Part 27

Besides the loan certificates issued in 1893, there was a considerable amount of emergency circulation taken out by the banks in the Southeast, under the title of "Clearing House certificates," in cities where no Clearing Houses existed. In adopting the name of Clearing House certificates, it was not the purpose of the banks to practice deception on the people, but to indicate what was really true and what the term would seem to imply, namely, that such certificates were temporary loans made by the banks associated together, and that the banks were pledged for their redemption. The denominations in the cities referred to were: Albany, Ga., $10, $5, and $1; Chester, S.C., $10, $5, and $1; Columbia, S.C., $50, $20, $10, $5, $2 and $1; Danville, Va., $100, $50, $20, $10, $5, $2, and $1; Newman, Ga., $10, $5 and $1; and Rock Hill, S.C., $5, $2 and $1. There is no doubt that the relief afforded in this manner was of great public assistance in the several communities where it was given, effecting results similar to those accomplished by the actual Clearing House loan certificates in the great centres. Business houses and corporations came to the relief of the situation and among them was the New Bedford Mfg. Co., Social Mfg. Co., Hartford, Conn., Eagle and Phoenix Mfg. Co., Columbus, Ga., Swift Mfg. Co., Columbus, Ga., Arnold Print Works, North Adams, Mass., Richmond Locomotive Works, Richmond, Va., Minneapolis and Northern Elevator Co., City of Tacoma, City of Richmond, City of Johnstown, Pa., Loomis and Hart Mfg. Co., Chattanooga, Tenn.

So much for panics up to our last. Then came the panic of 1907. Of this a prominent banker and economist has said: "The truth is that responsibilities for the panic of 1907 lie at the door of our currency system. No other adequate cause can be found. We do business by the modern system of bank credits, but we have failed to supplement this machinery with the means for readily converting bank credits into cash."

On Oct. 26, 1907, New York issued Clearing House loan certificates. On Oct. 26, 1907, Chicago also issued Clearing House loan certificates. On Nov. 6th, Chicago issued Clearing House checks for $1, $2, $5, $10, amounting to $7,500,000. These checks were secured by Clearing House loan certificates.

On November 16th, Philadelphia issued Clearing House certificates and the business houses issued pay checks for wages which were cleared through the Clearing House.

During the fall many cities issued Clearing House checks in small denominations which were used for currency. Canton issued pay checks for $1, $2, $5 and $10, amounting to $200,000, which had no security back of them.

In November pay checks in denominations of $2, $5, $10, $20 were issued to the fourteen banks of the Clearing House of Cincinnati.

Cleveland followed Chicago in denominations of $1, $2, $5, $10.

Fargo, Dakota, issued $5, $10, $20, $100 and $500.

Los Angeles issued October 30th "Clearing House certificates or scrip," designed as a circulating medium for the general use of the public.

Mr. Cannon records the action taken by the associated banks of Group No. 2 of the Ohio Bankers' Association, which includes twelve counties, and is worthy of comment since it offers the first concrete example of the possibilities of the banks of any particular section of any state, uniting in an effort to overcome the disastrous consequences resulting at times from false rumors in panic periods.

MR. MERCHANT: _Now, gentlemen, why all this frightful agony, this terrific straining, this ever-recurring tragedy and universal ruin, simply because we persist in being utterly ignorant of the simplest economic truths which our own actions on every such occasion have demonstrated--that there is absolutely no difference between a bank book credit and a bank note credit, except that the people want something that passes current in greatly increased quantities, when loaning stops or credit is checked. You have only to go to Scotland, and note the fact that there has been in operation there two hundred and seventeen years the vital principle involved, the conversion of bank book credits into bank note credits, and the current redemption of all bank credits in gold coin, whenever called for._

Why, gentlemen, if the man who wants to find the cure would only shake the moss from off his back, and take time to read what I am going to submit to you now, or pull the cobwebs out of his eyes and go up to Montreal, or Toronto, or any Canadian city, and see the bank notes come into the Clearing Houses, with the checks and drafts, he would wonder why he had been such a complete idiot all his life, when our nearest neighbor was enjoying perfect immunity from our troubles.

L. Carroll Root, an American economist and historical student of the first rank, after a most thorough and exhaustive investigation of banks and banking in New England before the war, concludes his comment as follows:

"When the National Banking System appeared upon the scene it found the channels of circulation in New England filled by a State bank currency of well recognized soundness.

"In general, it was a currency based upon the 'banking principle.' It was issued against general assets--not against the deposit of bonds. It was secured in addition, in most of the states, by the further liability of officers and stockholders, or by a first lien upon all the assets of the bank, or both. It was limited--rather loosely, we would now say--to one hundred and twenty-five or one hundred per cent of the capital. But though issued under the legislation of six different states, it was in reality a single currency system--made so through the agency of a commercial enterprise, established and carried on without the aid of law. The bills of banks in any one part of New England passed at par in every other part; and for years the notes of New England banks had been enjoying an extended circulation in the west, where its reputation found for it ready acceptance. At home, too, its valuable points were appreciated and its forced transference to the national system a matter of regret.

"The history of New England bank currency, thus closed, is significant for two developments which characterize it:

"First, the steady growth, under the teachings of experience, of the system as to the issue and regulation of bank currency, which has since then become generally approved among the English-speaking peoples of the New World. In one direction after another special opportunities for fraud or exploitation of a confiding public by rash banking developed their legitimate disasters and prompted the invention of remedies 'to fit the crime.' Conditions were so nearly alike throughout the New England states that each was prompt to suffer from any financial disease affecting any other, and equally prompt to adopt, with such improvements as its own enterprise might suggest, the remedies which had been found effectual elsewhere. As a result, the complete system, at the time of its practical suppression by the National Bank Act, was utilizing nearly every expedient to secure safe and conservative banking that were then or have since been incorporated in our own National Banking system, or in that of Canada--the two great plans which have since been matured.

"A second feature was the development of redemption facilities and methods. Starting with absolute chaos, assisted by no law, progressing tentatively as each necessity prompted the invention of new means to meet it, the result was a carefully buttressed and easily working system, under which, to an extent never approached in its efficiency by any plan elsewhere created by law, the bank note currency of New England was made elastic, safe and ideally convenient and inexpensive in use.

"For a full generation before the war, the amount of ultimate loss to noteholders was too small to be reckoned as an appreciable percentage on the amount of currency outstanding, while the delays and minor inconvenience in the prompt cashing of the bills of broken banks were the result rather of the imperfect communication and exchange facilities of those days than of material defects in the banking system itself; indeed, so satisfactory had been the workings of what is known as the 'Suffolk Bank Redemption Plan'--that the need even of the most modest guarantee fund for instant redemption of broken bank bills was not felt until after the panic of 1857; and even then the total loss was petty when compared with the total circulation, and such as the most moderate plan of subsidiary guarantee would have forever obviated."

MR. MANUFACTURER: That is most astonishing, actually astounding; they went through identically the same experiences during the first fifty years of this country that we have been going through during the last fifty, and they perfected a banking system which we killed by the 10 per cent tax on bank notes. Now we are gradually, whenever necessary, even in defiance of law coming back to the same principle of credit currency, for certainly, whatever may be said of the Clearing House loan certificates, generally speaking, all those $1, $2, $5, $10, $20, $50 and $100 Clearing House checks were nothing but a pure credit currency, and we do not seem to have sense enough to see it, and adopt that principle.

New England redeemed all her currency at the Suffolk Bank at Boston, the financial centre of that commercial zone. New England did before the war, precisely in the redemption of her bank currency what she has been doing since 1899, in redeeming New England checks at Boston. We must take our hats off to New England. All we want to do is to adopt the currency system which she worked out, and her free zone system for check redemptions.

Canada obtained her original banking law by copying the statutes of Massachusetts before the war. She has improved upon them in detail, but the great underlying principle is the same.

MR. MERCHANT: The total amount of certificates in one form or other, cash checks, etc., issued in 1907, was stated by the Comptroller of the Currency to be $248,279,700. It is a most interesting fact to note that just prior to the panic Hon. Charles N. Fowler, then Chairman of the Committee on Banking and Currency, of the House of Representatives, introduced a bill for the purpose of allowing the banks to issue $250,000,000 of bank notes of the pure credit currency character, and urged its adoption, as a measure of relief for the impending crisis. You will note the amount was only one million and three quarters in excess of the amount actually issued, or an estimate within three-fifths of one per cent of the amount actually used.

Never before in the history of the country was such license taken by the banks of the country as in 1907 in using bank credits in the form of cash checks indiscriminately; but they demonstrated this great economic truth that the nearer they approached to a pure credit currency, the nearer right they were. And they demonstrated this fact also to the satisfaction of every intelligent man on this question; that, if this country had been blessed with a credit currency redeemed through the Clearing Houses every day, precisely as these Clearing House certificates and pay checks were, the panic of 1907 would never have marred the commercial history of this country.

With all of our own experience before us, from the establishment of the banks of Virginia in 1803, is our stupidity to continue. And are we now to do something possibly more than stupid when we are naturally, even in defiance of law, as we have seen, finding our way out? If left alone, we shall soon adopt these same principles, now in practice in Scotland, Ireland and Canada? Principles which, without statutory laws, gave New England, before the war, the most perfect banking system that has ever existed anywhere in this world, all things considered.

MR. FARMER: Then why in thunder don't we adopt it now? I suppose we are through with the Clearing House now, aren't we? I hope so, for I am due at the farm. They are waiting for me.

UNCLE SAM: Just hold on a minute. If I understand the facts, you are all wrong about one thing, and this includes both Mr. Cannon and Mr. Hallock. The first Clearing House on this continent was not at New York at all, but it was established at Boston, where I held my first Tea Party, and it was started in 1818, thirty-five years before New York got to going. It only took two clerks to do the business for the first six years. By 1855, just two years after New York started, it took seventy clerks to do the business, and the redemptions amounted to four hundred million dollars per year. Transactions in New England in those days were comparatively very small, and the business was carried on as it is in France today, very largely with bank notes instead of checks. You remember, we learned one night that the Bank of France owed $1,000,000,000 (one billion) in notes, and only one-tenth as much, or only $100,000,000 subject to check; and that if a bank could issue notes, as freely as take deposits, the habits of the people would always determine whether the amount of bank notes was greater than the deposits.

From 1840 to 1860 the note issue of the 510 banks in New England ranged from $30,000,000 to $57,000,000, and averaged $43,000,000, while the deposits ranged from $15,000,000 to $47,000,000, and averaged only $31,000,000, or the note issue was nearly 50 per cent greater than the deposits. The note issue then was the main feature of the banking business, precisely as it is at the Bank of France, and they started a Clearing House to clear the bank notes and it was called "The Suffolk Bank," where all the New England bank notes were cleared, precisely as New England checks and drafts are cleared today. New England was a free bank note zone before the war precisely as it is a free check zone today. All notes were par at Boston, as all checks are par today, and the Suffolk Bank, where the bank notes were cleared, was just as much a Clearing House as the one they have in Boston today, for clearing the checks and drafts. There is not the slightest difference between the two, and the fact that no one of you men recognized it as a Clearing House, convinces me that you do not yet fully comprehend and appreciate the fact that there is not the slightest difference between deposits subject to check, and a true credit currency, or a bank note issue. This is the great fundamental, economic truth, and unless you understand and recognize it, you might as well quit now.

MR. BANKER: I thoroughly appreciate what you say, Uncle Sam, and I think we all do, but you have driven this matter home, so that I don't think we will ever forget it, or fail to apply it under such circumstances again, will we, boys?

MR. LABORINGMAN: No, never. That discovery of Uncle Sam's was a centre shot, a real bull's eye.

UNCLE SAM: The result of this evening's talk is then, as I recall it:

_First_: There is no statutory authority for any Clearing House, either in England or the United States.

_Second_: The first Clearing House started in London in 1775. The second Clearing House started in Boston in 1818 under the Suffolk Bank. The third started in New York in 1853.

_Third_: Clearing country checks was established in London in 1857. New England became a free zone for country checks in 1899.

_Fourth_: Clearing Houses without any authority of law have adopted the following functions: (_a_) They have fixed charges for services; (_b_) they have provided reserves for their convenience; (_c_) they have forced all those banks, which are members, and all those clearing through them to submit to examinations; (_d_) they have not only issued Clearing House certificates for use in settling balances, but for circulation as currency in denominations of $1, $2, $5, $10, $20, $50, $100, to meet the demands of trade.

If you'll give them fifty years more, and will not interfere with them, they will in actual defiance of law reëstablish the currency system of New England before the war and now in operation in Canada.

It's too late to detain you a minute longer. You may go now, but remember that it took your Uncle Samuel to discover the important historical fact that the first Clearing House established in this country was the Suffolk Bank at Boston.

Good Night.

FOOTNOTES:

[Footnote 1: Since the above was written New York City has become a free check zone for a large territory tributary to it.]

FOURTEENTH NIGHT

BANKING IN 1860

UNCLE SAM: This is the fourteenth night, boys, since we began to meet, and discuss what in a way concerns me far more than any other question except the morals of the people. The tariff you can change, any time, any day, and, as I think should be changed schedule by schedule, so that there would not be any disturbance of business. Nor could corrupt trades between the various interests be made, if that policy were pursued. When we take up our money plan we must be sure we are right, before we adopt it. I mean absolutely right; for there is no hope apparently of changing our monetary laws when once they get upon the statute books.

MR. LAWYER: That is certainly true, Uncle Sam, for we've not made a single substantial change in our National Bank Act since it was passed Feb. 23, 1863, almost fifty years ago. Of course, we dotted an "i" here and crossed a "t" there, but that is all.

MR. BANKER: I never thought of that before, but it is literally true. The only change ever made, worth mentioning, in the National Bank Act was that made in connection with the funding of the National Debt in the Act of March 14, 1900. Then Congress adopted word for word a provision contained in Congressman Fowler's first general Financial and Banking bill of March, 1897. This provision provided: That the new bonds should be payable in gold coin and bear interest at the rate of 2 per cent per annum and that the banks could issue circulation up to par of the bonds, and that the tax of 1 per cent should be reduced to one-half of 1 per cent. Not another change has been made, and this was incidental, rather than the direct purpose of the Act.

MR. LAWYER: This indifference, or non-interference with monetary laws, is not peculiar to ourselves, however. You find the same is true in England. There has been no change in the English Bank Act since it was adopted in 1844, although practically all the English banking economists during the past fifty years have agreed that it is most faulty in some respects, particularly in its currency provisions. The same is true of the Bank of France which was established in 1803 by Napoleon, who proved to be as great an economist as he was a general. The same was true during the first fifty years of our banking legislation. The same will always be true in every country, for nothing is ever done, affecting a financial system, until the situation becomes intolerable as it is in this country today, and as it is fast becoming in Germany. Of course, the reason is not far to seek; it arises out of the fact that there is a general fear that any change in the banking practices, or system of any country, will disturb the existing business conditions, or arrangements. Hence nothing is ever done, as long as the people will put up with it. It takes the terrors and wastes of business misfortune to bring any change however obviously needed; therefore, we must be very patient, and most thorough in our work of preparing a measure for the reformation of our present banking practices which have been correctly described as "archaic," "barbaric" and "the worst in the world."

MR. MERCHANT: That is right, we must be both patient and thorough; and to be thorough I think we ought to know what the situation was in this country in 1860, at the breaking out of the war; because if there is one fact that has impressed me more than any other, it is this, that all the real progress we have made during the past fifty years or since the war, has been either without any law, or in actual defiance of law. Under these circumstances I think it is of the utmost importance that we find out if we can what progress, if any, this country had made up to 1860, which was certainly a breaking up point in banking, as well as in all other lines.

MR. BANKER: I agree with Mr. Merchant, and ever since we began these discussions I have taken every opportunity to go back and investigate the banking situation, before 1860, hoping and expecting that our experience then would help us now. I have been literally amazed at what I have discovered in the way of sound banking in many of the states, and I have been profoundly impressed with the fact that then, too, as well as now, all that they had secured that was good was the outgrowth of experience.

MR. MANUFACTURER: I was so greatly impressed with the complete and, as it seemed to me, practically perfect system that had grown up under the Suffolk Clearing House, which started at Boston in 1818, that I have been wondering whether there were not other instances like that which would help us; for, gentlemen, whatever we may think, or want, personally, one thing is certain, and that is this, that we must take things largely as we find them, and legislate as far as possible in harmony with them, bringing the inefficient, the laggard and the "sucker" up to the approved standards of our banking experience and compelling every individual bank to do its part in providing its own insurance by carrying equal and adequate reserves and by carrying on its business in accordance with the highest standards of banking practices today. Then we must bring all of the banks of the country under the reign of economic law, and into one harmonious whole for the benefit of all the people. We must protect our gold reserves against the demands of the rest of the commercial world.

Now, if any one of you has any information about banking conditions before the war that can possibly be helpful, I hope he will give it to us for our consideration.

MR. BANKER: I have no hesitation whatever in saying that there were better banking institutions in the United States in 1860 than there are today, so far as the principles are concerned upon which they were operated. But, of course, we must note two things in this connection: First, banking generally was not nearly as good upon the average as it is today; nor could you expect it to be. Second, banks generally were small, and only in a very few states was banking any more under governmental direction and control than the grocery business, stock buying or horse trading. The result was that sharpers all over the country were using the word "bank" or "banker" to swindle the unwary people and defraud the public generally. Third, in some states the legislators were so ignorant of economic law that the laws passed by them only facilitated the schemes of the swindlers in their diabolical work.

It was the reaction against the disastrous and disgusting experiences in one state after another because of the rotten conditions prevailing that some of the states finally passed laws for the establishment of banking systems, which for soundness and efficiency had never been surpassed, nor even equalled for the territory covered and services rendered.

Let me cite you a few instances; I will take first Louisiana.