market the




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invigorating influence first made itself felt, and a buoyant
market characterized the later months of the year. The
loans of the New York banks, which had been stationary
during the spring and summer, began to increase, and,
notwithstanding the autumn requirements of the interior
banks, no very great advance in rates for loans occurred.
In the country generally the renewal of activity was a
marked feature of the opening months of 1892. The stimulation of the foreign demand for our staple agricultural
products did not, however, lead to anything like the rapid
advance which occurred either in 1880 or in 1898. A prolonged upward movement was subject to a number of
adverse influences. The disturbances in 1890 had not been
severe enough to clear the ground of all unsound undertakings. Moreover, Europe was still plunged in depression, made all the more profound by the necessity of paying
dearly for its food supply. Payment was made immediately in cash, but in large measure ultimate payment was
made by the return of American securities held abroad.
Finally as in Europe there was no business and speculative
activity, with its accompanying credit expansion, corresponding to what was taking place in this country, there was
a relatively high level of prices here, which stimulated merchandise imports and influenced the export trade adversely.
As a result of these various influences foreign exchange
rates were almost constantly against this country during
1892, and only in October and November were gold
imports in excess of exports. The net loss from gold
exports during the year amounted to $50,000,000. There
was, however, no diminution in the amount of money in




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circulation, but, rather, an increase of $22,000,000. In addition to silver issues and excess Treasury payments there
was also an increase of $8,000,000 in the note issues of the
banks. With the cessation of government purchases the
price of bonds had fallen enough to make it profitable for
banks to take out additional circulation. During the year
there was a notable increase in bank loans, but the greater
requirements for reserves and the increased amount of
money required outside the banks on account of more active business did not exhaust the cash resources and lending
power of the banks, and no pressure was experienced in the
money centers during the crop-moving period. Continued
monetary ease was secured at the price of a still further
deterioration in the quality of the money supply of the
country.
Before the close of 1892 another factor appeared in the
gold-movement situation—the return of American securities, owing to doubt among European investors of our
intention and ability to maintain the gold standard. This
influence, together with an increasingly unfavorable merchandise balance, caused gold to flow out in unexampled
quantities, beginning with an export of $11,000,000 in
December, 1892. During the first five months of 1893 the
net loss was nearly $60,000,000 Even this drain did not
greatly reduce the available stock of money in circulation,
silver issues, Treasury payments, increased circulation, and
domestic gold production offsetting all but $14,000,000 of
the loss. Taking the entire period from January, 1891, to
June, 1893, there was an increase of $68,000,000 in the
estimated amount of money in circulation. It will thus




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be seen that the money available for use had not been
reduced and that, however undesirable from a monetary
point of view, considered simply on the banking side, there
was no reason why the banks should have found themselves at the beginning of the crisis poorly supplied with
cash reserves.
Contrasting the reserves of the banks in December, 1891,
with those of December, 1892, there was an increase of
$8,000,000, while the money in circulation increased about
$37,000,000. Nearly $30,000,000, therefore, either was
absorbed by banks outside the national system or went into
every-day use in consequence of increasing population and
greater business activity. The return for March, 1893,
showed a loss of $4,000,000 in cash reserves, while there
was a falling off in the total amount in circulation of
$11,000,000. Between March and May the banks gained
more than $8,000,000, and the total of money in circulation was stationary. There can be little doubt that the
cash holdings of the banks would not have been as large
as they were in May, 1893, if that contraction in the currency had taken place which was needed to place it upon
a solid foundation. It is possible, however, that the
gradual inflation of the currency may have weakened the
banks indirectly. On account of abundant cash reserves,
the banks may have extended credit more freely during
1891 and 1892 than they would otherwise have consented
to do. Between May, 1891, and September, 1892, the
loans of the national banks increased from $1,969,000,000
to $2,171,000,000. This increase was very general in all
parts of the country. During the following eight months




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to May, 1893, there was a slight contraction of $10,000,000.
The banks of the New England and Middle Atlantic States
had reduced their loans by $35,000,000; in the Southern
States loans were stationary, while in the North Central and Western States there was a further increase of
$25,000,000.

This movement of bank loans clearly reflected the situation in different parts of the country. The West had
been most influenced by the profitable export trade of
1891, and business and speculative activities in that part
of the country continued up to the outbreak of the crisis.
In the East the cotton industry was unusually profitable
in 1892, but in other lines there was only a moderate
improvement. In the case of the railroads, while their
gross earnings increased there was some falling off in net
earnings. For this reason and because of the sales of
securities held in Europe, the stock market during 1892
was in general dull and quotations for standard securities
ruled lower at the end than at the beginning of the year.
There was therefore only a moderate increase in the loans
of the New York banks during the year, although the rates
for call loans were abnormally low. Activity on the stock
exchange was largely in connection with speculation in industrial companies and the financing of various combinations. Finally it may be noted that the increase in loans,
taking the country as a whole, was not greater than at
many other periods of active business in our history and
that the change in the proportion of reserves was not such
as to weaken the banks very materially. In May, 1891, the
proportion of cash reserves to deposit liabilities was 16.6




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per cent, in 1892 it was 18.4 per cent, and in 1893 it was
16.9 per cent. The statistical position of the banks was,
therefore, reasonably satisfactory.
On the other hand it became evident during the crisis
that the banks had been carrying a large amount of loans
which should have been long since written off or at least
written down. These loans had been made in many
instances before the panic in 1890, and in part they had
been made more recently, serving to bolster up weak
enterprises and to make an already unhealthy situation
more unsound. In the Southern States real estate speculation in town lots and mineral lands seems to have been
the most unsound element in the situation. There was
comparatively little speculation in agricultural lands
because the cotton crop of 1891 was not so exceptionally
remunerative as had been the case with the cereal crops
in the Northwest. It is possible that but for the silver
issues the banks might have enforced a more rigorous
policy against the renewal of loans and might not have
increased the total of loans to so considerable an extent
as they actually did. On the other hand the country
banks, which were chiefly responsible for loan expansion,
were well above their reserve requirements, and if there
had been less money in the country it might have happened that something like the same amount of credit
expansion would have occurred upon smaller reserves.
In that case deposits with reserve agents would not have
been so large, and it is, therefore, in the operations of the
city banks, if anywhere, that we must look for the banking effects of the silver issues. Fortunately, the regular




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returns of the banks give a clear answer to this question. The loans of the New York national banks were
$365,000,000 in May, 1892, and in March, 1893, they had
been reduced to $323,000,000, and in May to $307,000,000.
In Boston there was a reduction during the same period
from $156,000,000 to $142,000,000, and in most of the
other reserve cities there was also some contraction, or at
most a very moderate increase. In the eastern money
centers the unsatisfactory monetary situation seems in
some measure to have exerted a restraining influence.
During 1892 the low rates for loans were a clear indication
that the banks would have been glad to lend more than
the demand of borrowers made possible. The situation
was in marked contrast to the months preceding other
crises when every available credit resource at the money
centers has been stretched to the extreme limits of safety
and beyond. For these reasons the opinion may be ventured that the silver issues were not an important factor
in determining either the course of trade or the operations
of the banks during the period which preceded the crisis
of 1893.
THE FIRST STAGE OF THE CRISIS.
We must now follow the course of the New York money
market during the months which immediately preceded
the crisis. The usual return flow of money from the
interior was not much below the normal during the winter
of 1893,but it did not avail to increase the reserves of the
banks on account of the enormous gold exports. During
January, however, loans increased at a slightly more rapid
rate than in 1892, but in February sufficient impression
had been made upon the reserves of the banks to lead to




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some loan contraction and a slightly higher level of rates.
These factors, however, had little to do with the first
serious disturbance of the year which came with the failure
of the Philadelphia and Reading Railroad on February 26.
This railroad had taken the lead in absorbing coal lands
and had also ventured into the New England railroad field.
Both enterprises were far beyond the available capital of
the company and its downfall was directly due to the
weight of an enormous floating debt. The immediate
effects of the Reading failure were comparatively moderate; but it gave rise to doubts of other companies, particularly of the industrials, and the course of the stock
market was depressed and downward throughout March
and April. To this tendency high average call loan rates
and the continued contraction of bank loans, of course,
contributed.
The course of the banking operations of the New York
banks during the first four months of this and the preceding year is shown in the following table:
New York bank statement.
Surplus
reserve.

Loan s.

Net deposits.

$441,000,000
465,000,000
453, 000,000
433.000,000
425,000,000

$455»ooo,ooo
495,000,000
462,000,000
439,000,000
433,000,000

£122,000 000
142,000,000
122,000,000
120,000,000
121,OOO,OOO

#5,900,000
18,600,000
6,500,000
10,600,000
12,800,OOO

477,000,000

138,000,000
162,000,000
154,000,000
150,000,000
147,000,000

18,900,000
33,000,000

1893

Jan. 7
Feb. 4
Mar. 4
Apr. 1
May 6
1892

Jan. 9
Feb. 6
Mar. s
Apr. 2
May 7




444,000,000
460,000,000
488,ooo,000
489,000,000
493,000,000

515,000,000
533,000,000
528,000,000
531,000,000

163

21,200,OOO
18,000,000
14,8oo,000

National

Monetary

Commission

It will be noted that at the beginning of February, 1893,
the banks held a surplus reserve of $18,600,000 contrasted
with $33,000,000 in February, 1892. The statement for
the first week in May, 1893, shows a surplus of $12,800,000,
only $2,000,000 less than that in May, 1892. This comparatively good showing had been secured, notwithstanding
a loss in cash of $21,000,000 in 1893 as compared with
only $15,000,000 in 1892. It had been secured through
the contraction of loans from $465,000,000 to $425,000,000
while in the previous year loans had been increased by
$33,000,000. This contraction in loans had been carried
out slowly and steadily and with comparatively little
difficulty. It involved loss to holders of securities,
especially those of the more speculative variety, but even
in this respect it served a good purpose, since the condition
of many corporations warranted a far greater decline than
had actually taken place. Painful evidence of this fact
was afforded by the disastrous failure of the National
Cordage Company early in May. The course of events of
which that failure was a determining factor was thus
described in The Commercial and Financial Chronicle:
Again our market has passed through a severe stock panic, and again
the prodigious vitality of bankers and brokers has been abundantly demonstrated. On such an enormous and precipitate shrinkage in values it is
very remarkable that so few houses have failed, and those that were compelled to suspend were more or less loaded up with the stocks of those
companies which proved to be the bane of the market.
A stock dividend of ioo per cent in January and a receiver in May—this
is the brief statement of a method of financiering which has lead up to and
precipitated one of the worst stock panics of short duration that we have
ever known in this city. The story is almost a counterpart to that of
Philadelphia and Reading, which paid 5 per cent on its preferred income
bonds just before going into receivers' hands. It may not be possible to
prevent such methods altogether, but the public should get a clear idea
of what terrible disaster is brought to thousands of innocent holders of




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stocks and bonds, and the parties engaged in this sort of financial operation
ought not to be held up as heroes of the day, although they may have personal integrity.
The open-market rates for call loans during the week on stock and bond
collateral have ranged from 4 to 40 per cent, the average being 6 per cent.
To-day rates on call were 6 to 40 per cent. Commercial paper quoted at
6 to 9 per cent. a

Again, if we inquire how far the currency situation had
anything to do with the course of events up to this time,
the answer is clear that its influence was extremely slight.
It was argued at the time that fears for the maintenance
of the gold standard frightened investors and deprived
worthy enterprises of additional capital. But the enterprises which had failed were not worthy, and there were
many more whose situation would have been made worse
rather than better by additional capital, and an even greater
number whose further expansion would have served only
to provide facilities for the production of commodities
already in excess of profitable demand. It was also
argued that business was being deprived of needed circulating capital through wholesale credit contraction by
the banks, but the returns of the national banks, at
least, show that there had been no contraction whatever. For the banks as a whole, between March 6 and
May 4, there had been a slight increase of $3,000,000.
In New York there had been a contraction of $16,000,000,
in Boston $4,000,000, and in Chicago $4,000,000. In
the country at large there was therefor an expansion of at
least $27,000,000 up to the 1st of May. Finally, it may
be observed, that a situation which demands constantly
increasing credits to prevent collapse is certain to arrive
a The Commercial and Financial Chronicle, May 6, 1893, p. 743.




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at that state in any case, and that delay can hardly be
expected to improve matters.
There is also no evidence of any general distrust of the
banks up to this time. The total amount of money held
by the banks, as we have seen, had increased somewhat—
from $314,000,000 to $323,000,000—and in the case of the
New York banks from $94,500,000 to $98,000,000. There
was, however, one change of a most unusual character
disclosed by the returns of the banks for May. The
amount due from reserve agents was reduced from
$202,000,000 to $174,000,000, and in the case of the
New York banks from $137,000,000 to $114,000,000.
Changes in this item involve, usually, a shifting of cash
holdings between the banks, but, as was noted above, the
New York banks increased their cash holdings by $3,500,000.
Explanation of this apparent anomaly is simple. The
balance of payments for commodities was in favor of New
York, and the rest of the country, particularly the West
and South, was paying for the enormous imports of commodities which had taken place during preceding months.
In other words, the gold exports were in the last analysis
due to the obligations of the people generally and not those
of dealers in New York City. Another indication that the
balance of payments between New York and the rest of
the country was in favor of New York may be mentioned:
Drafts on New York received in payment for commodities
would increase individual deposits and diminish bankers'
deposits. Some such influence is suggested by the fact
that, though loans were reduced by $16,000,000 and
clearing-house exchanges by $11,000,000, there was a posi-




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tive increase in individual deposits. The result of all
these changes was to place the New York banks in a vastly
stronger position in May than in March. The proportion
of reserve to net deposits had increased from 26.34 P e r
cent to 28.52 per cent, and the proportion of bankers'
deposits to total deposits had diminished.
THE SECOND STAGE OF THE CRISIS.
Following the stock market collapse of May 4 the market was irregular and dull throughout the remainder of
the month. The lending rates of the banks were moderate,
but a further decline in the volume of loans continued, and
on May 27 they stood at $415,000,000, some $10,000,000
less than at the beginning of the month. In the meantime, the banks had been receiving large amounts of money
from the interior, and, notwithstanding continued gold
exports, the reserves rose from $121,000,000 to $134,000,000. The position of the banks, therefore, at the end of
May had distinctly improved; they were, in fact, stronger
than at the same time in the previous year, as is evident
from the following table:
New York Bank

Statement.
M a y 27, 1 8 9 3 .

Loans
Deposits

-

_

$415,801,000
436,724,000

Reserve
Surplus reserve

134,621,000

M a y 28, 1892.

$488,000,000
536,ooo,000

25.439.ooo
30.82

Per cent of reserve

158,000,000
24,600,000
29.58

During the following week there was a loss of $5,700,000
in reserves, principally on account of gold exports, which




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excited no particular alarm, but the loss for the week
ending June 10 was not only more considerable—nearly
$10,000,000—but it was also the beginning of an entirely
new stage in the crisis. Up to this time receipts of cash
from the interior had been fairly large. For the week
ending June 2 the reported movements of money between
the New York banks and the interior showed a net gain of
$2,500,000; but the following week shipments were over
$8,000,000 and were nearly as much for the week ending June 16. In the three weeks ending with June 17 the
reserve of the New York banks was reduced from $134,000,000 to $110,000,000 and the surplus reserve fell from
$24,600,000 to $8,700,000.
The cause of this abrupt change was certainly not in
any definite way connected with the silver situation. Information that the administration would move for the
repeal of the Sherman silver purchase act had already
been made public. The withdrawal of money from New
York was directly due to the failure and suspension of
large numbers of banks, both state and national, and
of private bankers in the West and South. Nineteen
national banks were placed in the hands of receivers during
May and June, and the number of state and private banks
which fell was even greater. The causes of these failures
were in most instances, as was pointed out by the Comptroller of the Currency, due to " violations of law and
imprudent methods of banking, and the closing of them
was only hastened by the general condition of financial
affairs. Some failed because of criminal acts on the part
of the officials in charge and others because of the lack of




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proper comprehension of the purposes of a bank." a Quite
apart from mismanagement it was inevitable that some
banks should have gone to the wall in consequence of the
many mercantile failures, 3,401 in number, with liabilities
of $169,000,000, which occurred during the period from
January to July, 1893. These failures exceeded both in
number and in the amount of liabilities those which had
occurred in any other period of equal length in our history.
Bank suspensions were almost as numerous as bank failures and seemed to have been due to a greater variety of
causes. In some instances banks were forced to suspend
temporarily because of the distrust excited by the failure
of banks in their neighborhood. In other instances it was
on account of the distance which separated banks from
their reserve agents. 6
In the eastern money centers bank failures and suspensions were attributed almost entirely to the silver influence. But it is to be noted that they occurred principally
in the West and Southwest, where there is no evidence
that people were distrustful of silver money. Had the
monetary influence been potent, we should expect to find
numerous failures in the eastern States and also some
discrimination on the part of depositors between the different kinds of money in circulation. Distrust of the solvency of the banks rather than dissatisfaction with the
circulating medium was clearly the direct cause which
brought about runs upon banks and the numerous failures
and suspensions.
a

Report of the Comptroller of the Currency for 1893, p. 10.
& For a list of suspended banks, with dates of suspension and resumption,
see Comptroller's Report for 1893, p. 78.




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So far as the national banks were concerned it mattered
little that the relative number of disasters among them
was considerably less than among state institutions. The
spread of distrust and the contagion of panic are essentially products of unreasoning fear. Moreover, the national banks of the cities held large balances of state as
well as of national banks, and to call home some portion
of these balances was in the circumstances the natural and
proper course for the country banks.
One element of weakness in the situation had disappeared. With the shipment of $1,000,000 on June 6 gold
exports ceased, and from that time to the end of the crisis
foreign exchange rates never fell to a point which suggested
the likelihood of the renewal of the movement. Indeed
$500,000 was engaged from London for export to the
United States on June 21. But the peculiar seriousness
of the situation was at once recognized by the New York
banks. Never since the establishment of the national
banking system had they been confronted with a like situation—widespread distrust of the solvency of their banks
among the people in entire sections of the country. The
ability of the New York banks to maintain payments was
not as yet in question. But though no bank in the city
was in difficulty and there was still a surplus reserve on
June 17 of $8,700,000, the machinery for the issue of
clearing-house loan certificates was set up on the 15th of
June.
The New York banks had never resorted to the issue of
clearing-house loan certificates at so early a stage in any
previous crisis. The following statement, taken from the




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Commercial and Financial Chronicle, clearly sets forth the
considerations which led to this wise action:
Much interest has been taken in the decision of the New York clearinghouse banks to issue clearing-house certificates if the need for so doing arises.
The statement issued by the banks on June 10 showed a heavy reduction
in the reserve, owing to withdrawals for the West, and this week, as already
said, the shipments to the interior have been remarkably large, the disturbed state of affairs in certain sections leading financial institutions there
to increase their cash resources. The agreement of the New York banks
to issue clearing-house certificates is a precautionary measure, which will
tend to prevent contraction of loans if this drain goes on, at the same time
showing the confidence the banks have in one another. More than this, it
will be useful in inducing the clearing-house associations of other cities to
take some similar course of united action. None of the certificates have
thus far been issued. a

Suspension of cash payments w^as not at that time associated in the mind of anyone with the issue of clearinghouse loan certificates, and there is no evidence whatever,
beyond the vague recollections of bankers at the present
time, that suspension was immediately resorted to by the
banks. Nowhere in contemporary journals has there been
found a single reference to refusal or delay on the part of
banks in meeting the demands of depositors for cash. If
such occurred, it must have been exceptional and a result
of the timidity of individual bankers. The issue of clearing-house loan certificates does not seem to have changed
in the slightest degree the relations between banks and
their depositors. This point is of the very utmost importance, because in 1907, as we shall see later, the tradition
seems to have become established among New York banks
that the issue of clearing-house loan certificates and the
suspension of cash payments are virtually one and the
same thing.
a Commercial and Financial Chronicle, June 17, 1893, p. 1000.
6158—10




12

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National

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Commission

After the authorization of clearing-house loan certificates the reserves of the New York banks continued to
fall away, the loss between June 17 and July 8 amounting
to nearly $16,000,000, making a total loss since the beginning of the movement of $40,000,000. Loans also were
further reduced during the week ending June 24 by nearly
$5,000,000, but during the two following weeks there was
an increase of nearly $13,000,000. Money had become
extremely stringent owing to the normal heavy requirements at the close of the half year, and from June 29 a
number of banks took out a large amount of certificates
and offered to lend freely. The bank statement for July 8
found the banks for the first time during the crisis below
reserve requirements with a deficiency of $5,082,000.
During the following week loans were reduced $5,000,000
and there was no appreciable change in reserve. There
was a loss of only $323,000 and the reserve deficiency was
reduced to $4,269,000. For the first time since the
beginning of June reported movements of currency were
in favor of the New York banks. The situation at that
time was such as to give rise to hopes that the worst of
the crisis was over. The prospects for the repeal of the
silver-purchase law were good. Reports of runs upon
banks in different parts of the country were less frequent
and during the second week of July the number of failures
was comparatively small.
The middle of July may properly be regarded as the
end of the second stage of this crisis. In its first stage the
disturbance was largely confined to New York and was
marked by the Reading and Cordage failures, a general




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decline in the stock market, the steady contraction of loans,
and improvement in the position of the New York banks.
During the second stage there was no serious disturbance
in New York, but the reserves of the banks were reduced
by $40,000,000 on account of the withdrawal of money by
banking depositors in the West and South. Serious strain
had been met boldly and successfully, and had no further
banking failures occurred it is probable that, with the
general trade depression which was setting in, the reserves
of the banks would soon have reached large proportions.
On July 12 the national banks made their usual returns
to the Comptroller of the Currency, thus providing data
for the analysis of the effects of the crisis upon the banks
during this second stage of its course. The following
table shows the condition of all the banks and the various
groups of banks on May 4 and July 12, 1893:
Loans.
All banks:
a 2,162
May 4
2, 020
July 12
Country banks:
May 4
, 196
July 12
, 108
Reserve
city
banks:
May 4
526
July 12
497
St. Louis:
May 4
32
July 12
26
Chicago:
May 4
._.
96
July 12
New York:
May 4
307
July 12
308

Net deposits.

1, 9 1 0 . o

1, 674. o
970. o
864-0

Cash reserve.

Ratio to
liabilities.

504.0
456.0

26. 4
27. 2

II. 2
13-3

120. o

24.4

no. o

26.8

16.87
16.93

55-5
48.5

29. 2

17. o

323-0
289. o

17.2

109. o
114. 8

464.0

78

404. o

Total reRatio to
serve with ! liabilities.
agents. !

27.7
19.9
99.6
81.3

29.4
30. 6

345-0
304.0

9».4
77.o

28.5
2.5.3

o Numbers, except ratios, represent million-dollar units.




173

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Commission

The contraction in loans amounting to $142,000,000,
nearly 7 per cent of the total, was more considerable than
in 1873 o r m I 9°7- With the exception of the New York
banks which increased loans $1,300,000 the banks everywhere resorted to contraction. By this means, and
through the reduction of deposits with agents and the loss
of cash, net deposits were reduced by $236,000,000, or
about 12 per cent. All classes of banks were able to reduce
deposit liabilities. Notwithstanding the loss of $34,000,000 in cash the banks were able to increase slightly the
ratio of cash to net deposits from 17 per cent to 17.2 per
cent. The country banks, as in 1873, positively increased
their cash holdings. The banks of the reserve cities and
those of Chicago and St. Louis experienced some loss, but
still increased slightly the proportion of cash to net
deposits. All banks, therefore, except those of New York
are found with a higher reserve ratio at the end than at
the beginning of the two months of financial strain.
About two-thirds of the cash loss fell upon the New York
banks, and the ratio of their reserve to net deposits was
reduced from 28.5 per cent to 25.3 per cent. While the
causes of the disturbance were, in many ways, unlike those
which brought about the crisis of 1873, banking movements
had taken almost exactly the same course. The banks in
all parts of the country were relying upon the New York
banks to supply them with the bulk of the money withdrawn by depositors, and by loan contraction were positively strengthening themselves. Reliance upon the New
York banks seems to have been even greater than is disclosed by the figures which we have analyzed. Between




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May 4 and July 12 the bills payable and the notes rediscounted of the national banks had increased from $40,000,000 to $61,000,000, and it is reasonably certain that
by far the greater part of this increase represented advances made by New York banks to banks in the West and
South. Advances of this kind explain the comparatively
small reduction in the bankers' deposits in New York
City which, between May and July, notwithstanding enormous shipments of cash, were only reduced by $6,000,000.a
It will accordingly be recognized that up to this time
the New York banks had fully lived up to the most exacting requirements which the responsibilities of their position
as central reserve agents placed upon them, and that they
had made a vastly better showing than the banks in the
other central reserve cities, Chicago and St. Louis.
THE THIRD STAGE OF THE CRISIS.
During the third week of July a second wave of distrust
of the banks spread over the West and South. More than
half of the Denver banks suspended and there were scattered failures at many points. The withdrawal of funds
from New York was at once resumed and the reported
net loss for the week ending July 22 was $2,800,000.
The bank statement for the week, reflecting earlier conditions, showed a gain in reserve of $2,100,000 and through
<>> Reduction in net deposits of the New York banks was chiefly in individual deposits, which were $286,000,000 on May 4 and $246,000,000 on
July 12. This reduction is to be accounted for chiefly by the smaller
clearing-house exchanges, which were $74,000,000 in May and $65,000,000
in July, but, as clearing-house loan certificates were included in this item
for the returns in 1893, the real reduction in clearing-house exchanges was
in the neighborhood of $30,000,000.




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the cancellation of deposit liabilities, resulting from a contraction of $4,300,000 in loans, the reserve deficit was
reduced to $1,256,000. Early in the following week came
bank failures in Chicago, Indianapolis, Milwaukee, Louisville, and smaller places, and the net shipments of the
New York banks were $7,800,000. A customary feature of
our crises was also announced; the Erie Railroad went
into the hands of receivers. Beset with fears of other
receiverships and with high call-loan rates the stock
exchange suffered the worst decline of the year. The
following account of the course of events during the week
is taken from the Commercial and Financial Chronicle:
Our markets have been more disturbed and excited this week than at
any time this year. The situation looked unpromising when the week
opened, and became daily more unsettled until Thursday, when there
was a decided improvement; but yesterday the situation was again somewhat less favorable. Monday and Tuesday an unusual number of failures
among our banks and private firms were reported in various parts of the
country, but especially in the West, some of them being concerns of long
standing and held in high repute. On those days, too, rumors became
hourly more distinct respecting the difficulties Erie's floating debt was
causing the management and the probability of its becoming needful to
put the road into the hands of receivers. Tuesday afternoon the announcement was made that receivers for the company had been appointed. On
Wednesday the failures referred to, the Erie receivership, and the s t a t e
of the money market caused an unsettled and feverish opening, which
conditions were used, and used most effectually, by those seeking to break
prices, values of all the leading stocks gradually melting away. This
decline was favored by the fact that the outside public having money to
invest either looked upon the Erie receivership as a more disturbing affair
than the step warranted, or else were discouraged by the frequent flurries
and declines in prices which have occurred of late, and so for the time being
kept off the market. The next day, Thursday, the outlook, as already
stated, was much brighter, and so it was yesterday, though there was some
reaction from the previous day, a further large break in General Electric
stock being a disturbing feature.
Money on call representing bankers' balances was not stringent until
Wednesday. The loans early in the week were from 6 to 2 per cent, the
latter figure being recorded on Monday after the inquiry for the day had




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been satisfied and there seemed to be an abundance offered. The demand
^for currency for shipment to the West, stimulated by the failure of the
" Mitchell" bank at Milwaukee and of banks at Louisville and Indianapolis,
was urgent on Tuesday, and on the following day a calling in of loans by
some of the banks and* trust companies in this city and in Brooklyn created
a disturbance in the money market, while the fall in stock values induced
discrimination against collateral, and the rate was advanced to threesixteenths of i per cent and interest, equal to about 74 per cent per annum,
and large amounts were loaned at one-eighth of 1 per cent and interest,
equal to 51 per cent per annum. On Thursday there was an early demand
for money which caused 51 per cent to be again recorded, but in the afternoon the rate fell to 6 per cent. Yesterday the course was much the same,
the range being 51 and 2 per cent, with the close at the lowest figure.
The average for the week was probably about 10 per cent. Renewals
were at from 6 to 8, and while banks and trust companies quoted 6, very
little was loaned over the counter at this figure, and the institutions that
had money to loan offered it in the stock exchange. Time contracts continue in urgent demand and good rates are bid, but the supply is small
and chiefly confined to private sources. Neither banks nor trust companies
are making loans on time, but it is probable that a few of the insurance
companies and other corporations have yielded to the importunities of
brokers. The basis of the business is 6 per cent; in addition 1 per cent
commission is paid for thirty days, i}4 per cent for sixty days, and 2 per
cent for four months. Scarcely anything is done in commercial paper,
and the few transactions made are at such rates as can be agreed upon.
Many of the jobbing commission houses are advising the mills with which
they do business to shut down, as it is impossible at present to make
advances, and many of the mills at the East are consequently closing. a

The bank statement showed a loss in reserve of
$5,100,000, and a somewhat greater reduction in deposits,
as loans were reduced $2,700,000. There was an increase
in the reserve deficit of from $1,300,000 to $4,300,000,
and the actual condition of the banks was certainly even
more unfavorable than this showing of average conditions.
We have now reached the crucial stage in this long
period of financial strain, by far the most prolonged which
the country has experienced in modern times. Suddenly
and unexpectedly the banks throughout the country, bea

Commercial and Financial Chronicle, July 29, 1893, p. 162.




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Commission

ginning with those in New York, partially suspended cash
payments. The immediate consequences of this unfortunate step were serious; and it also had the more permanent result of giving rise to an expectation of suspension
upon future occasions of difficulty, which was the most
serious cause of weakness disclosed during the financial
disturbance of 1907. The general situation, therefore, at
the time of suspension must be considered with great care.
In some respects affairs were in a more critical state
than in June; in other respects the situation was distinctly
more satisfactory. The number of bank failures was not
greater than those which had occurred during the two
worst weeks in June. There were, however, a greater
number of prominent city institutions involved and the
number of suspensions was considerably greater; 33 national banks suspended between July 14 and August 1.
Thereafter, the number of failures and suspensions was
small and included no important banks, and the opinion
was current even then that the difficulty from this source
was largely a thing of the past. Moreover, there was no
evidence of any sudden increase of panic at the beginning of August, and the demand for currency from New
York was apparently no greater than that which had come
during the second and third weeks of June. So far as
the New York banks in relation to interior institutions
were concerned, the situation was similar and there was
no reason to believe that the continued demand for
shipments of currency to the interior would not be discontinued in the course of time in August, just as had
been the case in July.




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The disturbance on the stock exchange following the
Erie failure may seem to have involved an element of
weakness not present in June, but in fact the decline on
the stock exchange strengthened the situation from a
purely banking point of view. Foreign purchases of our
securities were made in large quantity during the week
ending with July 29, and these purchases continued
throughout the month of August. Attractive bargains in
shares were not the only cause of these purchases. Foreign observers had become convinced that the silverpurchase law would be repealed at the impending session
of Congress, and were, therefore, confident of the future
value of our securities^
There was, as we have seen, not a little exaggeration
of the influence of silver money in bringing on the crisis.
After the outbreak of the crisis it is, however, clear that
the silver issues became a vastly more seriously disturbing factor. The difficulty of the Treasury in maintaining the gold standard was vastly increased, and the
suspension of gold payments became imminent. Although the prospective repeal of the law could not serve
to bring about renewed business activity, it did enable
us to secure temporary assistance from Europe, which
«After another severe decline in prices at the stock exchange this week
our market has been supported by the purchases of foreign buyers. This
is a 'most hopeful sign, and it indicates that in London they consider the
repeal of our silver law a foregone conclusion. Nor is it the first time
that the foreigners have been able to take a clearer view of our affairs than
we could get at home; for some weeks past their financial newspapers have
been speaking of the repeal of our silver law as a necessity that would force
itself upon us sooner or later, and their bankers are apparently willing to
back up the opinion by taking some of our securities at the low prices
now ruling.—The Commercial and Financial Chronicle, July 29, 1893, p. 171.




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was of the utmost banking importance during the short
acute stage of the crisis.
Between the middle of June and the end of July gold
had been imported at New York to the amount of more
than $5,ooo,ooo.a It had come in small consignments
and from a great variety of sources. During the week
ending July 29 gold began to move toward this country
in quantity, between $2,000,000 and $3,000,000 being
engaged for shipment, and during the following week
more than $10,000,000 was secured. The fall in exchange rates which made this possible was due to foreign
purchases of our securities and also to a decline in merchandise imports and an increase in exports. Further
importations were expected, and in fact occurred. It
will therefore be seen that the New York banks could
look forward to a supply of gold to take the place, at
least in part, of shipments to the interior.
Two further favorable elements in the situation may
be noted, though they were of minor importance. The
savings banks decided to enforce the legal notice for
withdrawal of deposits, taking this wise action before any
considerable withdrawals had been made. Finally, the
Chicago banks for the first time in their history authorized on July 26 the issue of clearing-house loan certificates.
SUSPENSION OF PAYMENTS.

While the general situation was thus on the whole such
as to give ground for hope of improvement, there was
a More gold would have arrived during the month if the banks had
adopted a liberal loan policy, enabling exchange dealers to purchase commercial bills more freely and to finance the gold while in transit. . (See
p. 191.)




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one further serious element of weakness in the situation.
When the withdrawals from New York began in June,
the banks were well above reserve requirements, having
a surplus of over $24,000,000. At the beginning of the
second period of strain they were slightly below reserve
requirements, and the bank statement of August 5 found
them with a reserve deficit of $14,017,000. During the
week the banks had lost $12,000,000 in reserve and had
slightly increased loans by $2,200,000. This statement
of average conditions probably represents something like
the actual situation of the banks on Tuesday or Wednesday, when the banks resorted to suspension.
Two reasons may be advanced for this action. It may
have been thought that a further depletion in the reserve
might cause general loss of confidence in the New York
banks, but this is a superficial reason at best. There is
no evidence that depositors had become distrustful of
the banks, and had this been feared the banks might
have adopted the expedient resorted to in 1873—the discontinuance of the publication of the bank statement
altogether. The real reason for suspension was that
which was pointed out in the report of the clearing-house
committee of 1873. The drain had not fallen equally
upon the banks. We have no means of knowing the
exact position of the few large banks which held the bulk
of bankers' deposits at this time, but there can be no
doubt that they must have suffered a far more serious
loss of reserve than that of the banks taken as a whole.a
« The last statement of condition of the individual banks appeared on
June 10. The subject is considered at greater length in connection with
the crisis of 1907, for which the available data are more complete. (See
p. 266.)




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Suspension was at no time complete, and in explaining
its extent bankers gave indirect but convincing evidence
that the deficiency in the reserves of particular banks
rather than a small total reserve was the cause of the
restriction of cash payments. It was stated that the
banks were continuing to ship currency to interior institutions drawing upon their cash balances, and that refusal
applied only to the payment upon drafts remitted to them
in the course of current business dealings. These drafts,
it was pointed out, did not enable the banks to secure money
from the banks on which they were drawn, since a bank
when it had a favorable clearing-house balance could only
get loan certificates. This was indeed true. During July
78 per cent of the balances between the banks were settled
with the certificates, and in August 95 per cent. Doubtless during the weeks of most acute strain, in the latter part
of July, virtually all balances were settled in this way.
Here we find the connection between the issue of clearinghouse loan certificates and suspension. A bank which
received many drafts could not pay out cash indefinitely
if it was unable to secure any money from the banks on
which the drafts were drawn. While only a few banks
were taking out certificates and the bulk of payments was
made in money, no difficulty was experienced; but as
soon as all the banks made use of that medium, the suspension of the banks which had large numbers of correrespondents soon became inevitable. The further contention of bankers that they had not suspended since
they had only refused to honor drafts was untenable.
The clearing-house loan certificate was a device which the




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banks themselves had adopted and they had failed to
provide any means for preventing its use leading to
partial suspension. The contention of some bankers that
they had suspended because they had no money to pay
out was doubtless true of a few banks, but for that very
reason other banks must have been all the stronger,
probably well above their required reserve.
That the arrangement for equalizing the reserves
adopted in 1873 would in this instance have availed to
prevent suspension is highly probable, indeed, a practical
certainty. Events proved that the banks had maintained payments up to the very last of the succession of
disasters with the results of which they had been contending. During August the number of bank failures was not
large and none of them was of great importance. We
can not, of course, know how soon money would have
begun to flow back to New York, but certainly the suspension of payments could hardly have hastened the
movement. Prom the beginning of September the reported movements of currency showed a gain for the New
York banks and for the week ending September 16 the
gain was no less than $8,000,000. One month more of
drain, therefore, was the most that the banks would have
been obliged to endure, and for the needs of that month
the banks would not, as in 1873, have been confined to
the single resource of the $79,000,000 of cash on hand.
Gold in quantity had been engaged prior to suspension
and continued to come in thereafter, the total gold
imports between the first of August and the middle of
September reaching the unexampled amount of more than




183

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Commission

$40,000,000. How far this movement was due to suspension and the currency premium will be discussed in
subsequent pages. 0 All authorities agree that much of
the gold would have been secured in any case, and there
is ground for the opinion that the amount sent was independent of suspension altogether. Still another influence
upon the money supply should be noted. The banks had
begun to take the necessary steps to secure additional
bank-note circulation. The addition to the money supply
thus secured was, of course, widely diffused among the
banks of the country, but to some extent it served to
diminish the withdrawals of funds from the money centers. The gain from this source was small, but still it was
a gain—$5,000,000 in July and $15,000,000 in August—
and it might have been considerably greater if the large
New York banks holding bankers' deposits had chosen to
take out circulation to anything like the amount their capital permitted. Finally, excess Treasury payments added
$9,000,000 to the money in circulation during the month
of August. From all these various sources, together with
the continued silver purchases, the money in circulation,
that is, in use and in the banks, increased $17,000,000 in
July and nearly $70,000,000 in August.
Although the banks probably held less money at the
end than at the beginning of the period, it is evident that
they were not obliged to meet the situation with such
rigid cash reserves as to have made the continuance of
payments an obviously hopeless endeavor.




a

See p. 191.

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Crises

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The probability that the equalization of reserves
would have served to prevent suspension in 1893 brings
up the question whether the banks might have been reasonably expected to resort to the arrangement in this
emergency. At first sight it seems unreasonable to
expect banks which reap no advantage from bankers'
deposits to employ their reserves to meet needs with
which they are not directly concerned. On the other
hand, all the banks agree upon and benefit by the use of
the clearing-house loan certificate. It is a device which
enables the banks to meet the demand for loans, and as
the loans of the New York banks are principally to local
borrowers it is the local situation that is thus relieved.
This is the proper policy for banks in any community,
but it should not be carried out at the cost of the rest
of the country or be allowed to overshadow all other
responsibilities. The continuance of loans enables the
banks to escape almost inevitable loss from failures of
customers through the sudden contraction of credit, and
also enables them to earn profits for their shareholders.
Individually all the New York banks reap an advantage
not only from the clearing-house loan certificate but also
from the position of New York as the money center of
the country; and anything which undermines its reputation for strength is harmful to all. Finally, profits are not
sacrificed when reserves are equalized, as the reserve is
not a source of profit; it is a foundation of credit and a
resource for emergencies. The use of a reserve does not
in any way reduce the gains of a bank from its loans or
other profitable operations. The objection to equalization




185

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Commission

is simply the natural objection to assisting those who should
have assisted themselves; it rests upon a sound basis of
human experience, but it does not follow that the refusal
to cooperate must be absolute. It may be conditional
upon amendment. This was the attitude of the more
conservative banks in 1873, but, as often happens,
their hopes of amendment were not realized. They proposed an indirect remedy, the prohibition of the payment
of interest on bankers' deposits. A more direct remedy
would be secured through the insistence, by clearing-house
authorities and the public, that banks holding these
highly explosive bankers' deposits should hold larger
reserves in normal times than are held by the banks carrying on a purely local business.
The value of large reserves was clearly shown in the
second stage of this crisis. At the beginning of June the
large banks were unusually strong in reserve, and they
were able to withstand the strain which followed the
first series of bank failures. Had their reserves been
somewhat larger, so as to have enabled them to go on for
a very few weeks more, it is highly probable that even
without equalization suspension would not have occurred.
THE CURRENCY PREMIUM.

The banks were not able for any length of time to confine suspension within the narrow limits of a refusal to
honor drafts with cash payments. A beginning once
made, they found themselves confronted with a situation
which compelled more complete suspension. Currency
went to a premium, and thereupon money was withheld
by many depositors whose business brought to them a




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constant stream of money. Moreover, depositors of the
"baser" sort began to withdraw, upon various pretexts,
larger amounts of money than were needed for their normal
requirements, in order to secure the profit from their sale.
The following table presents the highest and lowest quotations at which purchases were made by brokers, and
also similar quotations of sales by them during each day
throughout the period of the continuance of the currency
premium:
The currency

premium.
Buying
rates.

Aug.

Selling
rates.

K to 1
A to 1

34-

1

578_
9-

A to 2

3

to 3 A

2

to 3

4

3
to 3

A

4

4

t o 1 lA

1415i6_
17i8_
*9-

1 A t o 2 XA

2I_

1 JA t o 2 5
iHtoz

to i M

3
1 A to 2 A
2
to 3
1 A to 3
2

X

22_
2324-

to 2 A

3
°3
4
2K
2A
b
2
tO 2 j ^
iKtO 2

251

26_

to i K

28-

K

29-

A
A

30-

(d)

31S e p t . 1-

(d)

H

5-S t o
Kto

a G o l d y3 t o 2.
6 Gold 1 K .

6158—IO




13

cGold i K d P r e m i u m reported practically disappeared.

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National

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Commission

This table may be taken as indicating with a fair degree
of exactness the general course of the currency premium;
but it is probable that purchases and sales were made on
some days above or below the rates given. There were
of course no official quotations, and somewhat different
rates were found on some days in the two journals (New
York Evening Post and the New York Tribune) from
which the table was made up. a Rates were regularly
higher for small bills than for other kinds of money and
the purchase price of gold was subject to especially wide
fluctuations, because it was received irregularly and in
large quantities, on the particular days of the arrival of
European steamers. The premium continued for thirty
days, contrasting with twenty-eight days in 1873. The
range of quotations was similar in the two years but
rates continued upon a high level for a longer period of
time in 1893, rates of 1 per cent or more being quoted for
sixteen days in 1873 and for twenty-three days in 1893,
and above 2 per cent on only eight days in the first
instance and twenty-one days in the second.
During the first ten days of the currency premium
interior banks were reported to have been large purchasers. Then the premium declined, owing to a smaller
demand which was confined largely to those requiring
money for pay-roll purposes. On August 19 the premium
again rose to its maximum point of 4 per cent in consequence of the renewal of purchases by banks.
a

The Commercial and Financial Chronicle mentions 5 per cent as having
been paid for currency, but does not give the exact date. (See issue of
Aug. 12, 1893, p. 232,)




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The reported movements of currency between the New
York banks and the interior, and the condition of the
banks as shown by the weekly statements, do not help
greatly in interpreting the fluctuations in the premium,
but they do serve to explain its sudden disappearance
at the beginning of September. During each of the first
two weeks of August there were net shipments of money
to the interior of a little more than $5,000,000, and for
the third week $6,000,000; for the last week of the month,
$2,000,000; and for the week ending September 2, less
than $i,ooo,ooo.a In the following week there was a
slight gain for the New York banks, which was the beginning of a long-continued movement of funds to the
city. The reserves of the banks were reduced by
$2,700,000 for the week ending August 12, but there was
an increase in loans largely made for facilitating gold
imports. Deposits were reduced but slightly and the
reserve deficit was then $16,545,000, and the ratio of
reserve to deposit liabilities was 20.55 per cent. During
the following week the reserve was increased $8,400,000.
There was a slight reduction in loans and the reserve
deficit was reduced to $12,000,000. During the two following weeks to September 2 the reserve increased
$12,000,000, loans were reduced by $6,000,000, and the
reserve deficit was brought down to $1,500,000. The
next week the statement showed a surplus reserve of
nearly $3,000,000, and as it was based on rising averages
a

The reported movements of currency are not official, and do not provide
any evidence of the extent to which the banks supplied correspondents
with funds, because a part of the amount reported was currency purchased
at a premium for outside banks.




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we may be certain that at the beginning of this week
the banks had acquired at least the 25 per cent reserve.
They then removed all restrictions upon payments, thus
bringing about the disappearance of the currency premium. Whatever excuses may be made for suspension it
was wholly without good cause that the banks persisted in
this policy while their reserves were increasing in the rapid
fashion which marked the last two weeks of August.
In 1873 the currency premium was of short duration,
because the New York banks continued to meet all demands of banking correspondents and thus maintained
confidence until the natural return flow of money served
to build up depleted reserves. In 1893 the response to
demands for currency by interior institutions was less
complete,® and the restoration of reserves was secured
in another way—by enormous gold imports. During the
four weeks ending September 2 over $40,000,000 of gold
was imported to New York from Europe. These imports
a

The bank statement for the week ending August 19 showed an increase
of $4,000,000 in the reserve held. If allowance is made for the effect of
the average method, it seems probable that the banks did not allow their
reserves to decline at all after cash payments were restricted. The following table shows the changes in the condition of the banks just before and
during suspension:
Loans.

July 29.
Aug. s

Net
deposits.

$406,500,000

$382,200,000

408,700,000

3 7 2 , 9 0 0 , 000

12

411,800,000

372,200,OOO

19
26

406,500,000

Sept. 2 .

400.200,000

9-

397,000,000

370,300,000
3 7 0 , 5 0 0 , 000
374,000,000
373,800,000




403,600,000

* Surplus.
190

Reserve.

#91,200,000
79,200,000
76,500,000
80,500,000
85,900,000
91,900,000
96,400,000

Reserve
deficit.
$4,300,000
14.000,000
16.500,000
12,OOO,OOO
6,700,000
1,600,000
o 3,000,000

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greatly exceeded the amount of money which was sent
from New York to the rest of the country and explain
the rapid increase in reserves of the banks during the
period of the currency premium.
THE CAUSES OF GOU) IMPORTS.
The enormous influx of gold established a strong prima
facie case for the influence of the currency premium upon
the movement. Moreover, practically no gold was engaged
for import after the disappearance of the currency premium, the gold which was received during the latter part
of the month being largely for special purposes, such as the
$1,200,000 which arrived on September 20 in transit to
the West Indies. Finally, during the entire continuance
of suspension exchange rates were far above the normal
gold import point and at times even above the export
point. On the other hand at least $14,000,000 was engaged before there was any currency premium and
throughout the month real bills provided a large part of
the means for securing the gold that was imported.
During July and August merchandise exports exceeded
imports by more than $21,000,000 contrasted with an
excess of imports of $13,000,000 during the same period
in 1892. European purchases of securities at the end of
July and during much of August also provided a large
amount of sight exchange. In continuing exchange dealings and securing gold imports through these bills the
extension of loans by the banks was essential. The process was thus described:
The clearing-house loan committee have issued $9,300,000 loan certificates this week, and the amount now outstanding is $34,550,000. A large
proportion of these new certificates have been issued -to aid the foreign




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bankers in importing gold. The bankers deposit collateral with their
banks and borrow the money on the security for a fixed period at an agreedupon rate. The bank obtains loan certificates against this collateral and
when the gold arrives the loan will be repaid, the collateral released, and
the certificates canceled. a

Some gold was secured before suspension through
sterling loans in London, and it is only to the extent that
the amount of such loans was increased by suspension
over what would otherwise have been made that the
currency premium was a factor in the movement of gold.
The conditions of this problem can be stated, although
no definite answer can be given. Before suspension
higher interest rates in New York than in London made
the negotiation of sterling loans profitable, though the
operation was subject to possible loss, since exchange rates
were low and might advance before the maturity of the
bills. The difference in lending rates between New York
and London was favorable to such dealings throughout
July and August, but the successive advances in the Bank
of England rate between August 3 and August 24 from
2)4. to 5 per cent, while the money stringency was diminishing in New York, tended to reduce this advantage.
With the appearance of the currency premium the immediate profits of importers on gold previously engaged were
large, and this unexpected profit stimulated arrangements
for further shipments through sterling loans. But exchange rates also advanced, and were within a week at
the gold export point, thus offsetting a part of the profit
from the operation. A premium of at least 1 per cent was
then necessary to give the importers the ordinary profit
from the transaction. During the greater part of the
a The Commercial and Financial Chronicle, August 5, 1893, p. 196.




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month the published quotations were above this point,
but after gold came in quantity it seems to have been
difficult to secure sales at these terms. Moreover, the
importer had to take account of a possible fall or disappearance of the premium. He might sell the gold for
delivery on arrival, but this was an arrangement which
was not at all times possible. Finally, suspension seems
to have caused some diminution in the volume of real
bills, since it interrupted somewhat the movements of
grain and cotton. The problem of the influence of the
currency premium is obviously, therefore, one of extreme
complexity, regarding which it is probable that opinions of
exchange experts at the time would have been widely at
variance. Upon the whole it would seem safe to conclude
that the currency premium was only an influence of
minor importance in bringing about the gold movement.
The following extracts from the weekly review of the
foreign exchange market, taken from the Commercial and
Financial Chronicle, while they may not enable the reader
to follow the course of exchange, will serve to illustrate
the great complexity of the influences at work:
Our foreign exchange market was unsettled early in the week, lower on
Wednesday, and firmer at the close. The offerings were largely from the
arbitrage houses, with a fair supply of commercial bills, but there was a
steady demand to remit for prospective imports of gold, which caused a
reaction on Thursday, and long sterling was then affected by the advance
in the discount rate in London. a
Our foreign exchange market has been almost entirely dominated this
week by the premium on gold in transit and by the advance in the open
market and the official discount rate in Tondon. The premium upon gold
enhanced the value of the metal in New York, so as to make possible, if not
profitable, the import of gold. This was true, although on Thursday rates
for sight bills and cable transfers were not only above the normal golda

The Commercial and Financial Chronicle, August 5, 1893. p. 196.




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importing point, but very near that at which gold has been exported. The
premium here on gold ranged, as already stated, from \% to 2 per cent after
Tuesday, the average being equal to about 7 to Zyi cents per pound sterling,
but on Thursday afternoon there were indications of a smaller premium,
and yesterday afternoon the best bid for gold was one-half of 1 per cent,
with offerings at 1 per cent. a
Foreign exchange has been unsettled this week by the varying premiums
for gold and currency, and on Tuesday and Wednesday there were frequent
changes by some of the leading drawers. The market was also influenced
by dearer discounts in London, which indicated a possible advance in the
bank minimum. Commercial bills have been scarce, the movement of
cotton and grain being interrupted by the stringency in money, and arbitrage operations have had little or no effect. On Thursday it wTas stated
that bids could not be obtained for gold for gold to arrive within ten days,
but the bidding was chiefly for gold on the spot, and \y2 per cent and upward
was paid for such metal. Those who were importing generally had gold on
hand, which they sold at the ruling premium, and the profit enabled further
speculative importations to be made.&
Our foreign exchange market has again tended downward, chiefly by
reason of the varying premium on gold on the spot and to arrive; other
influences operating have been the renewal of sterling loans, the dearer
discount rate in London, and fairly liberal supplies of commercial bills
drawn against grain exports. The market was firm on Monday, unsettled
and lower on Tuesday, active, closing easier, on Wednesday, and dull and
steady on Thursday, with short rates affected by the advance in the Bank
of England rates of discount. 0
Our foreign exchange market was firm on Monday although business
was light. On the following day the tone was easier in consequence of
the absence of a premium for spot gold, and the market was also influenced by offerings of commercial bills against grain and provisions, and
on Wednesday there was a good supply of drafts against securities bought
for London and Amsterdam account. The market was dull and steady
on Thursday and slightly influenced by easier discounts in London.d

One further result of the currency premium was the
direct importation of gold by interior banks, especially
by those of Chicago. Instead of disposing of commercial
bills to foreign exchange houses in New York, they were
used to secure gold in London, which was shipped dia

T h e Commercial and Financial Chronicle, August 12, 1893, p. 232.
& Ibid., August 19, 1893, p. 273.
c Ibid., August 26, 1893, p. 321.
d Ibid., September 2, 1893, pp. 356-357.




194

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rectly to the various banks engaging in the operation.
Had the usual practice been followed, the banks would
have simply increased their unavailable balances in New
York. It is obvious that this had no effect upon the aggregate amount of gold sent to the United States.
SUSPENSION AND HOARDING.

As in the case of gold imports, the effect of the premium on currency upon the domestic money supply can
not be determined exactly. There were reports of money
being brought to brokers which had obviously been kept
by its owners for a long time before the outbreak of the
crisis and also of money which had been probably withdrawn from banks by frightened depositors. But as
early as August 16 a it was reported by brokers that
they were no longer getting hoarded money, but were purchasing from retail shopkeepers and from persons who
had succeeded in extracting money from the banks. A
suspicious increase in the amount of money which small
clothing manufacturers asked for, ostensibly for payroll
purposes, was observed at certain of the New York banks.
More generally it was found that depositors were not
paying into their banks customary amounts of currency.
While it is possible, though not probable, that the currency premium increased the domestic money supply, 5 it
is certain that it vastly increased the amount of money
required for a given volume of transactions. Evidence
for this conclusion is found in the apparent dearth of
a

See New York Evening Post, August 16, 1893.
It was estimated that not more than $15,000,000 was purchased during the continuance of the premium. (See p. 426.)
b




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money which followed immediately the announcement
that banks had restricted payments. The serious significance of the premium on currency was not at first
clearly recognized. Upon its first appearance it was observed in the Chronicle:
A little incident of the week, typical of the times, has been the effort to
establish a premium on small note currency. We do not look upon the
effort as important; how far the transactions have been made for effect
and how far they are real it would be difficult to sayfl

A week later the subject is treated in a fashion which
is in amusing contrast:
Other than the President's message and the meeting of Congress, which
we have remarked upon in a subsequent column, the premium on gold
and currency that has prevailed has been the important topic. This feature in the situation we referred to last week when it had developed only
very moderate proportions. From that beginning, however, the demand
for currency gradually grew more urgent, the premium rising as high even
as 5 per cent, disclosing a marked scarcity of currency, not alone in this
city but very noticeable at Philadelphia and Boston in the East and Chicago and other centers in the West. All kinds of currency were in request, including even standard silver dollars. Foreign bankers also report
that i ^ to 2 per cent was paid for gold to arrive. Of course, the gold
import movement had been affected by these operations, which in turn
have raised foreign exchange rates materially, since the premium paid
raises the power of exchange and consequently the point at which gold
can be imported at a profit. Thursday, however, there were decided indications that the transactions in currency had culminated. On that day
the supply was increased by large offerings and the demand slackened.
Yesterday the same conditions continued to prevail, and the premium on
currency dropped to i% and 2 per cent.&

Suspension in New York had necessarily involved suspension throughout the country, and thereupon the
dearth of money became the most striking feature of the
crisis, one which came home directly to the mass of the
people and which was remembered long after the exact
a Commercial and Financial Chronicle, August 5, 1893, p . 196.
& Ibid., August 12, 1893, p. 232.




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course of the crisis had been forgotten. Few observers
seem to have perceived that the dearth of money was a
consequence and not a cause of suspension, with the result
that power to issue notes in large quantities has become
the accepted panacea for meeting the difficulties with
which banks are confronted during emergencies. It was
estimated that something like $300,000,000 in money and
substitutes for money were added to the supply outside
the banks during August, and it was, therefore, urged
that it was necessary to give the banks power to issue
notes to something like that amount in order to enable
them to cope with similar situations in the future. Not
having this power, it was also generally felt that suspension by the banks was unavoidable and due to no fault
on their part.
Moreover, estimates of money requirements during this
crisis were very greatly exaggerated. In a pamphlet
published and widely circulated by the Sound Currency
Committee of the Reform Club it was assumed that the
reduction of about $200,000,000 in the deposits of the
national banks between May and July represented withdrawals of cash. We have already seen that the decline
in deposits was due principally to loan contraction and to
the withdrawal of money from reserve agents, and only
to an insignificant extent was it a result of the withdrawal
of money from the banks. In the second place, issues of
clearing-house loan certificates were frequently regarded as
an addition to the circulating medium. The maximum
amount of the certificates in the United States at any one
time was probably in the neighborhood of $60,000,000;
but they were simply loans between banks, and had all the




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certificates been retired there would not have been a penny
less in the banks taken as a whole. To some extent their
use i^ight have enabled the banks to pay out more cash
from their reserves than they otherwise might Have been
disposed to relinquish, but as they resorted to suspension
before reserves were seriously depleted, even this possibility was not realized.
Various substitutes for money were utilized to meet
the situation which the banks had brought about by
refusing to use their own stores of cash. Clearing-house
certificates (not clearing-house loan certificates) were
issued in many towns, especially in the Southeastern
States. Cashiers' checks in convenient denominations
seem to have been used in all parts of the country. In
factory towns pay checks became an acceptable part of
the circulating medium. a
Some hoarding had certainly taken place before the
beginning of August, but it was largely confined to those
parts of the South and West where there had been numerous bank failures and suspensions. The disappearance of
money after the beginning of August can not properly be
characterized as hoarding. People naturally refrain from
paying money into the banks after the banks have begun
to place restrictions upon its withdrawal. The various
substitutes for money served in a measure to take the
place of money which would have moved into and out of
the banks in ordinary course had they not resorted to
suspension.
o For an account of these and other substitutes for money see The Currency Famine of 1893, by J. DeWitt Warner, in Sound Currency, vol. 2,
No. 6, and in Sound Currency Year Book, 1896, pp. 341 to 356.




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The following extract, taken from the pamphlet already
referred to, is entirely accurate as to the course of events,
but places the cart directly before the horse in its explanation of the phenomena:
Then developed the feature that will forever characterize the stringency
of 1893—instructive to those who have not already learned how immaterial
is any ordinary supply of legal currency when compared with credit in its
various forms—the real currency of the country. * * * Almost between
morning and night the scramble for currency had begun and culminated
all over the country, and the preposterous bulk of our circulating medium
had been swallowed up as effectually as, in a scarcely less brief period, gold
and silver had disappeared before the premiun on specie a generation
before. Currency was hoarded until it became so scarce that it had to be
bought as merchandise at a premium of 1 to 3 per cent in checks payable
through the clearing house; and to enable their families to meet petty
bills at the summer resorts the merchants and professional men of the
cities were forced to purchase and send by express packages of bills or
coin; while savings banks hawked their government bond investments
about the money centers in a vain effort to secure currency.a
T H E E F F E C T OF SUSPENSION ON TRADE.

The effect of suspension upon the trade of the country
was similar to that which was analyzed in the case of the
crisis of 1873, though in some respects the general economic situation was different. In 1873 the banks restricted payments almost at the beginning of the disturbance, while in 1893 that step was taken only after some
months of struggle with adverse circumstances. In 1873
suspension was one of the initial causes interrupting the
normal course of business. In 1893 it was rather of the
nature of a last straw added to the burdens resting on the
business community. It is not possible, therefore, to
determine with any degree of accuracy the relative effects
a The Currency Famine of 1893, by J. DeWitt Warner, in Sound Currency, vol. 2, No. 6, and in Sound Currency Year Book, 1896, p. 340.




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of suspension during these two crises. Mercantile failures
and the curtailment of production had marked the course
of previous months. a And even if the banks had maintained payments, it is reasonably certain that August
would have witnessed further decline in general business
activities. Moreover, partial general suspension may
have enabled some banks which might have failed or
suspended completely to escape those misfortunes. It is
also possible that more drastic loan contraction would
have been enforced by the banks if they had been
exerting every effort to maintain cash payments.
There is, however, evidence that suspension was a
potent factor accentuating the depression in trade which
characterized the month of August. It increased the
general feeling of distrust which, as always in a crisis, does
so much to bring about greater inactivity than the actual
condition of affairs warrants. A more definite consequence was the difficulty in securing money for pay rolls,
which led to the temporary shutting down of many factories. Finally, it deranged the exchanges between different parts of the country, causing a slackening in the
movement of commodities and needless delays in collections which were already slow on account of the general
situation.
The preponderant result of these various influences was
certainly unfavorable. Perhaps the best indication is to
be found in the returns of railway gross earnings, which
are presented in the following table:
a For the effect of the crisis upon manufacturing industries before the
beginning of August see Bradstreet's, August 12, 1893, p. 502.




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Railway gross earnings.a

1892.

March
April
May
June
July
August
September
October
November.
December _

$61,900, 000

$58,700,000

56,000, 000

54,100,000

Per cent increase ( + ) or
decrease (—).
+
+
4+

5-53
3-42
7-8
2.97
4.85

65,000, 000

60,300,000

59,5oo, 0 0 0

.57,800,000

56,800, 000

59,700,000

-

54,700, 000

63,100,000

- 13. 29
-10.35
- 5
8.7

58,200, 000

64,900,000

64,000, 000

67,400,000

56, 7 0 0 , 0 0 0

63,100,000

48,000, 000

56, 3 0 0 , 0 0 0

-14.75

It will be observed that the crisis did not cause a falling off in earnings until July. The loss of nearly 5 per
cent in that month was followed by one of more than 13
per cent in August. Doubtless the loss for the latter
part of July was considerably greater than that for the
month taken as a whole. But when every allowance has
been made there can be no question that the greater
loss in August earnings reflects a far more unsatisfactory
volume of trade during that month. The September
returns showed some improvement over the previous
month, as did also those of October, but the percentage
of loss in earnings increased once more in November and
was at the highest point of the year in December. The
December return was, aside from the fact of one less
working day, an indication of the long period of trade
depression which was to follow. Much of the decline in
August, with the subsequent partial recovery, can only be
ascribed to the trade paralysis produced by the financial
a The Commercial and Financial Chronicle, February 25, 1894, p. 328.




National

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Commission

situation at that time. The situation was described as
follows in the Chronicle:
The month of August will long remain memorable as one of the most
remarkable in our industrial history. Never before has there been such a
sudden and striking cessation of industrial activity. Nor was any section
of the country exempt from the paralysis; mills, factories, furnaces, mines
nearly everywhere shut down in large numbers, and commerce and enterprise were arrested in an extraordinary and unprecedented degree. The
complete unsettlement of confidence and the derangement of our financial
machinery, which made it almost impossible to obtain loans or sell domestic exchange and wrhich put money to a premium over checks, had the
effect of stopping the wheels of industry and of contracting production
and consumption within the narrowest limits, so that our internal trade
was reduced to very small proportions—in fact, was brought almost to a
standstill—and hundreds of thousands of men thrown out of employment.^

Another indication of the course of trade was furnished
by the figures of clearing-house transactions, not including New York, where financial operations are a predominant factor. These returns show a loss for June of 10
per cent, of 15 per cent for July, and of no less than 29.8
per cent for August. During the succeeding three
months there was some improvement, followed by a
further decline, as in the case of railway earnings in
December.
During July the newspapers had contained many reports of the closing of factories on account of failures,
inability to make collections, or to procure credits from
the banks. In August these causes were mentioned i n '
some instances, but the most frequently assigned cause
of the shutting down of factories was inability to procure
money for pay rolls. The impression derived from an
examination of contemporary journals is that this difficulty was more general and more severely felt than in
a The Commercial and Financial Chronicle, September 16, 1893, p. 446.




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1873. But there are reasons' which render such a conclusion far from certain, and even less certain the conclusion that the banks restricted payments more generally. The number of factories had of course greatly
increased during the interval between the two crises, and
it is also probable that the news service had become more
complete. The weekly payment of wages had become
more general, thus increasing the requirements of employers. Finally, the resort to various substitutes for
money, which was far more general in 1893, may indicate
more general restriction of payments by the banks; but,
on the other hand, it may simply mean that employers
had found a way out of the difficulty. Inability to secure currency certainly did not continue through an
appreciably longer interval in 1893 than in 1873. As
early as August 18 reports of the reopening of factories
began to appear in the daily journals, and though reports
of the shutting down of factories continued for some days,
by the end of the month the tide had turned strongly in
the opposite direction. The banks removed the restrictions upon cash payments, gradually reaching complete
resumption early in September, and the simultaneous
renewal of business activities affords striking evidence of
the disturbing effect which had been brought about by
suspension.
THE DOMESTIC EXCHANGES.

The domestic exchanges had been deranged at various
points before the New York banks suspended at the
beginning of August. In Omaha, for example, it was
reported that "the failure of seven banks in Nebraska
6158—10




14

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makes Omaha banks rather more conservative, and they
now refuse country checks except for collection." 0 A
little later it was reported in Philadelphia that "banks
are husbanding currency very carefully, some of them
having been obliged to pay $5 per 1,000 exchange on
New York." 6 After the beginning of August reports of
difficulties of this kind became general and rates of exchange on New York became almost prohibitive in many
parts of the country. The following table, compiled from
Bradstreet's, shows the course of exchange on New York
at a number of important points throughout the country
between July 29 and September 9, 1893:
Philadelphia.
July 29.
Aug. 5_.
12.
19

26.
Sept. 2_
9-

35 to 45 cents discount..
$1 to $2 premium
$1 to $2 premium
$1.25 to $2 premium
90 cents to $1 premium.
15 to 20 cents premium.
20 to 25 cents discount .

$10 premium.
$10 premium.
J>io to #15 discount.
$15 to $20 discount.
$8.75 discount.
75 cents to $1 premium.
50 cents premium.

Chicago.
July 29.
Aug. 5
12

19
26
Sept. 2 .
9-




St. Louis.
$3 discount.
$4.25 discount.
$7.50 discount.
$7.50 discount.
$4 discount.
Par.
90 cents premium.

$3 discount
$7 to $10 discount. _
$25 to $30 discounte r s discount
$5 discount
$5 discount
5 o cents premium , _

a Bradstreet's, July 8, 1893, p. 431.
b Bradstreet's, July 22, 1893.

204

Crises

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Cincinnati.

July 29.
Aug. 5
12.

19
26
Sept. 2 .
9-

Minneapolis.

$2 d i s c o u n t

Aug.

$10 d i s c o u n t
$10 d i s c o u n t

5
12

19
26
S e p t . 2_
9-

July 29.
s
12

19
26
S e p t . 2_
9-

$1.75 d i s c o u n t .
$ 1.50 d i s c o u n t .
$2 d i s c o u n t .
$3 d i s c o u n t .
$3 d i s c o u n t .
Par.
50 c e n t s p r e m i u m .

New Orleans.

Par.
$1.50 d i s c o u n t .
$1.50 d i s c o u n t .
$5 d i s c o u n t .
$1 d i s c o u n t .
$10 p r e m i u m .
$1.50 p r e m i u m .

$1 s d i s c o u n t
$5 d i s c o u n t
$1 d i s c o u n t
Par

San Francisco.

Charleston.

Aug.

System

K a n s a s City.

50 c e n t s d i s c o u n t
$1 d i s c o u n t
$4 t o $5 d i s c o u n t
#3 t o $6 d i s c o u n t
$5 d i s c o u n t
P a r t o 50 c e n t s d i s c o u n t
Par

July 29.

Banking

$3.50 p r e m i u m .
$1.25 p r e m i u m .
75 c e n t s d i s c o u n t .
$1.25 p r e m i u m .
Par.
$1.25 p r e m i u m .

$1.25 p r e m i u m
$2.50 p r e m i u m
$2.50 p r e m i u m
$2.50 p r e m i u m
$10 t o #15 d i s c o u n t
$10 t o $13 d i s c o u n t
$ 1 0 t o $13 d i s c o u n t

$3 p r e m i u m .

An analysis of the various influences which affect
domestic exchange rates under the regime of suspension
will be found in the chapter on the crisis of 1907.® Here
it will be sufficient to note that they were generally at
a discount which was in most instances abnormally low.
The most striking example was Chicago, where a rate of
$30 per $1,000 was quoted at one time. These rates,
however abnormal, merely indicate the dislocated condition




0 See p. 291.

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of the domestic exchanges. They do not measure the
extent of the dislocation and still less do they measure its
effect upon the trade of the country. The published
rates apply chiefly to business between banks and furnish
no indication of the treatment which was accorded drafts
on distant places when paid into the banks by depositors.
Drafts were often of little or no utility to the holder
because the banks refused to take them except at a
ruinous discount or for collection. Exchange between
different parts of the country, at least between the more
important cities, does not seem to have been at any time
completely blocked. It was, however, deranged to such
an extent as to interfere seriously with the ordinary movement of commodities. The banking situation in general
and the dislocation of the exchanges in particular seem to
have been the influences which made the first two weeks
of August the worst period of the crisis in general trade.
The condition of affairs may be judged from the following
extracts from Bradstreet's for the weeks ending August 5
and 12:
While special telegrams from many points South and West report a more
hopeful feeling in financial and commercial circles, due to the increased
currency issue by New York national banks, the gold afloat for the United
States, and in the expectation t h a t Congress will promptly repeal the compulsory purchase of silver clause of the Sherman Act, the week has, on the
whole, brought more unfavorable features in the apparent hoarding and
scarcity of currency East and West, the near approach of the demand for
funds to "move the crops," the increase in the shut-down movement by
manufacturers in New England, Middle and Central Western States, and
the clog to trade shown by prohibitive rates for New York exchange a t
centers East, West, and Northwest. * * * Chicago packers and grain
shippers selling to interior eastern points, having been unable to sell their
New York exchange, are ordering the currency to pay for stuff shipped
direct by express, thus doing away with banks. At New York credit of both
banks and commercial interests is unimpaired, b u t actual money is scarce




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and commands a premium. The arrival of gold in transit is expected to
clear the atmosphere and relieve pressure. Demands for actual currency
from all quarters on New York are pressing. The scarcity of small notes
and silver dollars is a feature. Banks are generally refusing or complying
only partially with requests for large sums. * * *
Money remains stringent at Boston, Hartford, Providence, and Philadelphia, with a depressing effect on business. There is a smaller volume
of orders being received at Baltimore, and banks are not meeting the out of
town demand for currency. Currency is scarce at Pittsburg also, b u t at
Buffalo banks are refusing to ship currency west, while having sufficient
for local demand. Trade there is dull, and savings banks profess not to
need the sixty-day rule. a
The irrational but widespread hoarding of currency has compelled jobbers and manufacturers in many instances to do business more nearly
than ever on a cash basis, which has resulted in a further restriction of
trade throughout the country. This is accompanied by such signs of
aggravation as increased difficulty in disposing of commercial paper, a
still greater scarcity of currency at larger centers, and a shut-down movement among industrial establishments; the latter, together with curtailment of forces in that and in commercial lines, points to the enforced idleness of nearly 1,000,000 wage-earners within the past two months, as compared with not more than 400,000 at the close of 1884, the previous year
of greatest business depression. The week's bank clearings total is the
smallest of recent years—$802,000,000—17 per cent less than last week
and 20 per cent less than in the week of 1892. * * *
A hand to mouth demand for staples is reported from Boston; many
leading industries have shut down, currency is scarcer, commercial paper
is ignored, and general business rather more clogged than last week, all of
which applies as well to New York, Philadelphia, Baltimore, and Pittsburg.
Philadelphia banks request customers to stamp checks "payable through
the clearing house." Baltimore distillers experience difficulty in getting
currency to buy revenue stamps, while jobbers there report salesmen
returning, owing to lack of orders. Pittsburg hopes for greater ease in
its local money market, now that the clearing house will issue certificates. At Buffalo banks continue to pursue a very cautious policy, and
many merchants are stamping checks "payable through the clearing
house." * * *
Increased demands from country banks make currency scarcer at Cleveland and Cincinnati, where previous dullness is intensified. Business at
Louisville is almost at a standstill, banks declining to receive country
checks even for collection, and preferring not to handle New York exchange. General trade is almost on a cash basis at Indianapolis, and
reduced in volume, which is also true at Milwaukee. Chicago bankers are




< Bradstreet's, August 5, 1893, p. 495.
*

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hopeful, owing to the heavy gold importations, b u t orders left with jobbers
are held awaiting crop advices, some of the latter being doubtful. St.
Paul, Minneapolis, and Duluth jobbers are doing a hand to mouth business, awaiting a change in the situation. St. Louis reports a shrinkage in
the volume of sales of dry goods and hardware, while at Omaha banking
accommodations and the volume of trade continue in reduced volume.
Live stock receipts are smaller, with higher prices, and the corn crop is
damaged in western Nebraska, a

The first faint signs of recovery were observed during
the third week of August, and by the beginning of September the reaction from extreme depression was unmistakable. The passage by the House of Representatives
on August 28 of the bill repealing the silver purchase
clause of the act of 1890 did much to restore confidence,
but the restoration of banking facilities did far more to
start the wheels of industry. The domestic exchanges
resumed their normal course, and no further difficulty
was experienced in securing money for pay rolls. Unfavorable banking influences which had been at work long
before the beginning of August also disappeared. The
banks began to make loans more freely, and though the
total volume of loans seems to have been still further
reduced, contraction was no longer drastic, and where
business needs appeared loans were increased.
Contraction in loans was perhaps the most striking
feature of this crisis. From their maximum amotmt of
$2,161,000,000 on May 4 loans of the national banks were
reduced on July 12 to $2,020,000,000, and on October 4 to
$1,843,000,000, a total contraction of $318,000,000, or
more than 14.7 per cent. In 1873 loans had been reduced
but 5 per cent, and in 1907 the reduction *was only 2 per
cent. The long period over which the financial disturbance




a> Bradstreet's, August 12, 1893, p. 511.
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extended accounts in some measure for this unsatisfactory
showing in 1893; it simply reflects in part the inevitable
diminution in business dealings which would have taken
place sooner or later quite apart from banking and monetary causes. It can not be questioned, however, that the
banks in many parts of the country caused needless damage to their customers by a ruthless policy of loan contraction. Nowhere is thi§ more clearly evident than in Chicago,
a central reserve city with responsibilities to the community at large which are not incurred by purely local banks.
The Chicago banks reduced loans from $96,800,000 on
May 4 to $82,400,000 on July 12, and to $73,500,000 on
October 4. No sound reason can be given for such drastic
contraction, but it is explained by the failure of the Chicago banks to make use of clearing-house loan certificates.0
They were far stronger in July than in May and had still
further strengthened themselves in October, and there is
no indication that they had allowed their reserve to decline
appreciably during the interval. Each bank pursuing its
own selfish policy, all were forced to contract loans, thus
increasing the strain upon their own customers and in
some measure increasing the burdens upon the banks in
New York.
After the beginning of September the course of the
crisis of 1893 was no longer a banking affair. As always,
when general trade depression sets in, the banks soon
found themselves with an abundant supply of funds and
o The issue of clearing house loan certificates in Chicago was authorized
on July 26, but none were taken out by the banks. After the partial suspension which came in the following week they were no longer necessary.




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in position to lend far beyond the requirements of borrowers. On October 4 the cash reserves of the banks were
$346,000,000, contrasted with $289,000,000 on July 12.
At the earlier date the reserves of the banks were not at
the low point reached in August, and the flow of money to
the banks in September must have been far greater than
this increase. The next return on December 19 found
the banks with cash reserves of $414,000,000, an increase
since July of $125,000,000. This rapid return of money
to the banks suggests the very obvious conclusion that
the withdrawal of money in June and July was not due
to deep-seated doubts of the solvency of the banks in
general, but was due rather to a temporary wave of
distrust which might have been successfully overcome by
a bolder policy in the use of reserves.
NO CHANGES IN BANKING METHODS OR LEGISLATION.
The experience derived from this crisis led to no
changes whatever either in banking methods or in legislation. The silver question drew away men's minds
from any consideration of the questions raised by earlier
crises. Whether the banks through their own efforts
might not place themselves in a better position to meet
future emergencies does not seem to have been discussed. Both bankers and the public seem to have been
well satisfied with the showing made by the banks,
especially by those of New York; and indeed if comparison be made with the policy adopted by the Chicago
banks, the banks of the metropolis met the situation in
a creditable fashion.




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There was, however, evidence of a willingness to adopt
suspension in emergencies, which is in striking contrast
to the healthy critical attitude of both bankers and the
public in 1873.
It is difficult to imagine a more weak and pusilanimous attitude than that which found expression in the
following passage from Bradstreet's:
Since the present financial complications began the New York associated banks have virtually acted as one institution in all matters of vital
moment. The services they have rendered, not only to the business community at New York but to the banks and commercial interests of the
entire country, can not be overestimated. The situation has constantly
been one of danger and difficulty, and could only be met by extraordinary
measures. The .banks here have been called on to supply funds for the
whole country, and did so unhesitatingly until it became necessary to
put a check upon a movement which depleted the reserves upon which the
banking facilities of the entire United States depend. The restricting of
the facility with which bank credits could be converted into cash served
the purpose. I t tended to make the hoarding of money expensive, and
at the same time prevented individuals from utilizing the banks for the
purpose of speculating in currency. I t was a useful and salutary move
and will in the end aid in bringing about a restoration of confidence and
a normal condition of credit. Attacks upon the banks for the restriction
thus exercised may be founded in ignorance of the real principles, but
they tend to do a great deal of mischief and to create a state of public
feeling which it is eminently desirable should be avoided. These considerations apply with added force to the manifestations of hostility toward
the New York banks and their course by a certain element in Congress.
The banks have been supporting the credit of the country and checking
the symptoms of the panic, and ill-informed criticism upon their methods
have no excuse at a juncture of this gravity. 0

It may, however, be observed once more that the New
York banks had met successfully but one part of their
responsibilities to the community. The need for larger
reserves by the banks holding bankers' deposits or some
method for making use of the entire store of cash held
by the banks was just as clearly shown by the course of




a Bradstreet's, August 26, 1893, p. 534.
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Commission

the crisis as were the good results of the liberal loan
policy which was adopted.
Neither the Secretary of the Treasury nor the Comptroller of the Currency made any important recommendations in their annual reports which followed this crisis,a
their comparatively recent entrance into these offices
being perhaps a sufficient reason. The Comptroller of
the Currency contented himself with an argument backed
up with statistics to show that the number of suspensions
and failures among national banks was far less numerous
than among state institutions. 6 This was indeed true,
though the statistics were in some respects not comparable, to say nothing of some special circumstances which
accounted in a measure for the relatively poor showing
of the state institutions. c
The showing made by the national batiks was in any
event far from satisfactory. There were 65 failures during the year; only 13 banks paid all claims in full, and
but 9 of them were able to meet the interest obligation
during the period of liquidation. Claims against all failed
banks amounted to $14,434,105, and $9,778,449 was
paid. The cause of failure and also of suspension in
a

On account of the absence of a contemporary narrative of the crisis
in government reports, considerable portions of an article b y Mr. A. D.
Noyes have been reprinted in the Appendix. See Note I, pp. 413-427.
& See report of the Comptroller of the Currency, 1893, p. 13.
c The figures for the state banks included every kind of banking institution, even private banks. Moreover, the number of state b a n k s was
relatively large in the West and Southwest, where failures of all kinds of
banks were most numerous. Finally the state banks were relatively of
small size and the mortality among the smaller banks was particularly
great among both national and state banks.




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some- instances might probably have been removed by
more efficient examination and more rigorous enforcement
of the law by the Comptroller of the Currency.0
In later years, as we have seen, the most dramatic and
striking episode of the crisis—the dearth of currency—
became an important influence in directing attention
exclusively to various devices for a less rigid system of
note issue as a resource for future emergencies. That
by such means the ability of the banks to cope with crises
would be increased is not questioned; but, after all, such
proposals do not go to the root of the matter. Unless
associated with more conservative management it is
highly probable that enlarged power to issue notes would
be used in such a fashion in the years before crises as to
place the banks in an extremely hazardous position
through more unrestrained extension of credit than would
otherwise have been granted.
While there may be room for differences of opinion as
to the teaching of this crisis with regard to the need and
effects of a more liberal power of note issue, in another
direction an inference was drawn which was wholly
without foundation and which had the most unfortunate
effect upon the course of events in 1907. With the lapse
of time recollections of the exact course of the crisis
became vague, and gradually the view seems to have become established among bankers that the issue of clearing-house loan certificates inevitably and immediately involves suspension and the currency premium. These
a
S e e Appendix, Note G, pp. 400-405, for a detailed account of failures
and suspensions during 1893, taken from the Comptroller's Report for 1893.




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aspects of the crisis were remembered, but it was forgotten that certificates had been in use for six weeks
before suspension occurred, and that 1873 was the only
other occasion when their use had involved suspension.
We have seen that suspension may occur when loan certificates are being used, but there is strong ground for
the opinion that on those occasions suspension would
have come earlier had their issue not been authorized.
Without the certificate each bank would most certainly
have pursued in 1893 the policy of loan contraction, just
as was the case in 1857. Disastrous failures among
brokers and business houses would inevitably have followed; the banks would have suffered loss from the nonpayment of loans, and doubts of their solvency would
have been engendered with consequent runs and inevitable
suspension. General loan contraction spells general insolvency, while a relatively stable volume of loans secured
through the use of loan certificates may or may not enable
the banks to escape suspension. Never until 1907 did
the issue of loan certificates and suspension come at the
same moment, and then it was due more than anything
else to the utterly unfounded notion that the use of the
one had involved the other in previous emergencies.0
The issue of clearing-house loan certificates was not
more general in 1893 than in 1873, and though the amount
issued was greater it was not so large in proportion to the
volume of banking business. 6 The period of strain was,
a See p. 257.
& For an account of the issue of loan certificates in 1893 the reader is
referred to Note H in the Appendix containing the report of the New
York clearing house loan committee and extracts from the Report of the
Comptroller of the Currency for 1893. See pp. 406-412 below.




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however, unusually long, and consequently the use of
the certificates in quantity was more protracted than
on former occasions. To this may perhaps be attributed
the weakening of the disinclination of many of the banks
to take them out. In 1907, on the authorization of
their issue, they were immediately taken out by practically all the banks having to meet unfavorable balances.
In these circumstances, as we shall see in the following
chapter, immediate suspension became inevitable.




215

CHAPTER V.
THE CRISIS OF 1907.

The same elements of weakness have been uniformly
disclosed by the analysis of the experiences of the national
banks during successive periods of financial strain. The
normal condition of the banks was one of lack of preparation for emergencies. No adequate lending power or surplus cash reserve was available at any time except during
periods of trade depression when the banks were unable to
find borrowers for all the loans they were prepared to
make. This unsatisfactory situation was, however, not
clearly recognized. Minor causes of difficulty absorbed
the attention both of bankers and of the public. It was
felt that the banks had to work under unfavorable conditions, for the results of which they were not responsible,
and the conclusion was generally drawn that no blame
rested upon them. In 1873, f° r example, the currency
was inconvertible and depreciated, and the banks could
not increase their available cash reserve by the acquisition
of gold. During the eighties and early nineties silver
purchases weakened the monetary structure and bred distrust of American securities at home and in foreign countries. For our purposes, therefore, we are fortunate in
being provided with a crisis which was preceded by no
legislation or monetary conditions unfavorable to sound
banking. On the contrary, these influences tended to
strengthen the banks in very definite ways.
BANKING MOVEMENTS, 1897-1907.
At the beginning of the ten years of business activity
which culminated in 1907 the banks were in an exceedingly




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strong condition, as is usually the case at the end of a
long period of depression. During the four years following
the crisis of 1893 the loans, deposits, and cash reserves of
the banks fluctuated within narrow limits, reflecting the
stagnant condition of trade. On October 5, 1897, against
net deposits of $2,195,000,000 the national banks held a
cash reserve of $388,900,000, giving them the tolerably
high ratio of 17.7 per cent to deposit liabilities. Their
loans also must have been of high average quality after
four years of thoroughgoing liquidation and recuperation
in the business world.
Beginning with the autumn of 1897, the cash reserves
of the banks increased rapidly. At first the gain was
due to gold imports secured through abnormally large
grain exports to Europe, and afterwards on account of
increasing gold production, of which the United States
acquired a considerable share. A further gain was secured indirectly as a result of the currency act of 1900.
That measure made the issue of bank notes somewhat
more profitable to the banks, and between February 13,
1900, and August 22, 1907, bank-note circulation rose
from $204,900,000 to $551,900,000. By this means
nearly $350,000,000 was provided to meet the hand-tohand, needs of the people for money and to supply the
reserve requirements of state banks and trust companies.
The national banks were consequently enabled to secure
and retain a larger portion of the other kinds of money
in the country—those kinds which could be included as
a part of their own reserves. As a result of these various
influences, the cash holdings of the national banks in-




217

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creased from $388,900,000 on October 5, 1897, to
$701,600,000 on October 22, 1907.
With this increase of nearly $313,000,000 in their cash
reserves it would have been possible for the banks to
have nearly doubled their productive investments without diminishing the ratio of cash to deposit liabilities.
As a matter of fact, these investments were increased far
more than this—from $2,661,000,000 to $6,334,000,000.
This increase was roughly paralleled by the increase in net
deposit liabilities, which advanced from $2,195,000,000 to
$5,256,000,000, and the ratio of the cash reserve to deposit
liabilities was reduced from 17.7 per cent to 13.3 per cent.
The following table shows the changes in loans, net deposits (not including government deposits), cash reserves,
and reserve ratio at the time of the early autumn return of
the condition of the national banks from 1897 to 1907:
[Amounts expressed in millions]
Loans

Oct. 5.1897 -Sept. 20, 1898.
Sept. 7, 1899-Sept. s. 1900-Sept. 30, 1901Sept. 15, 1902.
Sept. 9, 1903-Sept. 6, 1904-Aug. 25, 1905 _
Sept. 4. 1906-.
Aug. 22, 1907-

$2,066
2, 172

Net
deposits

$2,179

Cash
reserve

2, 404
2,952

$388.9
420. 7
466.3

3.280

3,187
3.554
3 , 720

518.5
539- 5
508. 0

3.48i
3.726

3.863
4, 400

3.998

4. 735
4, 927
5 . 256

554-3
661.5
665.6
626. 0

2, 496
2,686
3.018

4. 298
4,678

701. 6

Ratio to
net
j deposits.
Per cent.
17-9
17-5
IS-8
16. 2
15- 2
13-7
14.3
150
14.3
12. 7
13-3

Every year witnessed an increase in loans (that for the
last year of the series being the most considerable) and
also in deposit liabilities. Cash reserves showed a gain,
except in 1902 and 1906, but the reserve ratio was subject




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to greater fluctuation. Between 1897 and 1902 the decline
was continuous, with the exception of 1900, when the
banks enjoyed the benefit of the change in the requirement as to note issue from 90 per cent to the full par
value of the bonds deposited as security. By 1902 the
banks had evidently approached as near to legal-reserve
requirements as they felt was consistent with safety,
and thereafter loans and deposit liabilities were kept
roughly within limits determined by the amount of cash
holdings. It will be noted that in 1902 the banks were
little above, and in 1906 somewhat below the ratio of
reserve on August 22, 1907, the date of the last return
before the crisis. That the banks were slightly stronger
in cash in 1907 than in 1906 may be in part due to the
earlier date of the return of 1907, nearly two weeks
earlier than that for the corresponding period in 1906.
It is evident, however, that the banks were at least in,
what was for them, a quite normal condition of strength
just before the beginning of the crisis. But this was not
on account of any exercise of restraint in making loans,
since the increase during the previous twelve months was
greater than for any other year of the period under
review. Finally, it may be noted that the proportion of
reserve to deposit liabilities which had become customary
was distinctly less than it was during the years before
either the crisis of 1873 or that of 1893.
Analysis of the condition of the banks by groups does
not give different results in the case of the country banks
and those of reserve cities. The net deposits of the
country banks increased without interruption from
6158—10




15

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Commission

$963,000,000 on October 3, 1897, to $2,527,000,000 on
August 22, 1907. Aside from a slight loss in 1900, cash
reserves also showed a gain in every year, rising from
$111,000,000 in 1897 to $199,600,000 in 1907. The
reserve ratio, which was 11.6 per cent at the outset,
declined rapidly and was constantly in the neighborhood
of 7.5 per cent from 1902 onward; in 1906 it was 7.5 per
cent; in 1907, 7.6 per cent.
In the reserve cities also deposits increased with the exception of a single year, 1903, rising from $586,000,000 to
$1,423,000,000. Cash reserves increased, except in 1902,
advancing from $94,000,000 in 1897 to $190,000,000 in 1907.
The reserve ratio was 17.8 per cent at the outset, but was
in the neighborhood of 1 2 ^ per cent from 1901 onward.
In 1906 it was 12.1 per cent; in 1907 it was 13.4 per cent.
The condition of the banks in the central reserve cities
presents greater individual differences. In St. Louis both
deposits and reserves increased regularly with the exception of 1900—the former from $33,000,000 to $116,000,000;
the latter from $8,200,000 to $29,200,000. The reserve
ratio of the St. Louis banks was below 25 per cent even
in 1897 and was above that point in only one year, 1905.
In 1906 it was 24 per cent and in 1907 23.5 per cent. In
Chicago deposits fell off somewhat in two years, 1900 and
1906, but increased from $105,700,000 in 1897 to $262,900,000 in 1907. The reserve underwent greater fluctuation, falling in 1899, 1902, and 1906, but, taking the
period as a whole, was increased from $38,000,000 to
$66,000,000. Beginning with a high reserve ratio of 36
per cent in 1897 the Chicago banks soon broke away from




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the traditionally ample reserve which had characterized
the banks of the city. In 1899 the reserve was 25.4 per
cent, in 1902 only 21.9 per cent, and thereafter every
autumn return showed a deficiency until 1907, when the
banks held a cash reserve equal to 25.3 per cent of their
deposit liabilities.
Leaving the New York banks out of consideration,
every group of banks except those of St. Louis was in a
slightly stronger condition in 1907 than in 1906; and all,
judged by the average of the preceding half dozen years,
were in a normal condition of strength; but as their condition was somewhat less strong than at the time of the
reports immediately preceding the financial crises of former years, it should have been evident that in case of an
emergency the pressure upon the banks of New York
would be even greater than in the past.
The position of the New York banks is so important a
factor in our banking system that their condition at the
time of each autumn report is appended in the following
table:
[Amounts expressed in millions.]
Loans.

287.9
253.2

827.4
825.7

199. 2
218.8

26.5

441

596. 0

54i

707. 7

569

769.6

611

811.3
753-4
741.0

607

807
805
702
713

221

Ratio to
deposits

1,034.3
993-8

$506.8

631

Cash
reserve.

Per cent.
27. o
25. 6
25. 1
27.8
26.6
24. 6
27.5
27.8
256
24. 2

$408

Oct. 5.1897 Sept. 20,1898
Sept. 7, 1899Sept. 5, 1900.
Sept. 30, 1901
Sept. 15, 1902
Sept. 9. 1903Sept. 6, 1904.
Aug. 25, 1905
Sept. 4. 1906.
Aug. 22, 1907




Net
deposits

$136.5
152. 7
177.6
2134
215- 6
184.3
203. 1

National

Monetary

Commission

It will be observed that the upward tendency of loans
was not so marked in New York as in the case of the banks
in general. The $408,000,000 of New York bank loans in
1897 was nearly 20 per cent of all the loans of the national
banks; while the $712,000,000 of loans in,1907 was just
above 15 per cent of the total. Fluctuations in all the
various items, except the reserve ratio, were no less wide a
than for the various groups of banks or for the banks
taken as a whole. Even at the beginning of the period
the New York banks were able to find borrowers for all
they were prepared to lend, and throughout the period
they were evidently handling their loan account so as to
keep just above the 25 per cent requirement against deposits. They did no more than maintain the reserve position
which previous experience had clearly shown to be inadequate, although the burden resting upon them through the
relatively greater expansion elsewhere tended to increase.
As in the case of cash reserves, that portion of the
reserves of the country and reserve city banks deposited
with agents increased during the period under review, but
not so rapidly as the increase in deposit liability. The
deposited reserves of the country banks were $192,500,000
in 1897, and $420,000,000 in 1907; while those of reserve
city banks increased from $104,500,000 to $194,000,000.b
a The enormous increase in reserve and loans in 1904 was a result of the
decline in trade which marked t h a t year. Loans were made a t such abnormally low rates in New York t h a t outside banks and the trust companies
of the city found it to their advantage to increase their balances with the
banks, upon which they received a return of 2 per cent.
& With the return for April, 1902, statements of reserves for country and
reserve city banks in the reports of the Comptroller of the Currency do
not include deposits in excess of the amount which each bank can include




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System

The failure of this portion of the reserves of these banks to
increase as rapidly as the growth of their net deposits would
not, however, tend to diminish appreciably the extent of
the withdrawals in an emergency, since the determining factors at such a time would be the state of the cash reserves
and the degree of confidence in their reserve agents.
A more significant indication of the situation as regards
deposited reserves is afforded by the following table, which
shows the gross and net amounts due other national banks
by the national banks of the three central reserve cities:
[Expressed in millions.]
St. Louis
Gross.
Oct. 5,1897-Sept. 4, i9o6_
Aug. 22, 1907

$14.0
4i.5
S2.3

Chicago.

New York.

Gross.

Net.

Gross.

$47-5

$21.7

$184.0
297-5
259.3

20. 7

117. 2

30.3

115.8

69. o
76. 7

$i5S.o
243.8
213.8

New York still maintained its commanding position as
a debtor of national banks. The comparatively unfavorable showing for New York for August, 1907, seems to
have been due to special temporary influences, for in January of that year the deposits due other banks held by
those in Chicago and St. Louis were only $100,000,000 compared with $262,000,000 in the case of New York. Balances with New York banks are subject to wide fluctuations from day to day, on accoimt of the enormous
settlements for outside banks which regularly take place
in that city. There had been no marked change in the
as a part of its reserves, but the total deposits are given here because they
convey a better idea of the basis upon which the banks were working and
also of the responsibilities of the banks which are reserve agents.




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proportion of deposits due to national banks compared
with the total deposits of the New York banks. They were
30 per cent of the total in 1897, nearly as much in 1906,
and 27 per cent in 1907. For Chicago and St. Louis the
relative importance of bankers' deposits to total deposits
was at all times considerably greater than in New York. 0
But for reasons explained in a previous chapter little
attention need be given to the condition of the banks of
those cities. b So far as the national banks are concerned,
then, the statistical position had undergone only one
change for the worse—namely, the smaller cash reserves
of the banks in the country, the reserve cities, and also
Chicago. The New York banks were comparatively as
strong as in the past and under no greater relative obligations to other national banks. They might, however,
reasonably have expected somewhat greater withdrawals
in an emergency, because of the smaller cash reserve ratio
of all the other banks in the system, through the probable
difference on this account was not remarkably great.
STATE BANKS AND TRUST COMPANIES.

In the analysis of previous crises it has not seemed
necessary to include any detailed reference to credit institutions under state laws. Even as late as 1893 the
resources of state banks and trust companies were but
little more than half those of the national banks, and the
deposits of state institutions in the national banks of the
money centers were a correspondingly small item relative
to the deposits of national banks with their reserve agents.
« Banks in Chicago and St. Louis whose business is to be purely local are
almost invariably organized under state laws.
& See p. 125.




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During the ten years from 1897 the growth of banking
institutions under state laws was remarkably rapid.
The total resources of state banks and trust companies
were reported at $1,981,000 in 1897 and at $7,290,000 in
1907, compared with $3,563,000 and $8,470,000 in the
case of the national banks.
This startling increase among banking institutions outside the national system greatly complicates the problem
of legislation designed to improve the national banking
system. But in following the course of the crisis of 1907
only two matters need be considered—the growth of
deposits in national banks, due to state institutions, and
the relations between trust companies and banks in New
York City.
On October 2, 1897, jthe net amount due from national
banks to state banks of all kinds was only $185,600,000;
on August 22, 1907, it was $646,000,000. Of course, much
of this amount was the result of current dealings between
the banks, but by far the greater portion was made up
of the reserves of these state institutions, which even in
the cities held much smaller amounts of cash than the
national banks. In particular the increase in the deposits
of state banks and trust companies held by the New York
banks was most striking and might well have been considered alarming. The following table tells the story:
[Expressed in millions.]
O c t . 2,
1897.

Net deposits due national banks
Net deposits due state banks, trust companies, etc.




225

75-9

Sept. 4,
1906.

$264.3
202.1

A u g . 22,
1907.

$213.8
196.3

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Monetary

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From a little more than one-third the aggregate of
bankers' deposits in 1897, the deposits due state institutions had become in 1907 almost equal to those due the
national banks. The aggregate of bankers' deposits had
also become a slightly larger part of the total deposits
of the New York banks, but the real importance of this
growth is due to the fact that the cash reserves of the
state banks and trust companies were notoriously inadequate. Even more than the national banks were these
state institutions certain to be obliged to draw down
their deposits in an emergency. That these deposits
should have been acquired with eagerness and without the
slightest unfavorable criticism from the public is indeed
strange. The state banks and trust companies were from
time to time the subjects of unfavorable comment, and
efforts were made looking toward the maintenance by
them of larger cash holdings; but that the receipt of enormous deposits from these institutions subjected the national banks holding them to serious dangers was not
apparently given a thought. At any rate, the banks
holding these deposits did not build up reserves any
larger than they would have carried had they been received from that class of conservative individuals who
habitually maintain large balances with their banks.
Even if the brunt of the storm in the autumn of 1907 had
not struck the trust companies, it is certain that their
requirements would have been relatively greater than
those of the national banks having deposits with reserve
agents.




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The growth of state banks in New York City was not
relatively more rapid than that of the national banks,
but that of the trust companies was vastly, even dramatically, greater. In January, 1898, the loans of the
trust companies were about $180,000,000, considerably
less than half those of the national banks. In August,
1907, their loans had increased to $610,000,000, compared with $712,000,000 for the national banks at the
same date.
The growth of the purely banking business of the New
York trust companies subjected the banks to an unprecedented amount of competition, but it can not be said to
have brought about any appreciable change in the character of their operations, nor did it involve any change
in the proportion of their cash reserves to deposit liabilities. In times of moderate strain the clearing-house
banks were often enabled by means of the trust companies
to make a better showing in the weekly bank statements
than would otherwise have been the case. As the business of the trust companies was chiefly local, they were
not subject to seasonal withdrawals of cash, and their
lending power was, therefore, more nearly the same
throughout the year. An increase in rates for loans in
New York was usually followed by a shifting of loans from
banks to trust companies. By this means the deposit
liabilities of the clearing-house banks were reduced, thus
enabling them to preserve the cherished 25 per cent reserve
ratio. The resort to this device was, of course, greatly
simplified through the close affiliations between some of
the large banks and trust companies, and it was so much




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in evidence during the years before the crisis that the
surplus reserve became quite as much an object of mirth
as of confidence.
ELEMENTS

OF WEAKNESS IN THE NEW
MARKET.

YORK MONEY

The ease with which the growth of the trust companies
made possible the shifting of tens of millions of loans and
deposit liabilities seems to have obscured the essential
unsoundness of the situation. If, for any reason, it
should become necessary for the trust companies to contract their banking operations, it would obviously be
necessary for the banks to shoulder the burden in order
to save the local situation. In the past the banks could
carry through some slight curtailment of loans in an
emergency without involving the business community
in disaster. The course of the panic of 1907 was to
show that in an emergency the New York national banks,
in addition to being obliged to meet heavy withdrawals
of cash, must also make a positive increase in their loans.
Another development of this period requires attention because it tended to increase the sensitiveness of
the New York money market in times of moderate strain
and because it created a serious element of weakness in
emergencies. The consolidation of corporations together
with other influences tended toward the concentration
of all kinds of financial transactions in New York, and
among them the business of making loans. Outside
banks, including those of Canada, came to supply an
increasingly large though variable portion of the funds
available for loans. No exact statistics are to be had, but




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it was estimated that in 1906 the loans of outside banks
in New York were no less than $300,000,000.° An
analogous development has taken place in London
through the lending by foreign banks in that market.
Now, to maintain payments in these circumstances and
to prevent extreme fluctuations in the rates for loans are
extremely difficult matters. The outside banks feel no
responsibility for the course of the market. They will
naturally withdraw from it when affairs at home require
more of their funds or when they have come to distrust
its future. It therefore becomes necessary for the local
banks in the money center to be able at all times to
shoulder at least a part of the loans which may be liquidated by outside banks, and also to supply the cash which
they thus secure the power to draw away.
Another somewhat analogous banking development
must also be noted. We have already seen that no part
of our foreign trade is financed on this side. Imports
are secured through commercial letters of credit, and
bills against exports are regularly discounted in Europe.
Anticipatory bills also have long been in use by means of
which immediate credits are secured against exports of
future months. During the years of active business
after 1897 another device was, if not for the first time
put into use, at least utilized to an extent hitherto
unknown—the finance bill. Like other bills in form, it
was made possible by the hypothecation of American
securities to bankers in foreign countries. The extent
to which such bills were drawn can not be determined
° A . D. Noyes, Forty Years of American Finance, p. 356.




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exactly, but more than once the credit secured in this way
amounted to several hundreds of millions of dollars. In
1906 the maximum was reached, and it was generally
believed that finance bills to the amount of $400,000,000
or $500,000,000 had been drawn. At the time of the
crisis of 1907 the amount of these bills was, as we shall
see, comparatively small, but their extensive use in earlier
years illustrates the tendency in the New York money
market to employ not only its own resources to the limits
fixed by law, but also to exhaust every other source of
credit, both domestic and foreign, leaving nothing in
reserve for emergencies.
Taking all these influences together it is evident that
the New York money market was far more subject to
severe strain than at any time covered by this investigation. To the possibility of withdrawals by outside banks
must be added the danger of withdrawals by a large group
of local institutions, the trust companies. Moreover,
there was the possibility that the contraction of loans by
outside banks, trust companies, and foreign lenders might
come together, creating a situation which would be
extremely difficult to handle successfully in any case and
well nigh impossible if in normal times the important
clearing-house banks failed to exercise great caution and
maintain large reserves.
THE POLICY OF THE TREASURY.
Some of
weakened
which the
there was

the influences which have been just described
the New York money market in ways for
national banks were not responsible. But
another influence, potent during this period,




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which tended positively to encourage unsound banking—
a large government surplus. The disposition of the government surplus both in this and other periods has varied
with successive Secretaries of the Treasury. Between
1900 and 1907 deposits of the Government with the
banks rather than bond purchases were constantly
favored. No banking objection can be made to this
practice if all funds immediately upon their receipt are
thus deposited, but in place of that policy a sort of
grandfatherly attitude toward the banks was adopted,
especially by Secretary Shaw. It does not fall within the
scope of this investigation to consider the numerous
devices which were made use of by him to relieve the
money market. They are summarized as follows in an
admirable study of the relations between "The Treasury
and the Banks," by Prof. A. P. Andrew:
Mr. Shaw's administration of the Treasury was marked by a t least six
significant departures from the paths of his predecessors. (I) He placed
government money with the banks upon other security than government
bonds; (II) he exempted the banks from maintaining the legal reserve
against government deposits; (III) he transferred to the banks public
money which had already been turned into the Treasury; (IV) he artificially stimulated the importation of gold; (V) he deliberately withdrew
money from the banks in certain seasons in order to redeposit it later,
and (VI) he forced alternately the enlargement and retirement of the
note issue by changing his orders about deposit security as he saw fit.a

Whether the operations of the Treasury were a fundamental influence tending to weaken the credit situation
may, however, be doubted. After all, the course of the
New York money market was not very different from
what it had been in the years before the crises of 1873
and 1893, when there was no government surplus. With
< The Quarterly Journal of Economics, August, 1907, p. 559.
*




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the exception of a few months before the crisis of 1893,
when, on account of the silver situation, the business
atmosphere was tinged with unusual caution, the New
York banks have always lent to the full extent of their
resources, even though a part of them was but temporarily at their disposal. The Treasury surplus is indeed
a stumbling block in the way of any proper realization
of the necessity of maintaining a large available reserve,
but that such a reserve would have been held between
1900 and 1907, had there been no surplus, is extremely
doubtful.
THE ULTIMATE RESERVE.
As in our analysis of the banking position before 1873,
it will be necessary to carry one step further the search for
the whereabouts of the ultimate reserve in our banking
system. Throughout the period covered by this study a
few of the New York banks have held the bulk of bankers'
deposits, the majority of the banks being engaged in
purely local business. In 1907 this concentration was
but little greater than in 1873, though on account of the
magnitude of bankers' deposits the banks holding them
had become more conspicuous and attracted much more
public attention. Instead of the seven banks of 1873,
there were in 1907 and the years immediately preceding
six banks which regularly held about three-fourths of all
bankers' deposits. These banks, in the order of their importance, were the City, the Bank of Commerce, the First,
the Park, the Chase, and the Hanover national banks.
The following table shows the condition of all the 38 New




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York national banks, the 6 banks, and the other 32 banks
on August 22, 1907:
[Expressed in millions.]
Thirty-eight
banks.
Capital
Surplus and undivided profits
Individual deposits
Due to national banks
Due to other banks
Loans
Due from national banks
Due from other banks
Clearing-house exchanges and other cash
items
Cash reserve
Total resources
Net bankers' deposits

$114.6

The six
banks.

206

158

$43
59
247
90
47

712
45

417
19

295
26

9

3

5

131
218

79
140

52

.364
410

836

140
532
259

$71
80

Thirty-two
banks.

285
168

304

78
528
106

Comparison with the similar table for 1873 a shows that
remarkable changes had taken place in the position of the
banks holding bankers' deposits. In 1873 the seven
banks controlled only about 30 per cent of the resources
of all the New York national banks. In 1907 the six
banks controlled over 60 per cent of the total. The
change in capital and surplus was equally noteworthy—
from less than 24 per cent to nearly 60 per cent. Other
items tell the same story. Individual deposits had increased from less than 20 to more than 54 per cent and
loans from about one-third to nearly three-fifths. Finally,
the cash reserve had increased from less than two-fifths to
about two-thirds that held by all the banks.
This growth of the banks holding bankers' deposits was
in keeping with their responsibilities and had a double




«See p. 17.
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significance. The ability of the other banks to assist the
six banks in an emergency, as was done in 1873, was
clearly very much lessened; at the same time the power
of the six banks, taken together, to cope with an emergency
was vastly increased. It can not be doubted that any
agreement upon a common policy in times of difficulty
could be carried through by them, even without the cooperation of the other banks. In 1873 the seven banks
were weak because they were carrying on business almost
entirely with bankers' deposits. In 1907 they were weak
taken singly, but acting together they would have wielded a
banking power sufficient, it may be readily believed, for
almost any emergency.
The improvement in the position of the banks responsible for bankers' deposits, however, may be easily overestimated. The greater capital and surplus in themselves did little except to give slightly greater confidence to depositors, and this gain was perhaps offset by
more general knowledge that some of these banks were
controlled by various financial groups whose principal
interests were not in banking pure and simple. The
large loan account of these banks did not strengthen
them as it would have done in 1873, since, on account
of the entrance of outside lenders into the market, these
banks were certain to be obliged to increase rather than
decrease their loans in an emergency. The only certain
resource for banks holding large bankers' deposits is a
large cash reserve, and that was as conspicuously lacking
in 1907 as it had been in 1873. In both years net bankers' deposits were more than twice the cash reserves of




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these banks, and their proportion of cash to net deposits, like that of the purely local banks, was but slightly
above the 25 per cent required by law.
The power of the banks holding bankers' deposits to
restrain the various dangerous influences which have
been analyzed was not great. Their situation in this
respect is not unlike that of the great European central
banks. When, for example, in London the reserves of
the other banks are increasing or foreign bankers are
investing more largely in loans in the London market,
the Bank of England can do little more than husband
its own resources. Similarly, the New York banks holding bankers' deposits can not check the resort to finance
bills or the entrance of outside banks into the market
for loans, but they can maintain large reserves, and
so long as they are permitted to hold the position of
central reserve agents it is not unreasonable to expect
that they should do so.
That the banks which held the reserves of other banks
were in no position to meet an emergency was clear
from the course of the money market during nearly
every year between 1900 and 1907. As in other periods of active business, loans were increased in summer,
only to be followed by disturbing contraction and high
rates in autumn. It has indeed been urged in defense
of the banks that, though these temporary fluctuations
might have been prevented by them, the proper and
effective remedy was through changes in legislation.
The erratic withdrawal and return of money to the
channels of trade through the operations of the Treas6158—10




16

23s

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Monetary

Commission

ury and the system of note issue were certainly in part
responsible. But, quite apart from these causes of temporary difficulty, it is clear that the banks were not
strong enough to meet the more occasional, but also
more severe, requirements of an emergency. Their responsibility at such a time was in no way connected
either with the system of note issue or the movements
of government funds. Trust company balances afford
an excellent example. The deposits of the trust companies with the national banks increased steadily with
the growth of their banking operations. Most of them
were city institutions, subject to no seasonal variations
in the requirements of their depositors for cash, but as
few of the trust companies held cash reserves, in receiving deposits from them the banks were assuming a
risk of a particularly explosive character. But they did
not on this account maintain reserves proportionately
greater than those held in former years. It is therefore
difficult to escape the conclusion that, if all government
funds had been deposited with the banks upon their
receipt, loans would have been still further increased in
those months, when, in fact, money was withdrawn from
the market by the Government. Legislative changes may
remove obstacles to sound banking, but they can not take
its place altogether.
INDICATIONS OF APPROACHING REACTION.

The failure of the banks holding the ultimate reserve
of the country to live up to the responsibilities of their
position is evident in still another direction. While the
exact moment of the outbreak of the crisis of 1907 could




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not be foreseen, the imminence of a period of trade
reaction had been for many months so probable that
precautionary measures might reasonably have been
expected from these banks, if not from the banks and
the public in general. A short account of the course of
events during 1906 and 1907 down to the outbreak of
the crisis will afford ample evidence of the obvious need
of caution and will also serve as an introduction to the
narrative of the crisis itself.
After the San Francisco earthquake on April 18, 1906,
eighteen months before the crisis, there were indications
in plenty that the pace was too rapid and that the equilibrium of economic forces was becoming increasingly
unstable. That catastrophe destroyed an immense
amount of capital, a loss which, through insurance, was
widely distributed; but even if it had not occurred it is
certain that demand for additional capital was outstripping current savings seeking investment. Increasing difficulty was experienced in marketing securities of the
very highest class. By some journalists and others
eagerly searching for objections to a prevailing tendency
this difficulty was attributed to the activities of the
national and state governments designed to regulate
corporations; but it can hardly be supposed that this
superficial view blinded those in responsible positions in
the financial world. The strain upon capital was worldwide, and in the United States municipal bonds whose
sale would have been stimulated by distrust of business
corporations could only be marketed when offered at
lower prices or a higher rate of interest.




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Whatever the causes, the inability to secure capital
by the sale of securities in a period of active business
should have been enough in itself to inspire unusual
caution in the management of banking institutions.
When corporations of the highest standing are obliged
to resort to short-term notes it may be assumed without
question that other corporations are expanding upon an
insufficient foundation of working capital, that current
obligations are increasing, and that bank credits are
being used to their utmost extent. This probability
might well have been recognized as a certainty when it
appeared that during the latter half of 1906 and the
first eight months of 1907 the loans of the national banks
had increased more rapidly than at any time in the
history of the system.
Increasing tension in New York, whenever comparatively slight contraction in loans took place, was another
indication pointing to the same condition of affairs. It
suggested that there were few persons in the community
with idle funds available to take over either the loans
or the collateral of borrowers, and that, consequently,
any considerable liquidation of loans would be difficult,
and, if carried through rapidly, disastrous.
Another indication of the approach of a period of
declining activity in trade was the increasing ratio of
costs reported in many industries. This is probably one
of the most fundamental causes of industrial reaction
and the necessity for an occasional period of recuperation.
During the ten years before 1907 production in many
branches had more than doubled; as, for example—coal,




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iron, and also railroad traffic. A far more rapid increase
in the number employed in such occupations was made
than was compatible with the maintenance of industrial
efficiency. The incompetent could hold places because
there were none to fill their positions, and there was no
time to acquire skill by those capable of acquiring it.
As a result of these and other causes which might be
mentioned there could be no doubt that the United
States, like other countries, was about to pass through
a period of reaction, though the exact moment of its
beginning could not be foreseen and might largely be
determined by fortuitous circumstances. It was so probable that with each month of 1906 and 1907 the exercise
of increasing caution might well have been expected in
all responsible circles.
Little heed seems to have been given to these warning
signs, but much was made of every straw which suggested a possible further advance. On July 31, 1906,
dividends were resumed on the common stock of the
United States Steel Corporation, and on August 18 the
Union Pacific dividend was advanced from 6 to 10 per
cent; and dividends were begun at the rate of 5 per cent
on the shares of the Southern Pacific Railroad. Events
seem to have proved conclusively the ability of these
companies to earn the dividends which were then declared, but nevertheless, coming when it did, this action
exercised an unfortunate general influence. It gave
encouragement to the unbridled optimism which was
already too much in evidence. It was preceded and
followed by a speculative movement on the stock exchange




239.

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which was made possible through credits granted by the
banks upon the foundation of the usual summer inflow
of funds from the interior. The unsoundness of the situation was shown during the first half of September,
when loan contraction of only $27,000,000 brought callloan rates on successive days to 40, 30, and 25 per cent.
Relief was secured in two ways—through the intervention of the Secretary of the Treasury and through foreign exchange operations. During September and October the money in circulation increased nearly $100,000,000.
Treasury holdings were reduced $23,000,000 by deposits in
the banks. State and other bonds were accepted as
security for such deposits on condition that the banks
should use the released United States bonds as a basis
for further issues of notes. Nearly $54,000,000 was
secured through gold imports, which were brought about
primarily by means of the negotiation of finance bills,
though the movement was slightly facilitated by the
deposit of government funds in the banks against gold
engagements. By these means after the middle of
September the New York banks were enabled to meet
further crop-moving requirements without any considerable loss in cash. Loan contraction ceased and there
was even some slight increase. The one apparent gain
was to enable the bull movement on the stock exchange
to continue through the autumn months. The last month
of the year, however, was marked by%a return of stringent
monetary conditions and a declining stock market. In
January came the usual return flow of money to New
York and temporary ease, but the stock market was then




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overshadowed by an influence which made liquidation
necessary and upon an extensive scale.
Owing principally to the enormous exports of gold to the
United States secured by means of finance bills, the Bank
of England on October 11 advanced its rate from 4 to 5
per cent, and followed this action on Friday, October
19, by an advance to 6 per cent, a rate which had been
reached only three times before during twenty years.
At the same time the bank intimated to the London
financial world that the acceptance of American finance
bills was a menace to the stability of the London market,
against which the bank would throw the full weight of its
power and influence. From that time the further negotiation of finance bills was at an end, and as those drawn
in earlier months matured payment was exacted, except
where by previous arrangement a single renewal had
been provided for. From December, 1906, the liquidation of these bills was the most potent single factor in the
situation. So long as it was possible to transfer loans
to the banks in New York no great difficulty was experienced, but toward the end of February it became
necessary for the banks to contract loans to an extent
about equal to the increase which had been made during
the first weeks of the year. The double process of liquidation soon culminated in the so-called " rich men's panic''
of March, 1907. Never before or since have such severe
declines taken place on the New York stock exchange.
The most notable decline was in the case of Union Pacific
shares, which fell over 50 points within less than two
weeks. Probably no one security had been used so
extensively as collateral in finance-bill operations.




241

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Some recovery took place at the end of March and in
subsequent months, though a succession of unfavorable
influences prevented any active speculative movement.
Copper had advanced to the extraordinary high price of
26 cents a pound at the beginning of 1907, reflecting in
part conditions of demand and supply and in part manipulation of the market for the metal. It was held stubbornly
at that price, although demand fell off sharply and stocks
accumulated. At length in July some concession was
made in price without, however, stimulating demand.
Thereafter the price fell rapidly and was only 13 cents at
the beginning of October. Even with the price cut in
half, the demand for copper was sluggish, and it became
clear that the diminishing consumption of copper was the
fundamental factor in the situation. Copper shares, which
had advanced with the price of copper, fell sharply though
hardly enough to discount fully market conditions.
Another significant bccurrence was the failure on June
28 of New York City's offering of $29,000,000 of 4 per cent
bonds, the applications for which aggregated only a little
more than $2,000,000. Finally, it may be mentioned that
the gain in railroad net earnings was not proportionate
to that in gross earnings and that during three of the first
nine months of the year there was a positive decline.
While the course of prices on the stock exchange after
the March panic was upward, the market manifested great
sensitiveness at all times. Early in August came another
decline, which wiped out more than the gain of the preceding months. This August decline was the only episode
during the year which can be ascribed in part at least to




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governmental activities designed to restrain corporations.
It followed hard upon the $29,000,000 fine imposed upon
the Standard Oil Company, which, coming at a time when
the market was not strong, may be properly regarded as
occasioning the sharp decline which followed its announcement. Had the crisis come at that time it might have been
argued with some plausibility that if not caused it was at
least precipitated by this rather spectacular exercise of
judicial power. But the crisis came more than two months
later, and therefore it can have been at most a contributing and not an immediate cause. There is, however, reason to hold that this and all other governmental activities
which had the control of corporations as their object did
quite as much good as harm from a purely financial point
of view.
Government interference in the affairs of corporations
may have caused some depreciation in their securities and
might also have caused plans for the investment of capital
and earnings in the improvement of corporate properties
to be deferred. But there was no diminution in the demand of corporations for additional capital so that it
becomes necessary to show that there were savings seeking investment which would have been available but for
alarm as to the future returns from investments in corporations. There is, however, no evidence whatever that
there was available idle capital either in this country or
else where in 1907. On account of the increased cost of
living and the growth of extravagant expenditure it is
probable that there had been a relative decline in new
savings, and as borrowers of all kinds had difficulty in




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securing capital the contention that governmental activities
were the controlling factor in the situation falls to the
ground.
On the other hand, in so far as government policies
tended to check speculation and suggested the need of
caution they served a most useful purpose. Had stocks
advanced rather than declined in August it is quite certain
that the banks and the business community would have
been far less able to withstand the approaching shock than
they actually were in October. The situation was in many
respects similar to that just before the panic in May, 1884,
although in the earlier year in addition to successive declines on the stock exchange there had been considerable
trade reaction. In 1907 the outlook for the future was not
promising in many basic industries, but there had been
no positive reaction except in the case of copper.
Stock exchange liquidation in March and August had
vastly improved the credit situation as contrasted with
the previous year. There was no serious monetary strain
in New York during August and September, although the
amount of money in circulation increased far less than in
previous years. We have already seen that the New
York banks on August 22 were in slightly better shape
than at about the same time in 1906. As the next report
to the Comptroller of the Currency was not made until
December, the condition of the banks in general just
before and during the greater part of the crisis can not
be analyzed. In the case of the New York banks resort
may be made to the weekly bank statement. The following table shows the condition of the banks on August




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24 and just before the outbreak of the crisis on October
19; figures for corresponding dates for the previous year
are also included:
New York bank

statement.

[Expressed in millions.]
1907.

1906.

A u g . 24.

Deposits
Reserve
Surplus reserve

O c t . 19.

Aug. 23.

O c t . 20.

$1,088.0
1,048.0
272. 0

$1, 076.0
1,025,0

$1,071.0

$1,082. 0

267. 0
11. 2

267. 0

271. 0

4- 2

6. 2

9-9

1,053.0

In 1906, notwithstanding large gold imports and aid
from the Government, the banks with difficulty were able
to maintain a surplus reserve. In 1907 there had been
no gold imports, and the release of money by the Treasury had been no greater in amount and a relatively
small part of it had been secured by the New York banks.
The surplus reserve was larger in August of the crisis year,
and notwithstanding a slight loss in cash, was increased
somewhat during the two months preceding the beginning
of the panic.
But it was the foreign exchange situation in which
there was by far the greatest improvement in October,
1907, contrasted with the same month of 1906. It is true
that exchange rates during the first three weeks of October
were in the neighborhood of the export point. This was
due to European sales of American securities, which were
largely sold as a result of a severe crisis in Amsterdam
and Hamburg. On October 19 $1,500,000 was engaged




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for shipment to Germany. There were, however, no
finance bills approaching maturity, and an unusually
small amount of anticipatory bills had been drawn, so
that as soon as grain and cotton should begin to move in
quantity it was certain that exchange would rule strongly
in favor of this country.
After the August decline on the stock exchange a number of unfavorable events served to weaken confidence.
The most important of these were the disclosures regarding the affairs of the New York street railway companies,
which culminated in the appointment of receivers toward
the end of September. There is, however, no evidence
that distrust of the solvency of the banks either in New
York or elsewhere had been excited. During the crisis
distrust rapidly developed, but this was owing to causes
similar to those which had produced the same effect in
other crises and can be naturally accounted for by the
events which marked its beginning.
THE BEGINNING OF THE CRISIS.

The initial episode of the crisis was, as has often happened in previous instances, insignificant enough. Copper was, as we have seen, the one branch of industry in
which a positive decline had taken place. No time could
possibly have been chosen so unfavorable for venturesome attempts at manipulation either of copper itself or
of the shares of copper companies. It happened that the
particular disaster which precipitated the crisis was a
copper gamble, the outcome of which would ordinarily
have had no public importance.




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An unsuccessful attempt to corner the stock of a copper company of secondary importance involved certain
brokerage firms, including that of the brothers of Mr.
F. A. Heinze, who at the beginning of the year had become president of the Mercantile National Bank by securing a majority of its stock. Mr. Heinze had acquired
a large fortune from highly spectacular operations in
Montana copper properties, and distrust of his methods
led many depositors to withdraw their accounts after the
change of management. The diminishing resources of
the bank seem to have been used to an increasing extent
in the furtherance of copper enterprises and speculation,
and the failure of the copper corner brought matters to a
head. The bank was unable to meet unfavorable balances at the clearing house, which assumed large proportions because alarmed depositors were shifting their
accounts to other banks. A request for assistance from
the clearing house was granted after an examination to
determine the solvency of the bank and upon condition
that the president and entire board of directors should
resign. On October 21 the bank began business under a
new management and thereafter ceased to be a disturbing factor in the situation, though, it may be added, in
January it was deemed advisable to close the bank for
liquidation.
While the reorganization of the Mercantile Bank was
being carried out the clearing house was given an opportunity to intervene in the affairs of certain other banks
whose management had long been regarded with distrust. One of the directors of the Mercantile Bank was




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C. F. Morse, whose activities in the industrial and banking
world had been of an extreme character, even when
judged by American speculative standards. He first
became prominent as a promoter of the American Ice
Company, an enterprise disastrous to its shareholders,
and in recent years had been actively engaged in the
formation of a combination of shipping companies engaged in the Atlantic coasting trade. For a number of
years he had been one of the largest owners of shares in
New York banks, but, it is important to observe, only in
banks of moderate size. He was a director in seven
banks, over three of which he seems to have exercised
complete control. In securing this chain of banks the
shares of one bank, along with other collateral, were
used as a security for loans with which to purchase shares
in another bank, and so on in succession, while the various
banks were efficient instruments in the furtherance of
other enterprises. Morse had long been regarded with
distrust in banking circles* and a clearing-house investigation of his methods had been made as early as 1902,
but it led to no definite action. His connection with the
Mercantile Bank seems to have frightened depositors in
his other banks, the most important of which was the
National Bank of North America, and two of them were
obliged to appeal to the clearing house for aid on October
19. Assistance was granted upon condition that Morse
should retire altogether from banking in New' York.
Much the same course was taken with Messrs. E. R. and
O. F. Thomas, who were associated with the Heinzes,
and were the chief owners of the Mechanics and Traders




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Bank, a state institution in the clearing house, and the
Consolidated Bank, which was not a member of the association. Taken together, five banks, members of the
clearing house, were concerned, three of which were
national and two state banks, and also three banking
institutions outside the association, a national, a state
bank, and a trust company. The total deposits of the
five banks on October 12 were only $56,000,000, and those
of the entire number only $71,000,000. It was not,
therefore, a very difficult matter to afford them the assistance they required. Various clearing-house banks
subscribed to a fund of $10,000,000 to be used if necessary, and on Monday, October 21, it may be said that the
clearing house had completed the work of putting its
affairs in order. It is to be noted that there had been
nothing in the nature of a crisis up to this time, although
the difficulties of these banks doubtless gave rise to a
vague feeling of distrust, which speedily assumed dangerous
proportions when it became known that certain far more
important banking institutions were also in need of
assistance.
The narrative of the crisis may with advantage be interrupted at this point to call attention to the significance of
this Heinze-Morse episode as an example of a deep-seated
cause of weakness in the financial system of the country.
National banks are not allowed to open branch offices, and
most of the states have enacted similar legislation. Consequently, banks are numerous, nearly 16,000, not including savings banks, and are generally of small size. While
this system of independent local banks has very great ad-




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vantages, it has also certain serious, though not incurable,
disadvantages. Few banks are large enough to be the
principal interest of those who own and control them.
Upon the whole the system has not worked badly, since
the directorate has commonly included capable men from
various occupations, but danger arises when an individual
or group of closely associated individuals gains control of
a bank for the purpose of furthering private undertakings.
This danger is of course vastly more serious when a bank
is situated in New York or some other money center in
which even the failure of a bank engaged in purely local
business has more than a local effect upon public confidence.
Unfortunately there seems to have been a distinct tendency
in this direction in recent years, and there is analmost entire lack of definite public opinion opposed to the practice.
The good nature and optimism characteristic of the country
extends even to financial matters, regarding which there
is a painful absence of thorough unflinching criticism in
any financial journal. The attitude of publicists is commonly weak and ineffective, and is well illustrated by the
following comment upon the particular case of the Morse
banks taken from an influential New York journal:
A few capitalists of no great standing, actively engaged in speculative
industrial schemes of their own, were gaining control of a group of banks
through mere stock ownership on a margin. * * * The possibility of
danger had been known for six years past. If it be asked why no one interfered, the answer is t h a t no one outside of the banking department had a right
to examine the soundness of these banks and challenge the manner of control; second, that the very hazards involved in existing conditions rendered
open accusation extremely perilous. 0

Surely a money market in which urgently needed remedies are thus treated can hardly escape an occasional up-




a

The Nation, October 24, 1907, p. 384.
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heaval. A healthy tradition should be cultivated which
would lead depositors to desert a bank known to be controlled by one man, or closely identified with a single enterprise. Even when honestly managed there is the obvious
danger which arises from lack of a wide distribution of
risks. The evidence in the Morse trial certainly suggested
an absence of rigor on the part of the Comptroller of the
Currency in suppressing abuses. An even more efEective
remedy might have been applied through clearing-house
action, a promising means of improvement which is now
being adopted in many cities.
TRUST COMPANY DIFFICULTIES.

Returning to the narrative of events in New York, it
may be noted once more that there had been nothing in
the nature of a crisis during the week the clearing house
was putting its affairs in order. Crisis conditions developed the following week and were occasioned by the difficulties of a certain trust company. The Knickerbocker
Trust Company was the third largest trust company in
New York, having deposits of $62,000,000. The connection of its president with some of the Morse enterprises
engendered distrust, which made itself felt in a succession
of unfavorable clearing balances. On Monday, October
21, the National Bank of Commerce announced that it
would discontinue clearing for the Knickerbocker on the
following day. An unofficial committee representing a
few trust companies and banks was not given an opportunity to examine its affairs until the last moment, so
that it would have been difficult if not impossible to
6158—10




17

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take definite action. Nothing was done aside from the
issue of a reassuring statement by the directors in which
the resignation of its president was announced. On Tuesday, after a run of three hours, during which $8,000,000
were paid out, the company was forced to suspend.
Whether the company could not have been assisted is
not clear, but that, if possible, it would have been of advantage both to the banks and the other trust companies
is certain. The size of the company alone rendered assistance an undertaking of no little difficulty, but the condition of its assets at the time could not have been hopelessly unsatisfactory, as the company was able to resume
business in the following March under a plan of reorganization agreed upon by its depositors and shareholders.
The plan of reorganization adopted, however, showed
that the assets of the company were even then far from
being in liquid condition, and in the absence of any association among the trust companies or of any feeling of responsibility on the part of the clearing-house banks, the
suspension of the company was unavoidable.
Had the Knickerbocker Trust Company been a bank
and a member of the clearing house, it is highly probable
that it would have been assisted, following the precedent
of 1884. Relative to the increasing magnitude of banking operations in New York, the Knickerbocker was not
so large as the Metropolitan Bank in 1884. Apparently
no proposal to assist the company was considered, and
this is readily explicable. Relations between the banks
and the trust companies had been somewhat strained for
a number of years. The banks complained of the unfair-




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ness of competition with institutions which were not required to hold a large cash reserve. In 1903 the clearing
house had adopted a rule which required all trust companies clearing through members of the association to
accumulate a reserve which, though smaller than that of
the banks, was considerably larger than was held by
most of the trust companies. Rather than submit to
this requirement, nearly all of these gave up clearinghouse privileges, the most important exception, curiously
enough, being the Knickerbocker Trust Company.a It
would therefore seem to have deserved peculiar consideration on the part of the clearing-house authorities. It may
also be suggested that assistance might well have been
granted from purely selfish motives. A group of banking
institutions is very similar to a row of bricks, the fall of
one endangering the stability of the rest. When all the
circumstances are considered, however, the failure of the
clearing-house authorities to take any action was doubtless
the most natural course, and though unfortunate in its
consequences, can hardly be regarded as blameworthy.
Equally mild judgment can not be passed upon the
means which were adopted at the next stage of the
crisis. On Wednesday, October 23, a run began on the
Trust Company of America, the second of the trust companies in size, having deposits of $64,000,000. The president of the Knickerbocker was one of its directors, but
the unfortunate disclosure that its affairs had been the
° T h e reserve of the Knickerbocker Trust Company on August 22, the
date of the last return to the state superintendent of banks, was$4,745,000,
a little more than t h a t of a n y other trust company in the city and very
much more than t h a t of most of them.




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s ion

subject of a conference on Tuesday was the chief influence in precipitating a panic among its depositors. The
company withstood a run which continued for two weeks,
during which it paid out some $34,000,000; on Wednesday and Thursday paying $12,000,000 and $9,000,000. The
Trust Company of America and also the Lincoln Trust
Company upon which a run began on Thursday were
assisted, since their assets were apparently in a more satisfactory condition than those of the Knickerbocker, but still
more because it was clear that the foundation of the entire
credit structure was endangered. The steps taken, however, were slow and the means adopted were not sufficiently
clear in import to renew general confidence. On Wednesday, October 23, a committee of five trust company
presidents was formed to receive applications for assistance, make examinations, and report to meetings of all
trust company presidents. Through this committee money
was provided from day to day in large amounts, bonds
contributed by various trust companies being turned
over to national banks, which used them as security
for additional government deposits. Confidence was not
restored until, on November 6, announcement was made
that a majority of the shares of the Trust Company of
America and of the Lincoln Trust Company had been
placed under the control of a committee of trust company
presidents and that the " necessary financial arrangements had been made to enable both companies to proceed with their business.'' The inference can not be
escaped that the New York money market was not adequately organized to cope quickly and effectively with an
emergency of this kind.




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With the rapid growth of trust companies, an increasingly large part of the banking business of the city was
entirely without organization. The trust companies
should either become members of the clearing-house association or at least form some organization of their own.
They would then have the machinery ready for prompt
action and some sense of common responsibility would
be developed. It is indeed true that on account of their
past the three companies were not deserving subjects
for assistance. Their methods of attracting business,
absurdly high interest on deposits, and the collection of
out-of-town checks without charges, were generally regarded as unsafe and even piratical. But the unwillingness of some of the trust companies to join in measures of
relief at all, or at least in proportion to their resources,
can not be attributed to this cause alone. But for
the powerful influence of Mr. J. P. Morgan it is probable that no united action whatever would have been
taken. It is certainly an element of weakness in our central
money market that influential credit institutions should
have to be dragooned into doing what is after all in their
own interest as well as to the general advantage.
This trust company episode suggests one conclusion of
general application. Unless it is possible at the outset to
take measures which are almost certain to restore confidence in threatened banking institutions, it is far better
to leave them to their own devices, either liquidation or
reorganization. The money furnished the two trust companies saved them from failure, but served no purpose of
general importance. If it had been used to meet the




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demands of banks throughout the country, alarm might
possibly have been delayed and general suspension
avoided.
UNFORTUNATE DELAY OF THE CLEARING HOUSE.

During the three days of heavy runs upon the trust
companies New York was threatened with a general
panic, and a number of other trust companies experienced runs of varying degrees of severity. A few small
mismanaged banking institutions in the outskirts of the
city were forced to suspend. Depositors began to withdraw money from savings banks and they were obliged
to exercise their right to require sixty days' notice. Loans
could only be secured with extreme difficulty and the fall
in stock exchange prices, while not so extreme as in
March, was alarmingly violent and affected securities
more generally. The strenuous efforts that were made to
relieve the situation were but partially successful, because
they lacked the authority and backing of the Clearing
House Association. As in the case of the Trust Company of America, the relief afforded was of a piecemeal
character without any certainty of its continuance. On
Thursday, in order to prevent complete collapse on the
stock exchange, Mr. J. P. Morgan formed a money pool
of $25,000,000, to which some of the leading banks and
financiers subscribed. On Friday, also, a similar pool was
formed, though $10,000,000 proved adequate for the
purpose. In no crisis since the civil war have matters
been allowed to drift along during so many days of acute
panic.




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Even though it would have been impossible to secure
agreement among members of the clearing house to
provide the trust companies with the assistance they
required, the immediate issue of loan certificates should
have been authorized to meet the general situation. The
failure to issue certificates on Tuesday or Wednesday
would be difficult to explain, if the reasons for delay had
not been set forth by no less an authority than the president of the clearing house, who observed subsequently:
Well, the panic occurred. The institutions that had been weakened by
unwise investments went down. New York was the storm center. The
paramount question was, Could the storm be stayed before its work of
devastation and ruin should spread over the entire country? This was the
problem confronting the clearing-house committee. The committee knew
that the issuance of clearing-house certificates would immediately bring
about a restriction of cash payments throughout the country, causing
widespread business inconvenience and embarrassment. Hoping that the
panicky condition might subside, the committee postponed from day to
day the issuance of clearing-house certificates, honoring the drafts that
were being made against our rapidly falling reserve until it showed a
deficit of $53,000,000a> [sic], and then concluded it would be folly to hesitate longer, and clearing-house certificates were issued.

The failure to issue clearing-house loan certificates at
least as early as Tuesday was the most serious error made
during this crisis. All experience in former crises went
to show that the early issue of certificates had a calming
effect upon the community, because they made it possible
for the banks to extend relief more freely by granting
accommodation to borrowers, and because they prevented
in part the weakening of particular institutions through
unfavorable clearing-house balances. Had clearing-house
loan certificates been issued early in the week it would
o> I t was not until two weeks after the issue of loan certificates that the
bank statement showed a deficit of $53,000,000.




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not have been necessary to resort to the cumbersome
device of money pools. Liquidation on the stock exchange would have been somewhat less, and the alarm, to
which the sudden fall in security prices contributed,
would have been in part escaped.
During the three days of heavy runs upoi^ the trust
companies the strain upon the clearing-house banks was
very severe, as they had to furnish most of the money
required by the trust companies, whose reserves were
deposited with them. At the same time they were shipping money to the interior banks, and they also suffered
some loss from payments to their own frightened depositors. But at the close of the week there were many
indications that the worst of the panic in New York was
past. Withdrawals of money by local depositors were
diminishing, the savings banks were exercising their right
to require sixty days' notice from depositors, and the trust
companies had agreed to pay depositors so far as possible
in certified checks upon clearing-house banks. Had New
York been a city with only local responsibilities it is
probable that the disturbance would have gone no further;
but, as in 1873 and in 1893, the disasters in New York
had caused alarm to spread throughout the country. The
country banker and his depositors were apparently unmoved by the Morse-Heinze troubles, but hard upon the
news of the difficulties of the Knickerbocker Trust Company came telegraphic demands from all over the country,
including the other central reserve cities, for the calling of
loans and the shipment of currency. A number of adverse
developments had also taken place in various parts of




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the country while New York was struggling with its own
difficulties. The Heinze troubles involved a bank in
Butte, Mont., and in Goldfield, Nev., runs on the banks
due to local causes forced them to suspend. In Providence, R. I., a large trust company with deposits of
$25,000,000 was obliged to close, and other smaller banks
were subjected to runs. The various Westinghouse companies went into the hands of receivers on account of
inability to secure the renewal of large floating indebtedness, and as a consequence the Pittsburg Stock Exchange
was closed a —an exchange dealing almost exclusively
with local securities.
These widely scattered troubles contributed to, but
were not the principal cause of, the alarm which spread
throughout the country, but which was mainly due to the
panic in New York. Everywhere the banks suddenly
found themselves confronted with demands for money by
frightened depositors; everywhere, also, banks manifested
a lack of confidence in each other. Country banks drew
money from city banks and all the banks throughout the
country demanded the return of funds deposited or on
loan in New York. The evidence of lack of confidence in
and between the banks is clear and it points to a serious
difficulty in carrying on banking in this country. For a
historical parallel in England we should need to go back
to the first quarter of the last century. Explanation is
simple, however, if the course of our previous crises is
recalled. Seven times during the last century the banks
a The Pittsburg Exchange remained closed throughout November and
December, as did also that of New Orleans.




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suspended payment in some measure at least, and there
has been a currency premium, the last occasion having
been so recent as 1893. There is a well-grounded belief
among the people that it will be difficult to secure cash
during periods of economic disturbance. In all countries
in times of crisis some depositors withdraw their money
and hoard it from unreasoning fear. In the United States
there are also withdrawals by prudent depositors who
wish to be absolutely certain to have the money needed
in their affairs, and by others who are influenced by the
prospect of a handsome profit in a few weeks through the
sale of money at a premium. Former suspensions have
established a tradition which is an ever-present source of
weakness and which can only be broken by successful
endurance by the banks of the strain of a crisis. The
crisis of 1907 provided an exceptionally favorable opportunity, since general economic conditions were far less
unsound than on many occasions when payment was suspended in the past. Unfortunately almost as soon as
withdrawals began, and before the New York banks had
suffered a serious loss in reserve, cash payments were
restricted once more. Moreover, payments were restricted
for the first time immediately upon the issue of clearinghouse loan certificates.
EXPLANATION OF THE SUSPENSION OF PAYMENTS BY THE
N E W YORK BANKS.

Before the beginning of the week ending November 2
a few banks elsewhere may have already suspended, but
this is not a matter of importance, as it was restriction in




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New York that inevitably precipitated more or less complete suspension throughout the entire country. This
discreditable step was taken when the New York banks
were much stronger than on other occasions and when
prospects for securing additional funds were far more
promising. The reasons for this action and the necessity
for it are the most important questions to which the
course of this crisis gives rise. In order to answer them it
will be necessary to interrupt the narrative of the crisis in
order to make a detailed analysis of the condition of the
New York banks at the time clearing-house loan certificates were authorized.
The bank statement for the week ending October 26
must serve as the point of departure, though it is, of course,
unsatisfactory, because, being based upon averages, it
shows a better condition than was actually the case. The
following table gives the principal items in the statement
for October 26, with the changes from the previous week:
[Expressed in millions.]

Oct. 26,
1907.

Loans
Net deposits
Reserve held
Reserve percentage
Surplus reserve (deficit)

$1,087.7
$1,023.8
$254.7
24.9

Difference
from previous week,
increase ( + ) ,
[decrease (—).
+$10.9
- $1.9
-$12.9
$12.4

A somewhat more accurate idea of the condition of the
banks can be gathered from the following table, which
shows the condition of the five banks which had been




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obliged to request assistance, and the condition of all the
other clearing-house banks:
[Expressed in millions.]
Five Morse-Heinze
banks.

All other clearinghouse banks.

Oct. 19.
Loans
Net deposits
Reserve held
Reserve percentage _
Surplus reserve

Oct. 26.

Oct. 19.

Oct. 26.

$60.8
$55-4
$10.7
19-3

$52.3
$39-9
$4-5

$1,016.o

$1,035
$982
$250
25
$4

10.8

$970.3
$256.9
26. 5
$14-4

The really solvent banks, it will be observed, had relieved the situation by an increase of nearly $20,000,000
in loans. Their cash loss was only $6,700,000, and they
still held a surplus reserve of moderate proportions. But
these changes do not adequately represent actual conditions. The statement for the following week shows an
increase in loans of $60,000,000 and a loss in reserve of
$30,000,000. Some part of this increase in loans, with its
resulting increase in deposit liability, was certainly made
during the previous week, and doubtless an even more
considerable part of the loss in cash had been incurred
since payments were restricted during the later week. If
we may assume that half the loan and deposit increase was
made as early as October 26 and that two-thirds of the
cash loss had then been sustained, the statement would
have been as follows:
Loans.
Net deposits
Reserve
Reserve percentage




$1,065 ($1,035+130)
$992 ($982+$30-$2o)
---,
$230 ($250—$20)
2^.2
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This table has an unreal appearance, but it is based
upon an analysis of all the available data. The bank
statement for November 9 showed a very small loss in
reserve, only $4,300,000, not very far from the amount
of reported movements of money between the banks,
the interior, and the subtreasury. The statement for
November 2, therefore, probably represented actual conditions very closely. The reported movements of money
between banks, the interior, and the subtreasury for the
week ending November 2 showed a loss of $7,000,000,
and since the banks must have lost some money locally
it is safe to assume that at least $10,000,000 of the reported $30,000,000 decrease in reserve came during the
week. In the case of loans the figure given is hardly
more than a guess, but as the banks made loans more
freely after the issue of loan certificates, the assumed
increase of $30,000,000 for the week ending October 26
is prabably too large rather than too small.
The actual condition of the banks can hardly have been
worse than the showing in the table, and was probably
somewhat better. The estimated loss in reserve of
$36,000,000 is small after so eventful a week, and does
not indicate the extent to which the banks supplied
depositors with money. On Thursday, October 24,
$25,000,000 was deposited with the New York banks by
the Secretary of the Treasury, and between October 19
and October 31 $36,000,000 was secured in this way.°
Just about half of the money which was paid out by the
a Response of the Secretary of the Treasury to Senate Resolution No. 33
of December 12, 1907, pp. 57-59. Senate Doc. No. 208, 60th Cong., 1st
session.




263

National

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Commission

banks during the two weeks ending November 2 was
secured from the Government. Reported movements of
money between banks and the interior accounted for a
net loss of $33,344,000. As a result of subtreasury operations which included some transfers of money to banks
in other cities having subtreasuries the New York banks
gained $29,500,000. It will thus be seen that the Government supplied the banks with nearly all the money with
which they responded to the demands of outside banks.
The loss in reserve of the banks is, therefore, accounted for
by payments made to meet the demands of local depositors, including the trust companies. This statement may,
of course, be reversed with equal truth—the Government
supplying local needs, outside needs being supplied from
the reserves of the banks. In any case it can not be
said that the New York banks had experienced an exhausting depletion of their reserves. Out of a total
reserve of $256,900,000 on October 19, the solvent banks
paid out only $36,000,000 from their reserves during the
two weeks to November 2; and if we may assume some
approach to the real condition of affairs in our estimate
of the actual condition of the banks, they had only paid
out $26,000,000 at the time payments were restricted.
It may, however, be urged, and with truth, that the
test of the ability of the banks to maintain payments is
not the amount of the aggregate reserve unless it is distributed with some evenness among banks in proportion
to their liabilities. In earlier crises we have seen that
the few banks holding bankers' deposits were subject
to particularly severe strain and that when their reserves




264

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System

were depleted suspension was unavoidable in the absence of any pooling agreement. The condition of the
individual banks was not disclosed during the crisis.
October 26 is the last date for which such information is
available. The following table shows the condition of
the six banks holding the bulk of bankers' balances and
that of the other clearing-house banks (not including the
five already eliminated) on October 19 and October 26
1907:

[Expressed in millions.]

Six banks.
Oct. 19.
Loans
Net deposits
Reserve
Reserve percentage

$544- 2
$507-4
$139.7
27. 2

Oct. 26
$568.4
$522.6
$132.2
25-3

Other clearing-house
banks.
Oct. 19.
$471.8
$462.9
$117.2
25-3

Oct. 26.
$467.7
$461.2
$118.0
25.6

No very striking differences between the two groups of
banks are disclosed in the table. The tendencies indicated, however, are significant. The six banks taken together had relieved the situation somewhat by a moderate
increase in loans, while there had been a little contraction
by the other banks. The reserves of the six banks had
fallen away by $7,500,000, and their reserve ratio was
rather less satisfactory, although still above the legal
requirement. On the other hand, the reserves of the
other banks had increased slightly, and also their reserve
percentage. There is no means of determining whether
the actual condition of the six banks relative to the other
banks was less favorable than that based on averages.




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It is probable that the six banks made a large part of the
loans not shown in the statement, and probably much of
the estimated actual loss in reserve was due to payments
made by them. On the other hand, between October 19
and October 31 the six banks secured additional government deposits to the amount of $30,700,000, while the
other banks in the clearing house secured only $6,000,000.
This distribution of the government money was entirely
proper, as it corresponded, at least roughly, with the relatively greater strain which was imposed upon the six
banks in consequence of the panic. But its complete justification depended upon whether the banks securing the
lion's share of the government deposits fully lived up to
their responsibilities. Finally, it may be observed that
even if all of the $20,000,000, by which we have assumed
the actual reserve was below the average reserve, had
come from the six banks they would still have held
$112,000,000 to meet further requirements, an amount
equal to at least 20 per cent of their deposit liabilities.
The suspension of payments by the banks can not, therefore, be attributed to the exhaustion of the reserve held
by any particular group of banks in the clearing house.
If this analysis is carried one step further and attention is given to the condition of particular banks, the
explanation of suspension while reserves in the aggregate
were still large will be disclosed. It is with some hesitation that the writer singles out the particular banks
whose reserves happen to have been depleted most seriously. It is proper to say that the differences disclosed
between different banks do not in the slightest degree




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reflect upon the management, the credit, or the standing
of the individual banks. None of the banks was subjected to any influences except those arising out of the
general situation. And, furthermore, the banks which
were apparently the greatest sufferers were so because
they were doing, either absolutely or relatively, more for
their customers and the community at large than their
fellows.
The following tables show the condition of the six most
important banks in the New York Clearing House on
October 19 and 26, 1907:
[Expressed in millions.]
Deposits.
Oct. 19.

$148.2

City
Commerce
First
Park
Hanover _.
Chase

Oct. 26

53-3

$159-5
129. o
102. 7
68.0
56.6

So-7

Oct. a6

$126.8
104. o

$138

84.5
76-5
61.6
53-9

88

52.4

130-1
916
69-3

Reserve held.

Oct. 19.

Oct. 19.

Oct. 26.

Percentage.

O c t . 19.

Oct. 26.

138
73
64
54

Government deposits received between Oct.
19 a n d 3 1 .

City
Commerce
First
Park
Hanover..
Chase

$35-2
26.8
26. 7
19.7
17.6
13-7

$37-2
27. o
19.8
18.2
17.3
12. 7

28.5

26.9

257

26. 2

31-5

22. 4

25.7

24.6

28.6

26.6

25-3

233

$9.5
1.6
9.2
1.0
5-4
32

Examination of the table brings out some striking
differences among the banks. All but two of the banks
6158—10




1£

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increased their loans, but only in the case of the First
National and the National City was the increase at all
considerable. The other banks do not seem to have
been rendering anything like that assistance which their
resources would have permitted. The two largest banks
(the City and the Bank of Commerce) increased their
cash holdings and one of them its reserve ratio. Making
every allowance for the effects of the average system, the
conclusion can not be escaped that these two banks were
not doing their utmost to relieve the situation. Changes
in reserves and reserve ratios of the six banks were not
very great, except in the case of the First National Bank.
Although it received over $9,000,000 from the Government between October 19 and October 31, its reserve
was reduced nearly $7,000,000 during the week ending
October 26, and at the same time its reserve ratio had
dropped from 31.5 per cent to 22.4 per cent. The loss
of cash for the six banks taken together was only
$7,500,000, but that of the First National alone was
$6,900,000. When it is remembered that the actual
situation of the banks was less satisfactory than the
average showing of the bank statement, it can readily be
realized that the reserves of particular banks may have
been seriously depleted at this time, while those of others
were, perhaps, still above legal requirements.
The explanation of this seemingly unfavorable showing
of the First National Bank is in every way creditable to
its management, while at the same time it illustrates the
way in which failure to issue clearing-house loan certificates at the beginning of a crisis may hasten general




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suspension. As we have already seen, demands for currency were made upon New York from all parts of the
country, including the other central reserve cities, as
soon as the troubles of the Knickerbocker Trust Company became known. To some extent outside banks
directed shipments to be made against their balances
with New York banks, but more largely the demand was
for immediate liquidation of call loans and the shipment
of the money received in payment therefor. At the
same time the New York trust companies were reducing
loans upon a wholesale scale. This double liquidation
of loans could not be carried very far unless additional
loans were made by the New York banks. It would
simply have forced borrowers into insolvency. The
clearing-house banks did shoulder this burden, but on
account of the delay in the issue of loan certificates it
was not distributed among the banks with any regard to
their available resources.
Banks with relatively large New York trust company
deposits or numerous correspondents in the West and
South were subject to the greatest demands for cash and
for the liquidation of loans. When the outside banks and
the trust companies called their loans, brokers, to whom
call loans are principally made, immediately resorted to
the banks carrying their regular accounts, and the banks
felt under obligation to afford them accommodation so far
at least as it could be shown to be absolutely necessary.
It naturally followed that the particular banks which
happened to have a relatively large number of such
accounts were obliged to lend heavily and to provide the




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means for paying the loans that had been called. In some
instances the loan called would have been made to a broker
whose account was with the reserve agent of the interior
bank which had ordered its liquidation. In that case
the New York bank would be obliged to shoulder the loan
itself and to ship the cash, taking it from its own reserve.
In other instances the loan may have been made for an
outside bank by some other New York bank. In that
case, if the broker's account happened to be with the New
York bank mentioned in the first instance, its loan to the
broker would tend to create an unfavorable balance
against it at the clearing house. The reserve agent calling the loan for the outside bank would thus secure the
means of payment from that member of the clearing house
which assumed the loan for the broker. It might thus
easily happen that while some banks were losing very little
cash and making few new loans, others would be rapidly
expanding loans and quite as rapidly paying out cash
from their reserves. This seems to have been the situation
on October 26. Now, if loan certificates had been issued
earlier in the week it would have been possible for a
bank in the position of the First National to escape the
unpleasant necessity of strengthening other banks upon
which demands both from correspondents and from brokers
happened to be considerably less than those made upon
itself. On account of the delay in issuing loan certificates
there were, therefore, greater differences in the condition
of the banks at the close of the week ending October 26
than would otherwise have been the case. Finally, if
the issue of loan certificates had been still further delayed




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it is clear that suspension would not have been prevented.
Some of the banks whose reserves were being depleted
would have been forced to contract loans in a wholesale
fashion. Disastrous failures would have occurred among
borrowers, the solvency of the banks would have become
doubtful, and runs would have forced on suspension just
as was the case in 1857.
On October 26 clearing-house loan certificates were at
length authorized, thus enabling the banks to meet the
local situation, and to an even greater extent than in the
past they served this purpose effectively. For the week
ending October 26 the bank statement showed a loan
increase of only $10,800,000, but during the next week it
was $60,700,000, and for the week ending November 9
$38,900,000, a total of over $110,000,000 for three weeks.
This great increase in loans was partly responsible for the
large reserve deficit which on November 2 was $38,000,000,
and on November 9, nearly $52,000,000. On both these
dates the reserve deficit would not have been more than
half what it was but for the increase in deposit liability
through loan expansion. In adopting this policy with
reierence to loans the banks were pursuing a course which
was eminently wise and proper and in accord with the
requirements of the situation. But, as has so often been
observed in previous chapters, the responsibilities of the
New York banks do not end with loans and the local situation. If the banks resort to arrangements which make it
possible for them to extend credit to borrowers, they ought
also at the same time to agree upon arrangements which
may be expected to remove the necessity for suspension.




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Particularly is this true when, as in 1907, the banks have
received enormous amounts of money from the Government.
Even if the banks had resorted to the use of loan certificates at the outset of the crisis it is highly improbable
that suspensions would have been escaped. An important
change had taken place in the attitude of the banks regarding the use of loan certificates. In 1890, it will be recalled,
the Bank of Commerce passed resolutions urging the
advisability of taking out certificates in order to grant
needed accommodation to the business community. There
was then apparently a widespread feeling among bankers
that to resort to certificates was an indication of weakness.
Since that time the pendulum has swung to the opposite
extreme. The largest banks, including those in the
strongest condition, hastened to take out certificates, and
they became immediately almost the sole medium for the
settlement of balances between banks. One important
bank met a large unfavorable balance with cash on Monday, October 28, but, finding that it stood alone, did not
repeat the experiment. During the last five days of October 84 per cent of clearing-house balances were settled in
certificates, and in November practically all payments (96
per cent) were settled in this way. a Whether the same
course would have been pursued if the certificates had been
issued at the outset, is not certain, but if so, suspension
would probably have followed. It was inevitable when
banks which had seized the opportunity to strengthen themselves afforded by the delay in issuing the certificates fol-




»See Appendix, Note J, p. 431.
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Crises

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lowed up this selfish action by their use in the settlement of
balances. Experience with the certificates in 1907 again
illustrates the ineffectiveness of this device when shorn of
its essential and original complement, an arrangement for
equalizing reserves. Recalling the course of events in 1873,
it can not be questioned for a moment that suspension would
not have occurred had similar action been taken in 1907,
nor would agreement by all the clearing-house members
have been necessary. The six large banks acting in concert could have sustained the local situation by making
loans and at the same time could have supplied the
demands of outside banks for money. Had that course
been followed, alarm would have been speedily allayed in
the country at large, as it was already being allayed in
New York City before the discreditable step of restricting
payments was taken.
Unfortunately there seems to be distinctly less unwillingness among bankers to resort to suspension than was the
case twenty or thirty years ago. It may be attributed in
part to the growing tendency since 1893 to look to changes
in legislation alone as a remedy for financial ills. It
seems also to be in part the result of a feeling common
among New York bankers that they can not reasonably be
expected to remit funds which are the proceeds of loans
made in the New York money market by outside banks
and liquidated in an emergency. Some bankers seem to
have felt that it was entirely proper to refuse to ship currency in such cases, and it is in connection with these loans
that they have taken the first step in restricting payments
in successive crises. It should be remembered, however,




273

National

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Commission

that responsibilities are incurred in return for the advantages which accrue to the New York banks from their
peculiar position. London holds its commanding position
because it is known that money lent there can be instantly
recalled. Similarly, New York is not meeting the obligations of its position as our domestic money center, to
say nothing of living up to future international possibilities, so long as it is unable or unwilling to respond to any
demand, however unreasonable, that can lawfully be made
upon it for cash.
Finally, there can be little doubt that the seriousness
of the general economic situation was greatly exaggerated by observers in New York. For years the possible
ill effects of government activities designed to regulate
corporations had been magnified beyond all reason in
financial circles, and the idea was quite honestly held
that the people generally cherished similar views. Mercantile and banking failures approaching in extent those
of 1873 a n d x ^93 were expected. The course of events,
however, conclusively proved that general economic conditions were not unsound. During the week ending November 2 there was but a single important banking failure, a
San Francisco trust company, with deposits of $9,000,000,
and, aside from the temporary closing of the National
Bank of Commerce in Kansas City on December 5,
there were no further important banking disasters during
the last two months of the year, i. e., to the end of this
period of financial strains Notwithstanding the severe
0 Early in November there were a number of additional banking failures in Oregon and California, and a month later came the failure of a
national bank of medium size and an important banking firm in Pittsburg.




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strain to which business generally was subjected in consequence of the restriction of payments by the banks,
mercantile failures were not extraordinarily large in number or in amount of liabilities. During October according to Dunn's Reports the amount involved in commercial
failures was $27,400,000, contrasted with $10,553,000 in
October, 1906, and $18,387,000 in 1903. In November,
1907, liabilities were only $17,637,000, compared with
$11,980,000 in the same month for 1906. Even more
convincing evidence of the comparatively sound condition of general business is afforded by the small number
of railroad receiverships and by the short duration of
general business depression following the crisis of 1907,
contrasted with either 1873 or 1893. In all these respects, as well as in the immediate cause of the outbreak,
the crisis in 1907 seems to have paralleled most closely
that of 1884, though some of the conditions, such as the
greater number of railway receiverships in 1884, tend to
the conclusion that the situation was fundamentally
more healthy in 1907 than in the earlier year. The most
striking difference is that in 1907 the banks restricted
payments, thus involving all branches of business in
severe strain, whereas in 1884 the banks united quickly
upon a common policy, and, acting wisely and boldly,
escaped that discreditable measure.
One of the unfortunate effects of suspension is the
creation of seemingly conclusive evidence for its necessity. During the two months that elapsed before the
restriction on cash payments was entirely removed an
enormous amount of money was added to the amount in




275

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Commission

circulation, but none of it was secured by the banks.
Through gold imports, government deposits, additional
issues of bank notes, and payments of cash by the banks,
something like $300,000,000 was added to the amount
of money in every-day use or in hoards. Furthermore, a
vast amount of substitutes for money was set afloat in
the community. It has been assumed that as much as
this amount of money, perhaps more, would have been
taken from the banks if they had not restricted payments.
This view, is, however, contrary to experience in every
instance where banks have met the demands of depositors
fearlessly in an emergency. Suspension increases enormously the propensity to hoard money; it also makes more
sluggish the movement of money which remains in actual
use. We can not be absolutely certain that the New
York banks would have been able to maintain payments
until calm was restored; but the amount of money which
went out of sight after suspension is no indication whatever of the amount which would have been required to
maintain cash payments.
Summarizing the results of this analysis of the influences which led to suspension in New York, it may be
said that it came about primarily because no real effort
was made to prevent it. It was directly due to uneven
distribution of the reserves held by the New York banks
and to the use of clearing-house loan certificates as the
sole medium of settlement of balances at the clearing
house. It was not because the available reserves of the
banks were exhausted, nor was it because there was no
prospect of replacing, at least in part, the outgo which




276

Crises

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would have been incurred had an attempt been made to
maintain payments. The influences leading to suspension have been considered in much detail because a quite
different view of its causes has been widely accepted.
An illuminating indication of the unsound principles upon
which the policy of the banks was based appears in the
address, already referred to, of the president of the New
York clearing house, which is so significant that it may
be quoted at some length:
The clearing-house committee knew by experience that the dissipation
of the New York banking reserve, upon which practically the credit volume
of the nation rests, would alarm the nation, intensify the panic, and greatly
prolong the period of recuperation. * * * New York bankers have
been severely criticised because they did not more fully respond to the
demands of country correspondents by shipping currency against balances.
To have fully honored the demands that were pouring in from all sections
of the country would have dissipated our banking reserve in a fortnight.
How could it be replenished? Were the interior bankers sending currency
to New York? What would have been the effect upon the country if the
New York banking reserve had been entirely depleted? It would have so
intensified the panicky feeling that widespread commercial disaster would
have resulted. * * * The $53,000,000 deficit in our banking reserve
occurred in less than ten days after the failure of the Knickerbocker Trust
Company, and was caused by the shipment to interior institutions of the
larger portion of that amount in that short time. We kept the door of
our treasure house wide open until for the good of the whole country it
became necessary to everywhere close it. I t never was fully closed; currency shipments continued in a restricted way throughout the panic, and
a large number of our banks kept up their counter payments as usual. 0
RESUMPTION DELAYED UNNECESSARILY.

Additional money was secured and in large quantity,
but it served no useful purpose, not even that of limiting
the duration of suspension to a short interval. Cash
payments were not completely resumed until the begin0 Commercial and Financial Chronicle, Oct. 10, 1908, Bankers' Convention Section, p. 84




277

National

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Commission

ning of January. For exactly two months, about twice
as long as in 1873 o r I$93> money was regularly bought
and sold at a premium in New York. For this prolongation of suspension there was not even a shadow or semblance of excuse. After the loss of $30,000,000 during
the week ending November 2 the New York banks held
a reserve of $224,000,000; on November 23 it had been
reduced by only $9,000,000; and thereafter it increased
week by week and stood at $251,000,000 at the time the
currency premium disappeared. It is significant that
the much smaller banking reserve of the Bank of England
was reduced during the first two weeks of this period
from £24,000,000 to £17,000,000 without the remotest
thought of suspension being entertained by anyone,
either in London or elsewhere.
It is not a little surprising that American financial
opinion was far from unfavorable to the banks, the suspension of which seems generally to have been thought
unavoidable. This view is a natural and inevitable consequence of an entirely erroneous habit of thought in this
country with reference to banking reserves. Before the
establishment of the national banking system in 1863
insufficient reserves were a constant source of weakness,
though something had been accomplished after the crisis
of 1857 through legislation and agreement among the
banks. The national banking law required a certain
minimum of reserve from banks entering the system, the
percentage varying with the location of the bank. For
a system composed of thousands of banks, large and small,
this legislation was unquestionably wise, but under its




278

Crises

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System

influence undue importance has come to be attached to
the maintenance at all times and at all costs of a certain
minimum ratio between reserve and deposit liabilities. On November 2, when the New York banks had
$224,000,000, there was a reserve deficit of $38,000,000,
and two weeks later the deficit was $54,000,000. The
following table shows the reserve and the reserve deficiency of the New York banks during the period of the
currency premium, which lasted from October 31 to
December 31, inclusive. The statement for January 4
being based upon rapidly rising reserve averages, probably shows very nearly the actual condition at the time
of resumption.
[Expressed in millions.]
Reserve
held.

Oct. 26Nov. s_
916-

Reserve
deficiency.

£254.7
224. 1
219.8
218. 7
2159
217. 8
222. s
226. 6
233- 1
242. 6

2330-

Dec. 7_
142I_

28.

250.6

Jan.
" Surplus.

This reserve deficiency was indeed far greater than ever
before, but the reserve ratio was at no time below 20 per
cent, contrasted with 12.8 per cent on October 18, 1873.^
0 The available reserve was at that time less than 4 ^ per cent. See p. 55.




279

National

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Commission

The reserve deficit was apparently regarded by bankers
and the public as a sufficient reason for partial suspension
and as evidence that everything had been done to the
full extent of the power of the banks to relieve the situation. Without exaggeration, this arithmetical ratio of
reserve can only be adequately characterized as a sort
of fetich to which every maxim of sound banking policy
is blindly sacrificed. Even though the banks outside of
New York manifested a still more slavish attention to
reserve requirements, it remains true that the New York
banks were primarily responsible because of their position as the central reserve banks of the country, and
because they initiated the policy of restriction.
THE CURRENCY PREMIUM.

Aside from its longer duration, the currency premium
in 1907 presents no peculiarities contrasted with 1873 or
1893. Its course is given for each day in the following
table, which was compiled by Prof. A. P. Andrew from
data procured from various New York newspapers: °
Currency premium.
High.

Oct. 31

_

Low.

Per cent.
3

Per cent.

2

3
4--

3

<*)
-

-

-

3K

2

(6)
3

«A. P . Andrew, "Hoarding in the Panic of 1907," Quarterly Journal of Economics,
February, 1908. For similar tables for 1873 and 1893, see p. 57,and p. 187.
&Sunday.




280

Crises

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Banking

System

Currency premium.
High.
Per cent,
(a)

Nov. 5_
6_
78_

4
3
3

9-

00
3
4
4
3
2V*

131415i6_
17i8_
19-

<*)
3
2X
3
2^1

iK

2324-

(»)

2536-

2728_
2930-

iX
iX\

(c)
00
1/4,

X
X
X

IVA)

IZA\
I*S

00

00

1314-

(»)

15i6_

iX\

17-

a Election Day.




6 Sunday.
281

c Thanksgiving Day.

National

Monetary

Commission
Currency premium.
High.

Low.

Per cent.

Per cent.

Dec. 18
19

H

H

20

(a)

(0)

C
O

(P)

26

...

28 .

.

X
H

__

(»)
(<0
a Sunday.

6 Christmas.

(a)

(c)

cNc premium.

No estimate can be made of the amount of money
which was brought into circulation from hoards a by the
currency premium, and the reader is referred to the discussions of this subject in previous chapters for reasons
tending to show that it would be likely to diminish rather
than increase the available money supply. 6
FOREIGN EXCHANGE.

The course of the foreign exchanges and the gold import
movement were not unlike those in previous crises. During
the week ending October 26 exchange rates had fallen
rapidly owing to dear money and to the expectation of
a
About $25,000,000 of domestic money was supposed to have been
bought by brokers in New York, but the extent to which it came from
hoards is uncertain. See the Financial Panic in the United States by A. D.
Noyes in The Forum for January, 1908, p. 302.
& See pp. 68 and 195.




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Crises

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increasing cotton exports; and on Friday, October 25, 0
exchange was at the gold import point. A blockade in
exchange was threatened, but the example of an important New York bank in continuing and increasing its
purchases of bills soon had the good effect of inducing
purchases by other banks and exchange dealers. Gold
engagements were announced at the beginning of the following week when sight exchange was quoted at $ 4 . 8 2 ^
to $4.82^. During the week about $25,000,000 was
engaged, and although exchange rates advanced to
$4.87, far above the import point, indeed well above
par, the gold engagements continued. On Monday,
November 4, exchange advanced to the highest point of
the month, $4.88^, well above the gold export point in
normal times, and still gold imports continued upon an
enormous scale. As was explained at length in the chapter
on the crisis of 1893, the currency premium was the cause
of the high rates quoted for exchange, but not the principal cause of the gold movement. 5 It was primarily due
to an enormous increase in merchandise exports and a
considerable falling off in imports. The gold was not
secured to any considerable extent by means of borrowing
in the London market. Contrasted with $373,000,000
during the last two months of 1906, exports for the
same period in 1907 were $411,600,000, while imports were $254,000,000 in 1906 and $203,000,000 in
1907. The excess of merchandise exports in 1906 was
only $119,000,000, while in 1907 it was no less than
a
G o l d could have been engaged on Friday, October 25, if importers had
been able to secure the necessary advances from the banks.
*>See p . 192.

6158—10




19

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$208,000,000. As there were practically no finance or
anticipatory bills to be liquidated, this sudden increase in
the excess of exports provided the means of payment for
the gold which was imported. The export movement of
commodities was not checked, as shippers were able to dispose of bills drawn against commodities sold in foreign
markets. In this one respect the situation was handled
most satisfactorily in 1907.
The amount of gold received in New York during
November was about $58,000,000 and in December
$38,000,000. This total of $96,000,000 was far greater
than the amount imported during any other crisis in our
history and affords further evidence of the ability of this
country to secure additional supplies of gold in an emergency. This power will remain so long as our foreign
trade is made up principally of imported luxuries and
exported necessities. But, as we have already seen, no
reliance was placed upon the prospective imports of gold,
nor was the actual receipt of the gold made use of to
cut short the period of suspension. Payments were not
resumed until the cash holdings of the New York banks
began to increase rapidly through the return of money
from circulation in consequence of general business depression; until, in other words, outside banks manifested
more confidence in the New York banks than they had
in themselves.
Although we made no use of the gold which was imported, its departure occasioned great disturbance in
foreign countries. The Bank of England was obliged to
advance its rate to 7 per cent, not to check gold exports,




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but in order to secure payment from other countries of
money which was due by them to the United States.
London being the central money market of the world, if
its rates had not advanced other countries would have
made payments to the United States by drawing down
London balances or by creating credits in London by discounting bills. The advance in the Bank-of-England rate
caused other countries to remit to London a large part of
the money which was due from them to this country a in
payment for our exports.
In New York much was made of the fact that large
amounts of money continued to be shipped to interior
banks throughout November and December. The following table prepared by the clearing-house authorities b
shows that this was indeed the case:
Week ending-

Oct. 26
Nov. 2 _ _ - .
9
16
23
30
Dec. 7
Total

Receipts from
the interior.

Shipments to
the interior.

Net loss.

$4.S44,Soo
3,644,600
2,566,300
3.079,700
3.555.300
2,483,500
4,169,900

$l9,556,8oo
21, 930, 400
15.963,500
24, 730,500
19,083,60O
13,711,500
15,989,200

$15,012,300
18,285,800
13,397,200
21,65O,80O
15,528,300
II,228,OOO
II, 819, 3OO

24.043,

130,965, 500

I06,921, 700

The significance of these large shipments requires some
explanation. Those of the first two weeks were offset by
government deposits in New York banks, and as for the
a
For an illuminating account of the various influences at work in the
London money market at this time, see Hartley Withers, The Meaning
of Money, p. 292.
& Response of the Secretary of the Treasury to Senate resolution No. 33
of December 12, 1907, Senate Doc. 208, 60th Congress, 1st session, p. 215.




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remainder they were simply the proceeds of commodities
produced in the West and South which were exported to
Europe. The gold which was imported did not belong
to New York; New York was merely the channel through
which bills of exchange went out and gold entered. If
New York had attempted to retain this gold, the goldimport movement would have ceased entirely and at
once.
SUSPENSION THROUGHOUT T H E COUNTRY.

Restriction of cash payments by the New York banks
was the signal for similar action elsewhere, and by the
close of the week ending November 2, partial suspension
was general throughout the country. The extent to
which suspension was carried can not be accurately
determined. It varied in the different sections of the
country and with different banks in the same place,
and also from day to day by the same bank. The
governors of some of the western States declared a succession of legal holidays, though not in every case at the
desire of the banks. This novel device was resorted to in
Oklahoma, Nevada, Washington, Oregon, and California.
The following proclamation issued by the acting governor
of Oklahoma on Monday, October 28, will serve as an
example: a
Whereas, I t appears to the undersigned acting governor of the Territory
of Oklahoma that all of the leading cities of the United States, through
their clearing-house associations, have entered into an argeement to protect themselves against conditions which they are apparently unable t o
control, and by such concerted action are refusing to ship currency to
country banks which have deposits with them or to honor the bills of
o Commercial and Financial Chronicle, November 2, 1907, p. 1118.




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lading drawn upon the banks of such, or to pay checks of customers over
the counters; and,
Whereas, Such action makes it impossible for the banks of Oklahoma to
meet the immediate demands upon them for currency to pay for the cotton
and other products of the Territory; and,
Whereas, Our banks appear to be in a solvent condition; therefore, be it
Ordained, T h a t a legal holiday extending from October 28 six days to
November 2 be proclaimed.
(Signed)

CHARLES FILSON,

Acting Governor.

More generally, as in the past, the banks simply "discriminated " in making payments. ° In Chicago, a central
reserve city, it was reported 5 on November 1 that "the
banks stopped shipping currency, for two or three days,
to their correspondents South and West, but for the past
day or two have resumed such remittances on a moderate
scale in cases where the demand seemed imperative."
From various reserve cities came similar reports, e. g.,
" in Indianapolis and St. Paul the banks agreed to suspend
temporarily the payment of money on checks, certificates
of deposit, or drafts, except for small sums, and further
for the present to furnish no money for bank correspondents/ ' " I n New Orleans the Associated Banks have
limited currency payments to any one depositor for $50,
except in cases where deviation from the rule seems
necessary." Restriction was perhaps more complete in
many cities than it was in New York, c but that does not
relieve the banks of the metropolis of responsibility for
a
For examples of the recommendation of the policy of suspension by
the banking officials of some of the States, see Appendix, Note K, p. 435.
& Commercial and Financial Chronicle, November 2, p. 1119.
c For specific instances of the refusal of New York banks to cash checks
drawn on them by other banks, see Senate Doc. 435, 60th Congress, 1st session, pp. 6, 12, 14* 15, and 27.




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having been the main cause of suspension. The reasons
for this view, however, have been stated at length in
previous chapters and need not be repeated. 0 As in 1873,
in many places resolutions were adopted by the banks
setting forth the reasons for restricting payments and the
peculiar arrangements which were being set up. In every
instance the refusal to ship currency by the banks of the
money centers, and particularly by those of New York,
was said, and with truth, to have made suspension necessary. The following resolutions adopted by the banks of
Atlanta, Ga., and Portland, Oreg., are appended as
typical examples. The Atlanta Clearing House Association adopted the following resolutions on October 30: 6
In view of the action taken by the New York Clearing House, and subsequently adopted by Chicago, St. Louis, Philadelphia, Cincinnati, New
Orleans, Nashville, Birmingham, Baltimore, Louisville, Memphis, Montgomery, Mobile, and many other principal cities throughout the country,
restricting the shipment of currency, and the restriction of other business
to its proper channel, the Clearing House; therefore, be it
Resolved by the Atlanta Clearing House Association—
1. That until further notice collections and bank balances be settled
in exchange or clearing-house certificates.
2. That checks drawn on the members of this association be paid through
the Atlanta Clearing House, and correspondents and customers be requested
to so stamp their checks.
3. That payments against all accounts, including certificates of deposit,
be limited to $50 in one day, or $100 in one week (Monday to Saturday).
4. That exception shall be made to the above in case of pay rolls, which
shall be paid as follows: All denominations of $5 and over in clearinghouse certificates, and all denominations of under $5 to be paid in cash as
desired.
Resolved further, That the manager of the Atlanta Clearing House Association be instructed to give notice to the correspondents of the Atlanta
Clearing-House banks that the above resolution is in effect on and after
this date and until further notice.
a See p. 126.
& Commercial and Financial Chronicle, November 9, p. 1182.




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The Portland (Oreg.) Clearing House
adopted its resolutions on October 28 :a

System
Association

Whereas, The banks of Portland have received telegraphic advices that
all the principal clearing-house associations in the United States have
decided to refuse to ship coin or currency against the deposit balances of
their correspondents; therefore, be it
Resolved, First, t h a t the banks of the Clearing-House Association of
Portland decline to ship coin or currency to their out-of-town correspondents.
Second, that all checks, certificates of deposit or drafts of customers and
out-of-town correspondents be paid only through the clearing house and
in clearing-house funds.
Third, that all items on out-of-town banks be taken only for collection,
subject to payment in legal tender.
Fourth, that the savings banks of the city of Portland be instructed to
demand notice of withdrawal of funds.
Fifth, t h a t this action be and remain in force as long as the leading cities
of the United States maintain a similar policy.

The following resolution was also adopted:
For the purpose of enabling the banks, members of the Portland Clearing
House, to afford proper assistance to the mercantile community, and also
to facilitate the inter-bank settlements resulting from their daily exchanges, be it
Resolved, That any bank in the clearing house may at its option deposit
with the loan committee of the clearing house an amount of bills receivable, bonds or other securities, to be approved by said committee, who
shall be authorized to issue thereon to said depositing bank certificates of
deposit, bearing interest at 7 per cent per annum, in denominations of
$5,000, to an amount equal to 75 per cent of such deposits. These certificates may be used in the settlements of balances at the clearing house
for a period of thirty days from the date thereof, and they shall be received
by creditor banks during t h a t period, daily, in the same proportion as
they bear to the aggregate amount of the debtor balances paid at the
clearing house. The interest which may accrue upon these certificates
shall at the expiration of thirty days be apportioned among the banks
which shall have held them during the time.
The securities deposited with said committee as above named shall be
held by them in trust as a special deposit, pledged for the redemption of
the certificates issued thereupon.
The committee shall be authorized to exchange any portion of said
securities for an equal amount of others, to be approved by them at the
o Commercial and Financial Chronicle, November 9, p. 1182.




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request of the depositing bank, and shall have power to demand additional
security, either by an exchange or an increased amount, at their discretion.

Clearing house loan certificates were issued in a far
greater number of cities than in previous crises. Nearly
60 of the 106 clearing houses in the country made use of
the device, and with the exception of Washington all
cities of the first rank were in the number. 0 In more than
twenty instances the use of certificates was not confined
to payments between banks. They were issued in small
denominations for payment to individual depositors.
This policy was wise after payments had been restricted.
They were perhaps the best possible substitute for money
for local requirements. Certainly it is better to use loan
certificates in this way than to refuse depositors any
available means of payment. In New York and elsewhere bankers have been inclined to take credit to themselves because they had confined the use of certificates to
payments with each other. But by this means the form
and not the substance of cash payments is preserved.
It is little more than straining at the proverbial gnat at
a time when depositors are not being paid cash on demand.
Upon the whole, pay roll difficulties do not seem to
have been so serious as in 1893. In some parts of the
country the banks seem to have supplied very generally
the requirements of their depositors for this purpose. It
may also be presumed that as a result of past experience
the banks and the business community are becoming
expert in devising quickly various substitutes for cash
which will serve for local purposes.
a For a detailed account of the issue of loan certificates during this
crisis, see Appendix, Note K, pp. 438-452.




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THE DOMESTIC EXCHANGES.

The dislocation of the domestic exchanges can not, however, be prevented by the various substitutes for money
which have only a local credit, and would seem to have
been no less complete and disturbing in its effects than on
other occasions. The course of exchange was, however,
subject to somewhat different influences, and quoted rates
followed a course quite unlike that already considered in
the case of the crisis of 1893. This may be readily seen
if the following table is compared with the similar table
for 1893 on page 204:
Table showing the rates of New York exchange in the various parts of the
country between October 26 and December 15, 1907.
Boston.
Oct. 26
Nov. 2
9
16
23
30.
Dec. 7
14

25 cents discount
25 cents discount
30 cents premium- _
$1.50 premium
$2 premium
Par
2 5 cents discount
30 cents discount
Chicago.

Oct. 26
Nov. 2
9
16
23
30
Dec. 7
14




50 cents discount
$1 to $1.25 discount
Par to $1.25
7 5 cents premium _ _
$1 premium
$1 premium
Par
Par

291

Philadelphia.

52.50 premium.
$5 premium.
$2.50 to $4 premium.
$2 to $3 premium.
$1.50 to $2.50 premium.
$2.50 premium.
St. Louis.
$1 discount.
Par.
$3-50 premium.
$7 premium.
$7 premium.
$4 t o $5 premium.
$2.50 premium.
$4.50 premium.

National

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Cincinnati.

O c t . 26
Nov.

2s cents discount

2_

__

i6__
23_
Dec.

___
_

7_

_

! 25 c e n t s p r e m i u m .

50 c e n t s d i s c o u n t
P a r t o 25 c e n t s d i s c o u n t P a r t o 60 c e n t s d i s c o u n t . _
P a r t o 60 c e n t s d i s c o u n t . .

__

9_

K a n s a s City.

_ _ - ___

30 t o 50 c e n t s d i s c o u n t
5 0 cents discount

25 c e n t s p r e m i u m .
$1 p r e m i u m .
$1 p r e m i u m .
$1 p r e m i u m .
$1 p r e m i u m .
$1 p r e m i u m .
$1 p r e m i u m .

New Orleans.

O c t . 26
Nov
2_
9_

$1 d i s c o u n t .
$1.50 discount.

_ _ _

_

$2.50 d i s c o u n t .
$3 d i s c o u n t .
Par.
Par.

16

Dec.

7 _#_

Par.
Par.

The rates in the table for October 26 may be taken as
ruling within normal limits, as they were not very different from those of the weeks immediately preceding.
Before the close of the week ending November 2, the
banks of New York and other cities had issued clearinghouse loan certificates and had also restricted payments,
and the premium on currency had made its appearance.
It will be observed that no great change took place immediately in exchange rates, and that it was not until the
middle of November that rates in many cities reached
an abnormal level. At no time did rates reach such extraordinarily abnormal points as the rate of $30 discount
per $1,000 in Chicago in 1893. It should be noted also
that exchange was very generally at a premium, whereas
in 1893 it was below in quite as many instances as above
par.




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There is no part of our banking machinery which has
received so little elucidation as that of the domestic
exchanges. Even for normal times the subject is obscure,
and the writer therefore ventures upon an explanation
of its course during a period of crisis with hesitation,
and he is by no means confident that important considerations may not have been overlooked.
As in the case of foreign exchange, domestic exchange
rates fluctuate within limits fixed by the cost of shipping
money, and also, in the case of cities distant from New
York, by the loss of interest while currency is in transit.
The quoted rates apply principally to business between
banks, the rates being determined by demand and supply.
A Boston bank, for example, receives from its customers
New York drafts and also checks drawn on banks in New
York and its vicinity. All these items will serve to build
up its balances in that city. On the other hand, its
depositors have been sending out checks, many of which
will in the course of time reach New York and reduce
its balances there. The Boston bank will also have
received from banks of New York and from banks elsewhere items for collection in its vicinity, and remittance in ordinary course will be made by it in New York
funds. Similarly it has sent away items for collection to
banks in other cities upon which it expects a like remittance. As a result of all these various influences the
balances of the Boston bank may either increase or decrease. If they increase it may be ready to sell exchange
to other Boston banks whose balances are running low.
It may also happen that the bank is desirous of reducing




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its New York balances, and in that case it will also appear
as a seller of exchange in the market.
Now, if in the course of a crisis clearing-house loan certificates become the principal or sole medium of payment
between banks, it may well happen that a bank will be
unwilling to sell exchange unless it is unusually well supplied with New York funds. By the sale of exchange it
can at best only secure a favorable clearing-house balance,
which will be settled in loan certificates, and if this balance should be unfavorable it can meet it by taking out
certificates on its own account. Each bank, therefore,
to a greater extent than in normal times, is obliged to
rely upon itself for means of payment in New York. The
loan certificate does indeed yield a return or involve an
expense of 6 or 7 per cent, while the return on New York
balances is only 2 per cent. This advantage does not,
however, seem to have induced the banks to sell exchange
as freely as in normal times.
This is, however, not the only disturbing influence.
The Boston bank may have remitted to New York upon
items collected by it for other banks—let us say those of
Philadelphia—but it may happen that the Philadelphia
banks delay or even discontinue remitting to New York
upon items sent to them for collection by banks of Boston
and other cities. The Boston bank can then no longer
rely upon what would normally serve to build up its own
New York balances. It will be simply acquiring a mass
of unavailable credits at scattered points throughout the
country. The supply of New York exchange which it
might have been willing to sell is consequently dimin-




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ished, and the premium on exchange must rise to a point
at which it will tempt some of the banks to sell exchange,
even though it intrenches upon their balances with agents
which are available for reserve.
The premium would naturally be especially high in
those cities where the banks were most unwilling to reduce
their New York balances. Philadelphia seems a case in
point, as its deposits with reserve agents, which were
$30,995,000 on August 22, were reduced to only $29,389,000
on December 3. At that time the premium on currency
in Philadelphia ranged from $1.50 to $3 per $1,000. It
is, therefore, a reasonable conclusion that the banks were
strongly disinclined to make use of their New York balances. In a few cities it is probable that the premium
reached a high level because the banks had exhausted their
New York balances. St. Louis may be mentioned as a
probable example. Being a central reserve city, its banks
would naturally have only such balances in New York as
normal business requirements made necessary. The dislocation of exchange elsewhere or the course of payments
between New York and St. Louis may have combined to
produce such a balance of payments as would have required currency shipments if the St. Louis banks had
remitted promptly to New York.
The extent to which banks in different cities delayed or
refused to remit to New York on items collected by them
for other banks can not be determined. Banks in one
city, very naturally and honestly, were inclined to lay the
blame upon banks elsewhere. The banks in other places,
however, may not have been able to secure payment of




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the items sent to them for collection from other banks in
their locality with the usual promptness. When every
allowance has been made, however, there can be no question that banks in certain cities, in these as well as in other
matters, adopted a policy wholly designed to strengthen
themselves regardless of consequences.
The general prevalence of the premium on New York
exchange is, as we have seen, accounted for in part by the
use of clearing-house loan certificates in settling balances
between banks and by the delay in remitting in New York
funds upon items collected for other banks. It seems
probable, however, that, taking the country as a whole,
the course of payments was favorable to the New York
banks. At the beginning of November withdrawals for
crop-moving purposes have in recent years begun to
diminish, except to the South, and movements of money
from eastern centers are distinctly in favor of New York
at that season of the year. If this were indeed the case
in 1907, it affords still another reason for thinking that the
New York banks migkt have met the crisis successfully
without restricting payments. They would probably
have been obliged to meet only withdrawals arising from
lack of confidence and not real needs for crop-moving
purposes, such as would have increased the difficulties of
the situation had the crisis begun at the beginning of
September.
Finally, it should be noted that the restriction of cash
payments to depositors and the currency premium seem
to have increased the demand for New York exchange.
Only in that city was it possible to buy any considerable




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quantity of money. Many banks in various parts of the
country purchased gold and currency at a premium in
New York and, instead of drawing on their own balances,
then entered their home market as purchasers of exchange
which was remitted in payment.
In the few instances where exchange was below par
the currency premium was a more direct influence; but
exchange could not have dropped to the low figures recorded in 1893 in the case of Chicago, because the Chicago banks in 1907 did not maintain payments among
themselves as they had done on previous occasions.
Exchange was at a discount only in those cities where
the course of payments was so strongly against New
York that practically all the banks found their balances
in that city increasing. Chicago might have been expected to belong to this group, but its banks made extensive use of bills derived from grain exports to secure gold
which was shipped directly to them. In general, exchange
was at a discount, or at par only, in the Southern States,
the banks of which, by means of cotton sales, are normally in position to draw money from the northeastern
part of the country during the late autumn.
In conclusion, it should perhaps be pointed out that
the quoted rates of exchange were often without much
significance. The ordinary course of dealings was so
completely disorganized in many places that the rates
were purely nominal, representing little or no actual
transactions.
U)AN

CONTRACTION.

From this analysis it will be evident that rates of
domestic exchange might have been somewhat less ab-




297

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normal if the banks had been prepared to make more
use of their balances with reserve agents in New York.
The rates in themselves, however, were of comparatively
slight general importance; they were simply symptomatic
of disturbed conditions and did not measure the extent
of the disturbance. The dislocation of the domestic exchanges exercised an unfavorable effect upon business
activities, because it increased the general lack of confidence, and, more directly, because of the delay which it
both created and encouraged in remittances of all sorts
between different parts of the country. When items for
which the banks would ordinarily give immediate credit
are taken for collection only, and when these collections
are delayed, it is obvious that a greater amount of accommodation in the form of loans will be required to
carry on a given volume of business than is needed in
normal times. The restriction of payments by the banks,
with its consequent dislocation of the exchanges may,
therefore, be regarded as partially responsible at least for
the scarcity of loans to which the trade journals very
generally attributed the depression in trade that marked
the closing months of the year. Only on the supposition
that the demand for loans had become greater can complaints of the business community of inability to secure
loans be satisfactorily explained since the extent to which
loans were reduced by the national banks at any rate
was insignificant—far less than in 1893. Between August
22 and December 3 loans were reduced from $4,709,000,000 to $4,624,000,000—only $85,000,000—almost exactly 2 per cent. While the returns of the national banks




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provide a far less certain indication of banking operations
than formerly, on account of the rapid growth of state
credit institutions, this contraction was so much less than
in 1893 that it seems fair to assume that positive loan
contraction was a comparatively slight disturbing factor.
There were, it is true, wide variations between different
cities and sections of the country, but on the Pacific
coast where contraction was most drastic loans were reduced only 7 per cent. In particular cities, especially
those in which there were banking troubles, such as
Kansas City and San Francisco, loans were reduced to
an extent which must have been positively disturbing,
but upon the whole in this respect the banks made a
better showing than ever before. The following table
shows the changes in loans in the various cities and sections of the country (not including the cities which appear separately) between August 22 and December 3, 1907:
[Expressed in millions ]
Loans and discounts
A u g . 22.

Boston
New England States
New York City
Philadelphia
Pittsburg
B altimore
Eastern States
Savannah __
New Orleans
Southern States
Cincinnati
Cleveland
Indianapolis
Chicago
6158—10




&I67 7
229

0

712

1

177 2
147 7
56 5

Dec. 3.

$1690
260. s
775- 1
178.0
139-8
570

693 2
2 5
26 6

679-9
2.6

527 9

496.5
52.9
52.8

55 1
54 2

27.4

25

20

299

3

21. 2

231

2

220. I

National

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Commission
Loans and discounts.
A u g . 22.
$23

Dec. 3.

45

$23. 7
32. o
4i-5
23-6
26. 5

117
704

676.6

25
22

22. 2
21. 6

257

Detroit
Milwaukee
Minneapolis
St. Paul
Kansas City
St. Louis
Middle Western States
Omaha
Denver
Western States
Seattle
Portland
San Francisco
Pacific States

245-3
17.0

33
37
22

17

114.9

13

9- 7

54

46.9

154

149-4

Nowhere throughout the country was there any considerable increase in loans except in New York, where
loans increased by $63,000,000—from $712,000,000 to
$775,000,000. In every period of financial strain hitherto
the New York banks had been able to contract loans
somewhat. Explanation of the different result in 1907 is
simple. The trust-company situation compelled them to
liquidate loans wherever possible, and the outside banks
also followed the same course. These two groups of
lenders more than exhausted the possibilities of contraction in New York, and a part of their loans had to be
taken over by the clearing-house banks to prevent a
general disaster. We have already seen that call loans
were particularly favored both by trust companies and
the outside banks. Even in 1873 the clearing-house
banks were able to reduce loans of that kind a relatively




a See p. 84.

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Crises

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little, and it might naturally be expected that still less
contraction would have been feasible in 1907. The following table shows that such an expectation would be
entirely in accord with the facts of the situation:
[Expressed in millions J
A u g . 22,
1907.

On demand, paper with one or more individual or firm names. _
On demand, secured by stocks, bonds, and other personal securities __
On time, paper with two or more individual or firm names
On time, single-name paper (one person or firm), without other
security
_ _!__
On time, secured by stocks, bonds, and other personal securities, or by real estate mortgages or other liens on realty
Total

_

Dec. 3,
1907.

$16.2

$22.3

251.8

306. 1
170. 2

161.1
130. 5
156.9
152. 4
712. 0

Among the many lessons which may be drawn from a
study of the experiences of the national banks during
crises, the entire absence of liquidness in call loans, so
far as the New York banks are concerned, is the most
certain and by no means the least important. Out of a
total loan increase of $63,000,000, call loans account for
$54,000,000; and, furthermore, time loans with collateral
security, which are largely of stock-exchange origin, account for another $4,000,000. The only kind of loan
which was reduced at all was one of the varieties of commercial loans—the time loan on " paper with a single
individual or firm name." Commercial loans can be reduced somewhat in New York, because that market is
resorted to by many outside borrowers, and they can be
thrown back upon their local banks. Moreover, with any
decline in business activity, the demand for commercial




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loans naturally falls off unless it is counteracted by the
dislocation of the domestic exchanges. Call loans, on the
other hand, are local New York loans, and consequently
the amount of them which must be made by New York
banks increases whenever other lenders retire from the
market. The opinion may be ventured that a New York
bank would be in a better position to meet an emergency
if all its loans were upon commercial paper than it is
under existing circumstances, though of course it would not
then be in position to slide along just above the 25 per
cent requirement in normal times.
Another cause of disturbance ih connection with loans,
independent of their volume, is the vast amount of shifting of loans which takes place in consequence of the
inability of note brokers to dispose of commercial paper
during a crisis. It would probably be under rather than
above the mark to assume that this business is reduced
very much more than one-half in an emergency like that
of 1893 or 1907. Borrowers are forced to resort almost
entirely to their own banks, just as was the case with the
stock brokers whose loans were liquidated by trust companies and outside banks in New York. This shifting of
loans involves much strain and uncertainty, and in many
instances it is not possible to carry it out at all.°
It would seem, then, that business distress from lack of
credit facilities was due to at least three influences: The
restriction of cash payments by the banks increased the
a To this circumstance may perhaps be attributed the relatively numerous instances of failure or suspension among concerns of large size which
was a notable feature of the crisis of 1907. See the analysis of failures in
1907 in Dun's Review for January 11, 1908.




302

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requirements of borrowers; the supply of loans was reduced
by a moderate amount of contraction; and the shifting of
loans involved considerable uncertainty and inconvenience. From the two last-mentioned causes it is probable
that no serious difficulty would have been experienced by
borrowers aside from those whose requirements were
ordinarily placed through note brokers. One of the satisfactory features of our system of local independent banks
is that they do not press hardly upon their regular
customers in emergencies. Those who place paper only
through note brokers naturally suffer, because the banks
take such paper either to employ temporarily idle funds
or as a peculiarly liquid resource, a sort of quasi-reserve.
For such borrowers the banks feel no responsibility; but
with the inevitable increase of such borrowing, on account
of the increasing size of the reproducing and distributing
unit, there is coming to be a greater need somewhere in
our banking system for a reserve of lending power for
emergencies.
THE CONDITION OF THE BANKS.

Following the method adopted in the investigation of
previous crises, an analysis of the returns of the national
banks to the Comptroller of the Currency just before and
after the crisis of 1907 may be expected to throw light
upon the course of events. Unfortunately, the statistical
data is far from satisfactory. The first of the two returns
was made on August 22—about two months before the
crisis, and the second, on December 3, came after the
worst of the panic was passed. It was because the




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returns in 1873 were made at more significant dates that
particular attention was given to this side of the subject
in the treatment of the crisis of that year. For 1907 it is
necessary to assume that no great change had taken place
in the condition of the banks between the end of August
and the middle of October, an assumption which, judging
from the weekly bank statements in New York, Boston,
and Philadelphia, is not far from the facts of the actual
situation. It would, however, be somewhat hazardous to
draw conclusions if it were not that the same tendencies
are disclosed which were so clearly manifest both in 18*73
and in 1893.
As in former periods of crisis the reserves of the banks,
taken as a whole, were not made use of to any considerable
extent. On August 22 the banks held $701,600,000, and
on December 3, $660,800,000—a loss of only $40,800,000.
If the holdings of the notes of other banks are included,
this loss is reduced to only $31,400,000. This cash loss
can be more than matched on many occasions when conditions were entirely normal, e. g., between August 25
and November 9, 1905, when the reserves of the banks fell
off more than $43,000,000. By means of loan contraction, the loss in cash, and the diminution in indebtedness
between the banks, net deposits were reduced from
$5,256,000,000 to $4,629,000,000, and there was a slight
increase in the proportion of cash held, which advanced
from 13.35 per cent to 13.45 P e r cent. This slight increase
in the reserve ratio was entirely in accord with precedent,
and its explanation is to be found in changes in the condition of the country banks, which are shown in the following
table:




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[Expressed in millions.]
A u g . 22.

Loans
_
__ _ Net deposits _
Cash reserve
._
Percentage of reserve
Net deposits with reserve agents __

$2,40I.O
$2,627.0
$199-6
7.6

___
_ _ __
_

Dec. 3.
$2,324.0

$4IO. O

Decrease.

$2,485-0

$77-0
$142.0

$246.0

°$47.6

99
$356.0

$54.o

a Increase.

The increase of $47,600,000 in reserves of this group of
banks exceeded by $6,800,000 the total loss in reserves
of the banks taken as a whole. This increase, as well as
that in reserve ratio, will cause no surprise to the reader
of the previous chapters of this investigation. At the
time, however, it was apparently regarded by many as
something unusual, and country banks were accused of
hoarding and the blame for suspension was laid at their
doors. There is no reason to believe that country banks
were endeavoring to hoard the money which they withdrew from their reserve agents at the beginning of the
crisis. They needed additional supplies of cash if they
were to meet the demands of their own depositors. But
after the New York banks suspended and suspension
became general they naturally held with a tight grip all
the money which they had in their possession at the
moment and also very naturally endeavored to extract
more from their reserve agents. The withdrawal of
money was entirely in accord with what the teachings of
past experience ought to have led reserve agents to expect
and to be in readiness to meet. In the future, as in the
past, whatever the causes of financial strain, country
banks will withdraw money in order to strengthen their




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reserves. These demands will be particularly large until
the New York banks pass through a crisis triumphantly,
meeting every demand for payment. The crisis of 1907
was the most favorable opportunity which the city banks
have had since the establishment of the national banking
system. Outside of New York and a few other cities
there were almost no failures either of national or of
state banking institutions to cause alarm to spread and
be renewed at intervals, as happened in 1893. The general business situation, moreover, was comparatively
sound, and the means for securing additional supplies of
money were not entirely lacking, as was the case in 1873.
It requires no gift of prophecy to foresee a general scramble
to get money from New York on the next occasion of
financial strain unless it is fortunately deferred to another
generation to whom the course of events in 1907 will be
merely a vague tradition.
Some observers, particularly in other countries, have
expressed the view that the banking troubles of 1907 were
the result of deep-seated moral causes, assuming that,
during the years immediately preceding, the many disclosures of corporate greed, mismanagement, and wild
financiering had created distrust of the banks. In the
case of the early runs upon New York banks and trust
companies there is, perhaps, some ground for this opinion.
It does not, however, apply to the banks in general or to
the withdrawal by country banks of their deposits with
reserve agents. In the absence of branch banking, the
banks in each place are, with few exceptions, owned as well
as managed by local people. The misdeeds, real or fan-




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System

cied, of trusts and railways can not be supposed to weaken
the confidence of the people in those of their neighbors
who happen to be engaged in banking. It might, however,
be thought that the withdrawal of their deposits by country banks was due to the distrust of the large city banks
were it not that the country banks in this matter were
simply following the course which they had taken in previous crises and which their situation made necessary.
Moreover, after the crisis money was returned to the city
banks as in former years, though there had been no
change in the management of these banks such as might
have restored confidence had it been lost. The country
banks may have been influenced in part by unreasoning
fear, and to a greater extent by past experience of the
difficulty of obtaining money from the reserve banks in
times of crisis; but the principal reason was the inadequacy
of their cash reserves to meet extraordinary requirements.
The fact that the country banks held more cash in December than in August is no indication whatever of what
their position would have been if the banks in New York
had not inaugurated the policy of suspension. Surely it
can not be held that the country banks should not withdraw any money from their reserve agents in an emergency! And after suspension, the country banks in holding their reserves intact were following a course not unlike
that of the city banks. The New York banks themselves,
as we have seen, held a larger reserve at the beginning of
December than at the beginning of the previous month.
Country banks in all sections of the country increased
their cash holdings, though the increase was comparatively




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slight in the North Atlantic States. At the beginning of
the crisis the withdrawals of money from reserve agents
were naturally most considerable on the part of those
banks which were at a distance from their agents, and by
banks generally in the West and South, where there had
been numerous failures in 1893, and where, consequently,
confidence in the banks was weak. The following table
shows changes in the cash holdings of the country banks
in different sections of the country:
[Expressed in millions.]
Aug. 22.
New England States
._ _ _
Eastern States
__________
Southern States
_ __
Middle Western States._ __ __ __ _ _
Western States_ _ _
Pacific States

_
_
__ .

D s c 3.

$20.1

_

____

$22. 1

55-9

63. 1
44- 8
66. 1

34-o

_

54-6
21.5

_

13- 1

18.7

Turning now to the reserve cities, we shall find a similar
repetition of the course taken by this group of banks in
previous crises:
[Expressed in millions.]
Aug. 22.
$1.246.0
$190.3

$1,187.0
$1,263.0
$162.6

13-4

12. 9

$166.5

Loans
Net deposits
Cash reserve
Reserve percentage
Net deposits with reserve agents

Dec. 3.

$i39.7

$1,423-0

Decrease.
$59-o
$160.0
$27.7
$26.8

As in 1873 and in 1893, the reserve city banks reduced
loans somewhat, in fact relatively rather more than the
country banks, and their cash reserve was also reduced,
but from the decline in reserves with agents it is clear




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that they shifted as much of the burden as possible upon
the banks of the central reserve cities. By means of a
very considerable reduction in net deposit liability the
ratio of cash reserve suffered no very appreciable decline. There were, of course, wide differences in the
policy pursued by the banks of the forty reserve cities.
In the East a relatively greater amount of cash was paid
out than in the West and South. In general it may be
said that reserve cities which were at the greatest distance from the eastern money centers exhibited the greatest unwillingness to make use of their cash holdings. As
in the case of the country banks, the confidence of the
people in the banks is somewhat less than in the East,
and there were not so many absolutely real needs among
depositors for money for pay-roll and similar purposes
as in the manufacturing sections of the country.
On account of the importance of the central reserve
cities the changes in their condition are presented separately :
[Expressed in millions.]
A u g . 22.

sr.

Dec. 3.

LOUIS.

Loans
Net deposits
Cash reserve
±.
Reserve percentage _

$ii7-9

$115.0

$2.9

$116.8

$107. 1

$26.8

$21.0

$9.7
$5.8

23. 0

19. 6

Loans
Net deposits
Cash reserve
Reserve percentage _

$231.3

$220.3

$262.9

$226.3

$66. 1

$54-0

25. 2

23-9

$36.6

Neither Chicago nor St. Louis shows very striking
differences from the reserve cities taken as a whole. It




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Commission

would indeed be possible to pick from among the reserve
cities some in which the banks experienced as great or
even greater loss in reserve and in which, moreover, there
was no contraction of loans. It is far more true to the
facts of actual banking practice to include these cities
among those of reserve-city rank, because, after all, the
full force of any financial strain rests primarily upon the
banks of New York and in a way quite unlike that upon
the banks of any other city. The following table shows
the changes in the condition of the New York banks between August 22 and December 3, 1907:
[Expressed in millions.]

A u g . 22.

Loans
Net deposits
Cash reserve
Reserve percentage _

$712.7
$825.7
$218.8
26. 5

Dec. 3.

Increase
(4-), decrease (—).

$776.9

+ $64. 2

$824.4
$177-1
20. 5

-$4i.7

-

$1-3

The causes of the increase in loans of the New York
banks have already been set forth. As a consequence
of that increase, net deposit liability remained almost
unchanged, notwithstanding the loss of $41,700,000 in
reserve. Both the percentage of the total reserve which
was used and the decline in ratio of reserves to deposits
make a good showing for the New York banks in comparison with those elsewhere, though allowance must be made
for the fact that the loss in cash came before the New
York banks restricted payments and before any considerable withdrawals were made from banks elsewhere.
The showing is not particularly flattering when one con-




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siders that New York is the central money market of the
country. Less than one-fifth of their reserves was used
by the banks. According to the statement for the beginning of December .the banks were then a little above
the lowest point in their reserves, but as the MorseHeinze banks were included in that statement it may be
safely assumed that at no time did the active solvent
banks use more than about that portion of their cash
holdings.
On account of the concentration of bankers' deposits
in a few banks it is desirable to carry the analysis one
step further. In New York the six large banks having
the bulk of such deposits held a cash reserve of
$139,700,000 on August 22; on October 26, according to
the bank statement, they held $132,200,000; on December 3 these banks held $112,500,000, a loss of $27,200,000
since August, almost exactly the 20 per cent by which
the reserves of all the banks were reduced. The utility
in an emergency of that part of the reserves of the national
banks which can be placed with reserve agents is indeed
slight. Emphasis is placed upon the case of the six
banks because of their relative importance, but in this
respect they were not appreciably better or worse than
other banks in New York or elsewhere. It is quite possible that some individual banks may have made great
efforts to meet the requirements of their banking depositors, but upon the whole it seems probable that they
gave far more attention to the needs of individual local
depositors. No recognition of the peculiar responsibility incurred in accepting bankers' deposits, such as




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was expressed in the report of the special clearing-house
committee in 1873, seems to have been felt by the banks
which acted as reserve agents in 1907.
In order to show the ineffectiveness of the deposited
portion of the reserves of the banks, the following table
has been prepared. The banks in each of the central
reserve cities holding any considerable amount of bankers'
balances are arranged in the order of their importance.
The various items of indebtedness between banks are
given and also the amount of cash reserves for August 22
and December 3, 1907. The table includes in the case
of New York seventeen of the thirty-eight banks and all
but 7 per cent of net bankers* deposits. For Chicago, nine
of the fourteen banks, and 98 per cent of deposits; and
for St. Louis, five of the eight banks and 98 per cent of
net bankers' deposits.
The table does not show the full extent to which reserve
agents responded to the demands of their correspondents,
since bankers' deposits were increased through inter-bank
borrowing. Among the national banks alone there was
an increase of $41,800,000 in rediscounts and bills payable. Making every allowance for this factor, however,
the comparatively small reduction in the cash holdings
of the banks of central reserve cities proves conclusively
that balances with city banks were of slight utility. Our
banking system would be strengthened by a very moderate increase in cash reserve, even if much of that portion of the reserve now deposited was no longer required,
and owing to the concentration of said deposits the
profits of a comparatively small number of banks would
be seriously diminished.




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Bankers1 deposits and cash reserves of the important banks in the central
reserve cities on August 22 and December 3, 1907.
[Expressed in millions.]

December 3, 1907.

A u g u s t 22, 1907.

Net
Net
Due liabili-l
Due
Due liabili-l Cash I Due
from
from
to (ties to]
to ties to J
banks banks banks. serve. I banks. banks.)
banks..
NBW YORK.

National City
£4-7
National Bank of Commerce
7-6
First
1. 2
National Park Bank
3- 7
Hanover
2.9
Chase
2. 7
Seaboard
1. 7
Importers and Traders
i-3
2. 1
Fourth
Mechanics
i-5
2. 1
Merchants
Bank of New York, N. B. A.
American Exchange
Irving National Exchange _ .
Citizens Central
Liberty
Chemical

$40. 2
27.7
19-3
21. 1
16. 9
14-5
4-9
5-2
3-9
4-9
3.8
3-9
4.9
3-8
3-9
2-9
6.1

$4.3
1-5

.8
5-8
1.9
3-9
1. o
1.6
2.3
1.6
2.4
•9
2.9
1.4
2.4

.8
2.8

$64. 0 $59 • 7
64.9
63 • 4
4 0 . 7 39 9
4i-3
47- 1
50.3
14.8

35 5 1
45 2
46 4
13 8

12. 1

10

5

148

12

5

11.6

10

0

9-9
8.7
10. 9

7 5
7 8
8 0

5-4

4

0

4. 2

1

8

5-8
9-6

5 0
6 8

45-9
35-4

33-0

CHICAGO.

First
_
Continental
Corn Exchange
Commercial
Bankers
Bank of the Republic
Fort Dearborn
Drovers Deposit
National Live Stock

15-2
6.6
6.8
4-9
3-8
3.0
2. 1

•7
i-5

53-6
39-4
24. 2
21.8
12.3

38.4
32.8
17.4
16. 9
8-5

9- 7
5-4
3-8

3- 1

4.4

20. o
14. 1
10. 6
7-4
30
3- 2
2. o
1. 2

12. 9
9-3
6.2
5-8
4. i_
4-5
1.7

3-3

14. 4

18. 1

12.3

•5

11. 3

7-2

9 . 0
2-5

4-5
.8

2-9

2 . 4

2-9

2. 9

6.7

26. 1

20. 6

i. 7 1

ST. LOUIS.

National Bank of Commerce.
Mechanics-American
Third
__..
Merchants Laclede
Central




8.5
6.8

7.8
2. o
1. 4

32.3
19.8
17.9
5-6
4. 2

313

23.8 I 10.3

8.2

26. 0

17.8

13- o I 4-8
5-5

4. 2

15-5

H - 3

7- 7
1.6
i-5

14-9

3-6
2.8

2. o

7. 2

6. 1

4.5 J

4. 2

2.

7

National

Monetary

Commission

EXPANSION OF THE CIRCULATING MEDIUM.
The various substitutes for money used during the panic
were made the subject of an elaborate investigation by
Dr. A. P. Andrew, now Director of the Mint, and copious
extracts from a paper by him are reproduced in the appendix to this reports A total of $238,000,000 of clearinghouse loan certificates of large denominations solely for
use between the banks was issued. An estimated amount
of more than $250,000,000 was provided for everyday use
in the form of small clearing-house loan certificates, clearing-house checks, cashiers' checks, pay checks, and other
devices. By no means all of any of these various substitutes for money were in circulation at any one time.
It has been estimated, for example, that of the $101,000,000 of loan certificates issued by the New York Clearing
House not more than $74,000,000 was actually in use.6
Although the amount of these substitutes was greater
absolutely, and probably relatively, than in previous
crises, it does not follow that the banks restricted cash
payments more completely. As has already been observed, it seems likely that by means of these substitutes
the local requirements of individual depositors were met
more completely than in the past. It may also be mentioned that the issues of loan certificates for payments
between the banks did not represent any addition to the
circulating medium. They simply obviated the customary
shifting of money between the banks in the settlement of
daily balances, with the result that the money held by the
a Appendix, Note K, pp. 434-459.
&See the Commercial and Financial Chronicle, May 30, 1908, p . 1315.




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banks remained just where it was at the time they were
authorized.
An enormous increase in the money supply of the
country was made between the end of August and the
beginning of December. The following table shows
the estimated amount of money in circulation, including
that in the banks at the close of each month from
August to December, 1907:
[Expressed in millions.]

August
September
October..
November.
December .

The increase during September and October was almost
wholly owing to deposits of additional government funds
in the banks. During November and December it was
due chiefly to gold imports and issues of bank notes.
The increase of $219,000,000 during the first four months
of the period, together with the loss of $41,000,000 by the
banks, a total of $260,000,000, represents the amount of
money which had gone into use or into hoards as a result
of the crisis. During December money began to flow
back into the banks to an extent it may be assumed at
least equal to the increase in the money supply of the
country during that month. The composition of the
$219,000,000 by which the money in circulation was
increased between the end of August and the beginning
of December was as follows: the gold supply was increased
6158—10




21

315

National

Monetary

Commission

$90,000,000, of which $70,000,000 was due to imports;
there was a slight addition of $5,000,000 to the amount of
silver money, and an increase of $52,000,000 in bank notes;
to this total of $146,000,000 must be added further
government deposits with the banks to the amount of
$73,000,000. f his large increase in the available supply
of money indicates the extent to which the banks were in
a better position to cope with the crisis of 1907 than were
the banks in 1873.
THE TREASURY AND THE PANIC.

One much discussed measure taken during the crisis
would have been seen to be quite unnecessary had experiences in former crises been familiar. On November 19,
although the Treasury was amply supplied with funds,
subscriptions were invited for the issue of $50,000,000 of
2 per cent Panama bonds and for $100,000,000 of 3 per
cent certificates. The object in view was to provide the
banks with securities as a basis for additional issues of
bank notes. It was arranged that the banks should retain
90 per cent of the purchase price of the bonds as a deposit,
and 75 per cent in the case of the certificates. A considerable percentage of the new securities would thus have
been required as a security for the deposits created in
purchasing them, but most of this requirement was met
by the use of state and municipal bonds which were not
available for circulation. The offer of $150,000,000 of
these new securities excited much opposition, and in fact
bids were accepted to the amount of $24,631,000 of
bonds, and $15,436,000 in the case of the certificates.
The positive effect of these new issues in additional cir-




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Crises

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culation was not experienced until December, during which
there was an increase of $34,000,000, a large part of which
would not have been made if these securities had not been
issued. In his able defense of his resort to this arrangement even the Secretary of the Treasury seems to have
felt that the issue of notes at that time served no useful
purpose. Money was then flowing back to the banks
because of trade depression, and continued to do so for
many months thereafter. He rested his case upon the
moral effect of the relief offered, urging that—
The most potent weapon at such times in bringing a crisis to an end is
often as much one of moral effect as of the definite action taken. I t has
been the history of many great crises in Europe, as well as in this country,
that the knowledge that adequate resources existed to avoid disaster was
often sufficient to obviate the necessity for employing such resources to
their utmost limit. An illustration in point is the action of the chancellor
of the exchequer in Great Britain in the panic of 1866, when the announcement that he had authorized the Bank of England to disregard the bank
act and to issue its notes to any necessary limit promptly arrested pressure
upon the banks. So prompt was the response of public feeling to this
action in suspending the demand for discounts and the withdrawal of
deposits that the bank did not find it necessary to avail itself of the authority
to issue additional notes. The fear that accommodation could not be
obtained by solvent business men was completely allayed and the panic
almost immediately subsided.^

But the situation in the United States was quite unlike
that in England. The Bank of England had used its
inadequate reserves; the national banks had not. It was
prepared to issue the notes secured by this special device,
while the national banks, including those of New York,
seem merely to have taken advantage of their issue to
build up their reserves a little more rapidly and did not
resume the ordinary course of payments. If the Secrea

Response of the Secretary of the Treasury to Senate Resolution No.
33 of December 12, 1907. Senate D o c , 60th Congress, 1st session, p. 17.




3i7

National

Monetary

Commission

tary of the Treasury had offered to issue these securities
during the week ending October 26 on condition that the
New York banks enter into arrangements with each other
which would have made possible further efforts to maintain payments, much could be said for the wisdom and
courage of the policy. But after suspension the condition of affairs was entirely changed. A few millions more
or less in the reserves of the banks or in the hands of the
people could make little difference one' way or another.
The dislocation of the exchanges could only be overcome
by resumption of payments by the banks; but they
showed no willingness to resume until the people, manifesting more confidence in the banks than the banks
manifested in the people, began to restore the money
which had been withdrawn.
CONCLUSION.

We have already seen that restrictions upon cash payments were not removed until the beginning of January.
Long before that time the banks in many parts of the
country had intimated their readiness to resume if the
New York banks would lead the way. Money was accumulating in banks both in New York and elsewhere,
but the New York banks took no definite action, until
at length in the last week of the year reported movements
of money between the banks and the rest of the country
showed a considerable balance in favor of the city. The
returns of the banks to the Comptroller of the Currency
on February 15 showed, as usual after a crisis, an enormous
increase in the cash reserves of the banks, an increase in
this instance of no less than $124,000,000. A consid-




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System

erable part of this amount must have been received during December, and its beginning should have been marked
by the immediate resumption of cash payments.
It is impossible to escape the depressing conclusion
that the banking situation in 1907 was handled less skillfully and boldly than in 1893, and far less so than in 1873.
No new elements of weakness were disclosed, but no real
effort was made to overcome difficulties which had been
met with partial success at least on former occasions.
A situation which was certainly less serious than in 1873
or 1893 and probably less serious than in 1884 was allowed
to drift into the most complete interruption of its banking facilities that the country has experienced since the
civil war. The fundamental cause of the trouble would
seem to have been a lack of faith in the possibility of
escaping suspension in an emergency under the existing
banking system. This feeling has been intensified as a
result of the crisis of 1907. It is based upon vivid perceptions of the effects rather than an understanding of the
causes of the breakdown of the country's credit machinery. These effects are indeed most serious, but if this
investigation may be made the basis for any conclusion,
it is that though the causes of crises are extremely various,
the method of handling them on the banking side is
simple.
Somewhere in the banking system of a country there
should be a reserve of lending power, and it should be
found in its central money market. Ability in New York
to increase loans and to meet the demands of depositors
for money would have allayed every panic since the




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establishment of the national banking system. Provision for such reserve power may doubtless be made in a
number of different ways. This investigation will have
served its purpose if in showing the causes and consequences of its absence in the past it brings home to the
reader the need not only of this reserve power, but also of
the readiness to use it in future emergencies.




320

NOTE

A.

EXTRACTS FROM THE ANNUAL REPORT OF THE SECRETARY
OF THE TREASURY (WILLIAM A. RICHARDSON) RELATING
TO THE CRISIS OF

1873. a

The prevailing practice, not only of national banks but
of s.tate banks and private bankers, of paying interest on
deposits attracts currency from all parts of the country
to the large cities, and especially to New York, the great
financial center. At seasons of the year when there is
comparatively little use for currency elsewhere, immense
balances accumulate in New York where, not being required by the demands of legitimate and ordinary business, they are loaned on call at a higher rate of interest
than that paid to depositors, and are used in speculation.
Every year, at the season when the demand sets in from
the West and South for currency to be used in payment
for and transportation of their agricultural products, there
occurs a stringency in the money market arising from the
calling in of such loans to meet this demand.
Until this year, though annually creating some embarrassment, this demand has been met without serious
difficulty.
During the past summer, anticipating the usual autumn
stringency, the Treasury Department sold gold while the
market price was high, currency abundant, and bonds for
sale in the market were scarce, and while there was a
surplus of gold in the Treasury; and thereby accumulated
about $14,000,000 of currency with the view of using
the same, or such part thereof as might be necessary,




a Finance Report, 1873, pp. xi-xviii.
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in the purchase of bonds for the sinking fund at times
during the autumn and winter when they could be bought
at a price not above par in gold, or in meeting demands
upon the Treasury, as circumstances should require.
This year there was a great demand for currency to
pay for the heavy crops of a bountiful harvest, for which
the European countries offered a ready market. The suspension of certain large banking houses, the first of which
occurred on the 18th day of September, alarmed the people
as to the safety of banks and banking institutions in general. Suddenly there began a rapid calling in of demand
loans and a very general run on the banks for the withdrawal of deposits. Entire confidence was manifested in
United States notes and even in national-bank notes, and
they were drawn wherever they could be obtained, and
were largely hoarded with as much avidity as coin was
ever hoarded in times of financial distress when that was
the circulating medium of the country. The banks found
themselves unable to meet the demands upon them, currency in circulation became exceedingly scarce, and the
business of the country became greatly embarrassed.
In this condition of things great pressure was brought
to bear upon the Treasury Department to afford relief by
the issue of United States notes. The first application
came from a number of gentlemen in New York, suggesting that no measure of relief would be adequate that
did not place at the service of the banks of that city
$20,000,000 in United States notes, and asking that
the assistant treasurer at New York should be authorized
to issue to those banks that amount of notes as a loan upon




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a pledge of clearing-house certificates secured by ample
collaterals, and for which certificates all the banks were
to be jointly and severally responsible. This proposition
was declined, it being clearly not within the duty or the
authority of the Treasury Department, under any provisions of law, thus to employ the public money.
Exchange on Europe having fallen to unusually low
rates, and indeed having become almost unsalable in the
market, to the embarrassment of our foreign and domestic
trade, applications were made to the Secretary of the
Treasury to use the money in the Treasury in the purchase
of exchange. The Treasury Department having no occasion to do this for its own use and no necessity for transferring funds to Europe, was compelled to decline this
proposition, which if accepted would have put the department in the position of becoming a dealer in exchange, a
position clearly inconsistent with its duties.
Subsequently the New York Produce Exchange made
a proposition to accomplish the same result in a different
form, and also requested, as others had before, that the
Secretary should pay at once the twenty-million loan of
1858, to which the following reply was made:
TREASURY

DEPARTMENT,

Washington, September 30, 1873.
S I R : Your letter of the 29th instant, covering two resolutions of the New
York Produce Exchange, has been received and the subject-matter fullyconsidered.
The resolutions are as follows:
" Whereas the critical condition of the commercial interests of the
country requires immediate relief by the removal of the block in negotiating foreign exchange; therefore be it
" Resolved, T h a t we respectfully suggest to the Secretary of the Treasury
the following plans for relief in this extraordinary emergency:
" F i r s t . T h a t currency be immediately issued to banks and bankers,
upon satisfactory evidence that gold has been placed upon special deposit




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in the Bank of England, by their correspondents in London, to the credit
of the United States, to be used solely in purchasing commercial bills of
exchange.
"Second. That the President of the United States and the Secretary of
the Treasury are respectfully requested to order the immediate prepayment of the outstanding loan of the United States due January i, 1874."
While the Government is desirous of doing all in its power to relieve the
present unsettled condition in business affairs—as has already been
announced by the President—it is constrained, in all its acts, to keep within
the letter and spirit of the laws, which the officers of the Government are
sworn to support, and they can not go beyond the authority which Congress has conferred upon them. Your first resolution presents difficulties
which can not be overcome. It is not supposed that you desire to exchange
coin in England for United States notes in New York at par. If your
proposition is for the Government to purchase gold in England, to be paid
for in United States notes at the current market rate in New York, it would
involve the Government in the business of importing and speculating in
gold, since the Treasury has no use for coin beyond its ordinary receipts,
and would be obliged to sell the coin so purchased at a price greater or less
than was paid for it. If your object is to induce the Treasury Department to
loan United States notes to banks in New York upon the pledge and deposit
in London of gold, it is asking the Secretary of the Treasury to loan the
money of the United States upon collateral security for which there is no
authority in law. If the Secretary of the Treasury can loan notes upon a
pledge of coin he can loan them upon a pledge of other property in his
discretion, as he has recently been requested to do, which would be an
extraordinary power as well as a most dangerous business to engage in,
and which my judgment would deter me from undertaking, as the Secretary of the Treasury, even if by any stretch of construction I might not
find it absolutely prohibited by law. The objections already mentioned to
your first resolution are so insuperable and conclusive t h a t it is unnecessary
for me to refer to the many practical difficulties which would arise if an
attempt should be made to comply with your request. Your second resolution calls for the payment at once of the loan of 1858, or the bonds com
monly called "fives of 1874." Upon a thorough investigation I am of opinion
that Congress has not conferred upon the Secretary of the Treasury power to
comply with your request in that particular, and in this opinio^ the law
officers of the Government concur. Under these circumstances you will
perceive that, while I have great respect for the gentlemen comprising the
New York Produce Exchange, I am compelled, by my views of the law and
of my duty, to respectfully decline to adopt the measure which your
resolutions propose.
I have the honor to be, very respectfully,




W M . A. RICHARDSON,

Secretary of the Treasury.
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The Chamber of Commerce of Charleston, S. C , petitioned for the transfer of currency to that city, and the
purchase with it at that point of exchange on New York,
to aid those engaged in forwarding the cotton crop to the
market. The following letter was sent in answer to this
petition:
TREASURY DEPARTMENT, October 3,
SAMUEL Y. T U P P E R ,

1873.

Esq.,

President Chamber of Commerce, Charleston, S. C:
I have the honor to acknowledge the receipt of the memorial of the
Charleston (S. C.) Chamber of Commerce, addressed to the President of the
United States, and referred to this department, which, after rectifying the
present stringency in the money market and the difficulty of obtaining
currency, requests " t h a t the sum of $500,000 be placed and maintained on
deposit with the assistant treasurer at Charleston, to be used by him in
the purchase of New York exchange from the banks."
To comply with the request, it would be necessary for the Treasury
Department to send currency by express to Charleston from time to time,
and to buy with it exchange on New York in competition with private
bankers.
Should this request be granted, a hundred other places in the country
might, with equal propriety, ask for the same relief, and if all such requests
were impartially granted the department would find itself engaged in an
extensive exchange business, fixing and regulating the rate of exchange
between different places in the country, and the public money, raised by
taxation only for the purpose of carrying on the Government, would be
employed to a very large amount in a business which Congress has not given
the Secretary of the Treasury any authority to engage in.
With a due regard to the proper management of the Treasury Department, within the provisions of the law, I have felt it to be my duty to
decline all similar propositions from other places, and your request must
therefore receive the same response.
I have the honor to be, very respectfully, yours,
W M . A. RICHARDSON,

Secretary of the Treasury.

The executive department of the Government was anxious to do everything in its power, under the law, and with
due regard to the protection of the Treasury and the maintenance of public credit, to allay the panic and to prevent
disaster to the legitimate commercial and industrial inter-




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ests of the country; but it was found impossible to afford
the relief in any of the many forms in which the relief was
asked. It was decided, therefore, to adopt the only practicable course which seemed to be open to it—the purchase
of bonds for the sinking fund to such an extent as the condition of the Treasury would allow, and thus release a
considerable amount of currency from its vaults. Purchases of bonds were commenced on the morning of the
20th of September and were continued until the 24th,
when it became evident that the amount offering for purchase was increasing to an extent beyond the power of
the Treasury to accept, and the purchasing was closed after
bonds to the amount of about $13,000,000 had been
bought, and without the use of any part of the $44,000,000
of United States notes generally known as the reserve.
It should be stated that in the excitement there were
many persons in the city of New York who insisted with
great earnestness that it was the duty of the Executive to
disregard any and all laws which stood in the way of affording the relief suggested by them—a proposition which
indicates the state of feeling and the excitement under
which applications were made to the Secretary of the
Treasury to use the public money and which, it is scarcely
necessary to add, could not be entertained by the officers
of the Government to whom it was addressed.
These facts are recited in order to lay before Congress
and place on record in a concise form exactly what the
Treasury Department was asked to do, and what it did,
in the late financial crisis.




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The currency paid out of the Treasury for bonds did
much to strengthen many savings banks and to prevent
a panic among their numerous depositors, who began to
be alarmed, and had there developed an extended run
upon those useful institutions it would inevitably have
caused widespread disaster and distress. It also fortified
other banks and checked the general alarm to some extent.
But the loss of confidence in the value of a great amount
of corporate property which immediately followed the
failure of banking houses connected with largely indebted
corporations, the distrust of the solvency of many other
institutions, the doubt as to the credit of firms and individuals whose business was supposed to be greatly extended, and the legitimate effect thereof in disturbing
the business of the country could not be avoided by any
amount of currency which might be added to the circulation already existing.
Confidence was to be entirely restored only by the
slow and cautious process of gaining a better knowledge
of true values and making investments accordingly and
by conducting business on a firmer basis, with less inflation and more regard to real soundness and intrinsic
values.
There can be no doubt that the practice of banks of
allowing interest on deposits payable on demand is pernicious and fraught with danger and embarrassment to
borrower and lender, as well as to the general businessinterests.
Deposits payable on demand should be limited to that
surplus which individuals require over and above their




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investments, and no part of that from which they expect
an income. Such deposits are comparatively stable in
average amount, and constitute a healthy basis for banking purposes within proper limits, which prudent bankers
know how to determine.
But if deposit accounts are employed as temporary
investments, the interest attracts a large amount of
money to those cities where such interest is paid, and
where speculation is most active, at seasons when as
much profit thereon can not be secured elsewhere. With
the first return of activity in legitimate business these
temporary investments are called in and jeopardize in
their sudden withdrawal the whole business of the banks,
both affecting the legitimate depositors on the one hand
by excitement and distrust, and on the other creating a
condition of things in which the borrowers on call are
also unable to respond. The banks have borrowed their
money of depositors on call. They have loaned it on
call to speculators, who by its use have contributed to
inflate the prices of the stocks or merchandise which have
been the subject of their speculations. The speculator
wants it till he can dispose of them without a loss. This
he is unable to do in a stringent money market. The
banks, their depositors, and the borrowers all want it at
the same time, and of course a stringency is developed
which spreads distress throughout the country.
The system creates immense amount of debts payable
on demand, all of which thus suddenly and unexpectedly
mature at the first shock of financial or commercial
embarrassment in the country and at the very time when




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most needed by debtors and when they are least able
to respond.
There is no safety for corporations or individuals whose
capital employed is wholly or mostly borrowed on call.
Many savings banks were protected from ruin in the
recent financial excitement by availing themselves of
provisions in their rules requiring sixty days or other
periods of notice before paying depositors, thus making all
their deposits payable on time. Every cautious and
well-managed savings institution has such a rule among
its by-laws.
Without attributing the stringency in the money
market which is experienced every autumn and occasionally at other seasons of the year solely to this practice of paying interest upon deposits in the large cities,
it is evident that when money is less needed in legitimate
business the practice encourages overtrading and speculation, always detrimental to the best interests of the
country, and the bad effects of which upon those interests
become more apparent and the disaster more widespread
when the necessary contraction begins to be felt.
I recommend that the national banks be prevented
from paying interest on deposits, or that they be restricted
and limited therein, either by direct prohibition, by discriminating taxation, or otherwise.
While legislation by Congress can not prevent state
banks and private bankers from continuing the practice,
it can prevent national banks from becoming involved
in and instrumental in producing the embarrassments
and difficulties to which it necessarily leads.




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The national banks, organized by law of Congress and
having relations with the Government in the issue of
circulating notes, ought to be the most cautious and safe
banking institutions of the country, and should be kept
aloof from all hazardous business which it is not possible
to prevent sanguine, venturesome, and speculative individuals from engaging in at the risk of their capital and
their credit.
With a fixed amount of circulation of bank notes and
of United States legal-tender notes not redeemable in
coin and with gold above par in currency, there must be
each year times of redundancy and times of scarcity of
currency, depending wholly on the demand, no method
existing for increasing the supply.
With a circulating medium redeemable in coin, a redundancy is corrected by the export, and a scarcity by
the import of specie from other countries.
There is a prevailing sentiment that more elasticity
should be given to the volume of the currency, so that
the amount in circulation might increase and diminish
according to the necessities of the business of the country.
But the difference of opinion on this subject is so great
and the real difficulties attending its solution are so
numerous that, without discussing any of the multitude
of plans which have been presented to the public through
the press and otherwise, I earnestly commend to the
wisdom of Congress a careful and thorough consideration
of this important subject, rendered more obviously important by the present embarrassed condition of large
business interests which have suffered by the recent




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financial crisis; and that, in such inquiry, avoiding further
inflation of the issue of irredeemable legal-tender notes,
the most desirable of all financial results to be attained,
namely, a permanent return to the sound basis of specie
payments and a gold standard to which all our paper
issues shall be made of equal value, shall be the aim.
To allow national banks to use part of their reserves
at seasons of the greatest pressure, under proper restrictions and regulations, would afford some flexibility.
Rigid statute laws applied to all banks at all seasons
and in all places alike often prove an embarrassment and
injury when they conflict with economic principles and
the laws of trade and business, which are stronger than
legislative enactments and can not be overthrown thereby.
Associated banks at the several redemption cities named
in the banking law, which are the great controlling centers
of business, might do much to give steadiness and safety
if they were authorized, through properly constituted
boards or committees of their own officers, to exercise a
large discretion in the use of their reserves in the rate of
interest to be charged at different seasons and under
different circumstances and in other matters within
limits prescribed by law.

6158—10




22

33*

NOTE
EXTRACTS FROM THE

B.

ANNUM

REPORT

OF THE

COMP-

TROLLER OF THE CURRENCY (JOHN JAY KNOX) RELATING TO THE CRISIS OF

1873/*

The crisis was caused in a great degree by the desire
of the country banks to withdraw their balances from the
city banks; first, because in the month of September the
amount on deposit with the city banks was needed for
the legitimate purposes of trade; and secondly, because
the country banks, foreseeing and fearing the return of
the experience of previous years, thought it safer to withdraw their balances at once. When the reserves of the
New York City banks became alarmingly reduced by the
drafts of their country correspondents, the only resource
left to the city banks was to convert their call loans,
amounting to some $60,000,000; but these, if paid at all,
were paid in checks upon the associated banks, and the
latter found, the next morning, at the clearing house, that,
although a portion of their liabilities had been reduced
by the payment of call loans, they were in the aggregate
no richer in currency than on the previous day. * * *
[ 6 The reserves of the 1,900 national banks located elsewhere than in the city of New York are held to a great
extent in that city. For most of the time during the
past year an amount equal to more than one-fifth of the
capital of all these national banks has been held on
deposit by the national banks of the city of New York to
o Finance Report, 1873, pp. 86-96.
& The three succeeding paragraghs which are enclosed in brackets are a
part of an excerpt from the report of 1872.




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the credit of their correspondents. In many cases these
credits amount to twice the capital of the bank with which
they are deposited; in other cases the amount of deposits
is three, four, and even five times the capital, which
amount has been attracted thither largely by the payment
of interest on deposits. The failure of one of these New
York City banks in a time of monetary stringency would
embarrass, if not ruin, many banks in the redemption
cities, and, in turn, the country correspondents of these
banks would suffer from the imprudence of the New
York bank, which would be responsible for wide-spread
disaster. * * *
In times of excessive stringency loans are not made by
such associations to business men upon commercial paper,
but to dealers in speculative securities, upon short time,
at high rates of interest; and an increase of call loans beyond the proper limit is more likely to afford facilities for
unwarrantable stock speculations than relief to legitimate
business transactions. * * *
The variations in the liabilities requiring reserve in the
banks of the city of New York are very great. The banks
outside of New York during the dull season send their
surplus means to that city for deposit upon interest, to
await the revival of business. The banks in the city of
New York at such periods of the year have no legitimate
outlet for these funds, and are, therefore, threatened with
loss. The stock board takes advantage of this condition
of affairs, speculation is stimulated by the cheapness of
money, and a market is found for the idle funds upon
doubtful collaterals, and the result is seen in the increased




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transactions at the clearing house, which during the past
year exceeded $32,000,000,000, or an average of more than
$100,000,000 daily—not one-half of which was the result
of legitimate business; the total amount of transactions
being greater than that of the bankers' clearing house of
the city of London. The evil arises largely from the payment by the banks of interest on deposits, an old and established custom which can not easily be changed by direct legislation. A considerable portion of these deposits
would remain at home if they could be used at a low rate
of interest, and made available at any time upon the return
of the season of active business. No sure investment of
this kind is, however, open to the country banks, and the
universal custom is to send forward the useless dollars
from vaults comparatively insecure to their correspondents in the city, where they are supposed to be safer and
at the same time earning dividends for shareholders.]
The rule requiring a reserve was adopted by the voluntary action of the Clearing House Association of the
city of New York previous to the passage of the national
currency act. At a meeting of bank, officers, representing 42 of the 46 banks of the city of New York, held at
the rooms of the Clearing House Association in March,
1858, it was agreed " t o keep on hand at all times an
amount of coin equivalent to not less than 20 per cent
of our net deposits of every kind, which shall be made to
include certified checks and other liabilities, except circulating notes, deducting the daily exchanges received from
the clearing house/' This resolution was adopted five




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years previous to the passage of the national currency
act, and its phraseology is not unlike the provisions of
that act in reference to reserves to be held by the national
banks of New York City. The resolution did not provide for a reserve on circulation for the reason that the
circulation of the city banks was at that time redeemable
at par in coin, so that no action was necessary in respect
to the reserve to be held upon circulating notes. From
that time to the passage of the national currency act
the resolution was generally observed, and since the
passage of the act neither the New York Clearing House
Association nor the clearing house association of any
city has requested the repeal of such restrictions. On the
contrary, the New York association has repeatedly refused
to modify the rule by agreeing that national-bank notes,
which by the law can be used in payment of debts to
each other, may be so employed.
The national currency act requires that the national
banks "shall at all times have on hand" the reserve
required in lawful money, and the advocates of a repeal
of the reserve laws insist that, under this provision, the
national banks are absolutely prohibited from using
these reserves at any time. The provision requiring that
a reserve shall be kept on hand at all times was intended
to protect the depositor and to keep the bank in funds for
the purpose of responding at all times to the demands
of its creditors. This is evident from the fact that the
bank is required, when its reserves become deficient, to
cease discounting and making dividends until the amount
of the reserve shall be restored. The word " reserve " is




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used, as has been suggested, in the same sense as it is
used in an army, and " the fact that a military commander
can not be definitely instructed when he may employ
his reserve force is not regarded as a reason why that
important portion of the army organization should be
abandoned or be reduced in number of efficiency." To
claim that a bank can not redeem its own notes upon
presentation, and can not pay the checks of its depositors
on demand if the payment of such debts shall intrench
upon its reserves, is equivalent to declaring that the
national currency act was intended to provide for the
destruction of the very institutions it had created. From
the first organization of the system to the present time
the uniform decisions have been that the object of the
reserve is to enable the bank at all times to pay its debts.
In times of panic the depositors of a bank, and not its
officers and directors, are its masters; and it is absurd
to maintain that a bank, liable at such times to be called
upon to pay its debts would, if there were no reserve laws,
loan upon commercial paper, at the risk of almost certain
failure and disgrace, the money which belongs to its
creditors.
While the Comptroller concedes that experience may
hereafter justify a modification of the provisions of the
act in this respect, he is clearly of the opinion, in view of
the lessons to be derived from the late suspension in
New York, that he would not be warranted in recommending any change at present.
*




•

*

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THE PANIC OF 1873.

The monetary crisis of 1873 may be said to have had
its beginning in New York City on September 8 by the
failure of the Warehouse Security Company and of two
houses which had left their regular business to embark in
enterprises foreign thereto, which were followed on the
13th by the failure of a large firm of stockbrokers. On
the 18th and 19th two of the largest banking houses in
the city, well known throughout the country, and which
were interested in the negotiations of large amounts of
railroad securities, also failed; and on the 20th of the
same month the failures of the Union Trust Company,
the National Trust Company, the National Bank of the
Commonwealth, and three other well-known banking
houses were announced. On the same day the New
York Stock Exchange, for the first time in its existence,
closed its doors, and they were not again opened for a
period of ten days, during which period legal-tender
notes commanded a premium over certified checks of
from one-fourth of 1 per cent to 3 per cent. An active
demand for deposits commenced on the 18th, and increased rapidly during the 19th and 20th, chiefly from
the country correspondents of the banks; and their
drafts continued to such an extent, " calling back their
deposits in a medium never before received,'' that the
reserves of the banks were alarmingly reduced.
The ''call loans," amounting to more than $60,000,000,
upon which the banks relied to place themselves in funds
in such an emergency, were entirely unavailable, because




337

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a I Mo n et ar y

Comm is $ ion

the means of the borrowers upon the realization of
which they depended to repay their loans were, to a
great extent, pledged with the banks. These collaterals
could in ordinary times have been sold, but at that
moment no market could be found except at ruinous
sacrifices. Had there been a market, the payments
would have been made in checks upon the associated
banks, which would not have added to the general supply
of cash. A meeting of the clearing-house association was
called, and on Saturday evening, September 20, the plan
for facilitating the settlement of balances at the clearing
house was unanimously adopted.
The suspension of currency payments followed and was
at first confined to the banks of New York City, but
afterwards extended to other large cities, because the New
York banks could not respond to the demands of their
correspondents in those cities, and these, in turn, could
not respond to the demands of their correspondents.
Exchange on New York, which would otherwise have
commanded a slight premium, was at a discount, and to
a considerable extent unavailable. The suspension of
the banks in other leading cities, almost without exception,
therefore followed, and their partial or entire suspension
continued for forty days, until confidence was in a measure
restored by the resumption of the New York City banks
on the 1st day of November.
Although predictions had been made of the approach
of a financial crisis, there were no apprehensions of its




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immediate occurrence. On the contrary there were in
almost every direction evidences of prosperity.
The harvest was nearly or quite completed, and the
bins and granaries were full to overflowing. The manufacturing and miming interests had also been prosperous
during the year, and there was good promise that the fall
trade, which had opened, would be as large as during previous years. The value of the cereals, potatoes, tobacco,
and hay for 1872 is estimated by the Department of Agriculture at $1,324,385,000. It is supposed that the value
of these products for the present year, a large portion of
which was at this time ready for sale and awaiting shipment to market, will not vary materially from the abovementioned estimate of last year. An estimate based
upon the census returns of 1869 gives the probable aggregate value of the marketable products of industry for the
year as $4,036,000,000, and a similar estimate upon the
same basis and upon returns to the Agricultural Department gives an increase of $1,788,000,000 for 1873 o v e r
the amount for 1868.
It is not the province of the Comptroller to explain the
causes which led to this suspension. In order to enter
upon such an explanation it would be necessary to obtain
comparative data for a series of years in reference to the
imports and exports, the products of industry, the issue
of currency and other evidences of debt, and, in fact, a
general discussion of the political economy of the country.
The immediate cause of the crisis is, however, more apparent. The money market had become overloaded with
debt, the cost of railroad construction for five years past




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Commission

being estimated to have been $1,700,000,000, or about
$340,000,000 annually, while debt based upon almost
every species of property—state, city, town, manufacturing corporations, and mining companies—had been
sold in the market. Such bonds and stocks had been disposed of to a considerable extent in foreign markets, and
so long as this continued the sale of similar securities was
stimulated and additional amounts offered. When the
sale of such securities could no longer be effected abroad,
the bonds of railroads and other enterprises of like
nature which were in process of construction were thus
forced upon the home market, until their negotiation
became almost impossible. The bankers of the city of
New York, who were burdened with the load, could not
respond to the demands of their creditors, the numerous
holders of similar securities became alarmed, and the panic
soon extended throughout the country.
The present financial crisis may in a great degree be
attributed to the intimate relations of the banks of the city
of New York with the transactions of the stock board, more
than one-fourth, and in many instances nearly one-third,
of the bills receivable of the banks, since the late civil
war, having consisted of demand loans to brokers and
members of the stock board, which transactions have a
tendency to impede and unsettle, instead of facilitating,
the legitimate business interests of the whole country.
Previous to the war the stock board is said to have consisted of only 150 members, and its organic principle was
a strictly commission business, under a stringent and conservative constitution and by-laws. The close of the




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war found the membership of the stock board increased
to 1,100, and composed of men from all parts of the country, many of whom had congregated in Wall street,
adopting for their rule of business the apt motto of
Horace:
Make money; make it honestly if you can; at all events, make money.

The quotations of the stock board are known to be too
frequently fictions of speculation, and yet these fictions
control the commerce and business of a great country, and
their influence is not confined to this country, but extends
to other countries, and seriously impairs our credit with
foreign nations. The fictitious debts of railroads and other
corporations which they have bolstered up, and which
have obtained quotations in London and other markets
of the world, have now been reduced to a more proper valuation, or stricken from the list.
Many measures of reform are proposed in order that
the lessons of the crisis may not be lost, and others be
led hereafter to repeat similar errors. Unity of action
among the leading banks of the great cities will do more to
reform abuses than any congressional enactment; for,
unless such corporations shall unite and insist upon legitimate methods of conducting business, the laws of Congress in reference thereto will be likely soon to become
inoperative, such enactments being observed in their true
spirit by the few, while the many evade them, and thus
invite a repetition of similar disasters.




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If, however, the banks are disinclined to unite for such
a purpose, the legislation required of Congress will be such
as will induce associations outside of the city of New York
to retain in their vaults such funds as are not needed at
the commercial center for purposes of legitimate business.

INTEREST ON DEPOSITS.

In my last annual report I referred briefly to the evils
resulting from the payment of interest upon deposits,
and my predecessors have frequently referred more at
length to the same subject. The difficulty has been
that the proposed legislation by Congress upon the subject would apply only to the national banks. The effect
of such legislation would be to bring state banks and
savings banks, organized by authority of the different
States, in direct competition with the national banks in
securing the accounts of correspondents and dealers;
the national banks would be desirous of retaining their
business, and the more unscrupulous would not hesitate
to evade the law by offering to make collections throughout the country free of charge, to buy and sell stocks
without commission, and to rediscount paper at low
rates. The proposed action of the clearing house in the
city of New York, if adopted by the clearing houses of
the principal cities of the Union, would do more to prevent the payment of interest upon deposits than any
congressional enactment; but the evils resulting from
the payment of interest upon deposits are by no means
confined to the city banks. It may be safely said that




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this custom, which prevails in almost every city and
village of the Union, has done more than any other to
demoralize the business of banking. State banks, private bankers, and associations under the guise of savings banks everywhere offer rates of interest upon deposits which can not safely be paid by those engaged in
legitimate business. National banks desirous of retaining the business of their dealers also make similar offers,
and the result is not only the increase of the rates of
interest paid to business men, but, as a consequence,
investments in unsecured loans, bringing ultimate loss
both upon the shareholders of the bank and the depositors. The kind of legislation needed is that which shall
apply to all banks and bankers alike, whether organized
under the national-currency act or otherwise. A law
prohibiting the payment of interest on deposits by the
national banks will have little effect unless followed by
similar legislation under authority of the different States,
and there is little hope that such legislation can be obtained. The national - currency act, which was passed
during the war, provided for a tax of one-half of i per
cent upon all deposits, and subsequently internalrevenue legislation extended this tax to all deposits
made with state banks and individual bankers. If legislation prohibiting the payment of interest on deposits
shall be proposed, I recommend that this law be so
amended as to repeal this tax, so far as it applies to
demand deposits, and that an increased rate of taxation
be imposed uniformly upon all deposits which, either
directly or indirectly, are placed with banks and bankers




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with the offer or expectation of receiving interest. Such
legislation if rigidly enforced would have the effect not
only of reducing the rate of interest throughout the country, but at the same time preventing the illegitimate organization of savings banks, which organizations should
be allowed only upon the condition that the savings of
the people shall be carefully and prudently invested and
the interest therefrom, after deducting reasonable expenses, distributed from time to time to the depositors
and to no other persons whatsoever.
CERTIFICATION OF CHECKS.

The act of March 3, 1869, authorizes the appointment
of a receiver "if any officer, clerk, or agent of any national bank shall certify any check drawn upon said
bank unless the person or company drawing the said
check shall have on deposit in said bank at the time
said check is certified an amount of money equal to the
amount specified in such check."
Receivers have been appointed during the past year
for the National Bank of the Commonwealth of New
York and the New Orleans National Banking Association for violations of this act, and it is the intention of
the Comptroller to hereafter rigidly enforce this act
whenever he is satisfied of such violation.




344

NOTE
EXTRACTS

FROM THE ANNUAL

TROLLER

OF

THE

CURRENCY

ING TO THE PANIC OF

C.
REPORT OF THE

COMP-

(H. W. CANNON)

RELAT-

1884.

CAUSES OF NEW YORK BANK FAILURES IN 1884.°

The most notable national-bank failure of the year in
the United States was that of the Marine National Bank,
of the city of New York, which closed its doors about
11 a. m. on the 6th of May. The bank examiners of the
city of New York immediately took possession of the bank
and found that it had been indebted to the clearing house
that day in the sum of $555,000. The examiner also
found the account of one firm overdrawn on the books of
the bank to the amount of $766,570.14. Upon further
examination it was found that this firm owed a total of
about $2,430,500, being more than six times the capital
of the bank. A portion of this indebtedness was in the
names of other parties—clerks in their office and relations
of one of the firm. How far the officials of the bank are
criminally responsible for these matters is a subject now
under investigation in the courts. The Comptroller finds,
from the report of the examiner, that this firm had three
different accounts with the bank—a private account of a
member of the firm, a general account, and a special
account. It appears, from an examination of the transcript
0

Report of the Comptroller of the Currency, 1884, pp. 41-43.




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of these accounts, that on May 5 their special account
was overdrawn by certified checks $383,402.07 and that
on the same day their general account was also overdrawn.
It is apparent, therefore, that the bank had violated the
law in regard to certifications by permitting these overdrafts. It is claimed, however, by the officers of the bank
that these certifications were made against securities
which were subsequently obtained from the bank by one
of the firm upon his representations that he had obtained
a loan upon them elsewhere and would make good his account. A further examination of the various accounts of
the firm shows that while the certification of their checks
was carried on to an enormous extent, they also made
very heavy deposits from day to day, and it will, perhaps,
be very difficult to furnish evidence proving conclusively
that the checks were certified before the deposits were
made.
An examination of the minutes of the board of directors
of the bank shows that on the n t h day of April, 1884,
twenty-five days before the failure of the bank, the committee of examination appointed by the board of directors
reported that they had examined the securities, counted
the bills and specie, and examined the balances on the
ledgers of the bank, and found the recorded statement of
the 7th of April, 1884, to be correct. The minutes further
show that the directors were in session about an hour
before the bank closed. They apparently had no suspicion
of the state of its affairs, and voted to discount certain
offerings of commercial paper; and within half an hour
after the adjournment of this meeting the bank closed its




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doors. It would seem, therefore, that the board of
directors were grossly deceived as to the true state of
affairs.
In this connection I desire to state that the records of
the comptroller's office show that many of the transactions
of the Marine National Bank of the city of New York have
been looked upon with disfavor, and that the association
has been frequently reprimanded for irregularities during
the past few years. None of the reports of examinations
of the bank made to this office, however, disclosed any
violations of the law forbidding the overcertification of
ckecks or gave the department any adequate idea of the
dangerous character of its loans, and this is not surprising,
the directors of the bank having been equally deceived in
regard to the situation.
After reviewing the information in his possession, it
seems to the comptroller that the failure of the Marine
National Bank is in consequence of the board of directors
having chosen for their president a man who was willing
to risk his own honor and the funds of the bank in speculation. He joined with himself another, who is now in
Ludlow street jail under indictment, and who was also a
member of the board of directors of the bank. While it
is true that the final failure has shown that there were
overcertifications on the last day, the comptroller judges,
from the information which he has received, that the bank
has been for a long time in the power of the firm to whom
the certifications were granted, through the president's
copartnership. This matter was carried to the extent of
permitting one of the firm to have access to, and appar6158—10




23

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ently free disposal of, the securities left as collateral to
his loans, and, so far as actual results are concerned, he
might as well have had the combinations of the cash
vaults of the bank and helped himself to their contents.
The Metropolitan National Bank suspended and closed
its doors about noon on May 14, and opened again for
business at 12 o'clock on the following day, the bank
examiner remaining in charge of the bank during its
suspension. He also remained at the bank during the
first days of its resumption, and has frequently visited it
since, and forwarded reports as to its liquidation of
deposits. Before permitting the bank to resume business
the comptroller received assurances from the examiner
that the bank was solvent, and also received telegrams
from the president and chairman on loans of the New
York Clearing House, stating that in their opinion the
bank was solvent and should be permitted to resume. The
bank is now closing its affairs, having arranged to pay its
depositors in full and gone into voluntary liquidation
under sections 5220 and 5221 of the United States Revised
Statutes.
It is difficult to determine, in the case of this bank, what
brought about its suspension. From the information
which the comptroller has, however, it appears that the
president of the Metropolitan National Bank had the credit
at least of being a very large speculator. He was supposed to be a man of very large means and wTas interested
in many enterprises which required the use of large sums of
money. The general liquidation in railroad and other
securities which had been going on for the past two years




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had no doubt affected the properties in which the president
was interested, and the public having become suspicious,
and apparently believing that he was a large borrower
from the bank, and had loaned money to parties who were
interested with himself, all of whom were assumed to have
lost largely by this depreciation of property, rumors were
circulated which excited distrust and suspicion against his
bank and caused the run upon it which resulted in its
suspension. Reports of examinations do not disclose any
overcertification of checks, and I can not conclude that
irregularities of this kind had anything to do with bringing
about the suspension.
The Metropolitan National Bank was examined on
April 28, 1884. The examination disclosed certain irregularities, and a letter was promptly written to the bank,
requiring the correction of the irregularities, and forbidding
the declaration of any further dividends until this had
been done. While this letter was acknowledged, the matter was pending at the time of the suspension of the bank.
The trouble at the Second National Bank of the city
of New York grew out of a defalcation amounting to
$3,185,000 by the president of the bank. The amount of
this defalcation was immediately guaranteed and the money
paid in by the directors. Owing to this prompt assistance
the bank did not suspend, and is going on with its business
in a solvent condition. As far as this office is advised, the
president used the money in speculations in Wall street,
and was able to conceal the fact of his misappropriations
of the funds of the bank on account of the securities being
kept in a vault located at some distance from the regular




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Commission

banking rooms, which are at the corner of Twenty-third
street and Fifth avenue. It appears that the president
had access to these securities without check or hindrance,
and used them to obtain money for his own private
speculations.
In the matter of the failure of the Marine National Bank
of New York, and the defalcation of the Second National
Bank of New York, it appears from the information on
file at this office that there have been not only irregularities, but violations of section 5209, United States Revised
Statutes. The United States district attorney at the city
of New York is in communication with the national bank
examiner and the receiver of the Marine National Bank in
regard to these matters, and the facts, which have been
submitted to this office, the Comptroller has formally
transmitted to the Attorney-General of the United States
through the Secretary of the Treasury.
CLEARING-HOUSE LOAN CERTIFICATES IN 1884.°

As has been stated, a meeting of the members of the
New York Clearing House Association was held on May
14, 1884, to consider what measures could be adopted
to protect the reserves of the associated banks and to
prevent suspension of gold and currency payments in
New York.
Resolutions were there adopted, which are given e*sewhere, authorizing the issuance by the loan committee
of the Clearing House Association of what were termed
o Report of the Comptroller of the Currency, 1884, pp. 36-38.




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clearing-house loan certificates, of which the following is
a copy:
No. —.]

[$ 10,000.
.

IyOAN COMMITTEE OF THE N E W

YORK

CLEARING H O U S E ASSOCIATION.
N E W YORK, May

75,

1884.

This certifies t h a t the
National Bank has deposited with the
committee securities in accordance with the proceedings of a meeting of
the association held May 14, 1884, upon which this certificate is issued.
This certificate will be received in payment of balances at the clearing
house for the sum of ten thousand dollars from any member of the Clearing
House Association. On the surrender of the certificate by the depositing
bank above named, the committee will indorse the amount as a payment
on the obligation of said bank, held by them, and surrender a proportionate share of collateral securities held therefor.

Committee.

These certificates were to be issued to banks who were
members of the association upon their securities or bills
receivable at the rate of 75 cents on the dollar. By the
cooperation of all the members of the Clearing House
Association the certificates were accepted in payment
of balances at the clearing house. Similar resolutions
were adopted and certificates issued during the panic of
1873, but this measure of relief was not taken until after
the panic had assumed such proportions that their use
and the consequent relief to the banks in settling their
balances at the clearing house could not restore confidence. There is little doubt but that the prompt action
of the associated banks in May last in issuing loan certificates had a most excellent effect not only in the city
of New York but throughout the country. The greatest




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Commission

amount of these certificates outstanding on any one day
was on May 24, 1884, when they amounted to $21,885,000.
After that date they were issued in limited amounts only,
and on June 7 their further issue was discontinued.
Of the 82 banks, members of the Clearing House Association, only 20 took out these certificates, and several
of the banks so taking them out did so simply as a precautionary measure and did not use them. The total
amount issued was $24,915,000, and about $7,000,000 of
these were issued to the Metropolitan National Bank. On
and after June 10 balances at the clearing house were paid
in lawful money. The principal security on which these
certificates were issued consisted of mercantile paper.
On July 1 all of the loan certificates, with the exception
of a portion of those which had been issued by the loan
committee to the Metropolitan National Bank, had been
returned to theT committee and canceled and the securities taken up. This bank had been compelled, owing
to its suspension and the lack of confidence which was
caused thereby, to liquidate almost its entire deposit
account, having reduced its deposits from $11,294,000
in May to $1,338,000 on September 30. Owing to this
enormous liquidation of deposits the Metropolitan National Bank was unable to collect its loans and realize
upon its securities with sufficient promptness to cancel
its loan certificates by July 1, and as these certificates
bear interest at 6 per cent and are secured by a deposit of
ample collaterals, as heretofore stated, the associated
banks were willing to carry them as loans, and on October
3, 1884, were still carrying $5,290,000 of the certificates




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issued to the Metropolitan National Bank. Since that
time this bank has gone into voluntary liquidation, and
these certificates will be paid and canceled as rapidly as
the collection of the securities upon which they are based
can be made.
The following table shows the aggregate issuance and
cancellation of clearing-house certificates from day to
day from May 15, 1884, to October 3, 1884:
Canceled.

M a y 15 _

$3,820,000

Outstanding.

820,000

16.

6,885,000

705,000

17-

6, 740, 0 0 0

445,000

19-

1,190,000

$200.000

580,000
22_

435.000
385,000

1.95o,000
800,000

165,000
725,000

1,560,000

23

140,000

160,000

865,000

24

180,000

4r5,000

885,000

460,000

470» 0 0 0

640,000

450,000

650,000

400,000

200,000

700,000

1,100,000

,500,000

335.ooo

90,000

,735,000

70,000

1,030,000

715,000

40,000

120,000

725,000

1.050, 0 0 0

605,000

26
27
28
28

,
.

29

June 2
3
4
5
6
June 6 to July i _
July 1 to Aug. 1 _
Aug. 1 to Sept. 1
Sept. 1 to Oct. 3-

9. 070, 0 0 0

640,000

2, 850, 0 0 0

85,000

, 570, 0 0 0

I,220,000
210,000

720,000
, 500,000
290,000

Total

24,915,000

ILLEGAL CERTIFICATION OF CHECKS. 0

In reference to the matter of illegal certification of
checks by the national banks of the city of New York,
o Report of the Comptroller of the Currency, 1884, pp. 44-50.




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the records of this office show that immediately upon the
passage of the act of July 12, 1882, the bank examiner of
New York City was directed to furnish information as to
whether it was the custom and practice of the national
banks of that city to certify checks in violation of section
13 of that act and section 5208, United States Revised
Statutes. Many of the banks in New York immediately
took advice of their attorneys, and opinions were sent to
this office which were deemed of importance in the matter.
The main point of these opinions was that the certifications forbidden were a form of acceptance, and that the
right to make a general acceptance was not interfered
with, reference being made to the third clause of section
5136, United States Revised Statutes, which confers upon
national banks the power to make contracts. Many of
the banks of New York, acting upon these opinions of
their attorneys, changed the form of certifications, and
the majority of the banks seem to have stamped their
checks for the purpose of certification with the word
"accepted," giving the date, and with the name of the
teller written underneath.
On October 4, 1882, a letter was addressed to the Secretary of the Treasury asking him to refer certain questions which had arisen under the law to the AttorneyGeneral for an opinion.
On November 24 the Attorney-General returned his
opinion. In reply to the first question, whether a national
bank had the right to accept checks drawn upon it unless
the drawer has the amount stated in the check actually on
deposit in the bank, he replied in the negative. To con-




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strue otherwise he held would be to allow a device to
evade the provisions of law.
In reply to the second question, whether an acceptance
under such circumstances would create a liability to the
bank for money borrowed, and as such be subject to the
limitation of section 5200 of the Revised Statutes, confining such liability to one-tenth of the capital stock of
the bank, the Attorney-General replied in the negative,
as the acceptance under such circumstances would not be
a loan of money but of credit.
To the third question, as to whether such acceptance to
an extent greater than the capital of the bank would be a
violation of section 5202 of the Revised Statutes, the
Attorney-General replied in the affirmative.
Immediately upon receipt of this opinion the banks
were notified of the same, and warned that due regard
must be had to the law as interpreted.
On July 19, 1883, a circular letter was sent to the New
York banks asking information as to the large amount of
certified checks and acceptances appearing in their last
previous quarterly report, to which answers were duly
received.
By an examination of the Wall Street National Bank,
made on September 4, 1883, what appeared to be a clear
case of violation of law was discovered, and a letter was
addressed by my predecessor to the Secretary of the
Treasury, inclosing a copy of the report, and asking him
to transmit it to the Departmentof Justice for action.
Although an endeavor was made by the district attorney
to have all the officers of the bank indicted, yet the grand




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jury found an indictment only against the teller of the
bank. When brought up for trial he plead guilty, but
presented an affidavit showing that he had acted under
the direction of his superior officers. The judge suspended sentence to admit of evidence of the implied
charge against these officers. The district attorney was
heard in this matter before a. United States commissioner, and presented evidence against the officers, and a
decision has been rendered holding all the officers for
trial, as follows:
The teller,
, stands indicted for the offense with which the
defendants here are charged, and I am informed t h a t the court has suspended action pending proceedings to ascertain the relations of the principal officers of the bank to the transactions in question. The bank
examiner, during his examination, stated that this was the first case arising
under the law in which proceedings had been instituted. I feel the
delicacy of my position in having to pass upon the questions involved in
the absence of any adjudication. It appears that the defendants, Evans
and Timpson, had no knowledge of these transactions with reference to
Cecil, Ward & Co., and it had been suggested in the course of this examination that they be regarded as practically out of the investigation. The
statute reads, "Any officer, clerk, or agent who shall," etc. The clerks
did not adopt the plan of accepting checks in lieu of certifying. What part
the cashier may have had in the adoption of it remains to be seen. I do
not regard him as necessarily the guilty party or the only offender simply
because he carried out the instructions of the bank or its policy. The
device which constitutes this evasion need not to have originated on the
day in question when it resulted in the violation of the law. The cause,
the device, may have originated long prior. I shall surely hold those who
caused the violation. From the evidence before me I can not avoid the
conviction that the model of accepting was resorted to purposely to avoid
the law; in other words, that they might in this way give customers credit
beyond the amount of their deposit; that is exactly what the law forbids
by certified checks, and it forbids it also by resorting to a device to accomplish it otherwise. T h a t the law has been violated I have no doubt. Whom
of the defendants should be adjudged the guilty party, and whether one or
more is for the court to determine and not for me to say. I have come to
the conclusion to hold all the defendants, that all questions presented by
this case may be fully heard and determined by the court.




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The reports to Congress of my predecessor, the Hon.
John Jay Knox, for the years 1882 and 1883, contained
full information in regard to the certification of checks,
legal and illegal, and enumerated the numerous ways there
were of evading a technical violation of the law. At the
same time a history of the growth of the practice of certifying checks was given. Certification was in use as a
method of business for more than thirty years previous
to the organization of the national banking system and at
least twenty years previous to the establishment of the
clearing house. It is the province of the office of the
Comptroller of the Currency to call the attention of the
proper officers of the Government to evidence by which
violations of law may be punished. In regard to overcertification of checks, unless they result in loss, it is
almost impossible to obtain evidence which will convict
the offenders. The examiner can not be in the bank at
all times. He must depend for his knowledge of its
business upon an examination of its books and accounts
and the general conduct of its business while he is making
his examination. In any case of certification, where no
loss is encountered, the books at the close of the day, as a
rule, show deposits equal to or greater than the checks
drawn. In the case of the Wall Street National Bank a
loss occurred by which the violation of the law was made
apparent, and proceedings were commenced. In the case
of the Marine National Bank, the Comptroller judges from
the information on file that there is good evidence of overcertification, and, as has been seen, action has already
been taken by the United States district attorney. It has




357

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Commission

been stated to the Comptroller that on the day of the suspension of the Metropolitan National Bank many of the
brokers engaged in business on Wall street, in New York,
were very indignant at the national banks because they
would not overcertify their checks and in this way lend
their credit to afford the brokers relief in the emergency.
It is the opinion of the Comptroller that since the passage
of the act of July 12, 1882, the officers of the national
banks of New York have given the matter of certification
of checks their serious attention, and that they have
endeavored to diminish the dangerous features of this
method of doing business.
After the passage of the act of July 12,1882, my predecessor suggested the establishment of a stock clearing
house to enable the brokers to make their settlements
without calling upon the banks to certify their checks for
the purpose of clearing their stocks. This matter has
received careful consideration by the brokers and bankers
of New York. No plan has yet been suggested, however,
which has seemed to meet the peculiar requirements of
the stock-exchange business in New York. The Comptroller hopes that the recent troubles growing out of Wall
street speculations will force the bankers and brokers of
New York, for their own protection, to agree upon a stock
clearing-house system, and he believes that the present
is an excellent time for the conservative bankers in the
city of New York to make a move in this matter.
The Comptroller believes, however, that overcertification of checks, viz, the certification of checks as "good"
when no funds are to the credit of the drawer of the checks,




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is not only practiced for the accommodation of the brokers
who deal in stocks, but is also done for the accommodation
of the dealers in produce. These dealers often require
large temporary accommodations of money to take up
bills of lading for produce which has been shipped to them
from the interior, and which they desire to take from cars
and warehouses for shipment abroad, and some accommodation is necessary in the interim until the ocean bills
of lading can be obtained and exchange drawn against
the consignment. While this practice is reprehensible and
is not legitimate as a banking transaction, business has
been and is carried on in this manner, and the fact that
the national banks of the city of New York are endeavoring
to comply with the law in regard to illegal certification of
checks has caused many dealers in produce to withdraw
their accounts from the national banking associations and
has largely increased the business of certain of the state
banks, which are under no restrictions of law in this
matter. This is particularly noticeable in the case of the
bank which was organized under the auspices of the New
York Produce Exchange.
BANK EXAMINATIONS.

The recent financial disturbances throughout the country,
and the consequent failures of national and state banks,
have called the attention of the public to the official
examination of banks as conducted under the authority
of the national-bank act, and under various state laws.
The national-bank act provides for the issue and regulation of a national currency secured by United States bonds,




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and provides, also, for a banking system, in order to facilitate the issue of this circulation. It contains provisions
bestowing certain privileges upon the banks organized
under it, and provides many safeguards for the public by
imposing on these banks such restrictions as the history
of banking throughout the world has seemed to indicate
were of a character to create a safe and permanent banking
system. This law has been amended and improved from
time to time, but it is not supposed that the national banking system is absolutely perfect, nor that imprudent banking under it can be altogether prevented.
In order to enable him to ascertain if the provisions of
the law are followed, section 5240, Revised Statutes,
authorizes the Comptroller to appoint suitable persons to
make an examination of the affairs of every national
banking association. It has been customary from the
establishment of the system to have a regularly appointed
examiner visit each national bank at least once a year, in
many cases twice a year, and when deemed necessary,
even more frequently. The examination of national banks
is conducted by the examiners in accordance with instructions issued from this office, which instructions, both
general and specific, have grown with the growth of the
system. The first general instructions to examiners were
issued September 15, 1864, by the Hon. Hugh McCulloch,
then Comptroller of the Currency, and as the bank act has
been amended and revised these instructions have been
altered as circumstances seemed to warrant. It has been
the aim of the Comptroller to increase the efficiency of the
examinations by carefully noting the causes that have in




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particular cases led to the suspension or failure of national
banks, and calling the attention of the examiners to these
causes, suggesting such methods of examination as seemed
to be best calculated to prevent repetition of such disasters,
and to expose violations of law which led to the same.
This official inquiry into the affairs of a national bank
does not end with the mere inspection of the cash, bills
receivable, books, and accounts of the association, but the
examiners are instructed to closely scrutinize the business of the bank, to investigate the standing and fitness
for their positions of the persons to whom the management of the affairs of the association are intrusted, and
the manner in which the business is usually conducted,
whether prudently or otherwise; to ascertain as far as
possible the character of the loans and discounts of the
bank and what losses, if any, have been or are likely to
be sustained.
The examiner is also instructed to ascertain how frequently the board of directors meet together to consult in
relation to the affairs of the bank, and to discover, if possible, any malfeasance in office or willful neglect of business on the part of the management; and is, moreover,
particularly instructed to report to the Comptroller
whether any excessive accommodations are granted in
violation of section 5200, Revised Statutes, and to note if
the officers of the bank are borrowing largely from the
association; to ascertain the customary state of the lawful
money reserve by examining the daily statements from
some time previous to the examination; whether or not
the bank borrows money to loan again; and in short, to dis-




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cover and report to this office all violations of law of whatever character.
Upon receipt of the report at this office all matters above
mentioned, and such others as may be referred to therein,
are carefully reviewed and considered, and the directors
of the bank are immediately notified of all violations of
the law, and they are required to have the same promptly
corrected. The attention of the directory is also specially
called to the reform of such matters as are deemed detrimental to the safety and welfare of the association.
The general public do not understand the amount of
labor performed weekly, monthly, and yearly by the examiners of national banks, many of whom have for years
rendered most excellent service. It can hardly be expected, however, with the limited compensation allowed
by law for making these examinations, that the Comptroller
can in all cases retain the services of the most expert
accountants, although by systematic division of the labor
he has endeavored to obtain the best results possible under
the circumstances.a
For the purposes of bank examination the United States
is apportioned into 25 districts, bank examiners being
a

It is submitted that the compensation allowed national-bank examiners by section 5240, Revised Statutes, is often insufficient. The assessments upon the banks, by which the law provides that the examiners' fees
shall be paid, are based upon the capital of the national banks examined,
and vary, according to capital, from $20 to $75. In many instances the
capital is not the proper basis upon which to compute the compensation
of national-bank examiners, as many banks with a comparatively small
capital have large lines of deposits, and consequently do a much larger
business and require more time and labor from the examiner t h a n other
associations with the same capital. The Comptroller is of the opinion t h a t
the fees paid to national-bank examiners should be based upon the capital
and average deposits of the national banking association.




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stationed in each district. Important reserve cities,
such as New York and Boston, generally form a district
of themselves, and the duties of the examiner stationed
there are usually confined to that city and its immediate
vicinity. Owing to the nature of the work, the position
of a national-bank examiner is one of great responsibility.
Notwithstanding this vigilance, the most competent examiners are liable to be deceived, and sometimes find it
impossible to discover and remedy in time even gross
mismanagement of the affairs of national banks.
No laws or system of examinations will prevent dishonest men from keeping false accounts and rendering
untrue statements, and by means of these and other devices they can conceal from the examiner the fact that
they are using the money intrusted to their charge in
private speculations until final disaster makes longer disguise impossible. It is thus exceedingly difficult to detect
violations of law or misuse of the funds of a bank.
The surest preventive is to have an honest, active, and
competent board of directors. A rogue or a dishonest
man who acquires the confidence of his associates to such
an extent that he can appropriate the funds of a bank
for his own use without their knowledge or that of the
board of directors, can have but little trouble in deceiving
the examiner and hiding his peculations from him.
In times of financial disaster and of a stringent money
market the acts of dishonest and corrupt officials in any
bank or banking firm or private corporation are more
liable to be discovered, and naturally during the past
year the consequences of disastrous speculation, which
6158—10




24

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had been for a long period carried on with impunity with
the aid of misappropriated funds, have been brought to
the surface. Men who were supposed to be worthy of
the entire confidence of communities, whose character
stood so high that they were intrusted not only with the
management of corporations, but with the investment of
private funds, have now been proven to have dishonestly
betrayed their trust. Never were the instances of this
kind more numerous than during the financial troubles of
the present year.
Such practices and the resulting disasters, however, do
not prove that the national banking laws are inefficient,
or that the national-bank examiners do not do their duty.
They rather indicate that the shareholders of joint-stock
corporations of all kinds, and particularly those of banks,
should be more careful to elect men as directors and
trustees who are competent and who will exercise proper
care and supervision over the management of the affairs
intrusted to them, who will select competent and honest
officers, provide suitable rules and regulations for the
conduct of the bank, keeping its accounts, etc., and appoint regular committees of examination, whose duty it
shall be not only to verify the accounts but to keep a
watchful eye over the affairs of the association and the
officers who immediately carry them on.
The public frequently draw wrong deductions as to the
responsibility of the Government and the bank examiners
in particular cases. For instance, in many cases where
failures occur the principal cause is found in the character
of the loans made, which are either excessive or made on




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improper security. There are 2,671 national banks in
the country. The loans and discounts of the banks at
the close of business September 30 aggregated more than
$1,240,000,000, and it is of course not the province of the
bank examiners to supervise the making of these loans.
Section 5200, Revised Statutes, provides that no loans
shall be made to any one individual, firm, or corporation
in amount exceeding one-tenth of the paid-in capital of a
bank, but there are many ways of evading this law, and
it is a physical impossibility for the Government to maintain the constant espionage over the affairs of the national
banks which alone would prevent the violation of this
statute. Any attempt to direct the making of loans and
to dictate to the directors and managers of the national
banks throughout the country as to what use they shall
make of their funds would of course be impracticable.
Many instances occur daily, which are not seen or known
to the general public, where the banks are notified of violations of law, and where their condition is improved by
action upon the reports of the examiner. When, however,
some unexpected failure occurs, brought about by injudicious banking, bad management, or adventurous speculation, or by dishonesty and fraud on the part of the
officers or directors, who are the very men to whom the
examiner must more or less look for information, the Government and the national banking laws are unjustly criticised. The fault is not with the law and not with the
examiner, on whose reports the directors have very likely
been notified and warned to exercise more care in the management of their affairs and to hold their officers in check.




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A national bank being a joint stock association, its
aggregation of capital having been brought together by
bankers or other persons for the purpose of utilizing more
effectually the resources of the locality in which it is doing
business, it is not the intention of the bank act to interfere with the business of said association so long as it is
conducted in accordance with the law. The exact line at
which the Government shall interfere and the point at
which government discipline shall commence is a matter
of some delicacy to determine. It is exceedingly difficult
to add materially to the restrictions of the national-bank
act without such an interference with the business of the
banks as would be practically prohibitory, for it is well
known that banking can be carried on under the laws of
most of the States of the Union with but very little interference and scarcely any espionage on the part of the
officials of the state government. It is because the national banking system has raised the standard of banking,
and because it is generally understood that money deposited with a national bank is as a rule much safer than in
institutions not under similar restrictions, that bankers
and capitalists avail themselves of the national-bank act
in order to gain the confidence and thereby the deposits
and business of the public.
The act appears to contain ample provisions for the
punishment of criminal offenders, and the Comptroller is
of the opinion that it is not so much the lack of law as it
is the difficulty of detection of offenders and of obtaining
sufficient evidence to convict that has prevented the punishment of officers and others connected with the national




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banks who have violated the criminal sections of this act.
In some cases the directors and shareholders of banks have
apparently suppressed information and evidence, and in
many instances it has been with great difficulty that the
Comptroller was able to present the necessary facts to the
Department of Justice to make a case. For obvious reasons the number of instances in which this office has endeavored to secure the arrest and conviction of offenders
by reporting to the proper officers of the law facts that
came to the knowledge of the Comptroller which seemed
to indicate certain violations of law can not be presented,
but it is believed that the records of the various State
and United States courts show a larger number of indictments and of convictions for violations of the nationalbank act than is generally known to the public.
It is possible that the provisions of the act relating to
the punishment of offenders in the matter of false oaths
of officers of banks with intention of deceiving the Comptroller as to the correctness of reports might be profitably
amended. The Comptroller is of the opinion that if the
criminal provisions of the bank act are to be amended, the
Department of Justice of the United States should be consulted for suggestions as to any weakness or defect in the
existing law.
INTEREST ON DEPOSITS. 0

The practice of paying interest on deposits by the national banks has been the subject of discussion for some
time past. It is the custom of the country banks to pay
interest on current accounts and also to issue certificates
« Report of the Comptroller of the Currency, 1884, pp. 57-59.




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of deposit bearing interest, which latter usually state
upon their face that no interest will be paid for three,
six, nine, or twelve months, as the case may be.
Banks located in the cities where a portion of the lawful money reserve of the country banks may legally be
kept have been for many years in the habit of paying
interest upon the daily balances of the accounts of their
country depositors. Owing to the fact that the banks in
the reserve cities other than New York keep large current accounts with their correspondents in that city,
who in turn pay interest on the average daily balances
of their correspondents, the result is that in times of easy
money large sums accumulate in the city of New York
subject to interest on current account. It is believed
that this accumulation of money in the New York banks
occasioned by this custom has a tendency to encourage
speculation in stocks, as these banks are compelled to
find some use for the money deposited with them on which
they are in turn compelled to pay interest, and as this
money is liable to be called for at any time it is necessary
to make loans payable on demand; and dealers in stocks
called on the stock exchange, which theoretically can be
readily sold at any time, are in consequence enabled to
obtain money for speculation by pledging these securities
as collateral and agreeing to repay the sum advanced on
demand. The panic of 1873 and the financial troubles of
May, 1884, have shown that these so-called "demand'*
loans are of such a character that the banks are not
always able to realize upon them in case of emergency.
The members of the New York Clearing House Associa-




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tion after the panic of 1873 discussed the abolition of the
payment of interest upon current accounts. Again, upon
the 4th of June, 1884, the association endeavored to have
its members agree to discontinue the payment of interest
on daily balances; but owing to the persistent dissent of
a few members the association was unable to make the
arrangement.
While the united action of the Clearing House Association in favor of the abolition of the payment of interest
on deposits would doubtless have great effect, yet so long
as it is the almost universal custom of banks, state and
national, and of private bankers throughout the country,
to pay such interest it is probable that if the associated
banks shall discontinue the practice they would do so to
their own great detriment and loss of business. Many
of the accounts of country banks and out-ofrtown correspondents would be transferred to the trust companies,
state banks, and private bankers who are not members
of the association and who would not be bound by its
regulations, and for this and other reasons it seems very
difficult to bring about an absolute cessation of the practice. Until all the bankers in the principal cities of the
country agree to discontinue the payment of interest it
is probable that it will continue to be paid upon current
accounts.
It has been held by the courts that the conferring of
special powers upon national banking associations prohibited them from the exercise of certain other powers
not specifically conferred, and the decisions of the United
States courts seem to indicate that it is unlawful for a




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national bank to borrow money to lend again, or to receive deposits payable at fixed future dates with interest
thereon.
Notwithstanding the fact that it has been held that
national banks could not receive deposits payable otherwise than on demand, it is possible that in view of the
fact that the custom of purchasing deposits by the payment of interest is so universal the courts might hold
that national banks would have the same rights as other
bankers to receive deposits subject to repayment upon a
notice of from five to thirty days; and if this should be
the case it is submitted that they should pay interest
only upon deposits of this character, for there can be
no doubt that it is extremely injudicious to receive current accounts payable on demand subject to interest.
It would appear that if this course was adopted two
classes of accounts would have to be maintained with
most of the country correspondents of national banks in
reserve cities, as it would be impracticable for a national
bank in the interior to have any portion of its reserve
deposited in such a manner that it could not be drawn
upon demand. In view of the facts as stated, it is doubtful if any legislation upon this matter should be had
which would discriminate against the national banks.




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NOTE

D.

BANKING REFORM PROPOSALS IN NE^J YORK IN

1884.

A.—ADDRESS OF GEORGE S. COE.A

At a meeting of the New York Clearing House Association, held on Wednesday, June 4, 1884, E. H. Perkins,
Jr., Esq., chairman, presiding, the following resolution was
unanimously adopted, viz:
Resolved, That the experience of the associated banks in the New York
clearing house during the recent panic, having again shown that every
member of the association, in a time of general and serious financial disturbance, is involuntarily compelled to make common cause with every
other member in the risks attending any practical expedient for general
relief, or of any effective combination for the public good, it is therefore
proper and necessary to enquire whether the methods of business, as conducted by the several members of this association, are uniform and correct
in their operation with the public, and equitable to all the banks which
are thus bound together in the Clearing House Association.

Mr. George S. Coe, president of the American Exchange
National Bank, in presenting this resolution, made substantially the following remarks, which were ordered to
be printed for the use of the members:
Mr. CHAIRMAN: In offering this resolution, I may at first warmly congratulate this association and the country at large, upon the great good
which has been accomplished in the recent financial crisis by means of the
organized power of this combination of banks.
After the failure of the Marine Bank, followed as it was so soon, by the
announcement of the startling events connected with the Second National,
the whole community was stirred to its depths with excitement and
apprehension, fearing every form of financial disaster. The reputation
before enjoyed by these institutions and the eminence of some of the men
directly and indirectly involved in their failure were such that faith in
human character was for the moment almost destroyed.




oBankers' Magazine, July, 1884, pp. 44-51.
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As bank officers, we were called here together suddenly by the promptness of our friend Mr. Tappen, and unanimously decided to reestablish our
clearing-house expedient for the issue of loan certificates, which had
proved so effective in former great public exigencies, and we appointed a
committee of safety to provide for any rlew event t h a t might occur.
Immediately after that meeting the suspension of the Metropolitan National
Bank was reported, which added still greater intensity to the already
inflamed condition of the public feeling.
Under these circumstances the clearing-house committee were summoned together at midnight to examine the condition of that institution
and to decide what action should be taken respecting it. A fearful responsibility was thus hastily thrown upon that committee. It was impossible
in a few short hours, and in the apprehension of further possible events,
to reach a definite conclusion upon the value of the large and diversified
assets of that bank. When we examined its books, this most important
fact at once appeared: That it owed some eight to nine millions of deposits,
a large proportion of which consisted of the reserves of interior banks,
which could not be imperiled or locked up for another day without producing a further calamity of widespread dimensions throughout the
country. It was also evident that the consequent certain suspension of
many banks in the interior cities would occur, and be followed by the
suspension of business men depending upon them, and by heavy drafts
upon those banks which held similar deposit reserves, and that the immediate danger to our city institutions was great, just in proportion to the
extent of such liabilities and to the amount that each bank was expanded
relatively to its immediate cash in hand. That, should the threatened
wild excitement pervade the country, a general suspension of banks,
bankers, and merchants was inevitable, and in such case the magnitude of
the loss to every institution would be incalculable.
The committee therefore came to the unanimous conclusion t h a t it was
better to confront the risk of losing one or two millions, if need be, by taking possession of the total assets of that bank, and by paying off its depositors, rather than by waiting to incur the hazard of an indefinite and greater
loss, by a general financial and commercial derangement throughout the
country; and that it was their manifest duty to promptly accept this grave
responsibility, confidently relying upon their-associates for approval and
support. On behalf of the combined capital and surplus of the banks in
this association, amounting to about a hundred millions, and also to protect the property and assets held by them together, of more t h a n three
hundred millions, your committee unhesitatingly acted, and thus saved t h e
nation from immeasurable calamity. The Metropolitan Bank was, obviously, the key to the whole situation. When this decision was announced
the next morning, confidence was instantly restored and business resumed
its even tenor. Seven-eighths of the deposits of the Metropolitan Bank
have already been paid off. Its many shareholders have been saved from




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threatened personal responsibility, and time is gained in which its large
property may be more deliberately converted into money. The restoration of confidence was as sudden as was its loss; so sudden, indeed, that
the immensity of the danger can now hardly be appreciated.
I rapidly review these important events, Mr. Chairman, because they
have once more illustrated the power and importance of this voluntary
association, and have also shown how the several members comprising it
are mutually dependent upon it and upon each other in any great emergency for the safety and stability of their own banks.
I t must be borne in mind that the banks in New York, holding as they
do the reserves of other institutions and of bankers in this city, and also
of banks and bankers throughout the country, and standing between home
and foreign commerce, are the last resort of this whole nation for cash
reserves, and that a financial disturbance or distrust in any part of the
land is sure to bring upon them a greater or less demand. Acting singly
and alone, what could each one of sixty or seventy independent institutions have done to stem the tide, which, in such an unnatural and simultaneous call for money from every quarter of an alarmed nation, must have
swept over them? No time was allowed to any bank to gather in its
loaned resources, and no power on earth could so suddenly respond to a
demand that—not any natural commercial want, but—general demoralization and wild panic alone had so unexpectedly created. It is perfectly
apparent that without this combined support each bank would have been
not only powerless in itself but the occasion of peril to others. I t was
only because we were thus associated and had in hand the printed forms
and instruments provided in past experience that we were able at the tap
of the drum instantly to fall into line and present an unbroken front and a
disciplined force to this formidable enemy. Our numbers, now no longer
a weakness, were thus converted into the greatest strength, and we were
able easily to carry away this heavy and disabled member, and to relieve
its creditors, shareholders, and friends from the danger of utter destruction, and also to arrest the panic so rapidly spreading. I think the association may well feel proud of this achievement, which for promptness,
efficiency, and breadth of influence has no superior in the annals of commerce.
Now, the association being of such importance and the connection with
it of each member being of this peculiar character, how can any honorable
gentleman among our number claim the right to selfishly pursue his business in utter disregard of these delicate relations by which the association
itself is sustained and the business of the nation is safely conducted? We
are in a most important sense directly responsible for each other and can not
avoid being disturbed by the ignorance, selfishness, or immoral conduct of
our most remote members.
Crises will arise in the future as in the past, and it is not only just but
necessary that we adopt such safe and uniform methods of business as expe-




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rience has approved, that we clearly understand what those methods are,
and freely invite from each other the utmost scrutiny in their observance.
In the light of recent experience, it seems no longer credible or possible t h a t
an intelligent body of men, composing an association of such dignity and
importance as this, can deliberately consent to remain responsible partners
in times of peril with those who are eager competitors and antagonists in
days of prosperity. The burdens, responsibilities, and profits of this great
trust ought to be shared together upon recognized and uniform conditions,
with special reference to the public welfare; and the only basis of competition for such business should consist in superior character, fidelity, and
intelligence in its management. Thus can this association become one
homogeneous body, composed of many members, like the Government
under which we live, and capable of efficiently performing the highest
duties, such as single financial institutions—conformably to their political
constitution—in older countries, render to commerce, in being the safest
custodians, and the ultimate resort of the money reserves of the people.
The issue of loan certificates, although practically equivalent to a supplemental issue of currency, exclusively for local uses between the members of
the association, are only, in fact, convenient instruments by which the bills
receivable and negotiable securities belonging to one bank are readily transferred to another, in exchange and as a substitute for its ready money,
thus covering the weaker by the stronger, and, in fact, by all the other banks
in the association during a time of common peril. For the time being, these
certificates form a connecting medium between the banks, by which they all
substantially become one in power, through the ebb and flow of the vital
elements which compose them, and by which their total money in hand is
made available at any special point of danger. In one sense our action
was outside of law. In fact, the law could never anticipate such experience,
nor establish a union so effective, and any legislation to enforce such generous and voluntary cooperation would only prevent it. The occasion was
sudden and momentous, and the banks proved equal to the occasion. I t
was the same after the panic of 1857, when, as state institutions, our similar
organization first originated. Also in 1861, after the battle of Bull Run,
when with our colleagues in Boston and Philadelphia we united and furnished the Government from week to week in its greatest extremity a total
of $150,000,000 in gold. Likewise in 1873, when the country was again
convulsed by financial trouble. In all these great financial disturbances—
each one like the present, but originating from a different cause—the beneficent influence and power of this association were fully illustrated, and some
of us now present can bear testimony to the fact that several banks here
represented owe their continued existence to the protection afforded them
upon one or another of those important occasions.
I appeal to you members of the association to give this subject the
most serious consideration. We are responsible not alone to our directors
and stockholders. Our responsibility takes a far wider range. Like the




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Bank of England in the British financial system, the banks composing
the New York Clearing House Association are the final reservoirs of the
cash reserve of the nation and its refuge in commercial commotion. Every
one of the thousands of banks and bankers throughout the land has intimate financial relations with us, and all the multitudes who depend upon
them are thus indirectly concerned in the stability and safety of our
methods of daily business. Every added facility of communication or of
commerce only tends more,closely to unite us to them and ourselves to
each other. The very conditions of modern life compel us to be more
and more mutually dependent.
There are three special abuses to which I desire for a moment to call
your attention.
First. The payment of interest upon deposits of money payable on
demand. This subject has upon several occasions in years past been under
consideration, and its total abolition has been almost unanimously agreed
to among our banks by written contract. Yet by the refusal of one or
more members it has failed to become a binding obligation. Like some
other great reforms, this one does not admit of partial application or of
compromise. Any attempt to make exceptions to the prohibition among
partners mutually dependent can only result in entirely releasing them all
from any obligation respecting it. Yet every banker will freely admit
that the purchase of deposits payable on demand operates, in some degree,
as an absolution of the obligation to be always in condition to meet the
contract. Both the giver and receiver of interest on such deposits, by
the nature of the business, substantially, though not expressly, agree
to such use of the money as may prevent its immediate return.
What, Mr. Chairman, is the nature of bank deposits? Every responsible
person in regulating his own affairs must withhold from permanent
investment and keep in ready money enough for his current wants. This
is his reserve. When such sums, for greater safety, are placed in charge of
another person, they do not lose their essential character; and when they
become further aggregated and pass into the possession of a bank or
banker they are still subject to the same immediate wants of every original
owner for the very purpose for which he set them aside. And when these
rivulets of capital become streams, and streams gather into rivers and flow
toward the ocean until they reach this city, where they come into financial
relations with other men in other continents, the parties who here take
them in charge assume new and accumulated responsibilities. They are
subject not only to the necessities of the people at home but also to the
world-wide influences of commerce.
Now, there is a constant and irrepressible conflict going on in the mind
of every intelligent man or woman between the desire to invest their own
capital so t h a t it may earn them the utmost revenue and the necessity
of retaining enough of it in ready cash to meet their current necessities.
This question decided, each for himself, that portion of the total which is




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thus reserved becomes charged with peculiar functions. I t is the national
reserve, and t h e chief cause of financial disturbances arises from trespassing upon it.
Is it not evident, Mr. Chairman, that when these reserves are attracted
by banks and bankers who pay interest for them, they immediately lose
their peculiar character and become, so far, a t once changed from reserves
into investments, and that their original purpose is greatly reversed? The
people's ready cash, by the very condition of receiving interest for it,
necessarily passes through the banker into fixed forms never intended.
Reserve and investment! Idleness and work! They are adverse and
irreconcilable conditions. I t is true that in the hands of sound commercial
banks some of these deposit funds may be legitimately used for t h e best
interests of society, in the negotiation of business notes representing
articles of human want and subsistence, passing from production into
consumption. This is using t h e fund by promoting the very object for
which each person originally provided it. But such, we all know, is not
the tendency nor the operation of t h e practice now in question. Money
payable on demand with interest is chiefly loaned here upon fixed property
intended for permanent investment and upon bonds, stocks, a n d other
obligations made for the construction of public enterprises and works of
established purpose, whose large expenditures are not again resolvable into
money. They are in their nature fixed, and they demand, not their ready
cash reserve, b u t the permanent savings of the people to construct them.
So that temporary loans of reserved capital upon such securities are certain
to be called in when they are hardest to pay, because the ready-money
reserves so injudiciously absorbed by them are called back by their owners
in apprehension or for the supply of their own needs.
We all know by experience t h a t those deposits upon which interest is
paid are the most fugitive and evanescent of all. Those who placed them
with us well understand their danger. While they receive interest, they
do so with doubt and suspicion of those who allow it, and with t h e consciousness that they themselves are partially compromising principle in
placing them with those who are willing to pay the price.
From the very start the vicious practice of paying interest for the custody
of the people's cash reserves pursues such funds like an enemy from place
to place and impairs their integrity a t every point. And when those
deposits have a t last concentrated in New York banks, the same evil overtakes them there, all tending to the reduction of tangible cash assets to the
lowest point, and to the weakness and impoverishment of the whole country.
Arrest this practice here, a t the termination of t h e line, and t h e reform
will, of necessity, run back through every link of the chain in other cities,
adding strength to t h e whole to t h e incalculable benefit of the nation.
Every institution that accepts the reserves of the community, agreeing to
return them upon instant demand, gives a full equivalent in their faithful




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care. It is in duty bound to retain so large proportion of such deposits, in
actual cash, that no other compensation can be safely allowed. Any such
payment should be taken at once as a confession that the fund is to be used
in some manner inconsistent with its real nature and is to be placed more or
less in peril. Deposits so unnaturally attracted are necessarily capricious
and transitory. They fly away at the first whisper of danger, to the
detriment of the many who have touched them. Those banks which so
purchase them are objects of special dread to their colleagues in business,
while at the same time they are continually held up as patterns of enterprise and as models for imitation. Differing so widely from their associates
in principle and in practice the two can not work harmoniously together,
nor equally and honorably share the burdens of a national financial system,
whose stability requires the New York banks voluntarily to stand firmly
and compactly together as one united body.
Experience among ourselves has again and again proved that the interestpaying banks are the first to become embarrassed by any kind of financial
disturbance, even if they themselves are not the means of producing it,
and t h a t they are then almost alone in being compelled to seek protection
from the loan committee, by a pledge of their securities.
Will a few members of this association, on the one hand, longer continue
a practice that subjects them to this humiliation? And is it just, on the
other, for a large majority to tacitly submit to having their business thus
drawn away, and the community periodically disturbed by associates whom,
in the hour of peril, they are compelled for their own protection to support?
There is no necessity whatever, as there is certainly no profit, for the
banks in the New York Clearing House, to continue this practice. Public
safety, business convenience, and social needs all absolutely require the
service which these banks perform. The commanding position of this
metropolis will constantly bring to it all the capital that healthful commerce
and trade can safely employ and any fictitious attractions only tend to
false estimates of wealth, and betray the community into unprofitable and
dangerous enterprises.
If the banks composing this body should unanimously agree to totally
abolish this practice, the business of each would not seriously diminish,
because no dealer could secure better terms by changing from one member
to another, and even if, in the course of time, the disparity between the
banks in deposits should consequently not continue as great as now, the
loss by any one in volume would be more than compensated by a.gain in
terms, and by diminished risk, labor, and expenses.
Taken as a whole, whatever the banks composing this association pay to
their dealers and correspondents as interest is a totally unnecessary and
gratuitous payment. I t is worse than money thrown away, so far as, and
because, it tends to divert the current of capital of the country from its
natural flow. If it be expedient for one member to practice it, it is




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expedient for all; and then the special and selfish advantage to any single
one is lost. If it should be continued after our recent experience, it must
be distinctly recognized as a defect in our financial system, and a standing
cause of contention and of sharper competition among banks in their pursuit of public favor, which must separate the two classes of institutions into
known and irreconcilable divisions.
In the business indirectly done through the New York Clearing House
there enters another element which it is also proper for us to consider as
affecting the stability of the whole system. The trust companies and other
depositories of funds, very much of which are payable on demand and bear
interest, are receiving the full benefit of this association through the
medium of one or another of our members, and so they successfully compete
with us all. They thus secure every facility of exchanging their checks
with all the banks, and are by t h a t means enabled to divert to themselves
a large proportion of the current deposits of the city and country, which
have always been regarded as a special function of banking institutions.
Instead of being trust companies in the real meaning of the term, many of
them are banks of deposit, paying interest. This large volume of deposits
is not only in much greater ratio to capital than are the deposits in banks,
but it is supported by no special cash reserve of its own whatever. The
only ready means it has consist in keeping current balances a t credit in
banks like other dealers. I t thus leans upon the same reserve as do the
banks themselves. If such institutions are to enjoy the privileges of the
clearing house, they should certainly at least bear the same burdens which
rest upon its members, and also contribute their full share of the reserve
funds in cash, by which the stability of the business is maintained. By a
strange generosity on the part of the Clearing House Association, it enables
these lively competitors to do their business with the public upon better
terms than they can do their own, while they do not contribute to the
public safety.
Second. Another abuse to which I invite your attention is t h a t of
receiving and crediting to dealers, as cash in hand, checks drawn upon
banks out of the city. The aggregate amount of such checks in progress
of collection by all the members of this body is not less than ten millions,
and may average fifteen or twenty millions.
These checks can not be converted into cash here in less time t h a n one
week, and for that period they remain as dead assets to the banks. How
did this absurd practice arise? Simply by the eagerness of one b a n k to
draw to itself the business of others by superior inducements, an advantage
which, in the nature of the case, could be b u t temporary. Others, in selfdefense, were necessarily compelled to follow the pernicious example, until
the practice became general. But for this practice this large sum would
naturally lie as deposits in New York banks from their correspondents
throughout the country, held here for the purposes of exchange. They




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are not expelled from their natural commercial resting place, and their
true position is actually reversed.
Third. There is still another subject of solicitude with which we are all
daily familiar. I allude to the reception of checks of large amounts,
drawn upon banks which particularly deal with brokers and operators in
bonds and stocks. The sums represented in such transactions by the
nature of the business are of great magnitude. The custom has become
established of pivoting the operations of the brokers' board through the
banks by expressing and accounting for their money value in detail, thus
making it necessary to draw upon banks the immense'total t h a t is passed
from hand to hand. They give rise to checks in sums greatly disproportioned to the capital of banks which keep such accounts, and are the occasion of constant embarrassment to bank officers, who desire to treat their
associates in the clearing house and their own dealers with generous confidence, and mean at the same time to avoid extraordinary risks. The
effort has been partially made to conduct this business by a clearing
house arrangement where shares, not money or checks, and only balances
resulting from them are thus paid; and it is the earnest desire of bank
officers that this effort should be accomplished. I believe t h a t the experiment, if seriously attempted, can be made successful to the satisfaction of
brokers, the relief and safety of the banks, and the good of the community.
The present mode of conducting the transactions of the stock exchange
adds enormously, and I believe unnecessarily, to the daily volume of business in the clearing house, increases the risks of the exchanges between
banks, and expresses a false idea of the commerce of the country.
These, Mr. Chairman, are three most important reforms. Their adoption will remove all cause of alienation and distrust between the banks
and members of our fraternity, will unite us together for greater efficiency
and mutual protection in doing the public business, and will make the
Clearing House Association a power for good and a tower of strength in the
nation.
Our country needs a reliable, ultimate financial resource in time of
trouble, such as every other commercial nation in the world enjoys. Here
it may be secured, without the danger which is always apprehended from
any single colossal institution. Each one acting independently, yet all
restrained by honorable agreement, the 60 or 70 banks composing this
association already possess the power to supply, if they will, this long-felt
defect in the American commercial system; and that, too, not by any
deliberately formed legal or corporate organization, more complete than
we now possess, but by the simple voluntary adherence to sound and selfevident principles of business, using our freedom to do right. These considerations must appeal to every man of common justice and common
sense. I present them to you now in the belief that the peculiar circumstances which have called us together will secure for them the most serious
attention and cordial assent.
6158—10




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After further discussion,'the resolution offered by Mr.
Coe was unanimously adopted and referred to a committee
of five members to consider and report to the association.
The chairman subsequently appointed the following as
that committee, viz: George S. Coe, president American
Exchange National Bank; George H. Potts, president
National Park Bank; O. D. Baldwin, president Fourth
National Bank; John J. Knox, president National Bank
of the Republic; R. L. Edwards, president Bank State of
New York.




3&>

B.—REPORT OF THE COMMITTEE OF THE N E W YORK
CLEARING HOUSE ASSOCIATION. 0

The committee appointed by the New York Clearing
House Association on June 4 "to recommend such reforms in the practices of the associated banks as would
render their business safer to the public and more equitable to each other," having made report, was increased
at a subsequent meeting of the association by three new
members and requested to consider further the whole
subject.
At a meeting of the association held on July 29 the following report was presented:
That while they substantially concur in the recommendations of the
committee in its previous report, they have endeavored to remove some
of the objections made during the discussion, so as to secure what they
consider very desirable—a cordial and unanimous adoption of these reforms by the whole association.
The most important and, in fact, the special reform which is essential
to the efficient and harmonious union and cooperation of the banks in
one association is the total abolition of the payment of interest upon current deposits.
This reform has been urged upon the banks from time to time for more
than twenty-five years and it has always received the most favorable consideration. Upon two special occasions after violent financial revulsions
throughout the country, like the present, it was adopted by almost unanimous agreement, and in each instance it failed of becoming a binding
obligation only by the dissent of two or three members whose active opposition was unfortunately permitted to defeat the wishes of the very large
majority.
Your committee believe that the careful custody of money held in such
a manner as to be always responsive to call is itself sufficient compensation
a Bankers' Magazine, August, 1884, pp. 129-33.




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to its owners and depositors, and that banks which carry their full proportion of the reserve cash of the nation and at the same time preserve their
assets in legitimate commercial securities render a just equivalent and
furnish a perfect guarantee for the trust committed to their care; and
t h a t any further consideration or compensation than this must be given
either at the expense of the needful reserve or of the safety of the investments. The proportion of cash to deposits, which from long experience
conservative institutions in national commercial centers find it expedient to hold, is at least from one-quarter to one-third the amount. I t
must be evident that at the average rate of interest this ratio can not be
maintained by any bank where compensation is given for its deposits.
The responsible duty of holding and maintaining the ultimate cash
reserve of this great nation is especially imposed upon the associated
banks in New York, and from doing its full part of this imperative duty
no one can honorably escape. They are all so inextricably bound together by the daily transfer of portions of the nation's deposits from one
bank to another, by the difficulty of recovering checks upon defaulting
members after they pass through the clearing house, by the universal
distrust which one failing institution casts upon its associates, and by
the urgent demand made upon the stronger in time of trouble to combine
their resources for the protection of the weaker to avert public disaster, t h a t
a n identity of interest is created by the very existence and necessities of this
association. This organization can therefore no longer be regarded as a
simple place of meeting of bank officers, without responsibility for and
utterly independent of and indifferent to each other's welfare and habits
of business. These banks, as custodians of an interchangeable public trust,
have practically and within certain limits become a federative community,
with mutual responsibilities and obligations, and it is no less the privilege
than the duty of the members to conduct their own business and to scrutinize the practices of others with a view to the stability of this association and the welfare of the nation.
This view of the mutual relation of members was fully recognized in the
recent action of the association, when they took possession of one of the
largest institutions and discharged its liabilities to the public of some eight
millions of dollars, and when they further agreed to participate in any loss
by the issue of loan certificates to t h a t and to other banks; and also when
they so changed the constitution as to permit official visitation and examination into the condition of members, and gave power to demand
security for their exchanges.
Powers so great and so important as these, which have been exercised and
concurred in by every member, are sufficient to show that this association
no longer regards itself as a simple meeting place for the exchange of papers,
without further responsibility, b u t that it has become an institution of
national significance and value, competent to consider any question vital
to its own interests.




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If the association can thus promptly meet the necessities of a great financial crisis, it may certainly venture to urge upon its members t h e importance
of such reform in their modes of business as they believe will tend to prevent
such a crisis, and will enable them the better to meet one if it come.
Although this has been the practical experience of the New York Clearing House Association, and although in every great emergency since its
organization it has proved itself possessed of vast capacity to benefit the
country and protect its own members, yet it must ever be kept in mind
that this is simply a voluntary association, subject to dissolution by a vote
of the majority, and subject also to the withdrawal of members at their own
pleasure. From the nature of the business, no bank, however prosperous, is
so independent of all circumstances t h a t it may not on some special occasion
find it convenient to seek the aid or the consideration of its colleagues. A
solemn obligation, therefore, rests upon everyone to concede something to
the common good. If the measure now proposed should, upon trial, prove
erroneous, it may be revoked as readily as it is adopted.
With the rapid growth of this nation it is more and more important that
this commercial depository be always kept specially strong in cash reserves,
and be prepared to meet any sudden exigency t h a t may arise within our
vast domain. When the intention to do this is distinctly declared by the
associated banks, by their abolishing the payment of interest upon deposits
and by thus removing a great cause of weakness and of alienation among
them, your committee believe that capital will be attracted to this city and
to this associated body as a place of special security. Thus it has proved
with those members who have tried it. If a small proportion of the deposits hitherto secured by purchase be consequently drawn away to other
institutions within this city, or to other places without it, t h a t which
remains will be more permanent and reliable, and will be sufficient to make
our business safer and more profitable than before.
If it result in the retention of a larger cash reserve by interior banks,
or in the withdrawal of those funds which are particularly subject to alarm
and which betray the depositaries into questionable temporary loans, it
can be no cause of regret to the banks nor to the nation.
The present occasion seems to your committee most opportune for this
reform. The subject has been ripening in this association for more than
a quarter of the century. The business of the nation requires the financial
support which this united and compact body can give it, and the experiment, if it be an experiment, ought now to be fairly and honorably tried.
To their special and important recommendation of ceasing to pay interests upon deposits your committee have added but one more, viz:
T h a t of confining the use of the clearing house exclusively to its own
members.
Hitherto the practice of permitting exchanges through members of t h e
association of checks drawn upon parties not members has freely given every
facility enjoyed by those who carry the burthens of the banking business
to those who do not, and who neither fairly participate it its expense nor




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in its responsibilities. Such parties, therefore, possess advantages superior
even to banks who created and who sustain the institution. *
I n order effectually to secure the object of strengthening the association
as proposed in the first recommendation of your committee it is manifestly
necessary to withhold gratuitous facilities from active outside competitors,
who would otherwise use our own appointed instrument to subvert the
object we have in view. If desired every legitimate depository possessed
of the needed requisites and responsibility may find entrance into t h e clearing house subject to the same conditions and restrictions as are imposed
upon existing members. More than this can not be justly required, and
less will not afford adequate protection.
In respect to the subject of receiving upon deposit as cash checks drawn
upon places out of the city, your committee have thought it inexpedient
now to make special recommendation, b u t they suggest t h a t a separate
and special committee be appointed to investigate this question, and also
to advise whether an arrangement could not be made through the clearing
house to secure some safe and prompt clearing of such checks, which will
accrue to the benefit of all banks in the association.
Finally, your committee can not disregard the just complaint of the banks
respecting the large volume of checks which arise from transactions in the
stock exchange, and which embarrass them in their dealings with each
other and greatly increase the risks of the clearing house. The committee,
however, content themselves by the simple expression of the wish generally
entertained among the banks t h a t some arrangement may be made by the
parties interested to establish a special clearing house for stocks, so t h a t
these large checks may be abated.
With these general remarks your committee present the following summary:
First. That no member of the New York Clearing House Association shall
pay interest upon or allow compensation for deposits after the ist January,
1885.
Second. That to secure uniformity in the business of the banks no checks
shall pass through the clearing house except those drawn upon members of
the association.
Third. That any infraction of the above rules shall be regarded as a
forfeiture of membership of the association, subject on complaint of any
member to investigation by the clearing-house committee, in the manner
provided in the constitution.
Fourth. That the association recommend that some mode of settlement
of transactions at the New York Stock Exchange be adopted, whereby
the large volume of checks which now pass through the clearing house from
that business may be diminished or avoided.
Fifth. If these measures be adopted by the association, that the committee recommend the same to clearing houses in Boston, Philadelphia,
Chicago, and other cities.




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All of which is respectfully submitted by the committee.
G E O . S. COE,
President American Exchange National

Bank.

G E O . H. POTTS,

President National Park
J O H N JAY

Bank.

KNOX,

President National Bank of the Republic.
R. L. EDWARDS,

President National Bank of the State of New

York.

JAMBS T. WOODWARD,

President Hanover National

Bank.

F . A. PALMER,

President National Broadway

Bank.

W M . L. J E N K I N S ,

President Bank of America.

A minority report, dissenting from the above, was as
follows:
The undersigned member of the committee appointed June 4, 1884, and
continued on July 8 with three members added " t o inquire if the
methods of business (in respect especially as to payment of interest on
deposits and the receiving of checks on out-of-town places as cash) as
conducted by the several members of this association are uniform, etc.,"
begs leave to report as the result of his individual inquiry:
First. That the vital principle of the business of banks of deposit and
discount lies in the gathering together of temporarily idle funds into a
center where they can be made useful for the common good; that the
payment of interest and negotiation of exchange, drafts, checks, etc.,
have been among the means employed for this purpose from time almost
immemorial by all commercial nations and communities; and that the
methods of business as conducted by the members of this association in
this respect are substantially uniform, 69 out of 72 banks in this city
paying interest and all receiving checks on out-of-town places as cash
for deposit.
Second. That the infinite mulitplicity and variety of the combinations
and complications which arise in the transactions of the business of a
great commercial country and a great commercial city, between banks
and their correspondents, the intimate confidential personal relations
between banks and their individual customers, make it absolutely necessary that there should be-the utmost possible freedom of action between
them; that a faithful compliance with our national and state laws will
secure perfect safety for all.
Third. That the total abolition of the payment of interest upon or
allowance of any compensation or consideration in any form, directly




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or indirectly, for deposits, as also the receiving of checks or drafts on other
cities as cash by an agreement of this association, would be productive
of great and lasting injury to the city of New York, endangering and
retarding its commercial prosperity and also to the United States; that
such an agreement is impracticable, and if made would be found impossible of enforcement by the association or execution by its individual
members.
It is therefore respectfully recommended that the further consideration
by this association of these matters be indefinitely postponed.
Respectfully submitted.




O. D. BALDWIN,

President Fourth National Bank.

386

NOTE E.
CLEARING-HOUSE LOAN CERTIFICATES IN

1890.0

The effect of a general monetary stringency is felt first
and most seriously by banks located in the larger of the
reserve cities. Whenever financial affairs are in a normal
condition the surplus funds of the local banks find their
way to the vaults of their correspondent banks located in
the great centers of business activity. This is undoubtedly
due in part to the fact that these deposits may be made
available for lawful money reserve and that a small rate
of interest is, as a rule, paid upon bank balances by
associations in the larger cities, and to the further fact
that the maintenance of a good balance with their city
correspondents strengthens the claim of the interior banks
upon the former for rediscounts when the temporary condition of redundancy passes away and the increased
demand for money is greater than the interior banks from
their resources can conveniently supply.
Thus it results that the wants of a continent in case of
general depression are at last brought through various
channels of business activity, by way of withdrawals or
loans, to the bankers of the great metropolitan cities for
relief, and they are presented in such a form, in many
cases, as to preclude the possibility of refusal, if general
bankruptcy is to be avoided.
During the period of the stringency above discussed the
cities of New York, Philadelphia, and Boston were subjected to the most pressing demands, and after very careo Report of the Comptroller of the Currency, 1891, pp. 12-15.




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ful consideration it was decided by the associated banks
that the exigency made necessary a resort to the issuing of
clearing-house loan certificates for the purpose of settling
clearing-house balances. This expedient had been successfully resorted to during the panics of 1873 a n d 1884.
At a meeting of the New York Clearing House Association on the n t h day of November, 1890, the following
resolution was unanimously adopted:
Resolved, That a committee of five be appointed by the chair, of which
the chairman shall be one, to receive from banks members of the association bills receivable and other securities, to be approved by said committee,
who shall be authorized to issue therefor, to such depositing banks, loan
certificates bearing interest at 6 per cent per annum, and in addition
thereto a commission of one-quarter of i cent for every thirty days such
certificates shall remain unpaid, and such loan certificates shall not be
in excess of 75 per cent of the market value of the securities or bills receivable so deposited, and such certificates shall be received and paid in
settlement of balances at the clearing house.

Under this resolution a committee of five was appointed,
and they proceeded, upon deposit of proper securities, to
issue to applying banks loan certificates in the following
form:
No. —.]

[$20,000.
LOAN COMMITTEE OF T H E
N E W YORK CLEARING H O U S E

ASSOCIATION,

, 1890.
This certifies t h a t the
has deposited with
this committee securities in accordance with the proceedings of a meeting
of the association held November 11, 1890, upon which this certificate is
issued. This certificate will be received in payment of balances at the
clearing house for the sum of twenty thousand dollars from any member
of the Clearing House Association.
On the surrender of this certificate by the depositing bank above named
the committee will indorse the amount as a payment on the obligation of
said bank held by them and surrender a proportionate share of the collateral securities held therefor.
($20,000.)
,




New York,

Committee.
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These certificates were, by unanimous agreement upon
the part of the clearing-house banks, accepted in lieu
of money in the settlement of clearing-house balances.
In order to provide for the retirement of these securities in case the collaterals pledged were found insufficient,
the several boards of directors of the associated banks
were requested to, and did, pass a resolution in the following form:
Resolved, T h a t any loss resulting from the issue of loan certificates shall
be borne by the banks comprising the Clearing House Association pro
rata of capital and surplus, and this resolution shall be ratified by the
boards of the respective banks members of the association, and a certified
copy of such consent delivered to the chairman of the loan committee.

This committee, acting under the authority granted
by the above resolution, issued to the associated banks
loan certificates aggregating $16,645,000. The first issue
was made November 12, 1890, and the entire issue was
retired on February 7, 1891. The largest amount outstanding at any one time was $15,205,000, on the 13th
of December, 1890.
On the 17th of November, 1890, similar proceedings
were had by the Boston Clearing House Association.
On that day, at a meeting of the association, the following resolution was unanimously adopted:
Resolved, T h a t a committee of five be appointed by the chair, of which
committee the chairman shall also be a member, to receive from banks
members of the association bills receivable and other securities, to be*
approved by said committee, who shall be authorized to issue therefor,
to such depositing banks, loan certificates bearing interest at 7.3 per cent
per annum, and such loan certificates shall not be in excess of 75 per cent
of the market value of the securities or bills receivable so deposited, and
such certificates shall be received and paid in settlement of balances at the
clearing house.




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It is observed also that the ultimate payment of the
certificates, in case the pledged collaterals proved to be
insufficient, was provided for through the ratification,
by the boards of directors of the respective banks, of the
following resolution passed by the Boston Clearing House
Association at the meeting above noted:
Resolved, That any loss arising from the issue of loan certificates shall
be borne by the banks comprising the Clearing House Association pro
rata, according to the average daily amount which each bank shall have
sent to the clearing house during the preceding year. I t was also voted
t h a t this resolution shall be ratified by the boards of directors of the
respective banks members of the association, and a certified copy of such
consent delivered to the chairman of the loan committee.

When a bank applied for and received loan certificates
it was required to deposit the necessary securities and
to also execute and deliver an obligation, of which the
following is a copy:
The
Bank has this day received of
, loan
committee of the Boston Clearing House Association, loan certificates
issued by said committee in pursuance of a vote of said association, passed
November 17, 1890, to the amount of
thousand dollars, and has
deposited with said committee the securities a statement whereof is hereto
annexed; and said
Bank receives said loan certificates
on the terms set forth in said vote, and agrees to pay the amount of said
certificates, with interest thereon, as provided in said vote.

Under the operation of the resolution of authority
granted by the clearing-house committee, as above noted,
loan certificates were first issued on November 19, 1890,
and the last were issued on December 6, 1890. On the
latter date the issue reached its maximum of $5,065,000.
The last of the issue was retired on January 6, 1891.
The Clearing House Association of Philadelphia took
action on November 18, 1890, at which time, at a meeting of the Clearing House Association, the following
resolution was adopted:




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Resolved, That, in accordance with resolution of September 24, 1873, as
amended October 18, 1873, the clearing-house committee will issue loan
certificates to banks applying, and receive them in payment of balances.

The resolution of September 24, 1873,
October 18, 1873, reads as follows:

as

amended

For the purpose of enabling the banks, members of the Philadelphia
Clearing House Association, to afford proper assistance to the mercantile
and manufacturing community, and also to facilitate the interbank settlements resulting from their daily exchanges, we, the undersigned, do
bind ourselves by the following agreement on the part of our respective
banks, viz:
First. That the clearing-house committee be, and they are hereby,
authorized to issue to any bank member of the association loan certificates
bearing 6 per cent interest on the deposits of bills receivable and other
securities to such an amount and to such percentage thereof as may in
their judgment be advisable.
These certificates may be used in settlement of balances at the clearing
house, and they shall be received by creditor banks in the same proportion as they bear to the aggregate amount of the debtor balances paid
at the clearing house. The interest that may accrue upon these certificates shall be apportioned monthly among the banks which shall have
held them during that time.
Second. The securities deposited with the said committee shall be held
by them as a special deposit, pledged for the redemption of the certificates issued thereupon, the same being accepted by the committee as
collateral security, with the express condition that neither the Clearing
House Association, the clearing-house committee, nor any member thereof
shall be responsible for any loss on said collaterals arising from failure to
make demand and protest, or from any other neglect or omission, other
than the refusal to take some reasonable step which the said depositing
bank may have previously required in writing.
Third. On the surrender of such certificates, or any of them, by the
depositing bank, the committee will indorse the amount as a payment on
the obligation of said bank held by them, and will surrender a proportionate
amount of securities, except in case of default of the bank, in any of its
transactions through the clearing house; in which case the securities will
be applied by the committee, first, to the payment of outstanding certificates, with interest; next, to the liquidation of any indebtedness of such
bank to the other banks, members of the Clearing House Association.
Fourth. The committee shall be authorized to exchange any portion
of said securities for others, to be approved by them, and shall have power
to demand additional security, a t their own discretion.
Fifth. T h a t the clearing-house committee be authorized to carry into
full effect this agreement, with power to establish such rules and regula-




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tions for the practical working thereof as they may deem necessary; and
any loss caused by the nonpayment of loan certificates shall be assessed
by the committee upon all the banks in the ratio of capital.
Sixth. The expenses incurred in carrying out this agreement shall be
assessed upon the banks in equal proportion to their respective capital.
Seventh. That the clearing-house committee be, and they are hereby,
authorized to terminate this agreement upon giving thirty days' notice
thereof at any stated meeting of the Clearing House Association.
PHILADELPHIA, November i8,

1890.

At a meeting of the clearing-house committee, held this day, it was, on
motion—
Resolved, That in accordance with resolutions of September 24, 1873, as
amended October 18, 1873, the clearing-house committee wTill issue loan
certificates to banks applying, and receive them in payment of balances.

It will be observed that the original agreement under
which the committee proceeded in this case was adopted
during the panic of 1873, a n d after that subsided no
further action was had under it until November, 1890,
but the machinery was kept standing during the whole
intervening period, ready for immediate use whenever
required.
The clearing-house committee having, by the agreement aforesaid, been authorized to issue loan certificates,
resolved, on November 5, 1890, to exercise this power,
whereupon the banks desiring to take out loan certificates were required to adopt a resolution empowering
the hypothecation of securities, under which the issue of
loan certificates, signed by not less than three members
of the committee, was commenced on November 19,
1890, and ceased on May 22, 1891, the total issue being
$9,655,000. The maximum issue, $8,870,000, was reached
on January 9. The certificates have all been retired excepting $170,000 issued to the Keystone and Spring
Garden national banks.




392

NOTE F.
T H E TREASURY AND THE MONEY MARKET IN

i8go. a

During this period [the fiscal year 1890] the Secretary
was able to purchase United States bonds at constantly
decreasing prices, so that at the end of the fiscal year 1890
the Government was paying for 4 per cent bonds 7 per
cent less than at the beginning of that period, and for 4 ^
per cent bonds ^% per cent less; but the diminished supply
of bonds held for sale, together with the lower prices being
paid, had been gradually curtailing the government purchases, and soon after the beginning of the present fiscal
year the growing surplus and the prospective needs of the
country made it advisable that steps be taken to obtain
more free offerings of bonds to the Government.
Accordingly, on July 19, 1890, a circular was published
rescinding that under which purchases had been made
since April 17, 1888, and inviting new proposals, to be
considered July 24, for the sale of the two classes of bonds
before mentioned. Under this circular there were offered
on the day prescribed $6,408,350 4 per cents and $594,550
^y2 per cents, at prices varying from 121.763 to 128.263 for
fours, and from 1 0 3 ^ to 104.40 for four and one-halfs, of
which there were purchased all the 4 per cents offered at
124, or less, amounting to $6,381,350, and all the four
and one-halfs offered at 1 0 3 ^ , or less, amounting to
$584,550. As the amount obtained on this day was less
«Report of the Secretary of the Treasury, 1890. Pages XXVIII to
XXXII.




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than the Government desired to purchase, the provisions
of the circular were extended, with the result that further
purchases were made, amounting in the aggregate to
$9*652,500 fours and $706,450 4 K P^ r cents.
It was soon apparent that these purchases were inadequate to meet existing conditions; therefore, on August 19,
the department gave notice that \% per cent bonds would
be redeemed with interest to and including May 31, 1891;
and two days later the circular of August 21 was published, inviting the surrender for redemption of 20,000,000
of those bonds upon condition of the prepayment after
September 1, 1890, of all the interest to and including
August 31, 1891, on the bonds so surrendered. Under
this circular there were redeemed $20,060,700 \% per cents.
Notwithstanding the disbursements resulting from purchases and redemptions of bonds under the circulars of
July 19 and August 21, the industrial and commercial interests of the country required that large additional
amounts should be at once returned to the channels of
trade. Accordingly, a circular was published August 30,
1890, inviting the surrender of an additional $20,000,000
of \Y2 per cents upon the same terms as before. This was
followed by another, dated September 6, inviting holders
of the 4 per cent bonds to accept prepayment of interest
on those bonds to July 1, 1891, a privilege which was
subsequently extended to the holders of currency sixes.
Under this circular of August 30 there were redeemed
$18,678,100 \]/2 per cent bonds, and under that of September 6 there was prepaid on the 4 per cent bonds and
currency sixes interest amounting to $12,009,951.50.




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These prepayments of interest are expressly authorized
by section 3699 of the Revised Statutes. They were
deemed expedient because of the disposition of the
holders of bonds to demand exorbitant prices for them.
The amount of public money set free within seventyfive days by these several disbursements was nearly
$76,660,000, and the net gain to circulation was not less
than $45,000,000, yet the financial conditions made
further prompt disbursements imperatively necessary.
A circular was therefore published September 13, 1890,
inviting proposals, to be considered on the 17th, for the
sale to the Government of $16,000,000 of 4 per cent
bonds. The offerings under this circular amounted to
$35,514,900, of which $17,071,150 were offered at 126^, or
less, and were accepted.
The total disbursements since June 30, 1890, by the
means above set forth, are recapitulated as follows:
Bonds redeemed.
Under circular of—
April 17, 1888
July 19, 1890
August 19, 1890
August 21, 1890
August 30, 1890
September 6, 1890. _
September 13, 1890.

Disbursement.

$2, i33.3So.oo
17, 324, 850. 00
560,050. 00
20,060,700.00
18,678,100.00
(a)
17,071,150.00
75,828,200. 00

Total
a

$2,358,884.00
21,225,989.46
581,138. 12
20,964.868.42
19,518, 176.83
12,009,951.50
21,617,673. 77
98,276,682.10

Prepayment of interest.

Another circular inviting the surrender of 4^2 per cent
bonds for redemption, with interest to and including
August 31, 1891, was published October 9, 1890. The
6158—10




26

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amount surrendered under that circular during the month
of October was $3,203,100.
The total amount of 4 and 4 ^ per cent bonds purchased
and redeemed since March 4, is $211,832,450, and the
amount expended therefor is $246,620,741.72. The reduction in the annual interest charge by reason of these
transactions is $8,967,609.75, and the total saving of
interest is $51,576,706.01.
It will be seen from the above statement that during
the three and one-third months, from July 19 to November 1, 1890, over $99,000,000 were disbursed in payment
for bonds and interest.
There are many grave objections to the accumulation of
a large surplus in the Treasury, and especially to the
power which the control of such surplus gives to the
Secretary. I am sure these objections appeal to no one
with so much force as to the head of the Department, upon
whom rests the difficult and delicate responsibility of its
administration.
In my judgment, the gravest defect in our present
financial system is its lack of elasticity. The national
banking system supplied this defect to some extent by the
authority which the banks have to increase their circulation in times of stringency and to reduce when money
becomes redundant; but, by reason of the high price of
bonds, this authority has ceased to be of much practical
value.
The demand for money in this country is so irregular
that an amount of circulation which will be ample during
ten months of the year will frequently prove so deficient




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during the other two months as to cause stringency and
commercial disaster. Such stringency may occur without
any speculative manipulations of money, though, unfortunately, it is often intensified by such manipulations.
The crops of the country have reached proportions so
immense that their movement to market in August and
September annually causes a dangerous absorption of
money. The lack of a sufficient supply to meet the increased demand during those months may entail heavy
losses upon the agricultural as well as upon other business
interests. Though financial stringency may occur at any
time, and from many causes, yet nearly all of the great
commercial crises in our history have occurred during the
months named, and unless some provision be made to
meet such contingencies in the future, like disasters may
be confidently expected.
I am aware that the theory obtains in the minds of
many people that if there were no surplus in the Treasury
a sufficient amount of money would be in circulation, and
hence no stringency would occur. The fact is, however,
that such stringency has seldom been produced by Treasury absorption, but generally by some sudden or unusual
demand for money entirely independent of Treasury conditions and operations. The financial pressure in September last, which at one time assumed a threatening character, illustrates the truth of this statement. There was at
that time no accumulation of money in the Treasury from
customs or internal-revenue taxes, nor from any other
source that could have affected the money market. On
the contrary, the total disbursements for all purposes,




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including bond purchases and interest prepayments, during the last preceding fifty-three days had been about
$29,000,000 in excess of the receipts from all sources.
The total apparent surplus on September 10, when the
money stringency culminated, was $99,509,220.53. Of
this amount $24,216,804.96 was on deposit in the banks,
and presumably in circulation among the people, and
$21,709,379.77 was fractional silver, which had been in
the Treasury vaults for several years, and was not available for any considerable disbursements. Deducting the
sums of these two items, viz, $45,926,184.73, left an actual
available surplus of only $53,583,035.80. The amount of
the bank-note redemption fund then in the Treasury,
which had been transferred to the available funds by the
act of July 14, 1890, was $54,000,000, being substantially
the amount of the available surplus on September 10, 1890.
This bank-note fund had been in the Treasury in varying
amounts for many years. In August, 1887, it was
$105,873,095.60, which had been gradually reduced by
disbursements to the amount above named. It is apparent, therefore, that the financial stringency under discussion was not produced by the absorption of money by the
Treasury, but by causes wholly outside of Treasury operations. At the time when the financial pressure in September reached its climax the extraordinary disbursements for bond purchases had substantially exhausted the
entire ordinary Treasury accumulations, and but for the
fact that Congress had wisely transferred the bank-note
redemption fund to-the available cash there would have
been no money at command in the Treasury by which the




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strained financial conditions could have been relieved and
threatened panic and disaster averted. Had this fund
been in the banks instead of the Treasury the business of
the country would have been adjusted to the increased
supply, and when the strain came it would have been
impossible for the banks to meet it. The Government
could not have withdrawn it from the banks without compelling a contraction of their loans and thus diminishing
their ability to give relief to their customers.
The more recent financial stringency in November,
immediately after the disbursement of over $100,000,000
for the purchase and redemption of bonds within the
preceding four months, furnishes another forcible illustration that such stringencies are due to other causes than
Treasury operations.




399

NOTE G.
BANK FAILURES AND SUSPENSIONS IN

1893.®

It does not seem essential, nor would it be possible, to
enter into a minute statement of all the circumstances
attendant upon the closing of the banks during the past
year. It is sufficient to say that the cause which brought
about the large proportion of such suspensions was the
action of depositors who, becoming doubtful of the solvency of the banking institutions of the country, withdrew their deposits. The result was that many banks,
after paying out on the one hand all the money in their
vaults and failing to collect their loans on the other, suspended and passed into the hands of the Comptroller.
With a full knowledge of the general solvency of these
institutions and the cause which brought about their suspension, the policy was inagurated of giving all banks,
which, under ordinary circumstances would not have closed
and whose management had been honest, an opportunity
to resume business. This policy was one which seemed to
commend itself to the Comptroller as proper to pursue
under the circumstances, and it is believed the results
have justified the experiment of its adoption.
In no instance has any bank been permitted to resume
on money borrowed or for which as an association it has
become liable. Whenever those active in the management
of the banks resuming, either as executive officers or
directors, have been debtors to such banks, their indebtedness has been paid or secured, and whenever impairment
a Report of the Comptroller of the Currency, 1893, p. 10-12.




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of capital stock has been found, such impairment has
been made good, either by voluntary or enforced assessment on the shareholders. In a number of instances
changes have been made in the directory and official corps
of resuming banks. The criticism to be made on the
management of these banks was the improper distribution
of their loans, a circumstance which greatly retarded the
conversion of such loans into money at a time when it was
needed to avoid suspension.
Of the banks which failed to resume many had long
been under the continual criticism of this Bureau for
violations of law and imprudent methods of banking, and
the closing of them was only hastened by the general condition of financial affairs. Some failed because of criminal
acts on the part of the officials in charge and others because
of a lack of proper appreciation of the purposes of a bank.
An analysis of the suspensions and failures which
occurred showed that during the year 158 banking associations, as heretofore stated, were compelled to suspend
business, being 4.09 per cent of the number of existing
associations. Their capital stock aggregated $30,350,000,
or approximately 4.3 per cent of the paid-in capital stock
of all the banks in the system.
Of the banks which suspended 65, or 41.14 per cent,
with a total capital stock of $10,935,000, were insolvent,
and required the appointment of receivers; 86, or 54.43
per cent, with a capital stock aggregating $18,205,000,
were able to resume business, and 7, or 4.43 per cent,
with a capital stock of $1,210,000, were placed in charge
of examiners in the expectation of resumption. Of the sus-




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pended banks 2 were located in the New England States,
both in New Hampshire, with a total capital stock of
$250,000, for each of which a receiver was appointed.
In the Middle States there were 3 suspensions—
2 in New York, with a total capital stock of $500,000,
and 1 in Pennsylvania, with a capital stock of $50,000.
Those in New York were placed in the hands of receivers,
and the 1 in Pennsylvania, in charge of an examiner
pending proposed resumption.
There were 38 suspensions in the Southern States, the
capital stock involved aggregating $8,815,000. Of these
19, with a total capital stock of $5,630,000, resumed
business, and the same number, with a total capital stock
of $3,185,000, failed. In this geographical division
Texas furnished the greatest number of suspensions,
namely, 12, with a total capital stock of $1,480,000, of
which 6, with a total capital stock of $430,000, resumed
business, and the remainder, capitalized to the amount
of $1,050,000, failed.. There were 6 suspensions in Kentucky and the same number in Tennessee. The total
capital stock of those in Kentucky was $2,300,000 and
of those in Tennessee $2,750,000. In Kentucky all the
banks that suspended, except one, with a capital stock
of $50,000, were permitted to resume business. Two of
the banks in Tennessee, with a total capital stock of
$2,000,000, resumed business and 4 were placed in the
hands of receivers. Four banks in Georgia suspended
and the same number in Alabama, with a total capital
stock of $675,000 and $550,000, respectively. Of these,
1 bank in Georgia, with a capital stock of $250,000, and




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3 in Alabama, with a total capital stock of $400,000,
resumed business. Two banks in North Carolina suspended, with a total capital stock of $300,000, both of
which were able to resume business, but the 2 which suspended in Florida, with a total capital stock of $200,000,
required the appointment of receivers, as did also the 1 in
Mississippi, which had a capital stock of $60,000, and
the one in Arkansas, with a capital stock of $500,000.
The Western States furnished 49 suspensions, with an
aggregate capital stock of $10,250,000. Of these, 31 resumed business, 17 failed, and 1 was placed in charge of
an examiner pending resumption or the appointment of
a receiver. The capital stock of the banks which resumed aggregated $6,275,000, and of those which failed
$3,750,000. The greatest number of suspensions which
occurred in this section was in Kansas, namely, 8, although the capital stock involved—$880,000—was less
than that of the banks in four other States. Four of the
banks in Kansas, with a total capital stock of $480,000,
resumed, and 3, with a capital stock of $300,000,
failed. Of the 7 banks in Indiana which suspended, 4,
with a total capital stock of $450,000, resumed, and 3,
with a total capital stock of $550,000, were placed in the
hands of receivers. In Iowa 6 banks suspended, with a
total capital stock of $575,000, of which number but 1
failed, with a capital stock of $50,000. The same number of banks in Nebraska suspended, 3 of which, with
a total capital stock of $350,000, resumed business, and
receivers were appointed for the remaining 3, the total
capital stock of which was $450,000. Five banks sus-




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pended in Wisconsin, with a total capital stock of $625,000,
all of which resumed business, while in Illinois there were
4 suspensions, with a capital stock aggregating $2,150,000.
All of these were placed in the hands of receivers. In
Missouri 3 banks suspended, with a total capital stock
of $1,300,000, all of which resumed. In Michigan there
were the same number of suspensions as in Missouri, but
the capital stock involved aggregated only $215,000.
But 1 of these banks resumed, the capital stock of which
was $65,000. The fewest suspensions which occurred in
any State in this division was in Ohio, there being but 2,
the aggregate capital stock of which was $180,000. One
of these banks, with a capital stock of $80,000, resumed
business, and the other failed.
Sixty-six banks suspended in the Pacific States and
Territories, being nearly 42 per cent of the total suspensions which occurred and represent capital stock amounting to 35 per cent of the total capital involved. Of these,
36 banks, with a capital of $6,300,000, were solvent and
resumed business; 25, with a capital of $3,250,000, were
placed in the hands of receivers; and 5, with a total capital
of $1,060,000, in charge of examiners pending resumption.
The greatest number of suspensions was in Colorado,
involving the largest amount of capital stock of suspended
banks of any State in the Union, the number being 16
and the capital $3,600,000. All of these banks resumed
except 2, the capital stock of which was $300,000. The
second greatest number of suspensions occurred in the
State of Washington, 14 banks, with an aggregate capital
stock of $1,735,000. Of this number, 4, with a capital




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stock of $425,000, resumed; 3, with a capital stock of
$510,000, were placed in charge of examiners pending
resumption; and 7 failed. The suspensions in Montana
numbered 10, and their capital stock amounted to
$1,875,000. Of these, 2, with a capital stock of $300,000,
resumed, and 7, with a capital stock of $1,075,000, were
placed in charge of receivers. Six suspensions occurred
in Oregon, and the same number in California, the aggregate capital stock represented being $800,000 and
$1,200,000, respectively. There was but one failure in
each State, the capital stock in the case of the Oregon
bank being $100,000 and that of the California bank
being $250,000. There were 3 suspensions in Utah,
3 in North Dakota, and 3 in South Dakota. The 3
banks in Utah, with a capital stock aggregating $250,000,
resumed business, while the 3 in North Dakota, with a total
capital stock of $400,000, failed. Two of the banks in
South Dakota, with a total capital stock of $100,000, were
placed in the hands of receivers, and 1, with a capital
stock of $125,000, resumed. Two suspensions occurred
in Wyoming, and the same number in New Mexico. One
bank in Wyoming, with a capital stock of $200,000,
resumed, and 1, the capital stock of which was $50,000,
failed. Of the banks in New Mexico, 1, with a capital
stock of $175,000, failed, and the other, with a capital
stock of $50,000, was placed in the hands of an examiner
pending resumption on the appointment of a receiver.
The only other suspension in this geographical division
occurred in Oklahoma, being that of a bank with a capital
stock of $50,000, which, being solvent, resumed.




405

NOTE

H.

A.—CLEARING HOUSE LOAN CERTIFICATES IN

1893.0

The unprecedented condition of the money market from
June to September called for extraordinary remedies, not
only to avert general disaster to the banks, but to prevent
commercial ruin. This remedy was the issuing of clearing
house loan certificates, which were brought into use, as in
1873, 1884, 1890 to 1891, by the associated banks of New
York, Boston, Philadelphia, Baltimore,' and other cities
where needed. The service rendered by them was invaluable, and to their timely issuance by the associated banks
of the cities named is due the fact that the year's records
of suspensions and failures is not greatly augmented.
The form of these certificates, with the conditions under
which they were issued in 1890-91 (the form and conditions being the same during the late issuance of them
as then), is described at length in the Comptroller's Annual
Report for 1891. 6 The subject is alluded to again only
because it constitutes a very important part of the year's
banking history, and for the additional reason that here
and there are to be found those who entertain an entirely
erroneous idea of the purpose for which these certificates
were issued and what was accomplished by their issuance.
Briefly stated, they were temporary loans made by the
banks associated together as clearing-house associations,
to the members of such association, and were available to
a Report of the Comptroller of the Currency, 1893, pp. 15-16.
b See Appendix, Note E, p . 388.




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such banks only for the purpose of settling balances due
from and to each other, these balances under normal conditions of business being always settled in coin or currency. Each clearing-house association selected a com
mittee charged with the issuing of the certificates to each
bank desiring the same, such bank being required before
receiving them to deposit with the committee its bills
receivable, or other securities, as collateral for the loan.
The amount of certificates issued to each bank was limited
to 75 per cent of the value of the securities deposited.
They bore interest at rates varying from 6 to 7.3 per cent.
Immediately upon their surrender to the committee they
were canceled and the securities held as collateral were
returned to the bank depositing the same.
At a time when vast sums of coin and currency were
being withdrawn from the banks to be hoarded these
loan certificates, by performing the functions of the currency or coin customarily required for settling daily balances at the clearing house, released so much currency
or coin to legitimate and current demands of business
and unquestionably placed it within the power of the
banks in the cities named to ^xtend to outside banks the
aid needed on the one hand and liberally granted on the
other. In no instance were these certificates designed to,
nor did they, circulate as money. They were due bills,
and their sole function consisted in discharging the single
obligation at the clearing house. An attempt on the part
of a bank in any of the associations issuing these certificates to use them otherwise would have incurred a fine
and other penalties provided in the rules governing such
associations. Their issuance at so early a date in the




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financial derangement of the country was most opportune in not only preventing an acute panic but intending to restore public confidence, such action demonstrating
that by mutual agreement of all, the weak banks of the
association would be, so far as depositors and other creditors were concerned, as strong as the strongest.
In inaugurating the issuing of certificates so promptly
and issuing them to so large an amount the clearinghouse association of New York in particular rendered the
country great service, and the associated banks of that
city are entitled to the credit which the public generally
accords them.
The following figures, showing the movement and
amount of the issue of loan certificates in 1893 in the
cities named, will indicate the measure of relief afforded
by them:
Date of
issue of
first certificate
June
June
June
Baltimore. _ __ . . . d o .
Aug.
Pittsburg
New York
Philadelphia

21

16
27

11

Date of largest amount
outstanding.

Aug.
Aug.
Aug,
Aug.
Sept.

29 to Sept. 6_
is
23 to Sept. 1 _
24 to Sept. 915

Total.




Largest
amount
outstanding.

£38, 280,000
10,965,000
11,445,000
1,475,000
987,000
63,152,000

408

Amount outstanding
October 31.

$3,835,000
845,000
332,000

B.—REPORT OF THE N E W YORK CLEARING-HOUSE LOAN
COMMITTEE.
N E W YORK,

October 31, 1893.

To the New York Clearing House Association:
The loan committee of 1893 respectfully present the
following report:
Early in June of this year, at an informal meeting
of several banking officers, the subject of the financial
outlook was discussed, and those present thought the
situation was sufficiently grave to call for some action
by the Clearing House Association.
On the 14th of June a meeting of the clearing-house
committee was called, at which all the members were
present. After a protracted discussion it was moved that
the following be adopted as the opinion of the committee:
The clearing-house committee think it advisable to call a meeting of
the Clearing House Association for Thursday, the 15th instant, at 12
o'clock. The committee will recommend at that meeting an issue of loan
certificates.

This was unanimously adopted, and in accordance with
this action a meeting of the Clearing House Association
was held Thursday, June 15, at 12 o'clock, 58 banks being
being represented thereat.
The President, Mr. Williams, stated that the meeting
had been called in order that the recommendation of the
clearing-house committee having reference to the disturbed financial condition of the country might be presented for action by the association.




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Mr. E. H. Perkins, jr., chairman of the clearing-house
committee, presented the views of that committee, as
above expressed.
After a protracted discussion, in which several members of the association participated, the following resolution was adopted:
Resolved, That a committee of five be appointed, with the President, to
receive from banks, members of the association, bills receivable and other
securities to be approved by said committee, who shall be authorized to
issue therefor to such depositing banks loan certificates bearing interest at
the rate of 6 per cent per annum, and such loan certificates shall not be in
excess of 75 per cent of the market value of the securities or bills receivable
so deposited, and such certificates shall be received and paid in settlement
of balances at the clearing house; and all the rules and regulations heretofore adopted in the issue of loan certificates shall be in force in the present
issue.

The president, Mr. Williams, appointed the following
gentlemen as the loan committee: Mr. F. D. Tapper!,
Mr. E. H. Perkins, jr., Mr. J. Edwards Simmons, Mr.
Henry W. Cannon, Mr. William A. Nash, and Mr. George
G. Williams, president ex officio.
The loan committee met immediately after the adjournment of the association, June 15, and organized by the
selection of Mr. Tappen as chairman, and Mr. Nash as
acting chairman in the absence of Mr. Tappen. The form
of certificate to be used and the necessary blanks were
adopted, and the manager was requested to have the same
prepared for use. The first issue of certificates under the
above resolution, $2,550,000, was made on June 17. The
first cancellation of certificates, to the amount of $100,000,
took place on the 6th day oi July. The committee have
met daily up to the present time, and have held 105 meetings. The aggregate amount of certificates issued was




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$41,490,000. The greatest amount outstanding was
$38,280,000, on August 29, and continued at that amount
until September 6. The amount of collateral received by
the committee, in a round sum, was $56,000,000, 72 per
cent, or $40,000,000, being in bills receivable; 28 per cent,
or $16,000,000, being in stocks and bonds. The total
number of pieces deposited with and examined by the
committee was 11,029. Four thousand and forty-nine
pieces were also examined as substitutions.
It has been frequently stated and feared by some that
the amount of certificates issued during the present crisis
was in excess of the amount issued, in proportion to the
deposits held by the banks, during any previous panic.
On examination of the figures, however, we find that this
has not been the case, as in 1873 the deposits were
$152,640,000 and loan certificates $22,410,000, being
14.7 per cent; in 1884, on deposits of $296,575,300, certificates were issued to the amount of $21,885,000, being
7.3 per cent; in 1890, on deposits of $376,746,500,
$15,205,000 certificates were issued, being 4 per cent;
in 1893, $374,010,100 deposits, certificates $38,280,000,
being 10.2 per cent. The greatest amount of certificates
in proportion to deposits was issued in 1873. Had the
same proportion of loan certificates been issued in 1893
as was issued in 1873 the amount would have reached
the sum of $55,000,000.
The percentages of loan certificates used in the payment of balance have been as follows: In June, 9 per
cent; in July, 78 per cent; in August, 95 per cent; in
September, 30 per cent; in October, nil, being a total of
6158—10




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certificates used in the payment of balance $299,273,000.
The amount of interest paid on certificates has been
$535,513.33. The expenses of the committee for stationery, clerk hire, etc., $562.27. All of this work has
been accomplished without loss to the association.
The committee takes this occasion to express their
thanks for the courtesy shown by the Chase National
Bank and the First National Bank in allowing the committee to use the vaults in their banks to deposit the
securities held by the committee, there being no suitable
accomodations connected with the clearing house for this
purpose.
Full and complete statistics of the transactions had
with each bank by the loan committee will be filed with
this report.
Respectfully submitted.
F. D. TAPPEN, Chairman,
E. H. PERKINS, Jr.,
J. EDWARD SIMMONS,
HENRY W. CANNON,
W I I J J A M A. NASH,
GEO.
WII^IAM




SHERER, Secretary,

412

G. W I U J A M S , Ex-ojficio.

NOTE I.
T H E BANKS AND THE PANIC OF
^k

^t

5?c

1893.°
*fc

B Y

5k

A

-

D. NOYES.
sic

It was on the western banks that the shock of panic
fell in 1893 with greatest violence. The records of no
previous panic show in this regard such impressive sectional contrasts. The list of national and state bank
failures for 1893 shows for the New England and Middle
Atlantic States 17 suspensions, with total estimated
liabilities of $13,138,073. This list includes such financial centers as New York, Boston, and Philadelphia.
On the other hand, the failure of similar institutions in
the five States of Ohio, Indiana, Illinois, Michigan, and
Wisconsin numbered 49, with aggregate liabilities of
$23,163,537. In the n granger and Rocky Mountain
States, still farther to the west, the state and national
bank failures reached the yet more disproportionate
number of 147, and reported liabilities footed up no less
than $24,781,181.h Taking the country as a whole, the
record shows that out of 360 national and state banks
suspended during 1893, with liabilities of $109,547,556,
no less than 343 failures, with liabilities of $96,409,483,
occurred in sections of the Union west or south of Pennsylvania. The failures of private banks and savings
institutions were distributed in almost exactly the same
proportion. c
a

T h i s note contains rather more than half of an article by Mr. Noyes
which appeared in the Political Science Quarterly, March, 1894.
b Figures compiled and published by Dun's Mercantile Agency.
c Total failures of such institutions in 1893 were 250; liabilities,
$41,895,346. Outside of the New England and Middle Atlantic States
failures were 224; liabilities, $35,543,801.




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For this remarkable disparity there were several reasons. Rapid development on other than local capital
had been the chief feature of the West's recent career,
and this was a double element of weakness. The collapse
of the "land booms" in 1899 a n d 1890 had served as a
wholesome check to speculation, but the two enormous
grain harvests of 1891 and 1892 had again revived it.
The warnings of 1890 and of the brief succeeding period
fell in that section on deaf ears. The evils of a vicious
currency took root for this reason far more extensively
west of the Ohio. "Bad loans" made up a startlingly
large proportion of the assets of bankrupt institutions.
The East, on the other hand, where foreign capital was
concentrated, felt much more severely the shock and the
significance of the London crash of 1890. When, in 1891,
the expulsion of gold by our accumulated paper currency
began, it was the eastern banks from whose vaults the
gold was first withdrawn to meet such export requirements. It was through these banks that the " r u n "
began, with 1893, on the Government's gold reserve for
the redemption of legal-tender notes. It was on the
eastern stock exchanges that foreign investors poured for
two years continuously their holdings of American securities. These multiplied signs of coming trouble were not
ignored. The eastern institutions were indeed subjected
to the same demoralizing pressure from currency overissues, and they furnished their share of reckless ventures
and dishonest speculation. But the weeding out of such
concerns was very thorough in 1890 and in the ensuing
year or two, and, as a rule, the policy of the Eastern city




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banks on the eve of the general breakdown was sound
and conservative. a
But all this relative conservatism in the eastern banks
failed to offset the results of a thoroughly dangerous
practice embodied in our banking system. This is the
carrying and loaning out, in city banks, of interior banks'
legal reserves. This account, which Prof. Amasa Walker
aptly described as the most "explosive" element in
American banking, arises from the larger opportunity
offered in great financial centers for the steady use of
capital. At nearly all times western banks are glad to
get the 2 per cent allowed for use of their deposits by
eastern institutions. The national-bank law, moreover,
permits the so-called "country banks" to deposit with
other banks in certain specified cities three-fifths of their
15 per cent cash reserve. Since the country banks can
at no time legally lend out this last-named fund, it is
kept, as might be supposed, perpetually on deposit with
the reserve city institutions. In recent years this trust
fund has reached phenomenal proportions. At the close
of 1892 the national "banks reported "due from approved
reserve agents" the sum of $204,948,159. The total
amount due from other banks was more than double this.
In May of 1892 the New York City banks alone held
$293,078,195 subject to call from other institutions. Let
it be noted not only that this fund was money belonging
a The truth of this was illustrated when New York's bubble of speculation in the "industrial stocks" broke in May. This group of stocks fell
on the average 25 points within a week, and some of them 40 or 50, but
no bank suffered. This was, moreover, before the issue of loan certificates.
As a matter of fact, the banks had long been notoriously shy of these
securities.




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to private depositors in other bai.'•: ; and subject to their
instant call, but that a large pR portion of it was the
very money prescribed by law to bo he. 1 for the purpose
of meeting " r u n s " by the western banks* own creditors.
This will explain the violence of the strain on city banks
when the country institutions all at once took fright.
Nor were the bad results of the system by any means
confined to cities whence interior deposits were withdrawn. The city depositories kept on hand by law a
cash reserve of 25 per cent. The country banks held in
their vaults only the insignificant reserve of 6 per cent.
Grant, what was generally true, that the city banks were
conservative in their use of deposited interior reserves
and invested them as a rule in demand loans on stock or
bond collateral. A bank in Iowa or Colorado, with its
three-fifths reserve deposited in New York City, may
easily enough, when panic threatens, telegraph an immediate call for the return of such deposits. But actual
money, even if ready for delivery, can not be shipped
from New York Xp Denver in a day, and forty-eight
hours' delay may easily settle th'e fate of the western institution. This is the reason why so many
banks throughout the West suspended in last summer's
crisis, when they were perfectly solvent on their books,
and indeed resumed payments in a few days' time—as
soon, in fact, as the money shipped from their reserve
depository reached them. 0 The whole practice, in a
a
The comptroller reports t h a t out of the total of 158 national bank
failures, with a capital stock of $30,350,000, 86, with a capital of $18,205,000
resumed business within a short time. None of the 5 banks which suspended in the New England and Middle States resumed payment. Of




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country of such vast distances as ours, is full of continual
possibilities of mischief. Whether or not a serviceable
reserve-deposit plan with better safeguards could be
devised, I shall not here discuss. But it is worth our
while to note that the Bank of England, the most conspicuous of all depositories of tributary bank funds,
carries in its entire deposit liabilities a less amount than
our eastern banks hold from deposits of interior reserves
alone. In England delay in transferring currency against
withdrawals by interior banks reaches a minimum. Yet
the Bank of England habitually holds against its total
deposits a cash reserve of 40 to 45 per cent, and even
now Mr. Walter Bagehot's argument is being repeated
by a score of excited London critics, that the bank, as
depository for other institutions, is in the nature of a
public trustee, whose directors must content themselves
wholly with ultra-conservative investments and with
profits below the average.
The facts undoubtedly make it hard to say exactly
how far the banks as a whole were culpable in this
inflation process, or how far they were themselves victims of outside circumstances. Both conclusions will
be found in many cases correct. When we discuss,
however, the conduct and policy of the banks after the
panic of 1893 had actually begun, we stand on firmer
ground. Every banking institution has its own peculiar
responsibility placed upon it in time of panic, but the
the 6 national banks which suspended in Iowa, all but 1 subsequently
resumed. Sixteen national banks suspended in Colorado, of which all but
2 resumed, and 6, respectively, in Oregon and California, of which in
each case all but 2 resumed.




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gravest responsibility by far rests on the great city depositories. * * *
* * * 'The reserve cities furnished throughout the
crisis a memorable exposition of the principles of sound
panic banking. The time-honored rule, established by
the "Bullion report" to Parliament in 1810, that in time
of panics banks should discount freely and fearlessly for
all solvent customers, was observed in a remarkable
degree. In New York City in ordinary times the loan
account often falls far below the deposit total ; a it rarely
exceeds it. Between June 4, 1893, the week when panic
may be said fairly to have begun, and August 5, which
may be called the height of actual panic, deposits in the
64 New York clearing-house banks decreased $58,466,000,
and actual specie and legal-tender holdings $49,621,800.
This was a terribly sudden and violent impairment of
reserves, the actual money decrease being 38 per cent.
Yet in the face of it, outstanding loans were contracted
only $7,972,700. This remarkable maintenance of bank
accommodation to borrowers, in the face of monetary
crisis, was made possible by two distinct and wise measures of policy. The first was a firm and continuous curtailment of outstanding loans before the panic's actual
outbreak. 6 This was to strengthen cash resources and
reduce pressing liabilities. The second measure was the
« In the first week of 1893 New York clearing-house bank loans were
$441,283,700; deposits, $455,367,800. In the last week of 1893 loans were
$417,606,900; deposits, $506,437,800.
& Between the first week of April and the first week of June loans were
reduced in New York $16,834,300, although in the same time the total
cash reserve increased $8,304,700, and the surplus reserve over the required 25 percent of net deposits, $10,324,425.




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adoption, when once real panic had begun, of a policy
almost exactly opposite.0 This was the issue of clearinghouse certificates in order to maintain the loan account.
I shall not enter into a lengthy discussion of this financial contrivance. It is enough to say that the loan certificates are a purely American invention, and that their
safe and satisfactory operation in financial crises6 has
won for the system the approval of practically all competent judges. They are, as is generally known, a species
of currency issued by a clearing-house committee to all
banks in the association applying for such accommodation
and furnishing approved and sufficient collateral. These
certificates are by agreement accepted in payment of
balances between banks of the clearing house. They
can not, of course, circulate outside the limits of this
clearing house, and an annual interest rate of 6 per cent
charged up daily against the bank in whose name such
certificates are outstanding insures their early redemption
when the money market is restored to equilibrium.
a The banks followed another thoroughly sound principle in lending
only at high rates, the sufficient reason being t h a t a high rate is a matter
of no concern to a borrower in real extremity, while a low rate is a temptation to unscrupulous borrowers to engage the money and then relend it at
a rate fixed by the needs of others. The banks were therefore entirely
right in lending at one-eighth per cent and interest, or 51 per cent yearly,
the $5,000,000 later obtained through loan certificates and released in
preparation for gold imports. An effort then to " b r e a k " the money
market by offers at a low rate would have had extremely bad results. So
in the ensuing week the action of the New York banks in raising the rate
for interior rediscounts to 12 per cent was fully justified. Both actions
have ample precedent in the skillful financiering of the Bank of England
during the Baring crisis of November, 1890.
& The real origin of the plan was in the action of the New York clearing
house in 1857, when certificates of credit were issued through the Metropolitan Bank to state banks which could not redeem their notes, the notes
being deposited as security against the certificates.




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Through the use of this ingenious emergency device
last summer solvent borrowers were protected by the
courageous advance of banking credits at the very worst
hour of panic. Nor were the system's benefits extended
to individual borrowers alone. Not only did the interior
banks, at the panic outbreak, call in from city institutions
a great part of their own deposited reserves, but they
were clamorous for " rediscounts;" in other words, for the
purchase from them for cash of paper already discounted
for their own customers. To this demand, too, which
came with no impropriety from heavy depositors, the
larger banks responded. The total of notes and bills
rediscounted for other institutions rose from $14,021,596
in March to $18,953,306 in May, and to $29,940,438 in
July, the height of the summer's panic. In 1873, during
a corresponding panic period, the account increased only
from $5,403,043 to $5,987,512.
The clearing houses of four other cities followed New
York's example in the issue of loan certificates. Chicago,
however, where a strong local prejudice exists against the
plan, refused to follow. In the worst of the August panic
a resolution authorizing such issues was indeed adopted
by the Chicago clearing house, but no bank availed itself
of the opportunity. The result was exactly what might
have been foreseen. In the eastern cities the use of loan
certificates so far offset the violent shrinkage in reserves
that between May 4 and July 12 the loan account of the
New York national banks actually increased; the loans of
Philadelphia were cut down only 2 per cent, and those of
Boston only 4 per cent. But Chicago, lacking the emer-




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gency provision of the eastern clearing houses, was forced
to reduce its loans no less than 15 per cent. a In a city
where local enterprises were already inflated by speculation incident to the World's Fair, the result of this contraction was a collapse more violent than that of any
other large commercial center. * * *
* * * There was no bank suspension in the reserve
cities during 1893, except where the strain of panic forced
public insolvency. This statement needs, however, one
important qualification, involving discussion of a very
delicate and unpleasant question. It will be remembered
by those who watched the course of panic financiering
that accusations were freely made, as early as July,
that banks were refusing cash payments to large depositors. At first the country banks were charged with refusing to remit their cash collections.6 Banks in some
larger cities were next accused of withholding similar remittances. At length it was alleged, in the daily press
and on the floor of the United States Senate, c that New
a

The contraction of loans in Chicago was far more violent in July and
in August, dates not covered by the national reports. The Chicago banks
themselves publish no statements except when called for by government
authorities.
ft Some novel and curious incidents arose in this connection. The express companies did a very large business during the panic in presenting
out-of-town checks a t the banks on which they were drawn and bringing
the money to the city bank whence the check was remitted. The out-oftown banks frequently resisted this by paying in silver dollars or fractional
coin. Domestic exchange between two great eastern cities was a t o n e time
fixed by the express charges for transporting silver dollars. On August
30 Chicago exchange on New York sold a t $3 premium per $1,000.
c
In the debate on Senator Peffer's resolution of August 22, instructing
the Comptroller of the Currency to inform the Senate whether certain New
York banks were or were not violating the national-bank act by refusing
cash to depositors and by charging exorbitant discount rates. The resolution was advocated by Senator Hill and opposed by Senators Hoar,
Gorman, Hawley, and others.




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York City banks were refusing to redeem checks of their
own depositors in legal-tender money. This accusation
was made with bitterness, and it was not denied. The
popular sentiment was, however, strongly against the
proposed Senatorial investigation. No bank depositor to
whom cash payment was refused ever gave public utterance to complaint. No legal process was invoked. The
newspaper critics soon found their attack on the banks
impolitic. The Senate resolution for an inquiry was referred to the Finance Committee, where it was smothered,
as it ought to have been and everyone knew it would be,
and there can be no doubt that its advocates paid the
penalty of their aggressiveness in a considerable loss of
popularity. Thus far, then, it might be argued that public opinion sustained the action of the banks in question.
From an economic standpoint, however, this by no
means ends the matter. That some of the New York
clearing-house banks did thus suspend cash payments is a
matter of public knowledge. No formal or concerted
action, indeed, was taken by the banks; the clearing
house ignored the whole performance; the majority of
New York institutions continued to pay cash on demand
to all depositors, and those which did refuse cash payments not only offered to such depositors checks on other
banks, a but cashed small checks without inquiry, and
larger checks when the need was shown to be imperative.
Nevertheless it was suspension, its effect on business and
a> Most of these banks sent to their customers rubber stamps marked
"payable through the clearing house." This was to be stamped on checks
when drawn, by way of a polite and euphemistic hint to receivers of the
checks that the bank declined to pay cash.




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credit was mischievous in the extreme, and it can be
justified only on the plea of absolute necessity.
This plea, in my opinion and in the judgment, I believe,
of the soundest clearing-house authorities, is quite untenable. The issue of loan certificates was a recourse still
open to every solvent bank, and the banks which did
shut down on cash payment to depositors included several
of the soundest institutions in the city. July's shipments
of currency, to meet deposit withdrawals of interior banks
and other institutions, were indeed extremely heavy, but
on August 5 there was still left in the New York clearinghouse bank reserves $79,218,500 specie and legal tenders.
Moreover, at the very time when banks resorted to such
partial suspension, importation of gold from Europe had
begun. Any bank with securities on which to take out
loan certificates was able, within seven days, to replace
such certificates in American gold coin.
But the plea of necessity was not the bankers' only plea.
It was openly argued that the restriction on cash payments had positively good results, in that it stopped withdrawals by money hoarders. Let us observe what were
the actual results of this restriction. It was followed by
a market phenomenon unfamiliar to the present generation. Currency, as the phrase was, went to a premium.
Two or three active Wall street money brokers at once inserted newspaper advertisements offering a premium for
gold or silver coin, or for paper legal tender currency.
This premium was at first 1 ]/2 and 2 per cent; it rose once
to 4 per cent. In quick response to these advertisements,
the hoarded money of New York and its vicinity poured




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into the Wall street offices. The brokers paid for this
currency, in turn, by certified checks on their own bankers.
They sold the currency at an average advance of one-half
of i per cent. Two classes of buyers chiefly furnished the
demand. First, and most naturally, there were employers
of labor with large weekly or monthly pay rolls, whose
deposits lay in banks which flatly refused to pay them
cash for checks. Second, and more numerous than might
have been supposed, there were banks which were unwilling
to refuse cash payments, but which were not averse to
paying a premium to replenish their cash reserves.
The first of these transactions makes the operation easy
of analysis. Currency, it is said in common phrase, was
bought with checks. But this statement involves an absurdity, for nothing had happened to alter the value of
the currency. The actual transaction was a sale of bank
checks for money. Something had very obviously happened to make the checks less valuable than they had
been before. At the bank on which they were drawn
these checks were now worthless for the one purpose for
which their makers drew them—conversion into coin and
bills of small denomination. They were sold in Wall
street, therefore, for what they would bring in cash.
Like irredeemable paper currency, their percentage of depreciation—in other words, the premium on the kind of
money needed—was measured by the ratio of supply and
demand, and by the probability of their ultimate cash
redemption. The supply of such checks offered last year
in exchange for currency was large. But, on the other
hand, early resumption of full cash payment by the banks




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was universally expected, and the checks themselves, still
being good for all banking transactions and exchanges
through the New York clearing house, were as good as
cash for the most of ordinary purposes. Therefore the
"premium'' on currency never rose exorbitantly high.
But did this operation check individual hoarding of
money? Obviously not. Withdrawal of funds from
banks which refused cash payments ceased of course;
but withdrawals from other banks were doubled. The
logic of the bank restriction, therefore, pointed, if sound,
to nothing short of general suspension. Nor was this all.
A large part of the regular and individual bank depositors of money were driven away at once. The chances
that a man with $100 currency will deposit it in bank,
when the bank announces that it will not return the
money on demand, and when the currency may be " sold "
for $102 in Wall street, are certainly small. The argument
that the banks were forced to refuse cash payment, because of the premium in Wall street, utterly confuses
cause and effect. Of course, after the premium was offered,
there was a chance that a depositor would withdraw his
$100, sell it for $102 in Wall street checks, withdraw the
$102 against this check, sell it again, and so on ad infinitum. But this ignores the fact that the bank restrictions
caused the currency premium. Had the banks all continued to pay cash, no premium would have been possible.
It is astonishing that anyone should question this.
What Wall street broker in his sober senses would pay
a $102 check for $100 currency when he could get $102
money by presenting the same check at bank?




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Hoarding was certainly increased by the bank restrictions. Deposits of cash in banks almost wholly ceased,
and domestic exchange was completely blocked. The
experience of August proved beyond dispute the effect
of the Wall street premium. This premium undoubtedly
brought to sight great quantities of previously hoarded
currency. 0 But no sooner had this money been exchanged and again disbursed than it vanished once more
from sight. No one who passed that month in New
York City will dispute this. So completely, under the
bank restrictions, did paper money disappear that by the
middle of August business of every kind was being done
with specie, and people who in years had never touched
a gold piece for their common uses were making daily
payments in eagles and double eagles. This money came
not from the "purchases" from currency hoarders, but
from the European gold importations. By the end of
August practically all the banks had resumed full paya
For obvious reasons it is very hard to arrive at any trustworthy estimate of the amount of money thus brought into the market. The Wall
street firm which did the largest proportion of the business estimates the
amount of money which changed hands during the currency premium at
$15,000,000; but this, though based on personal experience, is largely
guesswork. Some uptown retail stores sold their daily receipts of currency, a fact pretty publicly proved by the vigor with which other retail
houses, in their advertisements at the time, boasted that they had regularly deposited their cash receipts in bank. There were, moreover, many
sales of large blocks of currency, chiefly gold certificates, in lots as high
as $100,000, which had evidently been locked up in safe deposit vaults.
I t was a striking incident that on the death, several months before the
panic, of a well-known New Yorker, a man of wealth and financial reputation and a bank director, his executors found in his safe several hundred
thousand dollars in gold certificates. The hoarding in New York was
largely, and perhaps chiefly, speculative; in the interior, where it had far
more serious effects, it was a natural result of the deposit and savings
bank failures.




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ment to depositors. But for a long time hardly any
paper currency was paid; and how little the Wall street
purchases contributed to the recovery the bank exhibits
show. From August 5 to September 2, a period covering the existence of the currency premium, the specie
holdings of the New York City banks increased by
$10,930,70o.a But holdings of legal tenders increased
only $1,785,800, and deposits only $1,064,900.
a The net gold import during July was $5,776,401; during August,
$40,622,529. Much of this gold was, however, ordered by Chicago and
Boston capitalists and shipped direct to them. Still more was imported
by Wall street exchange bankers and sold by them at a premium to
savings banks, corporations, and business houses. The restriction on
bank payments to depositors was the reason why no gold, except that
ordered personally by bank officers, was deposited in the banks.

6158—10




28

427

NOTE J.
REPORT OF THE NEW YORK CLEARING-HOUSE COMMITTEE,
ACTING AS A LOAN COMMITTEE IN 1907

At a meeting of the Clearing House Association, held
October 26, 1907, to consider the disturbed state of financial affairs and to take such remedial action as might be
possible, the undersigned clearing-house committee, with
the president of the association, were appointed to act
as a loan committee with power to associate with them
such other bank officers as they judged necessary.
It had been hoped that the crisis imminent for a week
previous might be successfully met without the necessity
for the issuance of clearing-house loan certificates, in spite
of the urgent application for assistance from several banks,
members of the association. Such assistance had been
given through joint action of many of the banks who
advanced cash to the applying banks, receiving participating receipts for their several payments and the clearinghouse committee holding the collateral security at the
clearing house.
Public apprehension grew so rapidly, however, and the
drain upon all the banks so severe that it was soon evident
that no inferior expedient would suffice to make effective
the aid which it was apparent must shortly be solicited by
other members of the association, and the committee then
determined to recommend the appointment of a loan
committee.
The committee was unanimously appointed at noon,
October 26, 1907, and forthwith proceeded to issue loan
certificates, blank certificates and proper stationery having
been stored at the clearing house for such an emergency.
Under the terms of the resolution creating the committee, the following bank officers were appointed as




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associates of the committee: Messrs. James G. Cannon,
vice-president Fourth National Bank; Henry P. Davison,
vice-president First National Bank; Walter E. Frew,
vice-president Corn Exchange Bank; Gates W. McGarrah, president Mechanics National Bank; Albert H.
Wiggin, vice-president Chase National Bank.
To these gentlemen was assigned the duty of passing
upon the collateral offered for loans, and certifying to its
sufficiency before the issuance of certificates.
The assistance rendered by the members of the associate committee materially lightened the labors of the
loan committee, and the systematic methods employed
in handling the mass of collateral pledged for certificates
insured the transaction of the business of the committee
without delay or complication.
Eleven million two hundred and thirty-five thousand
dollars in certificates were issued to take up the participating receipts given for loans advanced from October 19
to October 26, and the interest due for such advances was
included in the first distribution of interest on the 15th
of the following month.
Until near the retirement of all but a small portion of certificates issued, your committee met on the morning of every
business day and frequently after noon, at least three members always being present and generally all of the committee.
The date of the first issue was October 26, 1907.
The date of the first cancellation was November 14,1907.
The date of the final issue was January 30, 1908.
The date of the final cancellation was March 28, 1908.
Gross issue, $101,060,000.
Maximum amount outstanding was $88,420,000, December 16, 1907.




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During this period there passed through the hands of the
committee, including original deposits of securities, substitutions of securities (both withdrawals and deposits) collateral
aggregating in amount $453,000,000, of which $330,000,000,
or 72.92 per cent, consisted of commercial paper and
$123,000,000, or 27.08 per cent, was made up of stocks,
bonds, and short-time railroad and other similar notes.
Of the 52 banks constituting membership in the association 32 took out loan certificates, from whom was
received in interest $1,116,245.83, which amount, of
course, was paid to banks holding said certificates.
Three thousand five hundred and forty-eight loan certificates were issued, as follows:
412 at $100,000 each
522 at $50,000 each
1,005 at $20,000 each
1,123 at $10,000 each
486 at $5,000 each

$41, 200,000
26, 100, 000
20,100, 000
11, 230,000
2, 430, 000

The greatest amount of certificates issued to any one
bank was $17,000,000 and the smallest $250,000, the latter
amount in two cases.
The time elapsed from the first issue, October 28, 1907,
to the final cancellation, March 28, 1908, was twenty-two
weeks, or one hundred and fifty-four days, as compared
with nineteen weeks, or one hundred and thirty-three days,
in 1893.
Respectfully submitted.
JAS. T. WOODWARD, Chairman.
W. A. NASH,
DUMONT CLARKE,
A. B. HEPBURN,
EDWARD TOWNSEND,
A. GILBERT,

Clearing House Committee.
N E W YORK,




April 7, 1908.
430

Crises

Under

National

Banking

System

Additional data relating to loan certificates:
RESOLUTION APPOINTING COMMITTEE.
(Adopted October 26, 1907.)
Resolved, T h a t the clearing-house committee, with the president of the
association, be authorized to receive from banks, members of the association, bills receivable and other securities to be approved by said committee, who shall be authorized to issue therefor to such depositing banks
loan certificates bearing interest at 6 per cent per annum, and such loan
certificates shall not be in excess of 75 per cent of the market value of the
securities or bills receivable so deposited, and such certificates shall be
received and paid in settlement of balances at the clearing house, and all
rules and regulations heretofore adopted in the issue of such certificates
shall be in force in the present issue. Said committee shall have power
to associate with it such other bank officers as they may judge necessary.
The percentage of maximum amount of certificates outstanding December 16, 1907 ($88,420,000), to total net deposits of clearing-house banks
($1,066,865,900) was 8.28.
The percentage of aggregate amount of certificates issued ($101,060,000)
to deposits as above was 9.38.

Table showing use of loan certificates in paying balances
at the clearing house:
Total
balances

Loan certificates paid in

$64,648,593
218,702,635
203,340,855

$54,460,000
2ii,475,000
198,200,000

96

337,895,293

64, 57S,ooo

19

824,587,376

528,710,000

64

Per cent.

1907.
84
97

1908.

Total




a Five days

431

Loan certificates of the New York Clearing

House.

Maximum
amount
outstanding.

Loan
comm.
of

D a t e of first
issue.

i860

N o v . 23, i 8 6 0

Feb.

27,1861

D e c . 12, i 8 6 0

Mar.

9,1861

$7.375.°oo

$6,860,000

Dec.

22, i 8 6 0

7

1861

S e p t . 19, 1861

Feb.

17,1862

Oct.

Apr.

28,1862

22,585,000

21,960,000

Feb.

7, 1862

6

1863

Nov.

Jan.

9,1864

Feb.

1,1864

11,471,000

9,608,000

N o v . 27 t o D e c .

*6

D a t e of last
issue.

D a t e of first
cancellation.

D a t e of final
cancellation.

Aggregate
issue.

Date.

R a t e of
interest.

N a t u r e of
collateral.

P. ct.

7.1861

4^

6, 1863

Mar.

7,1864

Apr. 25, 1864

Apr.

20,1864

1873

S e p t . 22, 1873

N o v . 20, 1873

Oct

3,1873

June 13,1864

17,728,000

16,418,000

Apr.

20, 1864

6

Jan.

26,565,000

22,410,000

Oct.

3.1873

7

14,1874

ment bonds.
United States

or

New York State
stocks,
bonds,
e t c . , or t e m p o rary receipts, a s
i n 1861.

1, 1863.

1864

United Statesstock;
Treasury n o t e s ;
s t o c k s of S t a t e
of N e w Y o r k .
Temporary
rec e i p t s of U n i t e d
S t a t e s for purc h a s e of g o v e r n -

S a m e a s i n 1863;
c o m m . of t h a t
year continued.
Bills
receivable;
stocks, b o n d s , a n d
o t h e r securities.

01884
1890




M a y 15, 1884
N o v . 12, 1890

June 6,1884
D e c . 22, 1890

May 19,1884
Nov. 28,1890

Sept. 2 3 , 1 8 8 6
Feb.

7,1891

24.915.000
16,645.000

21,885,000
15,205,000

May
Dec.

24, 1884
12, 1890

6

Do.

6

Do.

1893
1907

June 21, 1893
Oct. 26, 1907

Sept. 6, 1893
Jan. 30, 1908

July

6,1893

Nov, 14, 1907

Nov.

1,1893

41,490,000

Mar. 28, 1908 101,060,000

38,280,000

Aug. 20 to Sept.

6

Do.

88,420,000

6, 1893.
Dec. 16, 1907

6

Do.

« The certificates of all the banks, except part of those issued to the Metropolitan National Bank, were canceled by September 1, 1884, and
these were gradually retired as the bills receivable became due and were paid.




NOTE

K.

SUBSTITUTES FOR CASH IN THE PANIC OF
By

1907.°

A. P I A T T A N D R E W .

The autumn of 1907 witnessed what was probably the
most extensive and prolonged breakdown of the country's
credit mechanism which has occurred since the establishment of the national banking system. Upon no previous
occasion have the banks of so many cities resorted to
clearing-house loan certificates for the settlement of their
mutual obligations; never before have they issued them in
such large amounts, nor for such long periods of time; and
never have these certificates been so extensively issued
in small denominations to meet ordinary bank obligations in lieu of cash. Even during the critical periods of
1873 and 1893 it is unlikely that as many banks limited
the payment of their obligations in cash, although the
proportion of existing banks which so restricted payments
may have been as large. In the pages that follow will
be found some record of these phenomena, of the several
ways in which banks and other firms limited their cash
payments, of the issue of loan certificates in the clearing
houses of the country, and of the ingenious invention of
multifarious other substitutes for legal currency during
the weeks of hoarding and suspension.
Of official encouragement to suspension, singular and
striking examples occurred in several States. The most
extreme instances were the legal holidays declared by
a The Quarterly Journal of Economics, August, 1908.




434

Crises

Under

National

Banking

System

some of the Western governors, which were intended to
authorize banks, as well as other firms and individuals, to
decline payment when unduly pressed or wherever they
saw fit. The governor of Nevada was the first to resort
to this measure. Beginning on October 24, he declared
legal holidays continuously up to and including November
4. On October 28 the governor of Oregon also began
declaring such holidays, and he continued to declare them
by subsequent proclamations until December 14. In
California such holidays were proclaimed without interruption for a still longer period, from October 31 to December 21, thus suspending all debts for more than seven
weeks. This method of relieving business involved great
inconvenience in unexpected ways. The whole judicial
system was thereby brought to a standstill, the courts
being even restrained from trying criminal cases. The
governor of California very soon felt obliged to call a special
session of the state legislature, and so secured authority
to declare "special holidays" during which only civil
actions based upon expressed or implied contracts for the
payment of money would be precluded.
Scarcely less radical was the action of the officials who
supervise banking in several Middle Western States. In
Indiana the attorney-general, who had been invited to
the meeting of the State Bankers' Association at which it
was decided to suspend payments, advanced the opinion
that no state law was violated in limiting payments on
deposits, when demanded, if it was proposed to make a
small payment in each case. At the same time the
auditor of the State addressed the following hastily com-




435

National

Monetary

Commission

posed letter to all banks and trust companies within his
jurisdiction, virtually advising them to suspend and giving assurance that the question of their solvency would
not be officially raised:
INDIANAPOLIS, October 28y

1907.

To the Indiana Banks and Trust Companies:
GENTLEMEN; Your bank being solvent, should it adopt the same rule
that has been adopted by the banks of Indianapolis and refuse to pay to
any depositor or holder of a check only a limited amount of money in
cash and settle the balance due by issuing certified checks, or drafts on
correspondents, such act, in this emergency, will not be considered an
act of insolvency by this department.
The same rule will apply to trust companies.
J O H N C.

BIIXHEIMER,

Auditor of State.
P. S.—The question of your solvency is to be determined by yourselves
upon an examination of your present condition.

Similarly, in South Dakota, the public examiner and
superintendent of banks wrote to the state banks throughout that State, calling their attention to the action of the
banks of Sioux Falls and Madison in limiting the size of
cash withdrawals to $10, and in issuing cashier's checks
to take the place of currency. He recommended that
they do likewise, as indicated in the following excerpt:
I would suggest and recommend that where there is more than one
bank in a town they get together and agree along similar lines, for the
protection of themselves as well as the public, and where there is only one
bank that such bank take the matter up single-handed or confer with
banks in the towns near by.
I would also suggest that you get the business men of your town together
and explain to them the situation and the proposed plan, and in this way
secure their approval and support.
This method will of course be trying and unpleasant as well as inconvenient not only to the banks but to their depositors, but when the people
understand they will gladly cooperate for the mutual good. Conditions
will improve rapidly and the situation will soon become normal.
Respectfully,




J O H N L.

JONES,

Public
436

Examiner.

Crises

Under

National

Banking

System

So, too, in Iowa, the auditor, B. F. Carroll, at the outbreak of the panic, wrote a circular letter of similar
import to the bankers of that State containing this
advice:
I therefore suggest that you call your board of directors together at
once; canvass the situation; take such precautionary steps as may be
necessary in order to protect your interests and the interests of your
depositors. The department will temporarily permit such latitude as to
reserve and other legal restrictions as circumstances may demand. You
should take the depositors into the confidence of the bank; fully explain
to them the situation and ask them to cooperate to the extent of accepting
checks, drafts, and other forms of credit where the same can be used current and to withdraw just as small amounts of cash as is possible for them
to use in the transactions of their business. It may be necessary for your
bank to limit the amount of cash payments to depositors.

In Oklahoma, at a meeting of the State Bankers'
Association, "the bank commissioner when asked to make
a statement regarding the plan upon which the bankers
had agreed, and which, in brief, was to make only limited
cash payments, stated that while he could not officially
agree to the plan, that no banks would be closed because
they followed the plan."
In the majority of States, however, it is only just to
say that the bank commissioners and superintendents,
though tacitly tolerating the restriction of payments, very
much as did the Federal Comptroller of the Currency in
the case of the national banks, nevertheless gave no
explicit assent, much less recommendation to the practice.
The record presented in the accompanying table endeavors to exhibit as concisely as possible the extent to
which the banks in the larger cities of the country limited
their payments of cash and created substitutes therefor
during the panic. It is the result of inquiries addressed




437

National

Monetary

Commission

to banks in all cities of 25,000 or more inhabitants.
According to the census of 1900 there were approximately 147 such cities which were independent of each
other. We exclude by the use of the word " independent " those cities which are really suburbs or parts of
larger neighboring cities, and which directly or indirectly
" b a n k " through their institutions. In the neighborhood
of Boston, for instance, we exclude from separate reckoning such separate municipalities as Cambridge, Maiden,
Newton, Somerville, and Chelsea, the banks of which
practically "clear" through the Boston clearing house,
and consequently follow its policy. In the case of New
York we omit environing and related cities like Hoboken,
Jersey City, Newark, Passaic, and Elizabeth; in the case
of Pittsburg, Allegheny City; in the case of St. Iyouis,
East St. Louis; in the case of Omaha, South Omaha, etc.
No sharp line can be drawn, however, between the "independent" and the "affiliated" cities, and several of the
inclusions as well as some of the exclusions will doubtless
appear arbitrary.
Reports from the 1450 largest independent cities show
that during the disturbances of 1907, in at least 71, or
nearly half, resort was made by the banks to clearinghouse loan certificates, clearing-house checks, cashiers'
checks payable only through the clearing house, or other
substitutes for legal money; in 20 others the larger customers of the banks were asked to mark their checks
"payable only through the clearing house;" and in at
a
From two cities of more than 25,000 inhabitants, Pueblo, Colo., and
Lawrence, Mass., repeated letters of inquiry have elicited no response.




438

Crises

Under

National

Banking

System

least one other, where these practices were not pursued,
the size of checks that would be cashed was restricted.
Roughly speaking, in two-thirds of the cities of more
than 25,000 inhabitants the banks suspended cash payments to a greater or less degree.
From the last column of Table I it will be seen that in
36 of the larger cities, where an emergency currency was
issued, the banks for a time limited by agreement the cash
which any customer could withdraw to a stipulated
amount. This limitation varied all the way from $10 to
$300. In the other cases, marked " discretionary/' customers were asked, and generally obliged, to limit their
withdrawals of cash, and were asked to stamp their checks
" payable only through the clearing house," but no mathematical limit was placed upon the amount that could be
withdrawn.




439

TABLE I.—Cash restrictions and currency substitutes in cities of more than 25,000 inhabitants.
City.

Kind
of
device

Atlanta, G a .
Augusta, Ga
Baltimore, Md_
Bayonne, N. J -

o

B
A
D
A
D

Boston, Mass.
Buffalo, N. Y_
Canton, Ohio.

A
A
D

Cedar Rapids, Iowa _
Charleston, S. C

A
B
A
C
D
C
A
A
D
A
A
C
D

Chicago, 111.
Cincinnati, Ohio.
Cleveland, Ohio _
Columbus, Ohio.
Council Bluffs, I o w a .
Dallas, Tex
Davenport, Iowa
Denver, Colo




E

Date of first
issue

Date of retirement

Date of same

$996,409

Dec.

5, 1907

320,000 I Nov.
4.1907 Jan. 15,1908
6,1908
3,094,000 I Oct. 28,1907 Feb.
Amount not obtainable.
Oct. 28, 1907 Nov. 20. 1907
300,000
SSo.ooo Nov. 20,1907
1,000,000
Ave. amt. outstanding Nov. and
Dec.
12,595.000
Oct. 2 8 , 1 9 0 7 Jan. 2 4 , 1 9 0 8
915,000
Jan. 2 5 , 1 9 0 8
1,1907
Nov.
810,000
Nov. 1 0 , 1 9 0 7

320.000
2,786,000

Jan.
Dec.

15,1908
16, 1907

154,000
100,000
3 2 , 160, 0 0 0

Oct.

31,1907

Jan.

Largest
amount outstanding

16,1908

$1,500,000

Birmingham, Ala.

$

Total
amount
issued

Nov.
Nov.
Oct.

6, 1907
15,1907
28,1907

Jan.

17,1908

Mar.

1, 1 9 0 8

Jan.

27,1908

Nov.
Dec.
Oct.
Nov.

5,1907
3,1907
28, 1907
10, 1907

Feb.

7, 1 9 0 8

Jan.

29,1908

7,080,000
2,200,000
3,220,000
1,220,500

75,ooo

Feb.

1,1908

Dec.

Restrictions upon cash
withdrawals
$50 per day, $100 per
week.
Do.
Discretionary.
Do.
$25 per day, later $25
per week.

Circ.
1,000,000
12,595.000
550,000

154,000
70,000
16,140,000
7,080,000
2,200,000
3,220,000
803,500

Dec.3-10, 1907
Nov. 16,1907

Nov.
Nov.

15, 1907
29, 1907

Nov.
Jan.
Dec.

5,1907
6,1908
17, 1907

1, 1 9 0 7

Discretionary.
Do.
Scale proportionate to
depositor's balance.
$25 per day.

Discretionary.
$300 with discretion.
$50 with discretion.
Discretionary.
10 per customer.

15,000
90,000
201,199

78,248
750,000

Nov. 15, 1907
Oct. 29,1907
Nov
5,1907
do

Nov.

Feb. 2 9 , 1 9 0 8
Jan. 1 0 , 1 9 0 8
_do_
Feb.

3,1908

25,1907
$25 per customer.

500,000

Discretionary.

soo,ooo Oct. 28, 1907
170,000
Detroit, Mich
,145,000 Oct. 30, 1907
117,000 Oct. 28, 1907
Duluth, Minn
Amount not obtainable.
Baston, Pa
136,375 Nov. 20,1907
A. B
Fort Wayne, Ind_
345,000 Oct. 3 1 , 1907
A
(Plates prepared in small denominations, but not issued.)
Harrisburg, Pa
357,000 j Nov. 12,1907
Houston, Tex
Amount not obtainable.
Indianapolis, I n d .
,650,000 Nov.
4,1907
Joliet, 111
225,000 Nov. 10,1907
76,400 Nov.
Joplin, Mo
6,1907
,256,601 Oct. 30,1907
Kansas City, Mo _
745.000
Knoxville, Tenn_
282,500 Nov.
7.1907
Lexington, K y
20,000 Nov. 13.1907
198,000 Nov.
1.1907
Lincoln, N e b r .
Amount not obtainable.

Jan.

Little Rock, A r k .

Feb.
Feb.
Apr.
Jan.

Des Moines, Iowa_

A
B
A

\i

Los Angeles, Cal_
Louisville, K y
Lynn, Mass
Memphis, Tenn_ _
Milwaukee, Wis
Minneapolis, Minn.
Montgomery, A l a . .
Nashville, Tenn




A
A
B
A
D
D
A
C
A
B
B

183,000 Oct. 31. J 907
2,022,000 Oct. 30,1907
3,563,500 Nov. 25,1907
2, 490, O O Oct. 30,1907
O
Amount not obtainable.
jCirc. 300, 00c
1,948,000
T *«« «™ IfOct. 28, 1907
1.000,000 J
1.730,000

Nov.

1,1907

A m o u n t not obtainable.
417, 000 I Nov.

28,1908

Jan.
Jan.

. 1908
, 1908

Jan.
Jan.

24, 1908
30. 1908

Feb.

17, 1908
5, 1908
7, 1908
10,

Jan.
Feb.
Dec.

14, 1908
7, 1908
16, 1907

Nov.

21. 1908

Nov.
Dec.

26, 1908
20, 1907

$25 per day.

,
,
,
,

1908
1908
1908
1908

Dec.

835,000

5,956,601

Nov.

Nov.
Nov.
Nov.

148,600

Nov.

28, 1907

19, 1907

Discretionary.
$25 per day.
$100 per day.

Discretionary.
Savings accounts $20.
Open accounts $100.
23, 1907 Discretionary.
27, 1907 No restriction.
6, 1907 $100 on accounts over
$1. 000.
$50 on accounts under
$1, 000.
26, 1907 $50 per customer.
lioo to $200.
Discretionary.

Feb.

18, 1908

Jan.

1,060,000

$100 per day, later
per week,
$50 to $100 per day.

3,548,000

14, 1908

Nov.

Denominations as low as 25 cents.

5, 1907 I Jan.

1908 I
30,

Do.

Dec. 4-6, 1907

20,000
136,000

183,000

417. 000

O

Discretionary.

Interest bearing accounts restricted.

1,1908

Jan.
Jan.
Feb.
Jan.

503,000
119,700
2,030,000
117,000

Dec.

$200 with discretion.
$25 per day.
1, 1907 $50 per day.

10, 1907

b3

TABIDS I.—Cash restrictions and currency substitutes in cities of more than 25,000
City.

N e w Orleans, L a
N e w York, N . Y
O a k l a n d , Cal
Omaha, Nebr
Peoria, 111
Philadelphia, P a
Pittsburg, Pa
P o r t l a n d , Oreg
Providence, R . I
Racine, W i s
S a c r a m e n t o , Cal
S t . J o s e p h , Mo
S t . Louis, Mo
S t . P a u l , Minn

S a l t L a k e City, U t a h




Kind
of
device

Total
amount
issued.

D a t e of first
issue

$5, 2 2 6 , 0 0 0 Oct.
29,
A m o u n t n o t obtainable.
1 0 1 , 0 6 0 , 0 0 0 [ Oct.
26,
A m o u n t n o t obtainable.
i , 2 5 0 , 0 0 0 I Nov.
8, 1907
2, 007, 000 Oct.
29, 1907
A m o u n t n o t obtainable.
227,000 I Nov.
1, 1907
1 3 . 6 9 5 . 0 0 0 I Oct.
26, 1907
A m o u n t n o t obtainable.
7,445.000
47,000,000
1,000,000
Oct. 30. 1907
1,422,750
Nov.
6, 1907
A m o u n t n o t obtainable.
10,000
250,000
Oct.
29, 1907
515,000
Oct.
28, 1907
180,000
Dec.
12, 1907
15.965,000
Oct.
28, 1907
D circ. 5, 000, 000
A
i
1 , 9 0 0 , 0 0 0 Oct. 3 0 , 1907
A
B

802,000
453.650

_do_

D a t e of retirement.

Largest
amount outstanding.

Mar.

27, 1908

$3,

Mar.

30, 1908

88,420,000

Jan.
Jan.

21,1908
10, 1908

1 , 5 4 4 , 000

Jan.
Feb,

1,1908
8,1908

13.495.ooo

inhabitants—Continued.

D a t e of s a m e

287,000

15,1908
1,1908

Dec.

16, 1907

Jan.
Jan.
Jan.
Feb.

14, 1908
23,1908
360,000
20,1908 Circ. 100, 000
5,1908 1 0 , 5 7 8 , 0 0 0

Jan.

14, 1908

1,525,000

Feb.

17,1908

802,000
Circ.270, 000

Discretionary.
Do.
$ 1 0 0 or 20 per c e n t of
accounts under $500
$ 2 0 0 per c u s t o m e r .

590,000

2,200,000

OK

$50 per d a y .

Dec.

16, 1907

Dec.
Jan.
Feb.

Restrictions upon cash
withdrawals.

14, 1907

Dec.

1, 1907

Discretionary.

$ 3 0 0 per c u s t o m e r .
Discretionary.
$25 per d a y .
Discretionary.

Nov.
Dec.
Jan.

9, 1907
19, 1907
3,1908

Oct. 3 0 - D e c 2,
1907.

$ 2 0 0 per w e e k .
^Discretionary.
$ 2 0 0 per c u s t o m e r .

•$200 per w e e k .

OS

San Antonio. T e x .
San Francisco, Cal.
Savannah, Ga
Seattle, Wash
Sioux City, Iowa.
South Bend, I n d _ .
Spokane, Wash
Superior, W i s . .
Tacoma, W a s h .
Taunton, Mass
Topeka, Kans
Wheeling, W. Va_
Wichita, Kans
Wilmington, Del
Youngstown, Ohio.
Total

A
D
A
B
B
A
B
A
D
B
A
B
D
A, B
D
B
A
A
B
D
A
B

344,000
251 500
12. 339,ooo
7,390,000
265.000
1.700,000
1,150,000
245,000

1, 1907

Jan.

15,1908

29, 1907
4. 1907
do..
do__
Nov.
8, 1907
Oct. 28, 1907
obtainable.
Nov. 10,1907
Nov.
1,1907

Mar.

1, 1908

Jan.

10,1908

Jan.

13,1908

Nov.
Oct.
Nov.

Amount not
120,000
669,000
1 407,000
Amount not obtainable.
500,000 [ Nov.
7.1907
Amount not obtainable.
Nov. 14, 1907
40,000
8, 1907
195,°oo Nov.
do
173,000

321,000
172,963
12,339,000
7.390,000
265,000

Dec.
Nov.
Dec.
Dec.
Nov.

Nov.
10,1908
7,1908

Jan.

1,1908

Dec.
Jan.
Jan.

31, 1908
3,1908
21.1908

Jan.

23,1908

^Discretionary.
$100 per customer.

120,000
2,076,000

Nov.

Only savings accounts.
1,1907 I$25 to Dec. 10, then
i #50.

Nov. 22-Dec.
11,1907.
22,500
45,000
211,000

Nov.
Nov.

29, 1907
28, 1907

Dec.

12, 1907

$100 per customer.
Do.
Do.
Discretionary.
$50 per customer.
Discretionary.
Only savings accounts,
$25.

'330, 066, 223

A. = Clearing-house loan certificates in large denominations for the settlement of bank balances
B. = Clearing-house loan certificates in small denominations for general circulation
C = Clearing-house checks in convenient denominations for general circulation
D. =Cashiers' checks in convenient denominations payable only through the clearing house, and usually secured by the deposit of collateral
with the clearing house.
E. = New York exchange in convenient denominations for general circulation
F = Certificates of deposit in convenient denominations
G. = Pay checks in convenient denominations payable to bearer, and only through the clearing house.




<-9

20, 1907

43.000

Amount not obtainable
264.500 Nov. 20, 1907
276,500

^$50 per day.

$100 with discretion.

do
Jan.
Jan.

1, 1907
20, 1907
24.1907
16,1907
15,1907

fca

*5

National

Monetary

Commission

In addition to the places named in the table the banks
of the following cities of 25,000 or more inhabitants also
restricted payments to the extent of asking their larger
customers to mark their checks " payable only through the
clearinghouse:"
Allentown, Pa.
Bay City, Mich.
Binghamton, N. Y.<*
Dayton, Ohio (one trust company).
Erie, Pa.
Evansville, Ind.a
Fall River, Mass.o
Gloucester, Mass.
Hartford, Conn.
McKeesport, Pa.

Mobile, Ala.
New Haven, Conn.
Oshkosh, Wis.
Pawtucket, R. I.
Reading, Pa.
Saginaw, Mich.
Springfield, Mass.
Syracuse, N. Y.<*
Woonsocket, R. I.
York, Pa.

In at least one other city, Grand Rapids, Mich., where
neither clearing-house currency nor other emergency
substitutes was issued, and where depositors were not
asked to so mark their checks, the size of checks which
would be cashed was nevertheless limited.
The cities rated by the census of 1900 as having more
than 25,000 inhabitants, in which, if the replies of my
correspondents are to be trusted, depositors were subjected
to no restriction of payments, and no resort was made to
emergency devices, numbered 53. In some of these, to
be sure, as, for instance, Chattanooga, Tenn., Richmond,
Va., and Galveston, Tex., cash payments were limited to
the extent that clearing-house balances were settled during the panic in exchange on a reserve city instead of in
currency, but this practice is frequently followed even in
a In these cities, customers sending checks out of town were asked to make
their checks payable only through the clearing house in order to prevent
their collection by express.




444

Crises

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Banking

System

quite normal times. The list of cities which, with this
possible exception, remained upon a cash basis follows:
Population
(census of

City.

City.

Akron, Ohio
Albany, N. Y ___ ___
Altcona, Pa
_
Atlantic City, N. J .
Auburn, N. Y
Brockton, Mass _
_
Bridgeport, Conn_
__ _ _
Butte, Mont _
Camden, N. J
Chattanooga, Tenn
Chester, Pa__ _ _ _ _ _
Covington, Ky _ _
Dubuque, Iowa
Elmira, N. Y
______
Fitchburg, Mass
_ __ _ __
Fort Worth, Tex _ _ _ _ _
Galveston, Tex __ __
Holyoke, Mass
Jackson, Mich

La Crosse, Wis _

Manchester, N . H
New Bedford, Mass

______

__

__ _

Population
(census of
1900)

1900).

42,000
94.000
3 8 , 000
27,000
30,000
40,000
70,000
30,000
75.000
30,000 j

33.ooo
42,000
36,000
35.000
31,000
26,000

37.789
37.000
45.000
25,000
28,000
35.000
28, 000
41,000
9 4 , 000
56,000
62,000

New Britain, Conn
NewCastle, Pa
Newport, Ky__ _
Norfolk, Va
_
Paterson, N. J _
Portland, Me _
Quincy, 111
Richmond, Va. _
Rochester, N. Y
Rockford, 111
Salem, Mass.
Schenectady, N. Y
Scranton, Pa
Springfield, 111
Springfield, Ohio__
Terre Haute, Ind
Toledo, Ohio
Trenton, N. J_
Troy, N. Y
_ __
Utica, N. Y
Washington, D. C_
Waterbury, Conn__
Wilkes-Barre, Pa_
Williamsport, Pa
Worcester, Mass
Yonkers, N. Y __ ___

25,000
28,000
28,000
105,000
36,000
85,000
162,000
35,000
3 1 , 000
102,000
3 4 , 000

56,000

47,000

The roll of honor among the cities, if one were to arrange them in the order of their magnitude, would begin
as follows: Washington, Rochester, Toledo, Worcester,
Paterson, Scranton. It includes 8 cities in Massachusetts,
8 in New York, and 8 in Pennsylvania, 4 in New Jersey, 3
in Ohio, 3 in Connecticut, 3 in Illinois, 2 in Kentucky, 2 in
Virginia, 2 in Texas, and 1 each in Florida, Indiana,
Iowa, Maine, Michigan, Montana, New Hampshire, Ten-




445

National

Monetary

Commission

nessee, Wisconsin, and the District of Columbia. In the
remaining 26 States there was apparently no city with a
population of 25,000 in which the banks did not partially
restrict their payments during the panic.
The universality with which the panic of 1907 ranged
over the United States is also well attested by the fact that
there are only 6 States from which I have no record of
restriction of payments and issue of substitutes for cash on
the part of the banks, namely, Maine, Vermont, South
Dakota, Montana, Idaho, and Wyoming. Several of these
States, it may be added, contained no city of 25,000 inhabitants, and from them no information was received at
all. Their banks may also have limited payments and
issued emergency currency without its appearing in the
record here presented.
Financial excitement in 1907 was by no means confined
to the larger cities. limitation of payments and the
creation of emergency currency occurred in towns of every
degree of smallness all over the country. Our record
(Table II) of such issues is of necessity fragmentary.
Names of a number of towns are included where emergency
currency was known to have been issued, but from which
repeated letters of inquiry failed to elicit any reply as to
the amount. Unquestionably, the names of scores of
towns in which such currency was employed have not
chanced to reach the writer's attention. The table here
given presents an explicitly avowed issue of nearly
$4,500,000 in the case of 33 towns and cities; but it doubtless includes only a small fraction of what actually existed
in the smaller localities of the country during the panic.




446

Crises

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Banking

TABLE II.—Currency substitutes in cities of less than 25,000

Cities.

Atchison, Kans_ _ _ _
Bainbridge, Ga
Berlin, N. H
Berkeley, Cal
__
Bishop, Ga
Blakely, Ga
Brunswick, Ga
Columbia, S. C
Columbus, Ga
Danville, Va
Dawson, Ga
Douglas, Ga
Fargo, N. Dak
Gadsden, Ala
Gaffney, S. C
Greensboro, N. C
Greenwood, S. C _
Guthrie, Okla
Hastings, Nebr
Hattiesburg, Miss
Henderson, Ky _
Iron River, Mich _
Jackson, Ga
Key West, Fla
Kalamazoo, Mich__ _
Las Vegas, N. Mex
Lynchburg, Va_ _
Macon, Ga _
Milledgeville, Ga_ __ .
Muskogee, Okla
Newnan, Ga
__
New Carlisle, Ind_
Oklahoma, Okla _ _
Ogden, Utah _ _
Rome, Ga
Sedalia, Mo
South Boston, Va_ _
Sylvester, Ga__
Tampa, Fla
Thomaston, Ga _ _
Thomasville, Ga
Tifton, Ga
Valdosta, Ga__




Kind
of
device.
D
B

D
F
B
B
B
B
B
B
B
B
B
B
B
B
B

F

I:

D
C
D

B
B
B
B
B
B
D

B
D
A, B
D

B
D
B
B
B
B
B

B
B

Total
Amount
issued.

Date of first
issue.

Nov.
1, 1907
Nov.
6, 1907
Amount not obtainable.
34,000 j Nov. 5,1907
Amount not obtainable.
Amount not obtainable.
Nov.
6, 1907
109,000
Oct. 24, 1907
250,000
1, 1907
320, 000 Nov.
Oct. 30, 1907
617,200
$40,000
125,000

System
inhabitants

Date of retirement.

Jan.
Mar.

1,1908
1,1908

Jan.

Mar.
Mar.
Jan.
Jan.

28,1008
1,1908
22,1908
9,1908

45.000

Nov.
1, 1907 Mar.
1,1908
Oct. 29, 1907 Jan.
18,1908
Nov. 15, 1907 Jan.
1,1908
Nov. 11, 1907 Jan.
1,1908
Nov.
4, 1907 Jan.
25,1908
39,100
Amount not obtainable.
Amount not obtainable.
7. 7i3 j Oct. 28, 1907
>Dec.
20,1907
Amount not obtainable.
Oct.
1, 1907 Dec.
40,000
15.i9o7
Oct. 30, 1907 Jan.
82,000
9.1908
Nov. 12, 1907 Dec.
24,1907
24,000
Amount not obtainable.
Amount not obtainable.
Customers asked to make checlts payab le in exchange.
1, 1907 Dec.
30, 000 Nov.
31. 1907
381,000
Nov. 18,1907 Jan.
13.1908
325,000
Nov.
4, 1907 Jan.
31. 1908
Amount not obtainable.
Amount not obtainable.
Amount not obtainable.
Amount not obtainable.
200,000
Nov.
1, 1907 Jan.
1,1908
circ.275, 000 Nov.
1, 1907 Dec.
31. 1907
10,1908
Nov.
1, 1907 Jan.
120,000
15,1908
100,000
Nov. 15, 1907 Jan.
Nov.
5, 1907
100,000
Amount not obtainable.
1,1908
125,000
Nov. 22. 1907 Feb.
1,1908
Oct. 28, 1907 M a y
10,000
1,1908
40,000
Nov.
1,1907 Jan.
15.1908
50,000
Nov.
6, 1907 Feb.
1,1908 circ.
100,000
Nov.
1, 1907 Feb.
33.SQO
8. 000
20,000

447

National

Monetary

Commission

TABLE II.—Currency substitutes in cities of less than 25,000

inhabitants-

Continued.

Cities.

Kind
of
device.

Vicksburg, Miss
Virginia, Minn _ __ _
Waycross, Ga
Willacoochee, Ga
Winston-Salem, N. C . _ .

B
D
B
B
F

Total

Total
Amount
issued.

Date of first
issue.

Nov. 23,1907
Nov. 10, 1907
Amount not obtainable.
Amount not obtainable.
Nov.
1, 1907
350,000
#170,000

200,000

Date of retirement.

Apr.
Dec.

Jan.

25,1908
20, 1907

1, 1908 circ.

4, 4 2 0 , 5 1 3

A = clearing-house loan certificates in large denominations for the settlement of bank
balances.
B = clearing-house loan certificates in small denominations for general circulation.
C = clearing-house checks in convenient denominations for general circulation.
D =cashiers' checks in convenient denominations payable only through the clearing
house, and usually secured by the deposit of collateral with the clearing house.
F = certificates of deposit in convenient denominations.

An attempt has been made in the second column of
Tables I and II to classify the various kinds of substitutes for cash, and to indicate which kind was employed
in each city. Seven different sorts have been distinguished, but some of them closely resemble each other,
and the multiple variations among individual devices
renders such a grouping at times uncertain.
(a) The familiar expedient of issuing clearing-house
loan certificates in denominations ranging from $500 to
$20,000 for use in settling interbank balances has never
been resorted to upon such a scale as in 1907. During
the panic of 1893 eight cities were reported to have employed them; but during the disturbances of 1907 they
were used by no less than 42. In 1893 their issue was
confined mainly to the Northeast, New Orleans being the
only southern, and Detroit the most western example,®
a
See John De Witt Warner, The Currency Famine of 1893, in Sound
Currency, vol. ii, No. 6; A. D. Noyes, The Banks and the Panic of 1893,
Political Science Quarterly, vol. 9.




448

Crises

Under

National

Banking

System

but in 1907 their use knew no geographic limitations.
They were issued in several cities of California, Washington, and Oregon, in cities of Texas, Alabama, Louisianas
and Arkansas, and in almost every sizable city of the
Middle West, the most salient exceptions being Cleveland
and Cincinnati, in which, however, the banks by agreement made no demand upon each other for currency in
payment of balances during the panic.
A comparison of the amounts issued in the same cities
in the course of the two emergencies is of significance.
In New York City the issues of 1907 totaled a sum two
and a half times the largest issues that had ever been
made before; in Pittsburg they amounted to more than
seven times those of the earlier date; in New Orleans, to
five times; Detroit, to four times; in Baltimore, to twice
the issues of 1893; but in Boston, Philadelphia, and
Buffalo the amounts ran about the same in both crises.
The aggregate issue of regular clearing-house certificates
in the entire country during the panic of 1907 was 238
millions, or nearly three and a half times the total of 1893.
1893.
New York, _ _ _ __
Boston
_
_ _ _
Philadelphia
Baltimore _ _ _
_
New Orleans _
Pittsburg
Buffalo
Detroit
Other cities _

_

_

_
_

.__.._

__

_ _

__ _

_

_ _ _ _ _

_ _ _ __ _
_ __
_____
__
__.

_ _ _
__

$41,490,000
11,645,000
11,000,000
1,475.000
1,029,000
987,000
985,000
500,000

_ _ _

12, 5 9 5 . 0 0 0
13.695.000
3,094,000
5,226,000
7,445,000
915,000
2,145,000
91.878.175

6 9 , i n , 000

Total




_ __

_

1907.

449

238,053,175

National

Monetary

Commission

(b) The original purpose of clearing-house certificates,
as set forth by their authors and exponents and as they
were employed down to 1893, was for use in settling balances between the banks. During the panic of 1893, for
the first time, clearing-house associations issued certificates
in currency denominations to be used by the banks in
paying their customers. Their issue, however, was practically confined to the Southeastern States. a In the panic
of 1907 Georgia was again, as in 1893, the center for
emergency circulation of this sort, what were called " clearing-house certificates" being issued in at least 21 Georgia
towns; but devices of that name were also put in circulation in many other parts of the country, and not
infrequently even by banks of small towns, where no
clearing house had ever existed. In such cases they
were issued under the auspices of temporary committees
of the local banks, which accepted and held the collateral
offered to guarantee their redemption. In Douglas, Ga.,
for instance, a town with an estimated population of
2,500, $50,000 in these so-called "clearing-house certificates" were issued; in Tifton, Ga., with less than 3,000
inhabitants, $50,000 in certificates were also issued; in
South Boston, Va., with less than 4,000 inhabitants, an
issue of as much as $100,000 in certificates was made; even
in Bishop, Ga., with only 400 inhabitants, a limited amount
was issued.
These small certificates, like the large ones, were secured by collateral deposited with the clearing-house
committee, and were practically guaranteed by all of the




a See Warner, op. cit, p 6.
450

Crises

Under

National

Banking

System

associated banks, in that these banks agreed to accept
them at par for the sum named. The description of
collateral in most cases was a general affirmation that
"this certificate is secured by the deposit of approved
securities." But sometimes there was more detail, as in
Portland, Oreg., where it was asserted that the banks
have deposited "notes, bills of exchange, and other negotiable instruments secured by wheat, grain, canned
fish, lumber actually sold, and other marketable products,
and bonds approved by the committee," etc.; or in the
case of Charleston, S. C , where there were said to be deposited "securities of double the value of this certificate,
or bonds of the United States or of the State of South
Carolina, or of the city of Charleston, or of the city of
Columbia, 10 per cent in excess thereof;" or in Danville,
Va., where the payment of the certificate was "secured
by the combined capital of these banks, also by collateral
worth one-third more than all of the certificates issued."
Sometimes redemption was promised on demand "in exchange" (Topeka, Kans.) or "in clearing-house funds"
(Spokane, Wash.). Sometimes the certificates were made
payable "on or before three months from date" (Des
Moines, Iowa), or on or before some special date, like
April i, 1908 (Seattle, Wash.), or July 1, 1908 (Knoxville,
Tenn.). The certificates issued by the clearing house in
Las Vegas, N. Mex. (sample No. 7), were frankly to be
paid only "when deemed advisable by the board of directors." Those of the associated banks of Howard county,
Ind., announced that "due notice of redemption will be
given through the daily papers." Many of the certificates




451

National

Monetary

Commission

were elaborately engraved (note reverse of San Francisco
certificate), and were shaped and colored so as to resemble
ordinary bank or government notes. In denomination
they usually ranged from $i to $20, but in some cases, as
in Montgomery, Ala., they were issued for convenient
sums all the way from 25 cents to $50.
The compilation here presented, though very incomplete, records an issue of $23,831,813 of such devices in
the course of the panic of 1907.
(c) Identical with these certificates in character and
function, though differing in form, were the clearing-house
checks issued in a number of cities. Like the certificates,
they were issued by the associations to member banks upon
the deposit of approved securities. Like them, they were
accepted for deposit in any of the banks, but were payable only through the clearing house. They were also
in currency denominations, and were often quite as elaborately engraved, so as to resemble currency. The one
peculiarity which distinguished them from certificates
was that, instead of merely certifying indebtedness on the
part of the clearing-house association, they took the form
of checks drawn upon particular banks, and signed by the
manager of the clearing house. In Chicago a bank desiring such checks deposited with the clearing house a corresponding amount of the ordinary loan certificates of
large denominations, and received the checks in currency
denominations in exchange. They were also issued in
Cleveland, Milwaukee, Youngstown, South Bend, and
some smaller cities. Our record includes $12,060,248 of
such issues.




452

Crises

Under

National

Banking

System

(d) In spite of the provision of the National Bank Act,
that no national banking association shall issue " any other
notes to circulate as money than such as are authorized by
the provisions of this title," a large number of national
banks issued what were practically circulating notes in the
form of cashier's checks in convenient denominations. In
spite also of the 10 per cent tax upon any notes issued
by state banks, similar devices were issued freely and without hindrance by sortie of those institutions as well
(e. g., in Superior, Wis.). These checks usually purported
to be "payable to bearer," but they were "payable only
through the clearing house," or "in exchange," or, as
the phrase sometimes went, "in clearing-house funds."
Occasionally, an apparent effort was made to circumvent their illegality by making them payable to a supposed person. In St. Louis, Mo., and ir. Muskogee, Okla.,
they were made payable to "John Smith, or bearer," and
in Memphis, Tenn., to "Richard Roe, cr bearer." While
in the Southeastern States it was common for the banks
in the small towns to issue conjointly what they called
"clearing-house certificates," in small towns of the Middle
West the "cashier's checks" of individual banks were
much more common. Sometimes these cashier's checks,
like clearing-house certificates and clearing-house checks,
were secured by the deposit of approved collateral with a
committee of the clearing house, as, for example, in
Denver, Colo., Omaha, Nebr., and Birmingham, Ala. In
Richmond, Va., cashier's checks of a peculiar sort, called
"bank money orders," were prepared and printed by one
institution, the American National Bank, but were never




453

National

Monetary

Commission

actually issued. They optimistically declared upon their
face that they were "good anywhere at any time, transferable as many times as desired/' and " payable anywhere in the United States.''
(e) Another variety of currency issued during the panic
were the New York drafts in denominations of $i and
upward, issued by the banks of Birmingham, Ala., and
which were used for pay rolls and general circulation in
that locality. They were really cashiers' checks drawn
on New York, but were drawn against actual balances
held by particular New York correspondents. They were
payable through the New York clearing house, and were
not otherwise secured; yet they appear to have circulated
in and about Birmingham to the extent of millions of dollars without difficulty. The use of drafts upon reserve
banks as currency appears to have been peculiar to Birmingham, although the cashiers' checks "payable in
exchange," issued in many places, were not substantially
unlike.
(/) In a few instances the currency issued by the banks
took the form of negotiable certificates of deposit in convenient denominations. Sometimes these certificates asserted that a particular person or company had made the
deposit, as in the case of the bank of Winston-Salem,
N. C. Sometimes the assertion was altogether general, as
in the example from Berkeley, Cal. In some cases they
bore interest, and were payable after the expiration of a
certain period; in others they were immediately acceptable by the issuing bank through the clearing house, and
in such cases they bore no interest.




454

Crises

Under

National

Banking

System

Of the issues of currency made by individual banks
(dy e, f) I have only been able to obtain figures from a
few cities. They reach a total of $13,541,500, but issues
of that sort in the entire country would unquestionably
build an aggregate several times this amount.
(g) Last of all among the emergency devices were the
pay checks payable to bearer drawn by bank customers
upon their banks in currency denominations and used in
all parts of the country in payment of wages and in settlement of other commercial obligations. These checks
were generally " payable only through the clearing house,"
but they differed from those which have as yet been considered, in that they were not a liability of the clearinghouse association or of the bank on which they were
drawn, but of the firm or corporation for whose benefit
they were issued.
The pay-check system reached its largest development
in Pittsburg, where during the panic some $47,000,000
were issued, much of which was in denominations of $1
and $2. Their issue involved much more labor to the
clearing house, to the banks, and to corporations using
them than the issue of clearing-house checks would have
caused, for most of them were rushed back to the bank
within a week or ten days, and new checks had to be issued
in their stead. a It was claimed that a fifth as many certificates for continuous circulation would have answered
the same purposes, and would have saved much labor.
« I t is believed that about $10,000,000 in clearing-house checks for continuous circulation would have answered all purposes, and would have
saved much labor. When the pay-check clearances were at their height
many extra clerks were added to the regular forces of the clearing-house




455

National

Monetary

Commission

Pay checks were also issued by railroads, mining companies, manufacturers, and storekeepers in a large number of other cities. Shops and stores and places of
amusement in the neighborhood of their issue generally
accepted them, and it is indeed surprising, considering
their variety, their liability to counterfeit, and their general lack of security, how little real difficulty was experienced in getting them to circulate in lieu of cash. Of
these issues, whose total doubtless ran into the hundred
millions, we have no statistical data whatever except for
the estimate in the case of Pittsburg.
The banks of New York City determined upon the issue
of their clearing-house loan certificates on Saturday, October 26, and on the following Monday, October 28, the
associated banks of many other cities in all parts of the
country followed their example. In several places, however, conditions hung fire for a couple of weeks, and substitutes for cash were not instituted until the week beginning November 11. This was the case in such widely
banks, and working until 10 o'clock at night was not infrequent on Tuesdays, Wednesdays, and Thursdays, when the pay checks came in by the
basketfuls.
During the height of the pay-check distribution some of the larger banks
would receive from $500,000 to $700,000 worth of checks a day, including
the amounts drawn on them and from the banks for which they clear. A
few of the banks had from twelve to fifteen men sorting the pay checks,
and separate quarters had to be provided for the work. The number of
checks was very materially increased when the clearing house decided to
issue the $1 and $2 checks, but after the third or fourth week the number
of checks showed a marked falling off. The offices of large corporations
were also very busy places before pay days, as all the checks had to be
signed. Some clerks could sign 400 to 500 checks in eight hours, and the
amount of men required and the labor involved in issuing from 30,000 to
40,000 checks twice a month can be appreciated.—Special Correspondence
from Pittsburg to the Evening Post, New York, January 16, 1908.




456

Crises

Under

National

Banking

System

separated cities as Charleston, S. C.; Dallas, Tex.; Canton,
Ohio; Council Bluffs, Iowa; Joliet, 111.; Lexington, Ky.;
Harrisburg and Easton, Pa., and Topeka, Kans. In Cleveland, Ohio, cash substitutes were not resorted to until
more than a month after the outbreak of the panic,
not in fact until December 3, but this was altogether
exceptional.
The date of retirement given in the tables is neither
exact nor uniform. In cities where banks to which loan
certificates were issued failed during the panic, such certificates may have remained uncanceled long after the
certificates of solvent banks had been taken up and retired. In cities also where the certificates and checks
entered the general circulation and became scattered over
wide territory, some may have remained outstanding for
a considerable time after the notice of retirement was
published. In fact, small amounts, lost or destroyed or
taken by collectors, may never be presented for redemption. Some of the replies here tabulated indicate the
date when the banks ceased paying out the devices or
gave notice of their retirement, others represent the
time when substantially all of the certificates and checks
of solvent banks had been retired, only in a few cases do
they record the time when the entire amount had been
redeemed.
It is perhaps worthy of record in this connection that
in New York the time elapsing between the first issue and
the date of final cancellation of the certificates was twentytwo weeks, or three weeks longer than in the crisis of 1893.
In Pittsburg, Los Angeles, and New Orleans the emer-




457

National

Monetary

Commission

gency currency was outstanding also for about five
months, but such duration was clearly exceptional. In
most places the notes and certificates were rapidly retired soon after the beginning of the new year; i. e.,
within eight or ten weeks after the date of their first
issue.
Surveying the record as a wliole, we have here definite
figures for $334,000,000 of emergency currency issued
during the panic of 1907, classified as follows:
Clearing-house certificates (large)
Clearing-house certificates (small)
Clearing-house checks
Cashiers' checks
Manufacturers' pay checks

$238, 000,
23, 000,
12, 000,
14, 000,
47, 000,

Total

000
000
000
000
000

334, 000, 000

Making a very moderate allowance for the cashiers'
checks and pay checks issued in cities from which their
amounts have not been reported, including many of the
largest cities like New York and Philadelphia, we may
safely place an estimate of the total issue of substitutes
for cash above $500,000,000. For two months or more
these devices furnished the principal means of payment for
the greater part of the country, passing almost as freely
as greenbacks or bank notes from hand to hand and from
one locality to another. The San Francisco certificates,
for instances, circulated not only in California, but in
Nevada and in southeastern Oregon, some reaching as
far east as Philadelphia, some as far west as the Hawaiian
Islands. The banks of Pittsburg, on the other hand,
reported remittances of certificates and checks in denominations ranging from $1 up from as scattered localities




458

Crises

Under

National

Banking

System

as Cleveland, Cincinnati, St. Louis, Chicago, Milwaukee,
Duluth, Philadelphia, Danville, Va., and Spokane. Most of
this currency was illegal, but no one thought of prosecuting or interfering with its issuers. Much of it was subject
to a 10 per cent tax, but no one thought of collecting the
tax. As practically all of it bore the words " payable only
through the clearing house," its holders could not demand
payment for it in cash. In plain language, it was an
inconvertible paper money issued without the sanction
of law, an anachronism in our time, yet necessitated by
conditions for which our banking laws did not provide.
During the period of apprehension, when banks were being
run upon and legal money had disappeared in hoards, in
default of any legal means of relief it worked effectively
and doubtless prevented multitudes of bankruptcies
which otherwise would have occurred.

6158—10




30

459




INDEX.
A.
Agriculture, and causes of crisis of 1893, 154. See also Crops.
Akron, in crisis of 1907, 445.
Albany, suspension of cash payments (1873), 66; in crisis of 1907, 445.
Allentown, Pa., cash restriction (1907), 444.
Altoona, in crisis of 1907, 445.
American Exchange National Bank, New York, effect of crisis of 1907 on
bankers' deposits and reserve, 313.
American Ice Company, failure, 248.
American Watch Company, pay-roll difficulties (1873), 72.
Andrew, A. P., on deposit of government surplus, 231; table of currency
premium (1907), 280-282; on currency substitutes (1907), 314,434-459.
Atchison, Kans., currency substitutes (1907), 447.
Atlanta, cash restriction and currency substitutes (1907), 288, 440.
Atlantic City, in crisis of 1907, 445.
Atlantic State Bank, Brooklyn, failure, 111.
Auburn, N. Y., pay-roll difficulties (1873), 74; in crisis of 1907, 445.
Augusta, Ga., cash restriction and currency substitutes (1907), 440.
B.
Bainbridge, Ga., currency substitutes (1907), 447.
Baldwin, O. D., minority report on clearing-house reforms (1884), 385-386.
Baltimore, clearing-house loan certificates (1873), 62; (1893, 1907), 408,
449; suspension of cash payments (1873), 64; pay-roll difficulties (1873),
73; loans during crisis of 1907, 299; cash restriction and currency substitutes (1907), 440.
Bank examination, Comptroller Cannon on efficiency, 359-367.
Bank notes, reserve requirement before 1874, 9; amount (1869-1873),
9, n - 1 3 ; as bankers' deposits, redemption versus sale (1873), 28-29;
G. S. Coe on, as reserve (1873), 96; requirement of reserves against,
repealed, 105; and proposed reforms after crisis of 1873, 103, 120; and
equalizing of reserves (1873), 121; redemption fund, 105, 136, 398; in
crisis of 1893, 184; enlargement of issue during crises, 213, 316-318;
increase (1900-1907), 217.
Bank of Commerce, New York, and clearing-house loan certificates and
loan expansion (1890), 143.
Bank of England, advance in rate (1890), 141; (1906), 241; (1907), 284.




461

National

Monetary

Commission

Bank of New York, effect of crisis of 1907 on bankers' deposits and reserve,
313.
Bank of North America, New York, suspension, 142. *
Bank of the Republic, Chicago, effect of crisis of 1907 on bankers' deposits
and reserve, 313.
Bankers' deposits, amount (1869-1873), 11-13; concentration in New York,
I
5> 93, 2 3 2 ; condition of bankers' deposit and other national banks in
New York (1872), 16-18; table of fluctuation (1871-72), 19; effect of
payment of interest on, 20-24, 9 I- 95> 101> a n d cau * loans, 24, 27, 30, 92;
withdrawals (1872), 25-28, reliance on, in emergencies, 19, 27, 43-44,
86-88, 147, 305-307; and redemption of bank notes (1873), 28; conditions of New York banks (August and September, 1873), 34-35; meeting of demand on, during crisis, 51, 55, 70, 76; clearing-house committee
on probable effect on, of abandonment of interest, 97, 376-377, 383; interest on, not abandoned, 104, 119, 120; and panic of 1884, 115, 117, 118;
conditions causing decline (1890), 129; effect on, of crisis of 1890, 148;
conditions before crisis of 1893, 166; during that crisis, 175; necessity
of larger reserve against, 211; conditions (1897-1907), 222-224; of
state banks held by national banks (1907), 225-226; power and condition of six New York banks (1907), 232-236; condition of these banks
on suspension of cash payments, 265; effect of crisis of 1907 on bankers'
deposits and reserves in certain banks of central reserve cities, 312-313;
Comptroller Knox on withdrawal during crisis (1873), 332-334; A. D.
Noyes on dangers in crisis, 415-418. See also Deposits, Reserves.
Bankers' Magazine, financial review (1872), 25, 26; on financial conditions
(April, 1873), 29-31; on inadequacy of reserves (1873), 33.
Bankers National Bank, Chicago, effect of crisis of 1907 on bankers' deposits and reserve, 313.
Baring Brothers & Co., failure, 142.
Barker Brothers & Co., failure, 142.
Barton & Allen, suspension, 30.
Bay City, Mich., cash restriction (1907), 444.
Bayonne, N. J., cash restriction and currency substitutes (1907), 440.
Berkeley, Cal., currency substitutes (1907), 447, 454.
Berlin, N. H., currency substitutes (1907), 447.
Billheimer, J. C , and crisis of 1907, 436.
Binghamton, N. Y., cash restriction (1907), 444.
Birmingham, Ala., cash restriction and currency substitutes (1907), 440,
453, 454, 454Bishop, Ga., currency substitutes (1907), 447, 450.
Blakely, Ga., currency substitutes (1907), 447.
Bogart & Co., O. N., failure, i n .
Bonds, New York City, failure of issue (1907), 242.
Bonds, United States, governmental purchase (1872), 26; (1873), 40, 42,
326-327; (1889), 136; (1890), 137-139, 393-396, decline (1884), 112;
issue during crisis of 1907, 316.




462

Index
Boston, clearing-house loan certificates (1873), 62; (1890), 145, 389-390;
(1893, 1907), 408, 449; suspension of cash payments (1873), 67; payroll difficulties around (1873), 72; exchange on New York (1893), 204;
(1907), 291; loans during crisis of 1907, 299, 420; direct gold import
(1893), 427 n.; cash restriction and currency substitutes (1907), 440.
Bradstreet's, on dislocation of domestic exchanges (1893), 206-208; on
conduct of banks during crisis (1893), 211.
Branch banks, effect of lack, 249.
Bridgeport, Conn., in crisis of 1907, 445.
Brockton, in crisis of 1907, 445.
Brownell & Bro., suspension, 30.
Brunswick, Ga., currency substitutes (1907), 447.
Buck, Robert, report on clearing-house reforms, 103.
Buffalo, cash restriction and currency substitutes (1907), 440; amount of
clearing-house loan certificates (1893, 1907), 449.
Business. See Agriculture, Domestic exchange, Foreign exchange, Manufacturing, Trade.
Butte, in crisis of 1907, 259, 445.
C.
Cairo, 111., suspension of cash payments (1873), 66.
California, legal holidays during crisis of 1907, 286, 435.
Call loans. See Loans.
Cambria Iron Works, pay-roll difficulties (1873), 73.
Camden, N. J., in crisis of 1907, 445.
Canada Southern Railway, and crisis of 1873, 36.
Cannon, H. W., on panic of 1884, 113-114, 119, 345-370; on bank examinations, 359-367; and clearing-house loan certificates (1893), 410-412.
Cannon, J. G., and clearing-house loan certificates (1907), 429.
Canton, Ohio, cash restriction and currency substitutes (1907), 440, 457.
Carleton, C. T., defalcation, 37.
Carroll, B. F., and crisis of 1907, 437.
Cashier's checks, use as currency (1907), 453-454, 458.
Cedar Rapids, I o ^ a , cash restriction and currency substitutes (1907), 440.
Central National Bank, New York, and bankers' deposits (1873), 15 n.
Central National Bank, St. Louis, effect of crisis of 1907 on bankers' deposits and reserve, 313.
Central reserve cities, effect of law of 1887, 124-127. See also Chicago, New
York, St. Louis.
Certificates of deposit, use as currency (1907), 454.
Charleston, exchange on New York (1893), 205; in crisis of 1873, 325; cash
restriction and currency substitutes (1907), 440, 451, 457.
Chase National Bank, New York, bankers' deposits (1907), 232, condition
at time of suspension of cash payments, 267; effect of crisis on bankers'
deposits and reserve, 313.
Chattanooga, in crisis of 1907, 444.




463

National

Monetary

Commission

Checks on outside banks, question of receiving such in New York as cash,
I O O - I O I , 105, 378, 384. See also Overcertification.
Chemical National Bank, New York, and equalizing of reserves (1873), 121;
effect of crisis of 1907 on bankers' deposits and reserve, 313.
Chester, Pa., in crisis of 1907, 445.
Chicago, grain shipments during crisis of 1873, 60; suspension of cash payments (1873), 66; (1907), 287; clearing-house loan certificates (1873),
67; (1893), 180, 209, 209W., 420; exchange on New York (1873), 75;
(1893), 204; (1907), 291, 297; loans during crisis (1873), 83; (1893),
209; (1907), 299; reliance on New York balances (1873), 88; as central
reserve city, 124-127, 175; bank conditions (May, July, 1893), 173;
bank failures during crisis of 1893, 176; direct gold imports, 194, 427 n.;
banking conditions (1897-1907), 220; bankers' deposits (1897-1907), 223;
effect on national banks of crisis of 1907, 309; effect on chief bankers'
deposit banks, 313; cash restriction and currency substitutes (1907), 440,
452.
Cincinnati, clearing-house loan certificates (1873), 62, 65; suspension of
cash payments (1873), 64-65; exchange on New York (1893), 205;
(1907), 292; loan contraction (1907), 299; cash restriction and currency
substitutes (1907), 440.
Citizens Central National Bank, New York, effect of crisis of 1907 on
bankers' deposits and reserve, 313.
City National Bank, New York, bankers' deposits (1907), 232; condition
a t time of suspension of cash payments, 267, 268.
Clarke, Dumont, and clearing-house loan certificates (1907), 430.
Clearing House Association of New York, and closing of stock exchange
(1873), 39-40; report on the crisis and reforms, 90-104; reports on clearing for nonassociated banks, 99, 101, 105, 378, 383-384; separate clearing house for stock exchange, 104, 152, 358, 379, 384; assistance to a
suspended bank (1884), 114, 372; assistance to banks a t beginning of
crisis of 1907, 247-249; attitude toward control of a bank by one man or
one interest, 251; attitude toward relief of trust companies (1907),
252-256; address of G, S. Coe on crisis of 1884 and reforms, 371-379;
power and responsibility during crisis of 1884, 371-375; report of committee on reforms (1884), 380-386. See also Clearing-house loan certificates, Equalizing of reserves.
Clearing-house certificates, use as currency (1893), 198; (1907), 290, 314,
45o~452, 458.
Clearing-house checks, use as currency (1907), 452, 458.
Clearing-house loan certificates in New York, issues (1873), 45, 54, 5 4 n . \
(1884), 112, 113, 118,353; (1890), 142, 143; (1893), 170,214,408; (1907),
314, 449; origin and purpose, 47; and suspension of cash payments, 48,
63, 123, 145-146, 171, 182, 213-215, 260, 272; issue should have been
earlier (1873), 49; (1907), 257, 270-271; effect of issue (1873), 50; necessity of prompt issue, 114; and responsibility to country banks, 185; and
gold imports (1893), 191; and money supply, 197; and equalizing of
464




Index
reserves, 273; Comptroller Cannon on issue of 1884, 350-353; G. S. Coe
on issue of 1884, 374; Comptroller Lacey on issue of 1890, 387-389; report
of committee on issue of 1893, 409-412; A. D. Noyes on loans and issue
of 1893, 419-420; report of committee on issue of 1907, 428-431; table
of use (1860-1907), 432-433; period of use (1907), 457.
Clearing-house loan certificates outside New York, issues of 1873, 62; of 1890,
145; of 1893, 180, 209, 420; of 1907, 289, 290; Comptroller Lacey on
issues of 1890, 389-392; Comptroller Eckels on issues of 1893, 407-408;
A. P. Andrew on issues of 1893 and 1907, 434, 448, 456-458.
Cleveland, pay-roll difficulties (1873), 73; loans during crisis of 1907, 299;
cash restriction and currency substitutes (1907), 440, 452, 457.
Coe, G. S., and clearing-house loan certificates, 47; report on crisis of 1873
and reforms, 90-103; on panic of 1884, 119, 371-379; report on reforms
(1884), 385.
Columbia, S. C , currency substitutes (1907), 447.
Columbus, Ga., currency substitutes (1907), 447.
Columbus, Ohio, cash restriction and currency substitutes (1907), 440.
Commercial and Financial Chronicle, on sale of bank notes (1873), 29; on
strengthening reserves (June, 1873), 31; on outbreak of crisis of 1873,
36-38; on dry-goods trade during crisis of 1873, 77-80; on panic of 1884,
111-113; on preference for call loans (1890), 134; on failures in crisis of
1890, 141; on use of clearing-house loan certificates (1890), 145; (1893),
171; on government assistance (1890), 149; on failure of Natonal
Cordage Company (1893), 164; on crisis of 1893, 176; on foreign purchase of securities, 179W.; on gold imports and foreign exchange (1893),
191, 193; on currency premium, 196; on business stagnation, 202.
Commercial National Bank, Chicago, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Comptroller of the Currency. See Cannon, Eckels, Knox, Lacey.
Concord, N. H., suspension of cash payments (1873), 66.
Consolidated Bank, New York, and crisis of 1907, 249.
Continental National Bank, Chicago, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Cooke & Co., Jay, failure, 36; impending failure disclosed, 49.
Copper, market in 1907, 242, 246.
Corn Exchange National Bank, Chicago, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Corporations, government regulating activity and crisis of 1907, 237, 242244, 274.
Cortelyou, G. B., on issue of bank notes during crisis of 1907, 317.
Cotton, and crisis of 1873, 61.
Council Bluffs, cash restriction and currency substitutes (1907), 440, 457.
Country national banks, legal requirements as to reserves, 11; table of condition (1869-1873), 11; (September-November, 1873), 83; loan contraction
(1873), 83; unnecessary call on reserve agents (1873), 86; resources and
liabilities then, 86; New York banks and deposit of checks of, 100-101,




465

National

Monetary

Commission

105, 378, 384; increase of reserves during crisis, 147; condition (May,
July, 1893), 173; purchase of currency at premium (1893), 188; condition (1897-1907), 219; condition by sections after crisis of 1907, 307.
See also Bankers' deposits.
Covington, Ky., in crisis of 1907, 445.
Crisis of 1873, preceding economic activity, 1; and railroad building, 1;
responsibility of banks for conditions preceding, 2; inevitable, 2; nationalbank loans 1869-1873), 2-5; reserves (1869-1873), 5-15; concentration of
bankers' deposits, 15-24; New York money market (1872), 24-28;
stringency (April, 1873), 29-31; conditions in New York (August), 32; suddenness, 33; condition of New York banks immediately before, 34;
outbreak, 35-38; closing of stock exchange, 38-40; government assistance, 40-42; effect on New York banks, 43-44; clearing-house loan certificates and equalizing of reserves in New York, 45-53, 120-123;
suspension of cash payments in New York, 53-56; currency premium,
56-58; foreign exchange, 58-61; suspension throughout the country,
61-68; hoarding, 68-70; end of panic, 70; pay-roll difficulties, 71-75;
effect on trade, 75-81; bank failures, 81; analysis of banking returns,
82-89; wise policy of New York banks, 89, 94; importance of equalizing
reserves, 89; report of New York clearing house on, 90-103; subsequent changes in New York banking practices, 104; legislative results,
105-107; Secretary Richardson on government and, 321-331; Comptroller
Knox on, 332-344; Knox on unexpectedness, 338-339; on its causes, 339.
Crisis of 1884, trade conditions preceding, 108; reserves and silver, 108;
gold export, 109; failures and fraud in New York, 109-112; causes of
panic, 112; money stringency, 112; effect on foreign exchange, 112;
clearing-house loan certificates, n 2-114; assistance for suspended bank,
114; extent of panic, 114,119; bankers' deposits, 115; domestic exchanges,
116; inadequacy of reserves, 116; loan contraction, 116; condition of
New York banks before and after, 117-119; resulting proposed reforms,
119; no attempt to equalize reserves, 120, 123; no effect on banking
practices, 124; Comptroller Cannon on, 345-370; address of G. S. Coe on
actions during, and needed reforms, 371-379; report of committee of
clearing house on reforms, 380-386.
Crisis of 1890, causes, 127, 128, 140, 147; extent, 128; decline of New York
reserves, 129-133; preceding expansion of call loans, 133-134; contraction and outbreak, 134; unnecessary, 135; government surplus and
money market conditions, 135-137; Secretary Windom on this, 396-399;
government assistance, 137-139, 393-396; public opinion on this, 149.
151; further contraction, 139-140; final phase, stock decline and failures,
141; clearing-house loan certificates, 142, 143; outside New York, 145;
no suspension of cash payments, 145; foreign exchange, 146; reasons for
small effect on bankers' deposits, 148; effect on banking practices, 151-*
152; Comptroller Lacey on use of clearing-house loan certificates,
387-392.




466

Index
Crisis of 1893, origin of banking causes, 153; conditions preceding (1891-1893),
154-162, 414; first stage, 162-166; distrust and failure of banks, 166,
168-170, 175, 210, 212; second stage, 167-175; and silver situation, 168
169, 179, 208; early issue of clearing-house loan certificates, 170-171;
reliance on New York banks, 174, 175; third stage, 175-180; conditions
at time of suspension of cash payments, 177-180; gold import, reason
for it, 180, 191-194; suspension of cash payments, 180-186; failure to
equalize reserves, 183-186; currency premium, 186-191; suspension and
money supply, 195-199; suspension and trade, 199-203; domestic exchanges, 203-208; loan contraction, 208; no subsequent legislation on
banking methods, 210, 212; conduct of New York banks, 210-212;
Comptroller Eckels on bank failures and suspensions, 400-405; on
clearing-house loan certificates, 406-408; report of New York committee
on clearing-house loan certificates, 409-412; A. D. Noyes on, 413-427.
Crisis of 1907, no preceding conditions unfavorable to sound banking, 216;
banking movements (1897-1907), 216-224; development of state banks
and trust companies, 224-227; weaknesses in New York money market,
influence of trust companies, outside lenders, finance bills, 228-230;
influence of United States Treasury (1900-1907), 230-232; ultimate
reserve before the crisis, six New York banks, 232-236; indications
of economic reaction (1906), 236-239; warnings disregarded, 239; and
governmental regulation of corporations, 237, 242-244, 274; New York
stock market (August, 1906-August, 1907), 239-246; "rich men's panic,"
241; distrust of banks, 246, 249, 259; beginning, Heinze-Morse episode,
246-251; difficulties and relief of New York trust companies, 251-256;
delay in issue of clearing-house loan certificates, 257; betterment of New
York conditions, 258; extension over country, 258-260; unnecessary
New York suspension of cash payments, 260; reasons for suspension,
condition of New York banks at time, 260-277; unnecessary delay in
resumption, 277-280, 284; currency premium, 280-282; foreign exchange
and gold imports, 282-286; interior shipments of money (November),
285; suspension throughout the country, legal holidays, 286-289, 434437; clearing-house loan certificates outside New York, 289-290, 448;
pay-roll difficulties, 290; domestic exchanges, 291-297; loan contraction
throughout the country, 297-300; loan expansion in New York, 300-302;
conditions influencing business distress, 302; effect on all national banks,
303-307; as to moral cause, 306; effect on country banks 307; on reserve city banks, 308; on banks of Chicago and St. Louis, 309; of New
York, 310; on six banks of New York, 311; reserves and bankers' deposits of certain central reserve city banks before and after, 312-313;
expansion of circulation during, 314-316; action of the Treasury, 316318; ineffectual handling of banking situation, 319; report of New York
committee on use of clearing-house certificates, 428-431; A. P. Andrew
on currency substitutes, 437-459.




467

National

Monetary

Commission

Crops, and their movement (1873), 33; shipment during crisis (1873), 60,
64, 67; movement and crises, 127; in 1889, 1890, 128; export of grain
(1891), 156, 414.
Currency, conditions (1869-1873), 5; fixity (1873) and bank reserves, 8,
50, 96; New York legal-tender reserve (1869-1873), 13-14; release of
currency by Treasury (1873), 40-42; currency premium (1873), 56-58;
(1893), 186-191; (1907), 280-282; local substitutes (1873), 75; (1893),
198; fixity and evils of interest on deposits (1873), 92; and causes of
crisis of 1873, 103; legislation on legal tenders (1874), 106-107; character
and amount (1891-1892), 155-159; increase during crisis of 1893, 184;
currency premium and money supply (1893), 195-199; increase during
crisis of 1907, 275, 314-316; Secretary Richardson on legal-tender inflation (1873), 322; on greater elacticity (1873), 330-331; Secretary Windom on lack of elacticity (1890), 396-399; A. P. Andrew on currency
substitutes (1907), 437-459. See also Bank notes, Clearing-house loan
certificates, Gold, Silver, Suspension.
D.
Dallas, cash restriction and currency substitutes (1907), 440, 457.
Danville, Va., currency substitutes (1907), 447, 451.
Davenport, Iowa, suspension of cash payments (1873), 66; cash restriction
and currency substitutes (1907), 440.
Davison, H. P., and clearing-house loan certificates (1907), 429.
Dawson, Ga., currency substitutes (1907), 447.
Dayton, cash restriction (1907), 444.
Decker, Howell & Co., failure, 142.
Denver, bank suspensions in crisis of 1893, 175; loans during crisis of 1907,
300; cash restriction and currency substitutes (1907), 440, 453.
Deposits of national banks, table (1869-1873), 9, 11-13; of country banks
during crisis of 1873, 86; of reserve city banks, 87; of New York, 89; New
York clearing-house committee on receiving checks of out-of-town banks
as cash, 100-101, 105, 378, 384; of New York banks (1890-1893), 163;
(January, May, 1892, 1893), 163, 166; reduction during crisis of 1893,
173, 174; of all banks (1897-1907), 218; of country banks, 219; of St.
Louis and Chicago, 220; of New York, 221; deposit of government surplus, 231, 240, 263, 266, 316; condition of New York, just before crisis of
1907, 245; at time of suspension of cash payments, 261-264; of bankers'
deposit banks then, 265; of bankers' deposit banks in particular, 267;
effect of crisis of 1907 on, of all national banks, 305; of country banks, 308;
of reserve city banks, 308; of St. Louis and Chicago, 309; of New York,
310. See also Bankers' deposits, Interest, Reserves.
Des Moines, cash restriction and currency substitutes (1907), 441, 451.
Detroit, loans during crisis of 1907, 300; cash restriction and currency substitutes (1907), 441; amount of clearing-house loan certificates (1893,
1907), 449-




468

Index
Dimock & Co., A. W., failure, 112.
Distrust of banks, in crisis of 1893, 166, 169-170, 175, 181, 210; no evidence
of, before crisis of 1907, 246, 249; during the crisis, 259.
Domestic exchanges, responsibility of money centers, 61-62; suspension
and dislocation of (1873), 73-77; during panic of 1884, 115; during crisis
of 1893, 203-209, 421W.; during crisis of 1907, 291-292; explanation of
course during crises, 293-297.
Donnell, Lawson, & Simpson, failure, 111.
Douglas, Ga., currency substitutes (1907), 447, 450.
Drew, Daniel, and crisis of 1873, 36.
Drovers Deposit National Bank, Chicago, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Dry-goods trade, and suspension and depression (1873), 77-80.
Dubuque, suspension of cash payments (1873), 65; in crisis of 1907, 445.
Duluth, cash restriction and currency substitutes (1907), 441.
Dunbar, C. F., on redemption of bank notes, 29; on delay in issuing clearinghouse loan certificates, 49.

E.
Eastern States, loans during crisis of 1907, 299; condition of country banks
after crisis, 308.
Easton, Pa., cash restriction and currency substitutes (1907), 441, 457.
Eckels, J. H., on crisis of 1893, 212, 400-408.
Edwards, R. L., report on clearing-house reforms (1884), 385.
Elmira, N. Y., in crisis of 1907, 445.
Equalizing of reserves, in New York (1873), 46; reasons and importance,
48, 89; report of clearing-house committee on, 94; not done in 1884,
120, 123; difficulties and evasions in 1873, 120-123; necessity in crises,
145-146, 185-186, 211, 273; results of failure to resort to, in 1893, 183-185.
Erie, cash restriction (1907), 444.
Erie Railroad, receivership (1893), 176.
Evansville, Ind., cash restriction (1907), 444.
Everett, J. L., report on clearing-house reforms (1873), 103.
Exchange. See Domestic, Foreign.
F.
Failures, financial (1873), 37, 43, 81, 337; (1884), 110-112, 116, 345-349J
(1890), 142; (1893), 163, 164, 168, 172, 175, 176, 178, 212, 413; commercial (1893), 202; financial (1907), 252, 259, 274, 275; Comptroller
Eckels on (1893), 400-405.
Fall River, cash restriction (1907), 444.
Fargo, N. Dak., currency substitutes (1907), 447.
Finance bill of exchange, development, 229; opposition of Bank of England, 241.
First National Bank, Andersonyille, liquidation, 81.




469

National

Monetary

Commission

First National Bank, Carlisle, liquidation, 81.
First National Bank, Chicago, effect of crisis of 1907 on bankers' deposits
and reserve, 313.
First National Bank, Mansfield, liquidation, 81.
First National Bank, New York, and bankers' deposits (1873), 15n.\ effect
of crisis of 1907 on bankers' deposits and reserve, 232, 313; condition
at time of suspension of cash payments, 267, 268.
First National Bank, Norfolk, liquidation, 81.
First National Bank, Petersburg, liquidation, 81.
First National Bank, Topeka, liquidation, 81.
First National Bank, Washington, liquidation, 81.
First New Orleans National Banking Association, liquidation, 81; overcertification of checks, 344.
Fisk and Hatch, failures, 36, 37, 112.
Fitchburg, Mass., in crisis of 1907, 445.
Foreign exchange, during crisis of 1873, 58-61; business, 59; and currency
premium, 59; blockade and grain shipment, 60; effect of panic of 1884,
112; during crisis of 1890, 146; in 1892, 157; during crisis of 1893, 170,
180, 191-194; finance bill, 229; finance bills in 1906, 241; just before
crisis of 1907, 245; during the crisis, 282; Secretary Richardson on
question of government purchase (1873), 323-325. See also Gold.
Fort Dearborn National Bank, Chicago, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Fort Wayne, cash restriction and currency substitutes (1907), 441.
Fort Worth, in crisis of 1907, 445.
Fourth National Bank, New York, and bankers' deposits (1873), 15 n.\ run
on (1873), 37, 43; effect of crisis of 1907 on bankers' deposits and
reserve, 313.
Frew, W. E., and clearing-house loan certificates (1907), 429.
G.
Gadsden, Ala., currency substitutes (1907), 447.
Gaffney, S. C , currency substitutes (1907), 447.
Gallaudet & Co., P. W., failure, 142.
Galveston, in crisis of 1907, 444.
General Electric Company, in crisis of 1893, 176.
Georgia, in crisis of 1907, 450.
Gilbert, A., and clearing-house loan certificates (1907), 430.
Gloucester, Mass., cash restriction (1907), 444.
Goffe & Randle, failure, i n .
Gold, and bank reserves (1869-1873), 6,9,14,96; sale by government (1872),
26, 32; reserves in New York (August, 1873), 32; import during crisis of
1873,58; export (1884), 1091(1890), 131,133,140; movement (1891-1893),
154-155, 157, 158; cause of export (1893), 166; export during crisis of
1893, 167, 170; import during crisis, 180, 183, 426; reason for import,




470

Index
191-194; direct import by interior cities, 194, 427n.\ import (1906), 240;
import during crisis of 1907, 283-286; effect of import on Europe, 284;
increase during crisis, 315. See also Foreign exchange.
Goldfield, Nev., in crisis of 1907, 259.
Grain. See Crops.
Grand Rapids, cash restriction (1907), 444.
Grant & Ward, failure, n o , i n .
Greensboro, N. C , currency substitutes (1907), 447.
Greenwood, S. C , currency substitutes (1907), 447.
Gregory & Ballou, suspension, 142.
Guthrie, Okla., currency substitutes (1907), 447.
H.
Hanover National Bank, New York, bankers' deposits, 232; condition at
time of suspension of cash payments (1907), 267; effect of crisis of 1907
on bankers' deposits and reserve, 313.
Harrisburg, suspension of cash payments (1873), 66; cash restriction and
currency substitutes (1907), 441, 457.
Hartford, cash restriction (1907), 444.
Hastings, Nebr., currency substitutes (1907), 447.
Hatch & Foote, failure, i n .
Hattiesburg, Miss., currency substitute (1907), 447.
Haverhill, Mass., in crisis of 1907, 445.
Heinze, F . A., and beginning of crisis of 1907, 247.
Henderson, Ky., currency substitutes (1907), 447.
Hepburn, A. B., and clearing-house loan certificates (1907), 430.
Hoarding, extent, during crisis of 1873, 68-70; during crisis of 1893, 195;
198-199; A. P. Noyes on (1893), 423, 425-426, 426n.
Holyoke, Mass., in crisis of 1907, 445.
Hotchkiss, Burnham & Co., failure, i n .
Houston, cash restriction and currency substitutes (1907), 441.
Howard & Co., E., pay-roll difficulties (1873), 72.
Hoyt, Sprague & Co., suspension, 79, 80.
I.
Importers and Traders National Bank, New York, and bankers' deposits
(1873), 15 n.; effect of crisis of 1907 on bankers' deposits and reserve, 313.
Indiana, official encouragement of suspension of cash payments (1907), 435.
Indianapolis, suspension of cash payments (1873), 65; in crisis of 1893,
176, 177; cash restriction and currency substitutes (1907), 287, 441;
loans during crisis of 1907, 299.
Interest on bankers' and other deposits, 20; evil effects, 21-24, and call
loans, 24, 27, 30, 92; condemned in New York clearing-house reports,
91-95, 119, 120, 375-378, 381-383, 385; probable effect on reserves of




47i

National

Monetary

Commission

abandonment, 97, 376-377, 383; practice continued, 104; Secretary
Richardson on (1873), 321, 327-330; Comptroller Knox on (1873), 342344; Comptroller Cannon on (1884), 367-370.
Iowa, official encouragement of suspension of cash payments (1907), 437.
Iron River, Mich., currency substitutes (1907), 447.
Irving National Exchange Bank, New York, effect of crisis of 1907 on
bankers* deposits and reserve, 313.

JJackson, Ga., currency substitutes (1907), 447.
Jackson, Mich., in crisis of 1907, 445.
Jacksonville, Fla., in crisis of 1907, 445.
Jenkins, W. L., report on clearing-house reforms (1873), 103; (1884), 385.
Johnstown, Pa., pay-roll difficulties (1873), 73; in crisis of 1907, 445;
Joliet, cash restriction and currency substitutes (1907), 441, 457.
Jones, J. L., and crisis of 1907, 436.
Jones, J. Q., report on clearing-house reforms (1873), 103.
Joplin, Mo., cash restriction and currency substitutes (1907), 441.
K.
Kalamazoo, currency substitutes (1907), 447.
Kansas City, suspension of cash payments (1873), 66; exchange on New
York (1893), 205; (1907), 292; in crisis of 1907, 274; loan contraction
during crisis, 299, 300; cash restriction and currency substitutes, 441.
Kenyon, Cox & Co., failure, 35, 36.
Key West, currency substitutes (1907), 447.
Knickerbocker Trust Company, New York, suspension, 251-253.
Knox, J. J., on crisis of 1873, 81, 332-344; report on clearing-house reforms (1884), 385.
Knoxville, suspension of cash payments (1873), 66; cash restriction and
currency substitutes (1907), 441, 451.

L.
Lacey, E. S., on clearing-house loan certificates (1890), 387-392.
La Crosse, Wis., in crisis of 1907, 445.
Lancaster, Pa., in crisis of 1907, 445.
Las Vegas, N. Mex., currency substitutes (1907), 447, 451.
Leavenworth, Kans., suspension of cash payments (1873), 66.
Legal holidays during crisis of 1907, 286, 434.
Legal tenders. See Currency.
Legislation, effect of crisis of 1873, 105-107; of crisis of 1893, 210.
Lexington, Ky., cash restriction and currency substitutes (1907), 441, 457.
Liberty National Bank, New York, effect of crisis of 1907 on bankers'
deposits and reserve, 313.




472

Index
Lincoln, cash restriction and currency substitutes (1907), 441.
Lincoln Trust Company, New York, run on, 254.
Little Rock, cash restriction and currency substitutes (1907), 441.
Loans, national-bank, expansion and unsound business conditions before
crisis of 1873, 3-4; conditions (1869-1873), 4 - 5 ; of bankers' deposit and
other New York banks (1869-1873), 17; influence on, of payment of interest on deposits, 21-24; cau * loans and interest on deposits, 24, 27, 30, 92,
328, 368; New York market (1872), 25-28; contraction during crisis of
1873, 44-45, 52-53, 83; resumption after issue of clearing-house loan
certificates, 53, 60; contraction of call loans, 84; call loans not liquid in
emergency, 84, 93, 301; what loans then liquid, 85, primary object of
liquid assets, 85; limitation recommended by clearing-house committee
(1873), 97; rates for call loans during panic of 1884, 110-112, 117; for
commercial paper, 113; contraction during panic of 1884, 116; of out-oftown banks in New York, 118, 148, 228; fluctuation in rates for call loans
(1890), 130, 132, 138, 144, 144.fi., 145; expansion of call loans (August,
1890), 133-134; attempted contraction and crisis, 134, 139-140; expansion in crisis recommended, 143-144; amount (1891-1893), 157, 159,
160; character (1891-1893), 161; and silver, 161; of New York banks
(January-March, 1892-1893), 163-164; New York, during crisis of 1893,
172; general conditions during crisis, 173, 174; New York call loans
during crisis, 177; New York time and commercial paper, 177; contraction during crisis, 208; inadequate lending power during crises, 216; of
all national banks (1897-1907), 218; of New York banks (1897-1907),
221, 222; influence of trust companies on New York market, 227, 228;
increasing difficulty in liquidating (1906), 238, 240; contraction (March,
1907), 241; of New York banks just before crisis of 1907, 245; at time
of suspension of cash payments, 261-262; of bankers' deposit banks then,
265; of bankers' deposit banks in particular, 267, 268; New York conditions before and after crisis, 269-271, 309; contraction throughout the
country during crisis, 297-301; why expansion in New York during
crisis, 300; shifting of call loans during crisis, 302; regular customers not
pressed by banks during crises, 303; growing need of reserve of lending
power, 303, 319; effect of crisis on, in all national banks (1907), 304; in
country banks^ 308; in reserve city banks, 308; in St. Louis and Chicago,
309; Comptroller Knox on call loans (1873), 333-334, 337, 340; Comptroller
Cannon on governmental oversight (1884), 364; A. D. Noyes on expansion during crisis of 1893, 418-421.
Lockwood & Co., suspension, 30.
Los Angeles, cash restriction and currency substitutes (1907), 441, 457.
Louisville, suspension of cash payments (1873), 66; failures during crisis
of 1893, 176, 177; cash restriction and currency substitutes (1907), 441.
Low, A. A., on policy of loan expansion in crisis, 143.
Lowell, Mass., suspension of cash payments (1873), 66; m crisis of 1907, 445.
Lynchburg, Va., currency substitutes (1907), 447.
Lynn, cash restriction and currency substitutes (1907), 441.




473

National

Monetary

Commission

M.
McGarrah, G. W., and clearing-house loans certificates (1907), 429.
McKeesport, Pa., cash restriction (1907), 444.
Macon, Ga., currency substitutes (1907), 447.
Manchester, N. H., in crisis of 1907, 445.
Manufacturing, excessive production before 1873, 1, 339; pay-roll difficulties (1873), 71-75; (1893), 200, 202; (1907), 290; curtailment following crisis of 1873, 74; depression after crisis, 79-81; decline before 1884,
108. See also Trade.
Marine National Bank, New York, failure, n o , i n , 345-348, 350, 357.
Mechanics-American National Bank, St. Louis, effect of crisis of 1907 on
bankers' deposits and reserve, 313.
Mechanics and Traders Bank, New York, and crisis of 1907, 248.
Mechanics National Bank, New York, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Memphis, cash restriction and currency substitutes (1907), 441, 453.
Mercantile National Bank, New York, and crisis of 1907, 247.
Merchants Laclede National Bank, St. Louis, effect of crisis of 1907 on
bankers' deposits and reserve, 313.
Merchants National Bank, New York, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Merchants' National Bank, Petersburg, liquidation, 81.
Metropolitan National Bank, New York, suspension, i n , 112, 348-349;
assistance from clearing house, 114, 352, 372.
Middle Western States, loans during crisis of 1907, 300; condition of country banks after crisis, 308.
Milledgeville, Ga., currency substitutes (1907), 447.
Mills, Robeson & Smith, failure, 142.
Milwaukee, bank failures (1893), 176, 177; loans during crisis of 1907, 300;
cash restriction and currency substitutes (1907), 441, 452.
Minneapolis, exchange on New York (1893), 205; loans during crisis of
^^li 3°°» c a s n restriction and currency substitutes (1907), 441.
Mobile, cash restriction (1907), 444.
Money. See Bank notes, Circulation, Gold, Silver, Suspension.
Montgomery, Ala., cash restriction and currency substitutes (1907),
44i, 452.
Morgan, J. P., on loan expansion during crisis, 143; and crisis of 1907,
255, 256.
Morrison, J. M., report on clearing-house reforms, 103.
Morse, C. F., speculation and crisis of 1907, 248.
Muskogee, Okla., currency substitutes (1907), 447, 433.




474

Index
N.
Nash, W. A., and clearing-house loan certificates (1893), 410-412; (1907),
430Nashville, suspension of cash payments (1873), 65; cash restriction and
currency substitutes (1907), 441.
Nation, The, on control of banks (1907), 250.
National Bank of Commerce, Kansas City, suspension, 274.
National Bank of Commerce, New York, as bankers' deposit bank, 232; and
Knickerbocker Trust Company, 251; condition at time of suspension of
cash payments, 267, 268; effect of crisis of 1907 on bankers' deposits and
reserve, 313.
National Bank of Commerce, St. Louis, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
National Bank of North America, New York, and crisis of 1907, 248.
National Bank of the Commonwealth, New York, failure, 37, 43, 52, 337,
344; liquidation, 81.
National banks. See Central reserve, Country, Crisis, Reserve city.
National City Bank, New York, effect of crisis of 1907 on bankers' deposits
and reserve, 313.
National Cordage Company, failure, 164.
National Live Stock Bank, Chicago, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
National Park Bank, New York, and bankers' deposits (1873), 15 n.; (1907),
232; condition a t time of suspension of cash payments (1907), 267;
effect of crisis on bankers' deposits and reserve, 313.
Nevada, legal holidays during crisis of 1907, 286, 435.
Newark Savings Institution, failure, 112.
New Bedford, Mass., in crisis of 1907, 445.
New Britain, Conn., in crisis of 1907, 445.
Newburgh, N. Y., pay-roll difficulties (1873), 73.
New Carlisle, Ind., currency substitutes (1907), 447.
New Castle, Pa., in crisis of 1907, 445.
New England, loan expansion during crisis of 1907, 299; condition of
country banks after crisis, 308.
New Haven, cash restriction (1907), 444.
Newnan, Ga., currency substitutes (1907), 447.
New Orleans, clearing-house loan certificates (1873), 62; suspension of cash
payments (1873) 63; exchange on New York (1893), 205; (1907), 292;
closing of stock exchange (1907), 259*1; loans during crisis, 299; cash
restriction and currency substitutes, 442, 457; amount of clearing-house
loan certificates (1893, 1907), 449.
Newport, Ky., in crisis of 1907, 445.
New York City, failure of bond issue (1907), 242. See also next title.

6158—20




31

475

National

Monetary

Co mmis sion

New York City banks, importance and responsibility as central reserve city,
13, 15, 103, 126, 174, 175, 274, 306-307, 373, 374, 382; responsibility as
to domestic exchanges, 61-62; effect on, of increase in central reserve
cities, 125-127; development of trust companies, 235-228; need of reserve
of lending power for emergencies, 303, 319; cash restriction and currency
substitutes (1907), 442. See also Bankers' deposits, Clearing House,
Clearing-house loan certificates, Crisis, Deposits, Domestic exchanges,
Equalization, Foreign exchange, Interest, Loans, Reserves, Stock exchange, Suspension.
New York Warehouse and Security Company, failure, 35, 36, 337.
Ninth National Bank, New York, and bankers' deposits, 15 n.
Norfolk, Va., in crisis of 1907, 445.
North River Bank, New York, failure, 142.
Northern Pacific Railroad, and crisis of 1873, 36.
Northwestern Car Company, receivership, i n .
Noyes, A. D., on crisis of 1893, 413-427.
O.

Oakland, Cal., cash restriction and currency substitutes (1907), 442.
Ogden, Utah, currency substitutes (1907), 447.
Oklahoma, legal holidays during crisis of 1907, 286; official encouragement
to suspension, 437.
Oklahoma, Okla., currency substitutes (1907), 447.
Omaha, during crisis of 1893, 203; loans during crisis of 1907, 300; cash restriction and currency substitutes (1907), 442, 453.
Oregon, legal holidays during crisis of 1907, 286, 435.
Oshkosh, cash restriction (1907), 444.
Overcertification of checks for brokers, in New York (1873), 38; clearinghouse committee on this, 97-99, 101, 379, 384; forbidden by law, 104;
effect of stock exchange clearing house on, 104, 152, 358, 379, 384;
Comptroller Cannon on dangers (1884), 119, 346, 353-359; Comptroller
Knox on (1873), 344P.
Pacific coast, and crisis of 1873, 67; loans during crisis of 1907, 300; condition of country banks after crisis, 308.
Palmer, F. A., report on clearing-house reforms (1884), 385.
Panama bonds, issue during crisis of 1907, 316.
Panics. See Crisis.
Paterson, N. J., in crisis of 1907, 445.
Paton & Co., suspension, 78.
Pawtucket, cash restriction (1907), 444.
Pay checks, use as currency (1907), 455-456, 458.
Pay-roll difficulties during crisis (1873), 71-75; (1893), 200, 202.
Peake, Opdycke & Co., suspension, 78, 80.




476

Index
Pennsylvania Bank, Pittsburg, failure, 116.
Peoria, cash restriction and currency substitutes (1907), 442.
Perkins, E. H., Jr., and clearing-house loan certificates (1893), 410-412.
Philadelphia, clearing-house loan certificates (1873), 62; (1884), 145; (1890),
390-392; (1893), 408, 420; suspension of cash payments (1873), 65; payroll difficulties (1873), 73; exchange on New York during crisis (1893),
204; (1907), 291, 295; loans during crisis of 1907, 299; cash restriction
and currency substitutes (1907), 449.
Philadelphia and Reading Railroad, failure, 163, 164.
Pittsburg, pay-roll difficulties (1873), 72, 73; closing of stock exchange
(1907), 259; loans during crisis of 1907, 299; clearing-house loan certificates (1893, 1907), 408, 449; cash restriction and currency substitutes
(1907), 442, 455-458.
Pittston and Elmira Coal Company, pay-roll difficulties, 73.
Pooling of currency. See Equalizing of reserves.
Portland, Me., in crisis of 1907, 445.
Portland, Oreg., cash restriction and currency substitutes (1907), 289, 442,
451; loans during crisis, 300.
Potts, G. H., report on clearing-house reforms (1884), 385.
Price, wheat during crisis of 1873, 61; cotton, 61; steel rails (1883), 108.
Produce exchange, New York, and crisis of 1873, 323; and overcertification of checks, 359.
Production. See Crops, Manufacturing.
Providence, R. I., suspension of cash payments (1873), 65; pay-roll difficulties (1873), 74; in crisis of 1907, 259; cash restriction and currency
substitutes (1907), 442.
QQuincy, 111., in crisis of 1907, 445.
R.
Racine, Wis., cash restriction and currency substitutes (1907), 442.
Railroads, and cause of crisis of 1873, 1, 35, 36,339; effect of crisis on freight,
76; and crisis of 1893, 154, 176; effect of crisis on gross earnings, 201.
Randall & Wierum, suspension, 142.
Reading, Pa., cash restriction (1907), 444.
Redemption banks. See Reserve city, Central reserve.
Rediscounting during crises, 148, 312, 420.
Remington gun factory, pay-roll difficulties (1873), 73.
Reserve city banks, original purpose, 11; legal requirements as to reserves,
12; condition (1869-1873), 12; condition (September-November, 1873),
83, 87; loan contraction during panic, 83; reliance on New York deposits,
88; law of 1887, 124; condition (May, June, 1893), 173; condition
(1897-1907), 220; effect of crisis of 1907 on, 308.




477

N ational

Mo net ary

Commission

Reserves of national banks, conditions (i869-1873), 5-24; specie as, then,
6; specie in New York, 7, 14; and fixity of legal tenders, 8; against deposits and bank notes, 9; table (1869-1873) of liabilities and, 9; conditions governing proper amount, 10; effect of increased number of
banks on efficiency (1873), 10; legal requirement of country banks, 11;
condition of country bank (1869-1873), 11; legal requirement of reserve
city banks, 12; condition of reserve city bank (1869-1873), 12; importance of New York banks, their condition (1869-1873), 13-15; condition of bankers' deposit and other New York banks (1869-1873), 17-18;
dependence on New York, 19, 27,126; effect on, of payment of interest on
deposits, 21-25, 93; need of strengthening in New York (June, 1873), 31;
condition (August, September), 32, 34; general inadequacy of New York,
33, 211, 216, 234-235; policy as to, in New York in 1873 and later crises,
55-56; inadequate, in New York as cause of general suspension (1873),
68; and loans during crisis of 1873, 85; in country banks during crisis,
86; in reserve city banks, 87; in New York, 88, 94; clearing-house committee on necessity of "legal reserve," 95-97, 101; varieties of money in
(1873), 96; responsibility of system for crisis of 1873, 103; effect on, of
legislation of 1874, 105-107; effect of silver dollars (1883), 108; inadequacy of New York (1884), 116; small decline during panic of 1884 explained, 118; decline of New York (1890), 129-133; attempt to preserve surplus, causes unnecessary crisis (1884), 134; inadequacy as
cause of crisis of 1890, 141, 150; as unused asset in emergencies, 147, 151,
279; increase in country bank, during crises, 147; enforcement on state
banks of clearing-house's requirement, 151; of New York banks at
beginning of crisis of 1893, 153; amount and character (1891-1893),
154-156, 158, 159, 160, 161; in New York (January-June, 1892, 1893), 163,
164, 167, 168; New York, during crisis of 1893, 172, 173, 177, 181, 182;
general, during crisis, 173, 174; increase of New York, after suspension,
189-191; recovery after crisis, 209; of all national banks (1897-1907),
217-219; of country banks, 219-220; of St. Louis and Chicago, 220; of
New York, 221; inadequate, of state banks and trust companies, 226; New
York, and development of trust companies, 227, 236; influence of government surplus and deposit, 232; condition of ultimate reserve before
crisis of 1907, 232-236; New York, before crisis, 245; at time of suspension of cash payments, 261-264; of bankers' deposit banks then, 264;
of bankers' deposit banks in particular, 267; effect of crisis on, in all
national banks, 304; in country banks, 307; in reserve city banks, 308;
in St. Louis and Chicago, 309; in New York, 310; in six bankers' deposit
banks there, 311; in chief bankers' deposit banks of central reserve cities,
312-313; increase after crisis, 318; Secretary Richardson on use in
emergencies, 331; Comptroller Knox on this, 334-336. See also Deposits, Equalizing of reserves.
Resumption of specie payments, Secretary Richardson on (1873), 331.
"Rich men's panic" (1907), 241.




478

Index
Richardson, W. A., on crisis of 1873, 321-331.
Richmond, David, failure, 142.
Richmond, in crisis of 1907, 444, 453.
Robinson & Co., Nelson, failure, i n .
Rochester, pay-roll difficulties (1873), 73; in crisis of 1907, 445.
Rockford, 111., in crisis of 1907, 445.
Rome, Ga., currency substitutes (1907), 447.
S.
Sabin, D. M., and Northwestern Car Company, i n .
Sacramento, cash restriction and currency substitutes (1907), 442.
Saginaw, cash restriction (1907), 444.
St. Joseph, cash restriction and currency substitutes (1907), 442.
St. Louis, clearing-house loan certificates (1873), 62; suspension of cash
payments (1873), 64; pay-roll difficulties (1873), 72; as central reserve
city, 124-127, 175; condition of banks (May, July, 1893), 173; exchange
on New York (1893), 204; (1907), 291; condition of banks (1897-1907),
220; bankers' deposits (1897-1907), 223; effect on banks of crisis of
1907, 309; effect on chief bankers' deposit banks, 313; cash restriction
and currency substitutes (1907), 442, 453.
St. Paul, cash restriction and currency substitutes (1907), 287, 442; loans
during crisis, 300.
Salem, Mass., in crisis of 1907, 445.
Salt Lake City, cash restriction and currency substitutes (1907), 442.
San Antonio, cash restriction and currency substitutes (1907), 443.
San Francisco, exchange on New York (1893), 205; in crisis of 1907, 274;
loans during crisis, 299, 300; cash restriction and currency substitutes,
443, 458.
Savannah, suspension of cash payments (1873), 63; loans during crisis of
1907, 299; cash restriction and currency substitutes, 443.
Savings banks, in crisis of 1873, 42, 51, 69, 329; in crisis of 1893, 180; in
crisis of 1907, 256, 258.
Schenectady, in crisis of 1907, 445.
Scranton, in crisis of 1907, 445.
Seaboard National Bank, New York, effect of crisis of 1907 on bankers'
deposits and reserve, 313.
Seattle, loans during crisis of 1907, 300; cash restriction and currency substitutes, 443, 451.
Second National Bank, New York, defalcation of president, 110-111, 112,
H4,349-350.
Secretary of the Treasury. See Cortelyou, Richardson, United States
Treasury, Windom.
Securities, American, distrust in Europe (1883), 109; London sales and
decline (1890), 131, 140; (1891-1893), 157, 158; foreign purchase during
crisis of 1893, 179; foreign sale (1907), 245.




479

National

Monetary Commission

Sedalia, Mo., currency substitutes (1907), 447.
Shaw, L. M., policy of deposit of government surplus, 231.
Silver, effect on bank reserves (1883), i ° 8 ; Sherman law and gold exports
(1891), 154-155; and increase in circulation (1891-1893), 155, 158; and
loans (1891-1893), 161; and conditions preceding crisis of 1893, 162;
and the crisis, 165, 168, 169, 179, 208; increased circulation during crisis
of 1907, 316.
Simmons, J. E., and clearing-house loan certificates (1893), 410-412.
Sioux City, cash restriction and currency substitutes (1907), 443.
Sioux Falls, in crisis of 1907, 436.
Smith, A. H., forgeries, 142.
South Bend, cash restriction and currency substitutes (1907), 443, 452.
South Boston, Va., currency substitutes (1907), 447, 450.
Southern Pacific Railroad, dividend (1906), 239.
Southern States, loans during crisis of 1907, 299; condition of country
banks after crisis, 308.
Specie. See Gold, Silver.
Spokane, cash restriction and currency substitutes (1907), 443, 451.
Sprague, A. and W., suspension, 79, 80.
Springfield, 111., in crisis of 1907, 445.
Springfield, Mass., cash restriction (1907), 444.
Springfield, Ohio, in crisis of 1907, 445.
Squire & Co., J. P., pay-roll difficulties (1873), 72.
Standard Oil Company, fine (1907), 243.
State banks, and reserve requirements, 151; conditions unimportant in
crises before 1907, 224; growth (1897-1907), 225; deposits with national
banks, 225; result of lack of branches, 249.
Statistics. See Tables.
Stock exchange of New York, call loans and interest on bankers' deposits,
24, 27, 30, 92, 328, 368; in crisis of 1873, 37; closed, 38-40, 337; temporary overdrafts, 38, 97-99, 101, 104, 119, 344, 379, 384; clearing house
for, 104, 152, 358, 379, 384; failures and fraud (1884), 109-112; market
in 1891, 156; in 1892, 160; during crisis of 1893, 176, 179; movements
(1906), 239; panic (March, 1907), 241; continued sensitiveness, 242, 244;
during crisis of 1907, 256; closing of Pittsburg and New Orleans, 259;
Comptroller Knox on (1873), 340-341.
Superior, Wis., cash restriction and currency substitutes (1907), 443, 453.
Surplus. See United States Treasury.
Suspension of cash payments, and issue of clearing-house loan certificates,
48, 63, 123, 145, 171, 181, 213-215, 260, 272, 273; in New York (1873),
53-56, 76; currency premium (1873), 56-58; (1893), 186-188; (1907),
280-282; throughout the country (1873), responsibility of New York for,
61-68; and hoarding, 68; period of disturbing influence, 70; and payroll difficulties, 71-75; and domestic exchanges, 75-77; none in 1890,
145-146; condition of New York banks at time of (1893^ 177-180;




480

Index
reason for, in New York, 181; justification considered, 183-186; completeness, 186; reason for disappearance of currency premiums (1893),
189; unduly prolonged, 190; currency premium and gold imports, 1 9 1 194; premium and domestic money supply, 195; general (1893), 196;
effect on trade, 199-203; unnecessary resort to, in crisis of 1907, 260, 276;
condition of New York banks when resorted to, 261; attitude of New
York banks as to, 273; as evidence of its own necessity, 275; unduly
prolonged, 278, 284; table of New York reserves during, 279; throughout the country, legal holidays, 286-289, 434; and trade depression, 298;
fear of, as cause of crisis, 319; A. D. Noyes on (1893), 421-427; A. P.
Andrew on official encouragement to (1907), 434-437. See also Circulation.
Sylvester, Ga., currency substitutes (1907), 447.
Syracuse, cash restriction (1907), 444.

T.
Tables, condition of all national banks (1869-1873), 4; reserves and liabilities (1869-1873), 9; condition of country banks (1869-1873), 11; of
reserve city banks, 12; of New York banks, 13; of bankers' deposit and
other New York banks, 17; fluctuation of bankers' deposits (18711872), 19; movement of loans, deposits, reserves, in New York (1872),
22; loans of bankers' deposit and other New York banks, 23; withdrawal of bankers' deposits (1872), 27; condition of bankers' deposit
and other New York banks (August-September, 1873), 34; condition of New York banks (Sept. 20, 1873), 44; (Sept. 26), 52; (Sept.
27-Nov. 8), 55; currency premium (1873), 57; (1893), 187; (1907),
280-282; bank liquidation after crisis of 1873, 81; national bank
returns by classes (Sept. 12, Oct. 13, Nov. 1, 1873), 83; resources
and liabilities of country banks then, 86; of reserve city banks,
87; of New York banks, 88; condition of New York banks before
and after crisis of 1884, 117; condition of New York banks (June
28-Aug. 9, 1890), 132; (Aug. 9-Sept. 27), 138; (Nov. i-Dec. 15),
145; (January-May, 1892, 1893), 163; (May 27, 1892, 1893), 167;
condition of national banks by classes (May, July, 1893), 173; condition of New York banks (July 29-Sept. 9, 1893), 190^.; railroad
gross receipts (1892, 1893), 201; domestic exchanges (1893), 204-205;
condition of all national banks (1897-1907), 218; of New York
banks, 221; state bankers' deposits, 225; condition of bankers' deposit
and other New York banks (August, 1907), 233; condition of New York
banks just before crisis (1907), 245; at time of suspension of cash payments, 261-263; of bankers' deposit banks then, 265; of these banks in
particular, 267; New York reserves during suspension, 279; money shipments to interior (November, 1907), 285; domestic exchanges (1907),
291-292; loan contraction throughout country during crisis, 299; New
York loans by classes during crisis, 301; effect of crisis on all national




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Monetary

Commis s ion

banks, 305; on country banks, 308; on reserve city banks, 308; on St.
Louis and Chicago, 309; on New York, 310; on bankers' deposits and
reserves of certain banks in central reserve cities, 312-313; increase in
money supply (August-December, 1907), 315; clearing-house loan certificates (1884), 353; (1893), 408; (1860-1907), 432-433; (1893, 1907), 449;
government bond purchases (1888-1890), 395; balances paid by New
York clearing-house loan certificates (1907), 431; cash restrictions and
currency substitutes (1907), 440-443, 447-448, 458.
Tacoma, cash restriction and currency substitutes (1907), 443.
Tampa, currency substitutes (1907), 447.
Tappen, F. D., and stock exchange (1873), 46; report on clearing-house
reforms (1873), 103; and clearing-house loan certificates (1893), 410-412.
Taunton, Mass., suspension of cash payments (1873), 72; cash restriction
and currency substitutes (1907), 443.
Taylor, Moses, report on clearing-house reforms, 103.
Terre Haute, in crisis of 1907, 445.
Third National Bank, St. Louis, effect of crisis of 1907 on bankers' deposits
and reserve, 313.
Third National Bank, New York, and bankers' deposits (1873), 15 n.
Thomas, E. R. and O. F., and beginning of crisis of 1907, 248.
Thomaston, Ga., currency substitutes (1907), 447.
Thomasville, Ga., currency substitutes (1907), 447.
Tifton, Ga., currency substitutes (1907), 447, 450.
Toledo, pay-roll difficulties (1873), 72; in crisis of 1907, 445.
Topeka, cash restriction and currency substitutes (1907), 443, 451, 457Townsend, Edward, and clearing-house loan certificates (1907), 430.
Trade, effect of suspension of cash payments (1873) and development of
depression, 75-81; favorable balance (1890), 128; foreign (1891-1892),
155-157; mercantile failures (1893), 169; commercial paper during crisis
of 1893,177; conditions during crisis of 1893, 199; pay-roll difficulties, 200,
202, 290; foreshadowed reaction (1906), 237-239; warnings disregarded,
239; general condition at time of crisis of 1907, 274; mercantile failures
during crisis, 275; foreign, during 1907, 283; conditions influencing
depression during crisis, 298, 302. See also Domestic exchange, Foreign
exchange, Manufacturing.
Treasury. See United States Treasury.
Trenton, in crisis of 1907, 445.
Trust companies, deposits with national banks, 225; inadequate reserves,
226, 236; development in New York, 227; in crisis of 1907, 251-256;
attitude of clearing house toward, 252-254, lack of organization, 253;
G. S. Coe on (1884), 378.
Trust Company of America, New York, run on, 253.
Troy, N. Y., in crisis of 1907, 445.




482

Index
u.
Union Pacific Railroad, dividend (1906), 239; decline in shares (1907), 241.
Union Trust Company, run on, 37; suspension, 37; failure, 43, 337.
United States Steel Corporation, dividend on common stock (1906), 239.
United States Treasury, relief afforded by (1872, 1873), 26, 321; receipts and
payments at New York (September, 1873), 41 n.; purchases bonds (1873)*
40, 326; refuses to inflate currency, 41, 322; surplus (1889) and purchase
of bonds, 135; surplus and money market conditions (1890), 136; bond
purchases during crisis of 1890, 137-139, 393-396; reliance on, for money
(1890), 147; public opinion on relief by, 149-151; excess payments
during crisis of 1893, 184; policy of deposit of surplus, 231; deposits
(1906), 240; deposits during crisis of 1907, 263, 266, 316; Secretary
Richardson on, and crisis of 1873, 321-331; Secretary Windom on, and
crisis of 1890, 393-399; Windom on surplus and crises, 396-398.
Utica, N. Y., pay-roll difficulties (1873), 73; in crisis of 1907, 445.
V.
Valdosta, Ga., currency substitutes (1907), 447.
Vicksburg, currency substitutes (1907), 448.
Virginia, Minn., currency substitutes (1907), 448.
W.
Walcott & Co., J. C , suspension, 142.
Walker, Amasa, on bankers' deposits, 415.
Wall Street National Bank, New York, overcertification of checks, 355.
Washington, D. C , clearing-house loan certificates (1873), 62; in crisis of
1907, 445Washington, State of, legal holidays during crisis of 1907, 286.
Waterbury, Conn., in crisis of 1907, 445.
Waycross, Ga., currency substitutes (1907), 448.
Wesley, E. B., receiver of Union Trust Company, 37.
Western States, loans during crisis of 1907, 300; condition of country
banks after crisis, 308.
Westinghouse Company receivership (1907), 259.
Wheeling, cash restriction and currency substitutes 1907), 443.
Whitney & Co., C M . , failure, 142.
Wichita, cash restriction and currency substitutes (1907), 443.
Wiggin, A. H., and clearing-house loan certificates (1907), 429.
Wilkes-Barre, in crisis of 1907, 445.
Willacoochee, Ga., currency substitutes (1907), 448.
Williams, G. W., and clearing-house loan certificates (1893), 409-412.
Williams, J. C , failure, i n .
Williams, J. E., report on clearing-house reforms (1873), 103.
Williamsport, Pa., in crisis of 1907, 445.




483

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Monetary

Commission

Wilmington, Del., cash restriction and currency substitutes (1907), 443.
Winston-Salem, N. C , currency substitutes (1907), 448, 454.
Woodward, J. T., report on clearing-house reforms (1884), 385; and clearing-house loan certificates (1907), 430.
Woonsocket, R. I., cash restriction 1907), 444.
Worcester, Mass., suspension of cash payments (1873), 66; in crisis of 1907,
445Y.
Yonkers, in crisis of 1907, 445.
York, Pa., cash restriction (1907), 444.
Youngstown, cash restriction and currency substitutes (1907), 443, 452.




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