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, That any loss resulting from the issue of loan cer-
tificates 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,


On the 17th of November, 1890, similar proceedings were had by the Boston Clearing-House Association.

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 . . .

It will be observed that the original agreement under which the committee proceeded in this case was adopted during the panic of 1873 and 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 Novmber 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.

Annual Report, Comptroller of Currency (James H. Eckels)

[Fifty-third Congress, 2d Session, December 4, 1893, pages 10-25]


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 inaugurated 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 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 upon 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.

The fright among depositors of the present year appears to have affected all classes of banking institutions alike. The shrinkage of deposits of national banks from May 1 to July 12 last exceeded $190,000,000. In order to ascertain the extent of the shrinkage in banks other than national, the Comptroller requested each State officer charged with the supervision of banks organized under State authority to submit a statement showing similar information with respect to that class of banks. Replies were received from the officers of 23 States and 2 Territories indicating that the loss to banks of this

character corresponded with that shown by the returns from national banks. Generally no information was given with respect to savings banks and much less regarding private banks.


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-'91, 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 record 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. 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 a clearing-house association, to the members of such association, and were available to 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 committee 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 7310 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 the legitimate and current demands of business and unquestionably placed it within the power of the banks in the cities named to extend 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 but 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 financial derangement of the country was most opportune in not only preventing an acute panic, but in tending 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 in issuing them to so large an amount the Clearing-house 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:

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The issue of loan certificates in 1893 greatly exceeded that of previous years. In 1873 and 1884 they were issued only by the New York Clearing House Association, the total amount issued in 1873 being $26,565,000 and in 1884 $24,915,000.

In 1890-'91 they were issued in New York, Boston, and Philadelphia, the largest amounts outstanding at any time being as follows:

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Not less attention has been attracted during the present year, and particularly during the closing months of the year, to the subject of lawful-money reserve to be held by the banks, than to that of clearing-house loan certificates, and the discussion provoked has been quite as widespread.

As the law now stands all national banks, outside of certain designated "reserve cities," are required to maintain a reserve fund equal to 15 per cent of the net deposits made with such banks by individuals and by other banks and bankers. They are permitted by law to deposit not over three-fifths of this 15 per cent (or 9 per cent) with such national banks located in the "reserve cities" as the outside banks may with the Comptroller's approval select. The remaining two-fifths (or 6 per cent) must be kept in bank in lawful money, or more, if less

than three-fifths is kept with reserve agents. The national banks located in reserve cities are divided into two classes: (1) Those in the "central" reserve cities of New York, Chicago, and St. Louis being required to keep 25 per cent of their net deposits in bank in lawful money, with the privilege of acting as the reserve agents of any national banks located outside of these three cities. (2) Those located in the reserve cities, other than New York, Chicago, and St. Louis, being required to keep 25 per cent of their net deposits on hand, not over one-half of which may be deposited with any national bank or banks located in any of the three central reserve cities, while the remainder must be actually on hand in lawful money. The banks in the reserve cities of this class have the privilege of holding a part of the reserve of any bank or banks located outside of all reserve cities, viz, banks of the 15 per cent class.

In effect these requirements are not as onerous as they appear, for a national bank in New York City holding $100,000 of the reserve of any other bank or banks on deposit must keep only $25,000 of the amount on hand in money, while it is at liberty to lend or otherwise invest the remaining $75,000. So a bank in a reserve city of the second class holding $100,000 on deposit for other national banks may loan out or invest $75,000 of the amount, and of the remaining $25,000 must keep $12,500 in bank in money and may deposit $12,500 with its reserve agents, receiving a low rate of interest (usually 2 per cent) on the same. A bank of the 15 per cent class must keep only 6 per cent of its depositors' money actually on hand in bank, and is at liberty to deposit not over 9 per cent with its reserve agents, on which it usually receives a low rate of interest. To illustrate the operation of the law it will be found that with normal conditions of business the banks in reserve cities (not central) held on December 9, 1892, net deposits amounting to $495,196,952, against which they held $77,869,593 cash in bank, or about 16 per cent, and the 15 per cent banks held net deposits of $975,622,088, and against these $108,012,546 cash in bank, or about 11 per cent. Again, a large portion of the reserve actually held by the banks can not be considered as taken out of circulation, or as hoarded through operation of the law, for much of it is paid out during each business day, other money coming in through deposits to take the place of that paid out.

In any view of the matter, however, the intent of the law is to compel a bank to retain always on hand a very moderate proportion of the money deposited with it for safe keeping by the depositor, who practically makes a loan to the bank payable on demand, for the use of which he ordinarily receives no interest. The entire effect is to exercise a wholesome restraint upon a tendency to an undue extension of business by a bank, and that this intent is recognized as an underlying principle of safe and conservative commercial banking is evidenced by the fact that those banks which are compelled by law to maintain but 15 per cent reserve have voluntarily for years past held an average of over 25 per cent, the proportion required for banks located in reserve cities. The evident theory of the law is that a bank shall always have on hand such an amount of lawful money as will enable it under normal conditions of business to meet the current demands of its depositors. A careful examination of section 5191, United States Revised Statutes, as amended, will show that it is expected that emergencies will arise un

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