Part 26
"2. The Comptroller may appoint a receiver when he concludes that a bank is insolvent. But here again he has been hampered by the legal definition of insolvency, which is 'inability to pay current debts as they mature.'
"3. The making of a National bank report to the Comptroller so long as it is in accordance with the bank's books, however erroneous it may be as to actual values, which alone disclose a bank's true condition, cannot be construed as a misdemeanor.
"These legal restrictions are presumably the reason why some banks have been permitted to persistently publish to the public the figures of their statements as rendered to the Comptroller of the Currency after they are known to have met with heavy losses and have failed to provide for them by charging them to profit and loss. That this has been permitted in some cases is notorious. The case of the Chicago National Bank and a recent one in a large central city [$6,000,000 of $8,000,000 surplus was charged off] are conspicuous examples because of their size. Undoubtedly as a rule the published statements of the banks are reliable, but there are a few exceptions, with which, in view of the legal restrictions which govern his action, the Comptroller finds himself unable to cope. These exceptions, however, frequently result in failures and catastrophes. The Comptroller cannot legally take drastic measures with such banks until they perform some act of insolvency or when he believes their capitals to be impaired, which, being a matter of judgment in regard to the realizable value of their assets, is frequently difficult to prove.
"These disclosures in connection with the failures of these three banks showed the associated banks of Chicago that statements so rendered, which up to that time had been all the Clearing House Committee had to rely upon and which, as published, form the basis of the standing and credit of banks with the public, could not be implicitly relied upon. It was therefore unanimously resolved to adopt a system of supervision, under which there would be some assurance that such conditions could never again develop in any bank connected with the Chicago Clearing House Association. There was therefore organized a bureau of examination in connection with the Clearing House.
* * * * *
"As to the practical working of Clearing House examinations in Chicago during the six years of their existence I can only say that it has proved in every way most satisfactory and successful. There has been neither friction nor unpleasantness. Bank directors realize the great benefits derived and are unstinted in their praise of them. They are greatly assisted by these reports in keeping themselves informed on the condition of their banks and they readily coöperate with the Clearing House committee in the correction or elimination of anything open to criticism. Our experience has been that the banks have almost unanimously adopted every suggestion made by the committee. I cannot, of course, discuss such details as would show its efficacy. I can only say that the results have been most satisfactory to all concerned and that much good has been accomplished for the Chicago banks individually and collectively.
"The organization, being entirely voluntary, partakes somewhat of the nature of a gentlemen's agreement, under which each bank binds itself to conduct its business under proper methods. The effectiveness of the method lies in the fact that they are all measured by the same standard, viz.: that their statements as rendered to the Clearing House Association must be satisfactory to the committee, in view of the examiner's reports upon them, otherwise they cannot continue to enjoy Clearing House privileges."
MR. BANKER: From Mr. Wilson's statement about Los Angeles and Mr. Forgan's statement about Chicago, it must be perfectly clear to all of you, as it now is to me, that if we had in this country, say thirty or forty commercial zones, or free check zones, like New England now has, that is thirty or forty financial centres, covering all the territory naturally tributary to them, and so compassing, or covering the entire country, and these zones, all organized precisely as the Chicago Clearing House Association is organized for the examination of all the banks of the United States, bank failures would become a thing of the past.
MR. LAWYER: Well, let me see now, how you would insure that result, that is that bank failures would cease. The banks fail very often, possibly generally, because the officers of the banks have used the bank's assets in their own schemes, or those in which they are interested. But bank failures are very often due to fish paper, such as you described a few moments ago. How would you detect, check and stop that sort of thing? That is, how would you prevent too much paper from some one merchant, or manufacturer, getting into the banks?
MR. BANKER: Don't you see, Mr. Lawyer, that if your examination covered all the banks in a commercial zone, your examiners would always know, or could very easily find out, just how much paper any business house had in the banks of that particular zone, couldn't they? Don't you see that if they observed that a large amount of paper of some business house had been placed in the banks of that zone, that is, loans made, or paper sold, they would at once be placed upon their guard and inquiry, and would proceed to find out just how much paper that particular business house ought to have, or was entitled to have out, considering its capital, and the general character of its business? Don't you see that these bank examiners could insist on knowing all about the financial condition of any business house in their particular zone, just as well as the banks themselves could and do insist upon knowing? If a business house should refuse the bank examiner the fullest possible information about its affairs, its days would be numbered as a borrower at the banks of that zone, would they not?
MR. LAWYER: That is just the point. A business that is over expanding its credit by borrowing, or by selling its paper, will probably be working some other zone, or several of them at the same time.
MR. BANKER: You might naturally think so until you reflected upon the situation for a moment. Don't you see that if you had, as I have just said, thirty or forty such commercial zones, all organized, and all united into one system, as perfectly as if they were one single institution, that they could within twenty-four hours know to almost a dollar how much any business house in the whole United States had outstanding so far at least as the banks were concerned in all of them--simply by telephoning or telegraphing to each other?
_You must see that every one of these commercial zones would soon become the most comprehensive and the most perfect credit bureau in the entire world, and that taking them altogether, they could and would, by the most exhaustive methods, not even now fully appreciated, be able to check the whole commercial situation in the United States in an incomprehensibly short space of time. Nothing is so essential today as to know the facts about the situation because of the enormous increase of trade, and consequent expansion of credit._
MR. LAWYER: It does seem to me, after all, now that you have finished the details of your plan, that you have in it a perfect check upon the whole business of the banking world. Humanly speaking, I see no loophole nor escape whatever.
MR. LABORINGMAN: That looks to me like an all-round scheme. It will certainly work like the colored man's fish trap, it will catch 'em, both "agoin' and acomin'," and would give this country the only practical scheme I've ever heard of for insuring bank deposits; for it does not seem possible to me for a bank to get into a position where it ought to fail. Now, gentlemen, if there is one reform in this whole business that ought to be accomplished it is such an administration of these banks, as will practically prevent failures. Don't you think so yourselves? This question is always coming home to the working people, because a bank failure is a tragedy in their lives.
MR. MANUFACTURER: Yes, Mr. Laboringman, I certainly do agree with you, and I believe that this plan of having all the banks of the entire country examined by bankers just as they are now being examined by the clearing houses instead of politicians, and finding out, as such clearing house examiners will, not only the condition of the banks, but the financial condition of every business house as well, will accomplish what you want. The laboring people are entitled to better protection than what has yet been given them. This goes to the very root of things.
MR. MERCHANT: Gentlemen, I have been listening with the greatest possible interest to the story of the growth of the American Clearing House and the most marvelous thing about this matter to me is that this vast system which has not yet been correlated is the product of experience, and that there is not a single practice of this huge machine from the Atlantic to the Pacific as it is carried on, or operated, that is based upon a single statute. Think of the Clearing House Associations in those twenty cities, actually examining, not only their own members, but every other bank that clears its checks through one of their members. Why, gentlemen, today these bank examiners could cut off my credit at my bank without my knowing it by simply saying to the banks that my credit was too much extended, and that I ought to cut it down, and get into a safer position.
MR. FARMER: Well, do you know, I am of the opinion that there is nothing so important in these days as to have someone going around and compelling these fellows to pull in their horns. They will never interfere with anyone as long as he keeps in sight of the shore. It's a good thing and will do more than anything I know of to keep our business ship on an even keel.
MR. MANUFACTURER: When Mr. Farmer talked about pulling in their horns, I thought he was perfectly at home, and talked about something that he was familiar with; but when he gets to talking about a ship and keeping close to shore, it strikes me that he's getting out to sea. However, this proposed supervision and checking scheme strikes me just as it does him, as the most desirable, wholesome and healthy process by which we can go on in the future far more steadily, and in the end far more rapidly than we do now, with our ups and downs, and I am heartily in favor of it.
But, Mr. Banker, it occurs to me that if these thirty or forty zones you speak of are going to work so closely together, as you think, and have outlined, there will be sooner or later a tremendous business going on between them.
MR. BANKER: Of course there will; and that suggestion brings me naturally to the fourth point I raised in connection with the development of our American Clearing Houses which was a combination of a part of their reserves for their own convenience.
You will remember that I called your attention to the fact that it was estimated by high authority that the banks belonging to the Clearing House Associations were now carrying upwards of two hundred million dollars of their reserves at the various Clearing Houses. It does not seem to me as though it was taxing the imagination very much to see how very easy it would be to apply the same principle to the thirty or forty financial centers that is now being applied to all the banks included in the Clearing Houses. Of course I realize that the reserves will have to be upon a correspondingly increased scale, ranging from one billion to one billion and a half, as things now stand, and that they will all have to be actually combined, and perfectly mobilized, precisely as the reserves are, when a Clearing House Association fortifies itself, to protect all of its banks, and the commercial interests of any community in times of danger and panic.
MR. LABORINGMAN: What do you mean by Clearing House certificates? I have seen these things mentioned time and time again in the papers, and I must say I could not get on to them. I supposed it was just some huggery-muggery of Mr. Banker, over there, for the purpose of getting the best of the dear people.
MR. BANKER: On the contrary, just the reverse is true. Clearing House certificates, commonly so called, are issued only to protect the people's interest. They are issued for the common good, and are thoroughly appreciated by all those who understand their use, and the circumstances under which they are issued. Mr. Laboringman, you have just asked what a Clearing House certificate is. We all know what a gold certificate is. It certifies that there are deposited in the Treasury of the United States as many gold dollars as its face calls for, and the holder can go and get the gold dollars by presenting the certificate. In the early part of this evening, we learned that a Clearing House certificate was issued by a Clearing House whenever some bank deposited with it gold coin, gold certificates, silver certificates, or United States Notes; that is, such a Clearing House certificate is for such a deposit as is made, and entitles the holder to what it calls for, as was then stated. Now, the popular name, Clearing House certificate, is applied to something quite different from the exact, or technical, definition above given.
When we say that a Clearing House has issued Clearing House certificates, in ordinary, or popular, language we mean "Clearing House Loan Certificates," because the public never have any occasion for discussing the usual Clearing House certificates. The Clearing House loan certificates are issued by a Clearing House upon commercial paper, bonds, stocks or any satisfactory security. In 1907, collateral security amounting to $453,000,000 passed through the hands of the New York Clearing House Committee, of which $330,000,000, or 72.92 per cent, was commercial paper and $123,000,000, or 27.08 per cent, was bonds, stocks and short-time railroad paper.
MR. LAWYER: Mr. Banker, if you will allow me, I think that Mr. Cannon has stated this phase of the question so well that I should like to read it right here. He says:
"Clearing House certificates are of two kinds, those issued upon the deposit of gold coin (and in New York City and Boston on gold and silver certificates and legal tender notes) and those issued upon the deposit of collateral securities. The former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. The latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the Clearing House, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. The certificates issued upon the deposit of gold, etc., are termed 'Clearing House Certificates,' and those issued upon the deposit of collateral security are very properly termed 'Clearing House Loan Certificates,' with which latter only are we here concerned.
"Clearing House Loan Certificates may be defined as temporary loans made by the banks associated together as a Clearing House Association, to the members thereof, for the purpose of settling Clearing House balances. Such certificates are negotiable, as a rule, only among the members of the association, and are not in any sense to be regarded as currency. They are not even seen by the business community, and do not pass from bank to bank except in payment of Clearing House balances.
"To obtain an intelligent understanding of the real character and purpose of such certificates it will be well to treat somewhat of the circumstances under which they are issued. In the course of the present century the United States has undergone periodical derangements of business affairs, when confidence was displaced by mistrust, when the payment of debts became difficult, when property values declined, and business houses failed; when industry and trade were paralyzed, and general stagnation ensued in all lines of enterprise. In such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. Under our present currency system no adequate method is provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. Hence it is left in a large measure to the financiers of each community to work out their own remedy, supplemented by such mutual assistance as a courteous regard for each other may dictate or as business relations may demand.
"Quick to see the defects in our currency system, and the desirability of in some way supplying it, the bankers of New York, nearly fifty years ago, devised the scheme of issuing Clearing House Loan Certificates as a method of relief from temporary stringencies. Subsequently, nearly all the Clearing Houses in the great centers adopted the same device, and by their heroic resort to the measure they have at different times relieved the business community of untold disaster, for which invaluable service they have justly received the grateful recognition of the entire country.
"The great value of Clearing House loan certificates lies in the fact that they take the place of money in settlements at the Clearing House, and hence save the use of so much actual cash, leaving the amount to be used by the banks in making loans and discounts, and in meeting other obligations. The volume of currency, to all intents and purposes, is expanded by this means to the full amount of the certificates issued."
In the history of the past the denominations have varied from 25 cents to $100,000 in the different associations and in proportions varying from $50 to $100 of certificates to $100 of collateral deposited.
The total amount of its balances is not always paid in Clearing House loan certificates by a bank to which such certificates have been issued. Thus, for example, the debit balance of a given bank may be $500,000, which in ordinary times would be paid in money or gold certificates. In a time of panic a part of this sum--say $300,000--is paid in Clearing House loan certificates and the remaining $200,000 in currency. Another, with the same balance, might pay the whole in Clearing House certificates, while still another would pay the full amount without the use of any certificates whatsoever.
The first issue of Clearing House certificates occurred in 1860. In the autumn of that year there was a rapid shrinkage in bank deposits and a corresponding contraction in loans and discounts. The situation grew more and more serious as the end of the year approached. The presidential election was a disturbing factor of more than ordinary significance. Immediately succeeding the election of Abraham Lincoln to the presidency the situation began to assume a critical aspect. Distrust and uncertainty were universally felt.
In accordance with the authority thus given, the first issue of certificates was made Nov. 23, 1860, and the beneficial effect was immediately felt. The banks rapidly extended their loans, deposits increased, and commercial paper, which formerly could not be sold for 20 per cent, was now freely marketed at 7 per cent and 8 per cent. As a result of the pressure the association passed a resolution in the following September, authorizing another issue of loan certificates, and on Sept. 19, 1861, the first issue was made.
In 1863 the association issued certificates for the third time. The first bore the date of November 6th, and the largest amount outstanding at any one time was $9,608,000.
Owing to the prolongation of the war, with the consequent unrest in business circles, the issue of certificates for the fourth time began March 7, 1864, and reached its maximum, $16,418,000, on April 20th of the same year.
No more loan certificates were issued until the year 1873, when for the first time the Clearing House associations of other cities, seeing their great practical utility, began to avail themselves of their use. In the year mentioned the association at New York followed the precedent established in 1860, and the same course was taken by the Clearing House Associations at Boston, Philadelphia, Baltimore, Cincinnati, St. Louis and New Orleans. The panic which called forth such united action was one of unusual severity. It reached its climax in September, and so severe were its ravages that the New York Stock Exchange closed its doors on the 20th of the same month, for an indefinite period, but reopened them ten days thereafter.
The usual resolutions were passed by the Clearing House Association, authorizing the issue of certificates, and on September 22d the first issue was made. The amount was fixed at the outset at $10,000,000, which, with the announcement that the Government would purchase the same amount of bonds, caused an immediate subsidence of the panic, and in less than three days its most acute stages were over. During the two months referred to, certificates to the amount of $26,565,000 were issued.
New Orleans alone issued certificates in 1879, the amount being $54,000. New York alone issued certificates in 1884, the amount being $24,915,000.
The next certificates were issued Nov. 12, 1890, and the issue ceased December 22d, amounting in the aggregate to $16,645,000; the largest amount outstanding at any one time was $15,205,000, on December 12th; and the last certificates were retired February 7, 1891, less than three months from the date of the first issue. Boston and Philadelphia followed. Then came one of the memorable panics, 1893.
The issue was commenced June 21, 1893, and ceased September 6th of the same year, the total issue having been $41,490,000. The largest amount outstanding at one time ($38,280,000) was attained August 20th, which amount remained unaltered until September 6th. Then followed Philadelphia, Baltimore, New Orleans, Cincinnati, Buffalo, Atlanta and Birmingham. Birmingham to protect its cash issued denominations all the way from twenty-five and fifty cents up to $1, $2, $5, $10, and all the larger amounts.