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348
[AMERICAN
BANKS AND BANKING


kept in Washington for current redemption purposes. The redemption system is defective in that redemptions are not authorized at other places, and the notes reach the treasury on an average only about once in two years. For many years the banks were prohibited from retiring more than $3,000,000 of notes monthly, but the limit was raised by an act of 4th March 1907 to $9,000,000 per month.

Reserves are required against deposits to the amount of 25% in so-called reserve cities," and 15% in what are called the "country banks" outside of reserve cities. Not all these amounts, however, are required to be kept in cash. The three central reserve cities, where cash is required, with only trifling deductions, are New York, Chicago and St Louis. In other reserve cities, which in 1908 numbered forty, the banks are permitted to deposit half their cash in national banks in central reserve cities, while country banks may deposit three-fifths of their cash in any reserve city. The shareholders of national banks are subject in case of liquidation to double liability upon their shares, and this is now the rule in most of the conservative state banking systems. National bank-notes are not legal tender, but are receivable by the government for all obligations except customs dues.

The panic of 1907 imposed a severe strain upon the cash resources of the banks of New York City, but did not cause any such considerable number of failures as occurred in 1893.

Payment of cheques in currency was suspended in New York on the 28th of October 1907, and continued until about the beginning of the year 1908. The panic was precipitated by over-speculation by a group of national banks, followed by the suspension of the Knickerbocker Trust Company on the 22nd of October with deposits of $48,000,000. Then came runs on other companies, a deficit in the required reserves of New York banks of $38,838,825 in the week of 2nd November, and arrangements for the importation of foreign gold to an amount which soon approached $100,000,000. With an increase during the autumn of about $77,000,000 in national bank circulation, a transfer of $72,000,000 from the treasury to the banks, and a further decline in required reserves in New York during the next week, the amount of currency which was added to the circulation or disappeared during a few weeks of the panic amounted to more than $275,000,000, or nearly one-tenth of the usual volume of circulation in the country. The total bank-note circulation on the 28th of December 1907 had risen to $687,340,835; but this amount was abnormal and was reduced somewhat during the spring of 1908.

The position of the trust companies, especially those of the city of New York, was one of the disturbing features of the panic. These companies were comparatively a small factor in New York finance at the time of the panic of 1893. The capitalization of all the trust companies in the United States, even as late as 1897, was only $106,968,253, and individual deposits were $566,922,205. The capital of these companies had risen in 1907 to $276,146,081 and their deposits to $2,061,623,035. The trust companies of New York were required by the law of the state to maintain only 5% of their demand deposits in cash in their vaults. Whilst most of them had also large amounts on deposit in national banks, these reserves proved inadequate to sustain the vast mass of credit which was built upon them. The absolute amount of the reserves, however, was perhaps less important than the class of business to which some of the less conservative of these companies had committed themselves. Instead of keeping their assets liquid by purchases of commercial paper and loans on first-class negotiable securities, they had in some cases engaged in speculative underwritings and had locked up their funds in enterprises requiring a long time for their consummation.

It was these combined influences which led to distrust of the Knickerbocker Trust Company, and to the runs upon that company and others during the late days of October and early November. The result was to reduce the total resources of the forty-eight trust companies of Greater New York from $1,205,019,700 on the 22nd of August 1907 to $858,674,000 on the 19th of December 1907. Individual deposits subject to cheque fell from $692,744,900 to $437,733,400. Such a reduction of resources within so short a time, most of it being accomplished within a few weeks, has hardly ever been recorded in the history of banking, and the fact that the stronger companies were able to call in their cash and meet such demands was evidence to a certain extent that the criticisms upon them were exaggerated. The necessity for stronger reserves and for greater safeguards against speculative operations was so strongly impressed upon the public mind, however, that several restrictive measures were enacted at the session of the New York legislature in 1908, designed to prevent any abuses of this sort in the future.

The function of issuing notes, which is exclusively a privilege of national banks, has diminished in importance in America, as other methods of transferring credit have attained a wide development. This has not only been true of the national banks themselves, but has accounted for the development alongside the national banking system of state banks, private banks and trust companies, which have not had the privilege of note-issue, but have obtained other privileges sometimes greater than those of the national banks.

The aggregate resources of all classes of banks in the United States have greatly increased in recent years. The following table shows the increase in the chief items of the accounts of national banks for representative years from the reports made nearest to the beginning of the year:—

Progress of National Banks, 1865-1908
Year. No of
Banks
Loans and
Discounts.
Individual
Deposits
1865 638 $166,448,718 $183,479,636
1870 1615 688,875,203 546,236,881
1875 2027 955,862,580 682,846,607
1880 2052 933,543,661 755,459,966
1885 2664 1,234,202,226 987,649,055
1890 3326 1,811,686,891 1,436,402,685
1895 3737 1,991,913,123 1,695,489,346
1897 3661 1,901,160,110 1,639,688,393
1899 3590 2,214,394,838 2,225,269,813
1900 3602 2,479,819,494 2,380,610,361
1901 3942 2,706,534,643 2,623,997,521
1902 4291 3,038,255,447 2,964,417,965
1903 4666 3,303,148,091 3,152,878,796
1904 5180 3,469,195,043 3,300,619,898
1905 5528 3,728,166,086 3,612,499,598
1906 5911 4,071,041,164 4,088,420,135
1907 6288 4,463,267,629 4,115,650,294
1908 6625 4,585,337,094 4,176,873,717


The combined returns of state and private banks, savings banks and loan and trust companies in the United States show a growth within a few years which is indicated by the principal items of their accounts:—

Resources of State Banks, Trust Companies, &c.


Items. 1897. 1907.
Capital stock $380,090,778 $807,178,262
Surplus and profits 382,436,990 924,655,010
Loans 2,231,013,262 6,099,897,535
Deposits 3,324,254,807 8,776,755,207
Total Resources 4,258,677,065 11,168,514,516


The aggregate banking power of the United States, as computed by the comptroller of the currency in his annual report for 1907, increased from $5,150,000,000 in 1890 to $17,824,800,000 in 1907, and the banking power of foreign countries from $10,835,000,000 to $27,034,200,000, representing an increase for all reporting countries from $15,985,000,000 to $44,859,000,000.

The system of clearing cheques has attained a higher development in the United States than in any other country, except perhaps, Great Britain. Clearing-houses exist in about 112 leading cities, and the aggregate clearings for the year ending 30th September 1907 reached $154,662,515,258. The New York Clearing-House inevitably does a large proportion of this business; its clearings constituted in 1906 67.2% of the total clearings in 55 of the larger cities. The volume of clearings fluctuates greatly with the volume of stock-exchange transactions and with the business prosperity of the country. An indication of these fluctuations at New York is afforded by the following table, taken from Conant's Principles of Money and Banking, brought down to 1907.

Variations in Clearings at New York
Year. Average
Daily
Clearings.
Per cent
Balances to
Clearings.
Remarks.
1870 $90,274,479 3.72  
1873 115,885,794 4.15 Great business activity.
1874 74,692,574 5.62 Industrial depression.
1881 159,232,191 3.66 Renewal of railway building.
1885 82,789,480 5.12 Results of bank panic.
1890 123,074,139 4.65 Business expansion.
1894 79,704,426 6.54 Depression following panic.
1896 96,232,442 6.28 Free silver panic.
1899 189,961,029 5.37 Renewed confidence and activity.
1901 254,193,639 4.56 Culmination of industrial flotations.
1904 195,648,514 5.20 Diminished stock-exchange and business activity.
1906 342,422,773 3.69 Stock-market activity.

The Clearing-House Committee of the New York Clearing-House exercises a powerful influence over the banking situation through its ability to refuse aid in emergencies to a bank which is unwisely conducted. This power was used in the panic of 1907 to eliminate several important, but speculative, financial interests from control of national banks. Only national and state banks and the sub--