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Act of March 3, 1887
[24 Statutes at Large 559, Forty-Ninth Congress, Chapter 378, 2nd Session, Approved March 3, 1887, by Grover Cleveland]
AN ACT TO AMEND SECTIONS FIVE THOUSAND ONE HUNDRED
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That whenever three-fourths in number of the national banks located in any city of the United States having a population of fifty thousand people shall make application to the Comptroller of the Currency, in writing, asking that the name of the city in which such banks are located shall be added to the cities named in sections, fifty-one hundred and ninety-one and fifty-one hundred and ninety-two of the Revised Statutes, the Comptroller shall have authority to grant such request, and every bank located in such city shall at all times thereafter have on hand, in lawful money of the United States, an amount equal to at least twenty-five per centum of its deposits, as provided in sections fifty-one hundred and ninety-one and fifty-one hundred and ninety-five of the Revised Statutes.
SEC. 2. That whenever three-fourths in number of the national banks located in any city of the United States having a population of two hundred thousand people shall make application to the Comptroller of the Currency, in writing, asking that such city may be a central reserve city, like the city of New York, in which one-half of the lawful-money reserve of the national banks located in other reserve cities may be deposited, as provided in section fifty-one hundred and ninety-five of the Revised Statutes, the Comptroller shall have authority, with the approval of the Secretary of the Treasury, to grant such request, and every bank located in such city shall at all times thereafter have on hand, in lawful money of the United States, twenty-five per centum of its deposits, as provided in section fifty-one hundred and ninety-one of the Revised Statutes.
SEC. 3. That section three of the act of January fourteenth, eighteen hundred and seventy-five, entitled "An act to provide for the resumption of specie payments, be, and the same is, hereby amended by adding after the words "New York" the words "and the city of San Francisco, California."
Approved, March 3, 1887.
50,000 population may be serve" cities.
added to "re
200,000 population may be reserve" cities.
Legal-tender redeemed at
notes may be
Annual Report, Comptroller of Currency (Edward S. Lacey)
[Fifty-Second Congress, 1st Session, December 7, 1891, Pages 9-15]
MONETARY STRINGENCY OF 1890
The previous report year, which ended November 1, 1890, showed a comparatively small number of failures of national banking associations. Up to Midsummer of 1890 that year had been one of more than average business activity. It was, however, apparent in the early Spring, to those who were most observant of passing events, that unfavorable conditions existed, the evil effects of which would appear in the near future. This arose from consideration of the fact that agricultural interests were in an unsatisfactory condition, and also that overtrading and unhealthful expansion were everywhere apparent. During the year the building of railroads had been prosecuted with unusual vigor, making necessary the placing of unusually large lines of securities.
Immense sums heretofore available as loanable capital in the New England and Middle States had taken a fixed form by reason of investments in the Mississippi Valley and upon the Pacific coast in city and suburban property, in loans represented by farm mortgages, and in the stocks and bonds of unnumbered corporations organized for the purpose of conducting various kinds of manufacturing operations, and supplying water, light, and rapid transit to the inhabitants of the many rapidly growing cities and villages in the regions named. Not only did these enterprises attract capital from the Atlantic States, but English investors brought to this country vast sums for the purpose of grouping together and recapitalizing corporations engaged in manufacturing, industrial, and commercial pursuits.
This unexampled movement of capital toward the West not only divested the Atlantic States in a large degree of the loanable funds heretofore available for the relief of those engaged there in manufacturing and in business in its various forms, but it also had its effect upon the West in unduly stimulating speculative operations in real estate and laying the groundwork for the future collapse in prices which it was apparent must follow whenever the flow of money toward the field of these operations should for any cause be greatly diminished or entirely arrested.
The various banking institutions located in the region of country affected by the speculative spirit thus incited became necessarily more or less involved in the operations of their local customers. They found themselves early in the Summer of 1890 carrying large lines of loans representing investments in various forms of corporate enterprises, which were in a large degree in untried fields and dependent for success upon the rapid growth of towns and cities, yet unrealized. The banks of the country were therefore in an unduly extended condition upon the approach of Midsummer, and dependent in many cases upon rediscounts with their correspondents in the reserve cities in order to enable them to carry the heavy lines with which they were burdened. While in this condition the transfer of funds to this country from England and the Continent became at first greatly reduced in volume, and finally ceased. Not only was the supply of fresh funds from this source
cut off, but it was discovered that during the late Spring and early Summer months, as well as later on, vast amounts of American securities held abroad were forced upon the New York market by European holders for the purpose of preparing for a collapse which was expected to result from similar conditions of undue expansion existing abroad. The Continental countries had already passed through a period of liquidation and loss consequent upon the failure of the Panama Canal Company and the French Copper Syndicate. England, by reason of unusually large investments in all parts of the world, and especially in the Argentine Republic, was gradually but surely approaching an exceptionally severe monetary stringency.
As an evidence of this and the consequent disposition to increase the stock of gold there held, in order to strengthen their cash resources, it is noted that during the months of June, July, and August of last year the net exportation from the United States of gold coin and bullion exceeded $14,000,000, and for the period extending from January 1, 1890, to August 31, 1891, the net exportations of gold amounted to $75,405,613. While these causes were operating to prevent the necessary relief from reaching us from Europe, the demands upon the banks in New York and other large reserve cities rapidly increased, producing a reduction in the amount of deposits and an increase in the amounts loaned to and rediscounted for the interior banks.
The gross deposits of forty-six national banks in the city of New York show a falling off of $44,831,356 between the 28th of February and 17th of May, 1890; $13,519,527 of this representing a reduction in balances due to interior banks and those located in other reserve cities, while the reduction in loans and discounts was less than $10,000,000. The New York banks, however, were enabled to so strengthen their positions during the months of June and July that the marked stringency was delayed until August. It culminated about the middle of November, when the failure of a leading firm of brokers, the embarrassment of one large State bank, and the failure of another occurred in New York. These events were simultaneous with the announcement of the embarrassment of the Baring Brothers, of London, and the fact that a syndicate had been formed, headed by the Bank of England, through whose agency Baring Brothers' obligations were guaranteed to the extent of about $75,000,000.
The unsatisfactory condition of monetary affairs in England, and the desire to be prepared for the effect of the announcement of the embarrassment of the Baring Brothers, induced the Bank of England to borrow £3,000,000 in gold from the Bank of France, in addition to £1,500,000 received from Russia upon sale of treasury bonds. This extraordinary transaction is an evidence of the serious character of the monetary stringency in England, aggravated by the unsatisfactory conditions apparent in almost every civilized country where English capital has heretofore found investment.
Among the unfavorable conditions existing in our own country, in addition to the undue expansion and resulting speculative investments which have been heretofore noted, should be mentioned the greatly reduced yield last year of wheat, oats, and corn, and the low prices which prevailed for the same. It is also to be observed that the importation of foreign commodities in 1890 exceeded in value that of any previous year. This was due, to some extent, to the passage of the new tariff act, which was made to take effect on the 6th of October, 1890. This
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undoubtedly greatly stimulated importations, in order that their arrival prior to the date mentioned might enable them to escape the higher rate of duty supposed to be imposed by the new act.
To relieve this severe monetary stringency the Secretary of the Treasury increased his purchase of United States bonds to such an extent as to almost entirely exhaust the available surplus in the Treasury. During the three and one-third months from July 19 to November 1, 1890, over $99,000,000 were disbursed in payment for United States bonds and interest thereon. It is apparent, however, that while the relief afforded was timely and the sums disbursed very large, the unfavorable and threatening conditions were caused to a greater degree by want of confidence and a curtailment of credits than by lack of circulating medium. That this large disbursement had the effect of allaying excitement and promoting a return of confidence on the part of the general public is no doubt true.
As has been noted, the monetary stringency culminated on the 15th of November, 1890, and its effects within thirty days thereafter had to a considerable extent passed away, so far as could be observed in the larger cities. Its effect upon the country at large, however, still continued. Inability to place securities and to borrow money had arrested the operations of a great multitude of corporations scattered all over the country, and insolvency and failure had in a large number of cases ensued. Where failure did not take place new work was stopped, all credits were curtailed, and business in its different forms became greatly depressed. The growth of cities and villages was in many cases arrested, and the prices of city property, especially of a suburban character, became greatly reduced.
Corporations newly organized, with insufficient capital and inexperienced management, generally became insolvent, and speculative operations of every kind and character were prostrated. Liquidation took place in all branches of business, resulting in the failure and extinction of a large number of business enterprises which were never entitled to credit and in the curtailment of the operations of many possessing ample capital and skillful management.
The process of liquidation above referred to did not end with the monetary stringency in December, 1890, but has continued since that date, and its influences are still felt and its effects observed. The subject is here discussed because of its intimate connection with the bank failures of 1891.
CLEARING-HOUSE LOAN CERTIFICATES.
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 careful 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 and 1884.
At a meeting of the New York Clearing-House Association on the 11th 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 percent per annum, and in addition thereto a commission of one-quarter of 1 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 of 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:
Loan committee of the New York Clearing House Associa-
On the surrender of this certificate by the depositing bank