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BANKING AND CURRENCY.
tificates in order to meet their daily to be equal to that of the bankers clearance balances.
The situation was complicated still further by the out-of-town banks, which began calling in their deposits on the New York banks. At the same time country banks, too, began to demand the return of their reserve deposits in Chicago, Pittsburg, St. Louis, and other centres, and the clearing house associations in these places were before long following the lead of New York in issuing clearing house certificates. The fact that the New York banks were forced to meet their obligations to interior correspondents by means of checks instead of cash, helped still further to extend the money stringency to all quarters.
The stock exchanges of Pittsburg, New Orleans, and Minneapolis closed; currency went to a 4 per cent. premium-5 per cent. in Pittsburgand remained at premium till the close of the year; while many banking houses and industrial corporations were forced by the prevailing lack of currency to put out a wild-cat currency of their own. The stringency was felt very keenly in the West. In many places it was found difficult even to pay employees their weekly salaries, while all business was retarded by the inability of business men to discount one another's notes. Many concerns were forced to go into the hands of receivers for a time, but, everything considered, the number of failures was surprisingly small. Still the fright of the depositors continued
themselves, and banks in all sections had to struggle for bare existence. Withdrawals were limited to $50 a week- even less in some caseswhile the inability of business men to meet loans which were called in threatened a widespread suspension. In several Western States the governors decreed a week's holiday in order to permit affairs to right themselves naturally and public confidence to return, and in at least one State (California) this holiday was extended almost to the end of the year. It was largely as a result of such wise precautionary measures that, despite the frenzied conditions prevailing in all sections, only one important bank suspension (that of the Kansas City National Bank of Commerce) was reported throughout all this period from the Middle West.
All the while Secretary Cortelyou remained in New York and continued to advance governmental aid to all parts of the country as rapidly as possible. In less than a month after the panic subsided government funds on deposit had increased by more than $80,000,000, while interior banks were further aided by importations of gold, which, by December 1, had almost reached the $85,000,000 mark. It thus came about that before the end of the year both the Western and Southern banks had amassed enough to enable them once again to meet full payment of check demands; but they were afraid to do this until assurances of
safety reached them through the resumption of payments on the part of the New York banks. Everything considered, the recovery of the latter was remarkably rapid. The deficit in their reserves, which amounted to nearly $55,000,000 late in November, had been reduced to almost $10,000,000 by the beginning of 1908, and it was not long before the general resumption of payment was effected throughout the land.
The return of confidence was somewhat slow and business men everywhere exercised great caution at all times, but before the end of 1908 conditions seemed to have settled down to their normal level again. The causes assigned for this panic, which came so near causing disaster to the Nation, were many and diverse. A great number, among whom were included several prominent bankers and close students of economic conditions, placed the blame on President Roosevelt's shoulders, holding that the sweeping investigations he had instituted dealing with the corporate interests and their methods had been the means of paralyzing public confidence. On the other hand, the supporters of the Administration maintained that there could have been no trouble had not corruption existed to an alarming extent and that, with such a state of affairs, a panic could not have been avoided, even if it might have been postponed. Perhaps the most plausible explanation is furnished by the tremendous increase,
Many things contributed to the general clearing up of the situation. Besides the pooling of banking interests and the co-operation of trust companies, the prompt aid of the Treasury and the introduction of clearing house certificates, new issues of government bonds and certificates and large importations of gold were prominent factors. The first of the latter was arranged for within a week after the panic ended, while others followed in rapid succession, finally resulting in a fall of the cash premium. Still another very important relief measure was supplied through a liberal interpretation of the National banking law which, in order to secure deposits, permitted all National banks having deposits of United States bonds with the Treasury to substitute for these approved securities, so that the bonds so released could be utilized to guarantee increased circulation. In this way the outstanding bank-notes were shortly increased to about $20,000,000.
As soon as conditions appeared to have righted themselves, numerous reform movements were begun, the dominant cry being for a more elastic currency. In addition, it was demanded that the practice of using bank depos
BANKING AND CURRENCY.
its for collateral loans and discounts be stopped; that such trust companies as the panic had proved to be in a more precarious state than other types of banking institutions be so regulated as to be obliged to conduct their banking business entirely apart from their other interests. William Jennings Bryan's plan was that bank deposits should be guaranteed by the Government. The demand for a postal savings bank system was also widespread and insistent.
The upshot of all the various suggestions was the Aldrich-Vreeland Act, which became law on May 30, 1908. This act provides that, subject to the discretion of the Comptroller of the Currency, the Treasurer of the United States, and the Secretary of the Treasury, National banks of stipulated standing may, in case of emergency, secure additional circulation which shall be similar in character to the present National bank notes and shall be guaranteed by the Government. It is stipulated, however, that these emergency notes shall bear a graduated tax, not to exceed 10 per cent., to insure their quick retirement after the imperative need for them was passed, and that an amount equal to at least 10 per cent. of the emergency notes issued shall be deposited in lawful money with the United States Treasury, to serve as a redemption fund for the notes of any bank which may fail. Such emergency circulation may be secured either di
rectly or through a National currency association, both methods being provided for in elaborate detail. The formation of such a National currency association is also provided for by the Aldrich-Vreeland Act, as is a National monetary commission. This measure, however, is only a temporary one, expiring by limitation June 30, 1914. In the meantime it is the business of the National Monetary Commission to meet the general demand for banking reform.
The National banking system under which, with various minor changes, the country has been operating ever since the close of the Civil War, served
its purpose wonderfully; but the panic of 1907 brought to light its possible weaknesses in time of quick financial crisis. The people can afford to take no chances and, just as the State banks gave way to the National banks, the time now seems ripe for the latter institutions, in turn, to be supplanted by some more up-to-date and comprehensive system. The National Monetary Commission, composed of nine Senators and nine Representatives, headed by Senator Nelson W. Aldrich, has looked into conditions abroad, besides going deeply and scientifically into the monetary system and the banking and currency laws of this country. The comparison in many ways does not appear to reflect great credit upon the United States.
Present conditions seem to foreshadow a great reorganization of
the fiscal system of this country before long, the most probable solution being conceded to be the establishment of a central bank. Just what the operative methods of this institution shall be, however, has not as yet been definitely worked out, although a wealth of very comprehensive suggestions has been brought forward by close students of financial conditions. The general trend of public opinion seems to favor a central bank.
It therefore seems safe to assume that the country is drawing near to the end of a financial era. On the whole, with reorganization so close at hand, there seems to be little ground for complaint. The United States has now a postal savings bank, established by an act of Congress approved by the President in June of 1910. Private banking institutions, which have come to play a part of constantly increasing importance in the banking of America, are at present in a flourishing condition generally. By the end of February of 1908 all the clearing house certificates issued during the panic had been retired, and the rest of that year,
together with all of 1909 and 1910, saw periods of quick recovery and general prosperity of the most genuine kind. 1907, the growth of State and National banks, as well as of trust companies, has been logical and altogether healthy, and, although 1911 developed some banking setbacks, conditions. were usually healthy and the solvency of banking institutions in general was unquestioned.
Following the stringency of
Altogether, then, the United States, in view of the way it has weathered the severe financial storms in the past, has every reason to be well satisfied with itself and to look with the brightest hopes toward the future.*
* Carl C. Pleiu, The History of Banking in America (1903); Proceedings of the Annual Conventions of the American Bankers Association 1875-1906 (1906); John J. Knox, et al., A History of Banking in the United States, revised by Rhodes and Youngman (1900); W. G. Sumner, A History of Banking in the United States (1896); Albert Sidney Bolles, Law Relating to Banks and Their Depositors and to Bank Collections (1887) and The National Bank Act and Its Judicial Meaning (1888); Edward Atkinson, The Banking Principle (1895); Charles A. Conant, The Aldrich Banking Plan (1911); Horace White, Money and Banking Illustrated by American History (1908).
HISTORY OF THE UNITED STATES FINANCES."
Reorganization of finances at the close of the Civil War - The funding act of 1866- The panic of 1873 - Resumption of specie payment- - Tariff revision of 1883- Efforts to demonetize silver Further tariff revision - The financial panic of 1893 - The income tax The money question in the campaign of 1896 - Finances during our Spanish war Restoration of the gold standard The crisis of 1907- The National Monetary Commission
- Recent tariff revision.
At the end of the Civil War the United States was confronted with the mammoth problem of reorganizing its finances. The three prime essentials in this were the funding of the debt, the revision of the system of taxation in accordance with the debt policy, and the restoration of the standard of value through the resumption of specie payments. On September 1, On September 1, 1865, the public debt reached its highwater mark, being registered at $2,846,000,000, against which there was a sinking fund of $88,000,000, leaving a balance of $2,758,000,000. Of this Of this enormous amount legal tender notes. represented $433,160,000; $26,344,000 was in fractional currency, while much of the residue was made up of short-time paper or temporary securities, some of which were already maturing. Political conditions were not such as to facilitate a speedy set
tlement of fiscal questions. President Johnson was at odds with the party leaders in Congress, and affairs generally were in a disordered state. Fortunately Hugh McCulloch, who had been appointed to succeed Fessenden as Secretary of the Treasury, was a resolute man and was little hampered by the Executive, who devoted his time to other matters. McCulloch believed that the volume of currency should be reduced with the utmost rapidity, declaring this to be the only way the resumption of specie payments could be effected within a reasonable time.
There was much heated discussion on this point, but the general opinion at first seemed to favor McCulloch's view, for on December 18, 1865, the House of Representatives passed a resolution in favor of as speedy a contraction of the currency as the interests and welfare of the Nation would permit. The first decisive step taken by Congress toward a general reorganization, however, occurred on