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a large number of the banks in any locality suspend, the others cannot escape adopting the same course. But in 1884 the erroneousness of the belief had not been made clear by recent experience.

The New York banks weathered the moderate storms of 1884 and 1890 without suspension by means of the clearing-house loan certificate alone, and in the course of time all recollection of the arrangement for the equalization of reserves seems to have faded from the memory of the banking community.

In 1893 only a small part of the balances between the banks was settled in certificates at first; but by the end of July practically all balances were settled in that way and suspension followed at once. In 1907 all the banks having unfavorable balances, with but one important exception, took out certificates on the first day that their issue was authorized, and suspension was then for the first time simultaneous with their issue.

The connection between suspension and the use of clearing-house loan certificates as the sole medium of payment between the banks is simple and direct. The bank which receives a relatively large amount of drafts and checks on other banks from its customers cannot pay out cash indefinitely if it is unable to secure any money from the banks on which they are drawn. So long as only a few banks are taking out certificates and the bulk of payments are made in money no difficulty is experienced; but as soon as all the banks make use of that medium the suspension of the banks which have large numbers of correspondents soon becomes inevitable. The clearing-house loan certificate was a device which the banks themselves had adopted, and they had failed to provide any means for preventing partial suspension as the result of its use. That the arrangement for equalizing the reserves, adopted in 1873, would have availed to prevent suspension on subsequent occasions is highly probable, indeed a practical certainty.

The reserve situation in 1893 and 1907 was by no means desperate at the time of suspension. In 1893 the New York banks were in what was for them an unusually strong condition at the beginning of the disturbance, having early in June a cash reserve exceeding 30 per cent of their net deposits. A succession of banking failures in the West and South led to heavy withdrawals from New York during the latter part of June and the beginning of July. Then followed a lull and money began to be returned to New York. During the third week of July banking failures were renewed in the West and

South and the drain was resumed. The positively unfavorable aspects of the situation were altogether similar to those of the previous month, with the one further circumstance of a reduced cash reserve in New York. On the other hand, additional means with which to meet the situation were becoming available. At the end of July gold imports in large amounts had been arranged. Foreign purchases of our securities were heavy, reflecting increasing confidence in the repeal of the silver-purchase law. Arrangements had also been made which would certainly lead to a considerable increase in the issues of bank notes during August and September. Notwithstanding all these favorable circumstances the New York banks suspended, during the first week of August, when they still held a cash reserve of $79,000,000, more than 20 per cent of their deposit liabilities.

In 1907 the New York banks restricted payments when they still held a cash reserve of more than $220,000,000 and when the reserve ratio was also above 20 per cent. Both in 1893 and in 1907 suspension was not a measure of last resort taken after the banks had entirely exhausted their reserves and when there were no means of securing additional cash resources. Moreover, after cash payments were restricted the policy of the banks was unlike that adopted in 1873 in that the banks did not make further use of their reserves; they hoarded them and added to their amount, thus unduly prolonging the period of suspension.

95. SUBSTITUTES FOR CASH IN THE PANIC OF 19071

BY A. PIATT ANDREW

Reports from the 145 largest "independent" cities show that during the disturbance of 1907 in at least 71, or nearly half, resort was made by the banks to clearing-house loan certificates, clearing-house checks, cashiers' checks payable only through the clearing-house, or other substitutes for legal money; in 20 others the larger customers of the banks were asked to mark their checks "payable only through the clearing-house"; and in at least one other, where these practices were not pursued, the size of checks that would be cashed was restricted. Roughly speaking, in two-thirds of the cities of more than 25,000 inhabitants the banks suspended cash payments to a greater or less degree.

1 Adapted from "Substitutes for Cash in the Panic of 1907," Quarterly Journal of Economics, XXII (1907-8), 501-16.

Seven different types of substitutes for cash have been distinguished, though some of them closely resemble each other. There were also many variations in the various individual types.

A. The familiar expedient of issuing clearing-house loan certificates in denominations ranging from $500 to $20,000 for use in settling interbank balances has never been resorted to upon such a scale as in 1907. During the panic of 1893 eight cities were reported to have employed them; but during the disturbances of 1907 they were used by no less than 42. The aggregate issue of regular clearing-house certificates in the entire country during the panic of 1907 was 238 millions, or nearly three and a half times the total of 1893.

B. During the panic of 1893, for the first time clearing-house associations issued certificates in currency denominations to be used by the banks in paying their customers. Their issue, however, was practically confined to the southeastern states. In the panic of 1907 Georgia was again, as in 1893, the center for emergency circulation of this sort, what were called "clearing-house certificates" being issued in at least 21 Georgia towns; but devices of that name were also put in circulation in many other parts of the country, and not infrequently even by banks of small towns, where no clearing-house had ever existed. In such cases they were issued under the auspices of temporary committees of the local banks, which accepted and held the collateral offered to guarantee their redemption.

These small certificates, like the large ones, were secured by collateral deposited with the clearing-house committee, and were practically guaranteed by all the associated banks, in that these banks agreed to accept them at par for the sum named. The description of collateral in most cases was a general affirmation that "this certificate is secured by the deposit of approved securities." But sometimes there was more detail, as in Portland, Oregon, where it was asserted that the banks have deposited "notes, bills of exchange, and other negotiable instruments secured by wheat, grain, canned fish, lumber actually sold, and other marketable products, and bonds approved by the committee," etc.; or in the case of Charleston, South Carolina, where there were said to be deposited "securities of double the value of this certificate, or bonds of the United States or of the State of South Carolina, or of the city of Charleston, or of the city of Columbia, 10 per cent in excess thereof."

Many of the certificates were elaborately engraved and were shaped and colored so as to resemble ordinary bank or government

notes. In denomination they usually ranged from $1 to $20, but in some cases, as in Montgomery, Alabama, they were issued for convenient sums all the way from 25 cents to $50.

The compilation here presented, though very incomplete, records an issue of $23,831,813 of such devices in the course of the panic of 1907. C. Identical with these certificates in character and function, though differing in form, were the clearing-house checks issued in a number of cities. Like the certificates, they were issued by the associations to member banks upon the deposit of approved securities. Like them, they were accepted for deposit in any of the banks, but were payable only through the clearing-house. They were also in currency denominations, and were often quite as elaborately engraved, so as to resemble currency. The one peculiarity which distinguished them from certificates was that instead of merely certifying indebtedness on the part of the clearing-house association, they took the form of checks drawn on particular banks, and signed by the manager of the clearing-house. In Chicago a bank desiring such checks deposited with the clearing-house a corresponding amount of the ordinary loan certificates of large denominations and received the checks in currency denominations in exchange. They were also issued in Cleveland, Milwaukee, Youngstown, South Bend, and some smaller cities. Our record includes $12,060,248 of such issues.

D. In spite of the provisions of the National Bank Act, that no national banking association shall issue "any other notes to circulate as money than such as are authorized by the provisions of this title," a large number of national banks issued what were practically circulating notes in the form of cashier's checks in convenient denominations. In spite also of the 10 per cent tax upon any notes issued by state banks, similar devices were issued freely and without hindrance by some of those institutions as well (e.g., in Superior, Wisconsin). These checks usually purported to be "payable to bearer,” but they were "payable only through the clearing-house," or "in exchange," or, as the phrase sometimes went, "in clearing-house funds." While in the southeastern states it was common for the banks in the small towns to issue conjointly what they called "clearinghouse certificates," in small towns of the Middle West the "cashier's checks" of the individual banks were much more common. Sometimes these cashier's checks, like clearing-house certificates and clearing-house checks, were secured by the deposit of approved collateral with a committee of the clearing-house.

E. Another variety of currency issued during the panic were the New York drafts in denominations of $1 and upward, issued by the banks of Birmingham, Alabama, and which were used for pay-rolls and general circulation in that locality.. They were really cashier's checks drawn on New York, but were drawn against actual balances held by particular New York correspondents. They were payable through the New York clearing-house, and were not otherwise secured, yet they appear to have circulated in and about Birmingham to the extent of millions of dollars without difficulty.

F. In a few instances the currency issued by the banks took the form of negotiable certificates of deposit in convenient denominations. Sometimes these certificates asserted that a particular person or company made the deposit, as in the case of the Bank of WinstonSalem, North Carolina. Sometimes the assertion was altogether general, as in the example from Berkeley, California. In some cases they bore interest, and were payable after the expiration of a certain period; in others they were immediately acceptable by the issuing bank through the clearing-house, and in such cases they bore no interest.

G. Last of all among the emergency devices were the pay checks payable to bearer drawn by bank customers upon their banks in currency denominations and used in all parts of the country in payment of wages and in settlement of other commercial obligations. These checks were generally "payable only through the clearinghouse," but they differed from those which have as yet been considered, in that they were not a liability of the clearing-house association or of the bank on which they were drawn, but of the firm or corporation for whose benefit they were issued.

The pay-check system reached its largest development in Pittsburgh, where during the panic some $47,000,000 were issued, much of which was in denominations of $1 and $2. Their issue involved much more labor to the clearing-house, to the banks, and to the corporations using them than the issue of clearing-house checks would have caused, for most of them were rushed back to the bank within a week or ten days, and new checks had to be issued in their stead.

Pay checks were also issued by railroads, mining companies, manufacturers, and storekeepers in a large number of cities. Shops and stores and places of amusement in the neighborhood of their issue generally accepted them, and it is indeed surprising, considering their variety, their liability to counterfeit, and their general lack of

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