uncle sam: we are on the very last lap tonight, as i understand the situation. we have had the standard of value, money, currency, exchange, value, price, property, wealth, credit, reserves, the bank; and now comes the settlement of the claims against the bank in the shape of checks, drafts and bills of exchange.

when we finish this conversation we can, i hope, begin to put things together, that is, make use of our material.

mr. banker: uncle sam is right, we shall be ready to do some constructing when we have disposed of the clearing house, which is destined to play a gigantic part in the future of american banking. this is true because the clearing house is bound to become the machinery by which all american banks are to co?perate and protect themselves through their combined strength; and it will be a splendid exhibition of what true co?peration can accomplish.

the character and origin then of the clearing house, its present and prospective function, must be carefully studied by us, if this assumption is correct.

mr. merchant: the character of the clearing house, or the principle upon which it works, is simple enough; although its operations are vast, and its achievements in times of financial stress have been most striking, even though not always satisfactory.

the principle of clearing is, as i have just said, simple indeed. if i have a claim against mr. manufacturer, and he has an equal claim against me, we clear them by exchanging our claims with each other. if one of you gentlemen should sue another for one hundred dollars, and the other should make a defense by pleading an offset of one hundred dollars, and the court should allow[pg 290] both claims, you would clear them through the court, the one offsetting the other; that is all there is of the principal involved.

mr. banker: mr. merchant, you have put this matter more simply than any book has ever done. indeed, i had not reduced the transaction to such simple terms. to put it in the form of a definition, as you stated, it would read this way: "to offset one claim against another, and pay the balance, if any, is clearing them."

i had thought that it would be my particular task to explain this transaction of clearing, and after a good deal of meditation i had worked out a thought which i am sure is next best, after your definition; and it will take us one step nearer to the clearing house, without getting into any of its complexities. my illustration is this: if there were but one bank in a town, and all the people did their business through this single bank, by depositing their money and checks, and then paid all their bills, with checks on the bank, apart from any outside business, every debt in the town would be paid by check, and there would be no need of any money at all as the claims and debts would be exactly equal, and would always cancel each other to a cent.

mr. lawyer: what you have said about one bank in a town is equally true of two, three or four, or any number of banks, if you assume that every person in town does his entire business through the banks, providing, of course, that the banks get together, and offset all the checks and drafts they receive during the day. there might be something to pay from day to day for the time being, but all would be adjusted in the end, without any variation or difference.

mr. banker: precisely so, but when you get those bankers together, for the purpose of trading checks, you have created a clearing house.

stephen colwell says: "clearing is beyond all question, the simplest, the most economical, and when ap[pg 291]plicable, the most efficient of all modes of paying debts; it is precisely analogous to balancing accounts."

james g. cannon, author of the leading work upon the history of american clearing houses, describes a clearing house "as an office, established by the banks of a city, where their representatives meet daily to exchange drafts and checks, and adjust balances." again, "as a device to simplify and facilitate the daily exchanges of items, checks, drafts and bills of exchange, and the settlement of balances among the banks, and a medium for muted action upon all questions affecting their mutual welfare."

you would think that the clearing house was such a simple matter, and such a great advantage that a clearing house would have been thought of, and put into operation as soon as banks got under way, but not so. their development and establishment, as we know them today, has been slow indeed, and the early history of their origin most interesting.

jevons says: "about the year 1775, a few of the london bankers hired a room where their clerks could meet to exchange notes and bills, and settle their mutual debts. the society was of the nature of a strictly private club; the public knowing nothing about it, and the transactions being conducted in perfect secrecy. mr. gilbart tells us that even in this form it was regarded as a questionable innovation, and some of the principal bankers refused to have anything to do with it. by degrees, however, the convenience of the arrangement made itself apparent, more bankers were admitted to the society, and a distinct committee and set of rules were formed for its management. although it remains to the present day a private and voluntary association, unchartered, and in fact unknown to the law, the clearing house has steadily grown in importance, and in the publicity of its proceedings.

"several important extensions of the clearing work have been made in the last twenty-five years. after the[pg 292] rise of the london joint stock banks, subsequent to 1833, they were for a long time refused admittance to the clearing house; but in june, 1854, they were at last allowed to join the association. the bank of england long remained entirely outside of the confederation, but more recently, it has become a member." (written in 1875.)

the establishment of clearing houses in english cities, outside of london, did not take place until a century, almost, after that in london went into operation, or as late as 1872, which was just five years short of a century later.

as early as 1831 albert gallatin presented a plan for a clearing house in new york, and so perfectly outlined the scheme, finally adopted, that i want to read it to you. and i want to impress upon you the fact that gallatin was one of the very ablest economists that we have ever produced.

"there is a measure which though belonging to the administration of banks, rather than to legal enactment, is suggested on account of its great importance. few regulations would be more useful in preventing dangerous expansion of discounts and issues on the part of the city banks, than a regular exchange of notes and checks, and an actual daily or semi-weekly payment of the balances. it must be recollected that it is by this process alone that a bank of the united states has ever acted or been supposed to act as a regulator of the currency. its action would not in that respect be wanted in any city, the banks of which would, by adopting the process, regulate themselves. it is one of the principal ingredients of the system of the banks of scotland. the bankers of london, by the daily exchange of drafts at the clearing house, reduce the ultimate balance to a very small sum; and that balance is immediately paid in notes of the bank of england. the want of a similar arrangement among the banks of this city produces relaxation, favors improper expansion, and is attended with serious[pg 293] inconvenience. the principal difficulty in the way of an arrangement for that purpose is the want of a common medium other than specie for effecting the payment of balances. those are daily fluctuating; and a perpetual drawing and redrawing of specie from and into the banks is unpopular and inconvenient.

"in order to remedy this it has been suggested that a general cash office might be established, in which each bank should place a sum in specie, proportionate to its capital, which would be carried to its credit in the books of the office. each bank would be daily debited, or credited, in those books for the balance of its account with all the other banks. each bank might, at any time, draw for specie on the office for the excess of its credit, beyond its quota; and each bank should be obliged to replenish its quota whenever it was diminished one half, or in any other proportion agreed on. it may be that some similar arrangement might be made in every other county, or larger convenient district of the state. it would not be necessary to establish then a general cash office. each of the banks of scotland has an agent at edinburgh, and the balances are there settled twice a week, and paid generally by drafts on london. in the same manner the balances due by the banks in each district might be paid by draft on new york, or any other place agreed on."

james c. hallock, the highest authority in this country upon clearing house operations, has so succinctly stated how the checks were disposed of, before the clearing house was established, that i am going to read that to you, and show you two diagrams, which we will keep on file for future reference. "in 1853, the banks of new york city organized a clearing house, the first in america; until then they had done business without one. the method had been laborious.

"each of the fifty-two banks had daily received over its counter, or by mail, checks on every other bank in town. to collect them the banks had opened deposit ac[pg 294]counts with one another. each had become a depositor in fifty-one city banks. each also had had the others as depositors and kept fifty-one accounts with them. the pass books used had been of the ordinary form as 'merchants' bank, in account with chatham bank.'

"according to the common usage of depositors, each bank would have sent messengers to fifty-one banks daily, and each would have had fifty-one messengers come to its own counter from the other banks. they had done a little better than that. the chatham bank, for instance, would have checks on the merchants' bank. it would list them on a deposit slip, charge the merchants' bank with the amount in its pass book, and place the checks in the book which the messenger would now carry to the merchants' bank, and deliver to its receiving teller. the latter would remove the checks, and having some on the chatham bank with list attached, he would credit his bank with the amount in the pass book, place the package in it and hand it back, thus refilled to the messenger.

"this exchange of checks by two banks at the counter of one was a rudimentary clearing which, like all bank clearings, saved labor, time and trouble. to deposit these checks in the customary manner would have required two messengers and two pass books. by this clearing arrangement one messenger and one pass book sufficed. perceiving the sensibleness of this saving, the new york banks had for many years tacitly agreed that each should send messengers to one-half of the banks for six months, and the other half for the next six months. they had thus reduced the number of banks to be visited daily by each from fifty-one to twenty-six banks, and accordingly reduced the number of pass books in use by each.

"the accompanying diagram representing the banks arranged in a circle, with two of them sending messages to twenty-six each, indicates how toilsome the exchange of checks still was, up to the formation of the new york[pg 295] clearing house, which commenced operations on oct. 11, 1853; though only two banks are represented as sending, in fact, all were really sending, or being sent to; for every bank sent to all others that did not send to it.

pic

without a clearing house in new york.

diagram showing a bank messenger's 26 trips to exchange checks with other banks.

"when two banks exchanged checks the amounts were almost always unequal, leaving a balance for one to pay and the other to receive. every day every bank, if they had settled daily, would have had fifty-one balances to pay, or receive. they were payable in coin. instead of attempting the daily adjustment of accounts, which[pg 296] would have consumed hours, and caused much annoyance, it had become a tacit agreement that a weekly settlement of balances should be made after the exchange of friday morning. on settlement day, the cashier of each bank would draw checks for every debt due to him by other banks, and send out the messengers to collect them. over fifty porters were out all at once, wrote a bank officer of the time, with an aggregate of several hundred bank drafts in their pockets, balking each other, drawing specie at some places, and depositing it in others, and the whole process was one of confusion, disputes and unavoidable blunders of which no description could give an exact impression.

"the second diagram, representing the fifty-two banks in a circle around the clearing house, indicates how completely all this misdirection and waste of energy stopped upon the installation of that marvelous method which affects such amazing economy. every bank now sends straight to a common point. every bank sends there all the checks it has on all the city banks, and charges the whole amount against an imaginary debtor—the clearing house. every bank receives there all the checks all the other city banks have on it, and admits its indebtedness for the whole amount to an imaginary creditor—the clearing house. the balance can now be struck. if the bank loses, it pays the clearing house the difference. if the bank gains, the clearing house pays the bank; and there is the end of it, reached by the shortest path with the greatest ease and quickness.

"the principal results may be summarized:

"the clearing house saved every bank in new york city on the average twenty-six trips daily to exchange checks with other banks. it abolished sending to other banks for this purpose. it substituted one trip to the clearing house—an economy of 96? per cent.

"the clearing house saved every bank in new york the payment or receipt, mostly in coin, of fifty balances on settlement day (friday). it abolished settling at the[pg 297] counter of banks, except for checks, sent through the clearing and returned 'not good.' it substituted one payment, or receipt, of a net balance to or from the clearing house, an economy of 98 per cent.

pic

with a clearing house in new york.

diagram showing single trips to exchange checks with all other banks in the city.

"the clearing house saved the banks of new york all the drudgery, irritation and anxiety which had made daily settlements impracticable. it abolished the weekly settlement; it substituted daily settlements to the clearing house—an economy of considerable importance.

"the clearing house saved all the banks of new york[pg 298] the trouble of keeping accounts with one another. it abolished accounts of city banks with city banks—closed 2,652 accounts. it substituted one account for each bank with the clearing house—an economy of 98 per cent.

"these savings, not to mention others, proved beyond dispute, that clearing checks economizes."

it was twenty-two years before gallatin's suggestion was adopted, and a clearing house was established, which, as stated, was in 1853. the first clearing was effected on oct. 11, 1853, and amounted to $22,648,109.87. the balances amounted to $1,290,522.28.

boston followed in the footsteps of new york, and established a clearing house in 1856, and philadelphia in 1858.

the next step in the line of progress, in the matter of bank clearings, came, as hallock says, as a result of cheap postage and the railroads in england, and included country checks.

he says: "somewhat less than half a century ago london recognized the fact that the out-of-town check was an indispensable instrument of civilized man, at least in great britain. he would use it, contrary to custom, and despite the remonstrances of city bankers, who thought only london drafts should be sent to london.

"a product of modern times and method, country checks came to london with the railroads. few at first, when the average postage on a letter consisting of a single sheet, was nine pence, and another sheet, or any enclosure, however small, doubled the rate, making the postage on a letter enclosing a check thirty-six cents, on the average. with penny postage established in 1840, regulating the rate on a letter by its weight (one penny per half ounce), without regard to the number of sheets, or enclosures, country checks began to stream into london.

"in 1858 the city bankers, perceiving their inability to suppress, or exclude them, decided to adopt the sugges[pg 299]tion of some country bankers, and collect english and welsh checks through the clearing house.

"the idea originated in the spring of 1858 with a young country banker, william gillett, the son and grandson of country bankers. he visited the provincial banks, and interested them in the project. when prepared to carry it out the country bankers met in london on sept. 29th of that year, and communicated the plan to the london clearing banks to obtain their support. the londoners opposed it; they suggested doubt as to the utility and feasibility of any change in existing systems. however, their co?peration being solicited, the london bankers held a meeting at the clearing house on oct. 12th, to take the matter into consideration, and appointed a special committee to confer with the country bankers.

"then, on reflection, it appeared to another young man, the son and grandson of clearing bankers, that the organization of a large and entirely new establishment, which the country bankers proposed, was unnecessary, as the london bankers could give them all the facilities they required, without any great additional labor, or expense. this junior officer in the private bank of which his father was the head, has since gained world-wide celebrity in science and literature as sir john lubbock (now lord avebury). even with the aid of such talent and opportunities as his, it required unflinching resolution to establish country clearing in london. after devising a method that conformed as closely as practicable to actual usage in clearing city banks, young lubbock had to call at every london bank, at most of them several times, and explain fully the exact manner in which he proposed to carry out the system. it was very difficult for him to convince his brother bankers. finally the special committee requested him to meet the principal clerks of the different banks. these clerks unanimously recommended the adoption of his plan.

"the london bankers then adopted it, and on nov.[pg 300] 16th submitted it to their country correspondents. the plan for an independent country clearing house was abandoned by the country bankers' committee on nov. 19th, and the clearing of country checks commenced in london on nov. 23, 1858. in less than eight weeks, after the idea was broached in london, it was put in practice there."

this system covers 60,000 square miles.

mr. hallock says, "sedalia bankers unconsciously imitated the london plan, but modified it, as had been done abroad elsewhere; for out-of-town checks are cleared, not only in london, but also in other english cities, as manchester, liverpool, birmingham, newcastle-on-tyne, leeds, sheffield and bradford, in some eight scotch towns and dublin."

the next advance, which is undoubtedly destined to revolutionize clearing in the united states, was started in boston in 1899 by making new england a free check zone.

hallock says: "the clearing of out-of-town checks, though opposed for years by a small minority of boston banks, was successfully established at boston in 1899. the system includes checks on all points in new england, and maintains a free zone of nearly equal extent.

"proposed in 1877 and 1883, the boston movement at first resulted in a deadlock, based on the supposed importance of having certain city banks, who declined to come in, participate. after twenty-two years through another movement started among the connecticut banks, the deadlock was broken by substituting the manager of the boston clearing house for any abstaining members, and giving him checks on their correspondents to collect. the association finally decided that all checks passed through the out-of-town clearing should be collected by him.

"the only opposition exhibited by country banks has been in the refusal of a few to pay the clearing house in full for their checks, deducting so-called exchange.[pg 301] boston checks passed through the clearing house are paid in full, or not at all. new england checks should be. this can be effected, either as in london, by boston banks returning checks, drawn on such banks, as not collectible through the boston clearing house, or by the manager, charging to collect checks, bearing indorsement of the non-par banks, which would cut them off from the use of the new england free list, now enjoyed by them, without reciprocity; that is, without being themselves on the free list."

mr. charles a. ruggles, manager of the boston clearing house, says: "in the thirteen years that we have made collections in this way, we have collected over eight thousand million dollars ($8,000,000,000).

"our cost now is, and has been for ten years, seven cents for a thousand dollars. that includes the clerk hire of fifteen men, postage and stationery, and we collect seven or eight hundred million dollars a year; furthermore, 90 per cent of the banks in new england remit at par. we collect 95 per cent of it in twenty-eight hours."

it is an interesting and important historical fact that the country banks of england and wales forced the clearing of country checks at london; so, too, the banks of connecticut, thirty of them in number, by combining under the advice and leadership of mr. james c. hallock, succeeded in having the plan adopted by the boston clearing house. as a result new england became a free check zone. i think we should note in this connection that the father of mr. james c. hallock was the organizer, if not, indeed, the originator of the new york clearing house in 1853.

mr. laboringman: mr. lawyer, you talk and talk and talk, when you could say what you really have to say, in one-tenth of the time, and in about as many words. we have spent a whole hour in the history of the origin of the clearing house, and have just learned what i could repeat in about two minutes.

[pg 302]

first: london, in a kind of a sneaking way, began to clear checks in 1775, and kept a clearing house in a blind alley. nothing more was done in england by way of advance until 1858, when the country banks of england and wales, covering a territory of 60,000 square miles, by threatening to start their own clearing house in london, compelled the london banks to clear their checks. not till 1872, nearly one hundred years later, did any other city adopt it. but today many cities in great britain are clearing country checks.

second: gallatin proposed a clearing house for new york in 1831. hallock established it in 1853. boston and philadelphia followed in three and five years, respectively. in 1899, new england became a free check zone, all checks being received at par at boston. since then several other cities have followed suit. atlanta, macon, nashville, sedalia and kansas city. now, i have said everything you said. next!

uncle sam: mr. laboringman always gets a "b" line on things.

mr. lawyer: that is true in substance, but the very fact that mr. laboringman has stated the case so well is the greatest compliment he could pay us. it is only by iteration and reiteration, word upon word, and precept upon precept, that has made this whole subject so plain to all of us. we have made haste by going slowly, and we don't want to get into a hurry now.

mr. banker: i agree with you, mr. lawyer, patience has been our best and truest friend in all these talks, and we should not desert her now.

mr. laboringman: that's all right, but let us get down, right down to business. just where are we at now? and where are we going to in the clearing house matter?

mr. banker: we are now going to discuss the clearing house from five points of view.

first: the clearing house, from its original standpoint—new york was the pioneer, and is probably our[pg 303] highest type. its clearings are certainly by far the largest in the world.

second: the clearing of country checks, of which boston was the pioneer in a large way, although preceded in point of time by sedalia, mo., a country city of only 15,231 people in 1900.

third: the examination of all banks clearing through the clearing house, of which chicago was the pioneer, starting june 1, 1906—and probably the best type, although there are today about twenty cities following in her footsteps, including the following: minneapolis, feb. 1, 1907; st. paul, may 1, 1908; st. louis, oct. 11, 1907; los angeles and san francisco following upon the heels of st. louis; kansas city, march 1, 1908; st. joseph, the early part of 1909; philadelphia, april 5, 1909; new york, 1912, with others, not mentioned, making twenty in all.

fourth: the centralization of the reserves of the banks at the clearing houses, as a matter of convenience in settling balances, and carrying on their common business generally, but subsequently for the purpose of facilitating the issuance of clearing house certificates.

mr. lawyer: let me repeat to you, gentlemen, what may have been stated before, that there is no law providing for the existence of the london clearing house, nor is there a single law in a single state in any way authorizing or affecting a single clearing house in the united states. therefore, all that they have done has been without any authority of law. they are a law unto themselves; and it is not at all certain that that has not been wise. indeed, i am of the opinion that it has been most fortunate for the business interests of the country. what do you think, mr. banker?

mr. banker: i am of the same opinion; in confirmation let us return to the consideration of the points suggested.

first: the new york clearing house, as stated, had its first clearing oct. 11, 1853. mr. cannon says that[pg 304] not until august, 1854, did the new york clearing house have a constitution. this instrument, with the subsequent changes, is in force today, and constitutes as perfect an illustration of the evolution of law by practice, as can be found anywhere.

this institution had various homes until it took up its present quarters in one of the most beautiful buildings in the whole country—worthy in every way of its use and purpose. it has cost $1,130,000 and is owned by the clearing house banks of new york, under the name of the clearing house building company.

mr. cannon says: "the administration of the clearing house is vested in a president, secretary, manager, assistant manager, and five standing committees.... the manager under the control of the clearing house committee, has full charge of all business at the clearing house, but before entering upon his duties, he is required to give bond, in the sum of $10,000.... although the constitution provides for the appointment of a manager, annually, it is the custom to retain the same one in office, year after year. as a matter of fact, there have been only three managers in the whole history of the association.... the clearing house committee is clothed with almost absolute power, being second in authority only to the association itself. the ablest and most experienced bank officers, therefore, are usually chosen to serve on it. the committee is elected annually. the association at present, 1912, consists of sixty-three members and twenty-two non-members, and the united states sub-treasury, located at new york. the latter makes its exchanges only at the clearing house, its balances being settled at its own counter. it has no voice in the government of the association, and pays a nominal sum for actual expenses. the privilege which the sub-treasury enjoys of making its exchanges through the clearing house is a matter of great accommodation, both to the sub-treasury and to the banks. the new york post office clears through one of the members, but[pg 305] renders no compensation to the association for the privilege.

"the membership of the association, since its organization, has been constantly changing, owing to the admission and expulsion of members and voluntary withdrawals, as provided by the constitution.... a bank, the capital of which does not exceed $5,000,000, must pay $5,000; a bank, the capital of which exceeds $5,000,000, must pay $7,500. any member increasing its capital is required to pay in accordance with those rates."

in 1899, the large number of trust companies that had come into existence attracted the attention of the clearing house and the clearing house committee adopted a rule that no trust company could clear that had not been in existence for at least one year, and that every trust company clearing through a member shall furnish a weekly statement of its condition to the manager of the association.

the new york state law did not then provide that any trust company should carry cash reserves, although state banks were required to have 15 per cent cash in their vaults. it was tacitly understood that all banks clearing, should have 25 per cent reserve. of course the trust companies could ride the banks, and they took advantage of their opportunity. this caused great dissatisfaction, and rightly so. on feb. 11, 1903, the association passed a resolution requiring that every institution (not a bank required to maintain specified reserves) "shall after june 1, 1903, keep in its vaults a cash reserve, equal to 5 per cent; after feb. 1, 1904, 7? per cent; after june 1, 1904, not less than 10 per cent, nor more than 15 per cent, as the association might determine."

the trust companies kicked and protested, and almost, without exception, withdrew from the clearing house; but, after the panic of 1907, the new york legislature passed a law requiring them to carry 15 per cent cash reserves.

on june 13, 1908, the association passed a resolution[pg 306] compelling all trust companies, who were members, to carry a cash reserve of 25 per cent, and on jan. 16, 1908, the association for the first time in its history made a rule compelling all its members to keep a cash reserve of 25 per cent.

every member of the new york clearing house is required to furnish to the manager, weekly, for publication, a statement showing its condition, showing the average amount of loans, and discounts, specie, legal tender, notes in circulation and deposits. the capital and net profits are also given, this being the only association which gives the latter item.

along the same line of legislation controlling the action or conduct of its members, the clearing house committee, having plenary power to do so, passed a rule—determining just what every member and bank, clearing through members, should charge for collections.

the rule made some cities free, that is, there were no charges for collection made compulsory. some cities were under a fixed charge of one-tenth of one per cent, and others under a fixed charge of one-quarter of one per cent. upon april 3, 1899, this rule became obligatory, and if any member violated it, the penalty was $5,000 for the first offense; for the second offense it might be expelled from the association.[1]

mr. laboringman: that is precisely the same rule we have in our union, only our limit is not so high. we fine a member $5.00 for his first offense, and for the second offense we take away his card. by jove, that is a hot proposition. and these are the very fellows who are always cussing us because of our union rules.

mr. lawyer: i want to tell you something else, gentlemen, that combination among the banks is clearly in restraint of trade and in violation of the sherman anti-trust law. anybody who wants to can bring those banks to time.

[pg 307]

mr. banker: now, gentlemen, don't you perceive that this institution, step by step, has evolved its own laws, or rules of action, slowly developing its present system, and regulating and controlling the conduct of those outside institutions which enjoy its privileges? the story of this clearing house is the record of all of them in principle. they are, each and every one of them, self-centered, self-contained, and a law unto themselves.

the operation of the new york clearing house is practically that of all the others. its room is sixty feet square. four rows of desks occupy the floor. each member has its own numbered desk separated from its neighbors' by a wire net work.

at one minute to ten o'clock the manager sounds the gong and all are instantly ready for the exchange which begins promptly at ten o'clock.

at the expiration of forty-five minutes usually, but sometimes in thirty-seven minutes, and even in thirty-five minutes, every member of the association has in its possession all the paper drawn upon itself, which the other members have credited on their books, and has delivered all the paper drawn upon all the other members of the association in exchange which it has credited upon its books.

mr. cannon states that the amount delivered by any member has never been exactly equal to the amount received but has come within one cent upon a single occasion. to complete the clearing transaction, it is necessary, of course, for those who owe anything to pay it to the clearing house, and for the clearing house in turn to distribute what is paid to it among those who are entitled to receive it.

as a matter of convenience for the purpose of settling the balances, the members of the clearing house deposit with the clearing house gold coin, gold certificates, silver certificates and legal tender notes, and receive clearing house certificates, therefor, in denominations of $1,000, $2,000, $3,000, $4,000, $5,000, $10,000, $20,000, $50,[pg 308]000 and $100,000 each. all notes of a smaller denomination than $5.00 should, according to practice, be put up in packages of not more than $5,000. all packages are sealed and marked with the name of the institution depositing them with the amount, date and kind of money they contain.

the banks, also, deposit at the sub-treasury in new york gold coin, for which certificates are issued by the assistant united states treasurer. these certificates are in two denominations, $5,000 and $10,000 each; the holders of these certificates are the absolute owners of them.

it is stated upon high authority that the amount of such money now deposited at the various clearing houses throughout the united states exceeds the sum of $200,000,000. in other words, that we have today in the united states centralized our reserves to that extent for certain purposes.

mr. merchant: mr. banker, your history of the development of the clearing house and your description of its operations have certainly been very clear, and most interesting. the second point you mention, the clearing of country checks, will appeal to all the business men of the country as it has to me for a long time; especially since i have a great deal of business up in new england, where this practice has been in force since 1899. i was up there the other day, and my partner took me to see mr. charles a. ruggles, the manager of the boston clearing house. after he had described the system of clearing country checks, he handed me a little pamphlet giving the history of its development in boston and setting forth its reasons and advantages so graphically, that i am going to quote from it in telling you gentlemen about it.

let me say to you that i am confident that when this principle is fully understood, and carried out, as it soon will be, to its logical conclusion, checks, precisely like our bank notes, will be par everywhere in the united[pg 309] states. i am fully aware that you are greatly surprised at this statement; but take my word for it and remember that what i have prophesied is going to happen. free zones are going to increase until every check will be free within its own zone, and almost immediately as a consequence, the zone centers will settle with each other daily; that is all checks will not only be free in their own zones, but will be free between all zones, that is all checks will be par everywhere.

however, let me tell you how it developed in new england. ruggles describes it in these words:

"that the use of checks has increased rapidly in the past ten years is an undisputed fact, and the question of how to handle them to advantage, or without loss, is a problem that has caused much discussion. all large cities have had the same experience, and have dealt with the question in various ways. rather than ask his bank to draw exchange, the country merchant sent his check to boston in payment of his account, and in this way, he was encouraged by the city merchants who deposited the check in his bank, where it was received at par. this continued until the volume handled reached such proportions as to make the item of exchange quite prominent in the expense account, which the city bankers sought to reduce by various methods. in many cases checks were not sent directly to the banks upon which they were drawn, some other route being selected to avoid exchange charges; as, for example, a check on stonington, conn., deposited in westerly, r.i., only six miles distant, after many days, during which it traveled one thousand miles, perhaps, passed through providence, boston, newport, then new haven and new london and reached its destination bearing the endorsement of nine banks. mr. cannon in his work on clearing houses cites a remarkable case of zigzagging to avoid collection charges; a check on sag harbor, n.y., paid to a hoboken firm was eleven days reaching its destination. had it been collected through the new york clearing house ten days'[pg 310] time, fifteen hundred miles of travel and a vast amount of clerical work might have been saved."

here are two diagrams showing the route and the indorsements of the check to which mr. cannon referred, taken from mr. cannon's work on clearing houses.

mr. ruggles further says: "the subject of the collection of the country check in a more expeditious and economical method than that then in force in boston, was first agitated in 1877, when a committee of five was appointed to consider the question. a majority reported that the annual cost to the banks of boston was two hundred and twenty-nine thousand dollars for collecting new england checks and recommended that the business be consolidated, which would very materially reduce labor and expense. this report was received and placed on file. a minority report was also submitted in opposition to any change, on the ground that it would sever the social and business relations which then existed, and the clerical force required to handle the entire business would incur so heavy an expense that the cost of collecting would be as much, if not more, than was the case by the method then existing. no further action was taken until 1883, when another committee was appointed to consider the same question. they reported that returns from all the banks showed that double the business reported by the former committee was then being transacted and that the probable cost was four hundred thousand dollars; they suggested that an agency similar to the clearing house be established for the purpose of making the collections. the banks failed to endorse this proposition and the matter was dropped until 1898, when a committee was appointed by the bank presidents' association to again consider this important question; in their report it was recommended that the clearing house association act on the matter and undertake to make the collections. a committee was appointed by that body, who endorsed the previous report. their report was accepted and the clearing house association author[pg 311]

[pg 312]ized the clearing house committee to put in operation the present system, and the banks of massachusetts were first addressed on the subject on april 14, 1899, the result being a conference between the massachusetts bank cashiers' association and the clearing house committee. this conference revealed a decided difference of opinion at first, but both sides were brought to a clear understanding of the situation eventually. the position taken by the clearing house was that it did not propose to dictate to the country banker how he should transact his business or coerce him into acting in conjunction with the clearing house; nevertheless, the boston banks claimed the right to use their own methods in making collections, and should the country banker decide to charge exchange, checks on his bank would not be accepted at par in boston, and might be collected by express or such other means as was thought advisable. comparatively few of the banks in massachusetts appeared in opposition when the subject had been fully discussed. at a second conference the cashiers' association asked the privilege of making payments in new york exchange if more convenient for them, and this request was readily complied with. they also asked that they might ship currency when necessary, at the expense of the boston banks; this request was also granted, and in a few months all were remitting at par and checks from all the boston banks were being collected through the clearing house. on sept. 21st, maine was added to the list, followed by rhode island and connecticut on nov. 9th, and new hampshire and vermont in january, 1900.

pic

fac-simile of the back of the check, showing the numerous indorsements it bore on finally reaching the bank on which it was drawn.

from james g. cannon's work on clearing houses.

"the first year the amount collected was $541,000,000 at a cost of ten cents per thousand dollars; the second year $565,000,000 at a cost of eight cents; the third year $607,000,000 with cost reduced to seven cents. since the opening of the foreign department, as we term it, the average yearly business has been six hundred million dollars, and the average cost seven cents. the expenses are met by an assessment levied on the banks based[pg 314] on their daily average business. there are at present in new england six hundred and thirty-seven banks and trust companies to whom checks are sent daily, and the number of packages handled will average five thousand."

pic

map showing the check's itinerary.

from james g. cannon's work on clearing houses.

mr. banker: mr. merchant, i am very much surprised that you have made such a thorough study of this feature of the banking problem, but i am also equally gratified. you have certainly explained the question so clearly and fully that no one can fail to be impressed with the future possibilities of this plan of clearing country checks, and i am convinced that you are absolutely right that the time is not far distant when every check in the united states will be par everywhere precisely as our bank notes are today; and why should they not be so, since both are identically the same thing in principle.

mr. lawyer: i can see what a tremendous advantage that would be to our commerce, indeed, incalculable, and i can see that there is no substantial difference between a check on a bank and a bank note, which is a check of the bank on itself; both are mere credits, and as you say, when fully comprehended and rightly understood, will be treated in precisely the same way in the exchanges of the country. but it does seem to me as though we shall have to have a better knowledge of our banks, and the business houses of the country, too, if this great reform is to be brought about.

mr. banker: that is true, but the bankers of the country have realized for a long time that their greatest peril came from the unsound practices and reckless methods of some of their own number and have already taken steps to protect themselves against such practices.

you, gentlemen, will all of you, no doubt, remember the walsh failure at chicago in 1906. you will also remember that walsh had control of three different banks with approximately $30,000,000 resources; one was a national bank, under national supervision; one a trust company and one a savings bank; both of the latter being under state supervision. this enabled walsh to flim-flam the[pg 315] examiners, one examiner being national and the other state, by juggling the assets and then finally diverting practically all of the deposits into his own enterprises; certainly the best part of them was used in promoting his business schemes. it took this kind of an earthquake to wake up chicago and bring into the banking fraternity, or business world, one of the greatest reforms of the commercial life of the country. i say commercial world advisedly because about the same time chicago had an experience with a fish house that was really the biggest fish story that was ever told. the sad thing about this fish story was that it was true and cost the fishermen, the chicago banks, and the fishermen and bankers elsewhere, about $3,000,000.

these two experiences capped the climax and illustrated perfectly the need of just what followed in the clearing house at chicago.

this brings me naturally to the third point that i mentioned as important and vital in the evolution of the american clearing house.

on june 1, 1906, the clearing house association of chicago, illinois, acting upon a resolution introduced by mr. fenton, vice-president of one of its banks, established an independent system of clearing house bank examinations. only recently the chairman of the clearing house used this language:

"the result of our experience in chicago is most satisfactory and gratifying. the banks have almost unanimously adopted every suggestion made by the clearing house committee for their betterment and strength. in several instances the committee, from its wider knowledge of the financial situation, has been able to save some of the smaller institutions from loss by enabling them to take hold of conditions in time. i cannot properly go into such details as would illustrate the effectiveness of clearing house examinations as we have experienced it, and can only say in a general way that[pg 316] it has been even more satisfactory than i anticipated it would be before it was undertaken."

mr. lawyer: right on this point i want to read to you a letter i have just received from the clearing house examiner of los angeles, california.

dear sir:

replying to your inquiry of december 9th, will say that clearing house examinations were begun in los angeles on may 1, 1908. since the inauguration of the system there have been no bank failures, because the executive committee of the clearing house association will not permit banks to reach the danger point.

we have had one instance where, after watching a bank for three years, giving it a chance to correct its bad methods and put itself in good condition, the clearing house finally compelled it to assign all of its assets to a trustee, and the public was notified that all claims would be paid on demand....

national and state examinations have improved greatly during the last ten years, but they will always lack the strongest element—the calm, clear judgment of the local executive committee, whose demands are founded on knowledge of the situation, and whose mind is not warped by political strings.

yours very truly,

(signed) john w. wilson,

examiner, los angeles

clearing house assn.

mr. cannon in his admirable work on clearing houses, says:

in substantially his own words the chicago examiners operate under the following conditions: the examinations extend to all the associated banks in chicago, and to all non-member institutions. the work is conducted with the aid of five regular assistants, each fitted by experience to thoroughly do that part of the work assigned[pg 317] to him. the examinations include, besides the verification of the assets and liabilities of each bank, so far as is possible, an investigation of the workings of every department, and are made as thorough as is practicable. after each examination the examiner prepares a detailed report in duplicate, describing the bank's loans, bonds, investments and other assets, mentioning specially all those, either direct, or indirect, to officers, directors, or employees, or to corporations in which they may be interested. the report also contains a description of conditions found in every department. one of these reports is filed in the vaults of the clearing house in the custody of the examiner, and the other is handed to the examined banks' president for the use of its directors. the individual directors are then notified that the examination has been made, and that a copy of the examiners' report has been handed to the presidents for their use. in this way every director is given an opportunity to see the report, and the examiner, in every instance, insists upon receiving acknowledgment of the receipt of these notices.

the detailed report, retained by the examiner, is not submitted to the clearing house committee, under whose direct supervision he operates, unless the discovery of unusual conditions make it necessary. a special report in brief form is prepared in every case, and read to the clearing house committee at meetings called for that purpose. the report is made in letter form, and describes in general terms the character of the examined banks' assets, points out all loans, direct or indirect, to officers, directors, or employees, or to corporations in which they may have an interest. it further describes all excessive and important loans, calls attention to any unwarranted conditions, gross irregularities, or dangerous tendencies, should any such exist, and expresses in a general way the examiner's opinion of each bank as he finds it.

the circumstances under which the first clearing[pg 318] house bank examiner was appointed and the result are well set forth by james b. forgan, president first national bank of chicago.

"chicago was the pioneer in clearing house bank examinations.

"they were inaugurated there in 1906 after the failure of a national bank and two state banks. these institutions were under the direct management of one man who was president of the three. the condition of their affairs when disclosed surprised and appalled the other chicago bankers. the liabilities of the private ventures of the president had gradually accumulated in the three banks until they had absorbed the entire capital and surplus of all three, amounting to $3,500,000, and 44 per cent of their aggregate deposits of $27,000,000, one-third of which was public funds.

"the condition in the national bank had developed through a period of years during which the comptroller of the currency, through the semi-annual reports of his examiners, had been kept fully advised of what was going on. among the assets were found nineteen fictitious loans for $90,000 each represented by so-called memorandum notes. each memorandum note purported to be secured by $100,000 of second mortgage bonds of the wisconsin & michigan railway co. this road was controlled by the bank president, and the bonds proved worthless. the first mortgage bonds of the same road, $952,000 of which (being almost the entire issue) were also among the assets of the banks, were finally disposed of at about 23 cents on the dollar. these memorandum notes did not, on the face of them, even pretend to be the obligations of bona fide borrowers. the ostensible signatures on them, although in different names, were all in the handwriting of the clerk who filled them out and who wrote plainly in red ink across the face of each the words 'memorandum note.' they could not deceive anyone who saw them and they did not deceive the na[pg 319]tional bank examiners who reported to the comptroller the facts in connection with them.

"although cognizant of these irregularities and of the accumulating obligations in the bank of the president's private enterprises, the comptroller apparently could not or at all events did not take measures to stop them by other means than those of expostulation and reproof until matters became so bad that they simply could not be permitted to go further.

"when at last drastic measures were decided upon the comptroller and the state auditor, acting together on a saturday afternoon after the vaults of the three banks had been closed with time locks set for monday morning, notified our clearing house committee that unless provision were made for payment in full of the deposits none of the banks would be permitted to open for business on monday morning and they would be put in the hands of receivers.

"business conditions were strained and the time was therefore particularly unfavorable for permitting the failure of three prominent banks. the effects of such a calamity it was feared would have extended far beyond the confines of chicago.

"the situation was thus protected from a general disturbance of public confidence, but it was done at the cost of a very heavy loss, foreseen at the time and since realized by the participating banks.

"the statements of the national bank made five times a year to the comptroller's department, copies of which were rendered to the clearing house committee and on which it had implicitly relied, failed to disclose these conditions.

"i have given you these details of this unfortunate affair because they show so clearly the limitations of governmental supervision of banks under our national banking law as it has been interpreted by the courts and by the legal advisers of the comptroller's department.

"let me draw your attention to a few of the legal re[pg 320]strictions which limit the comptroller's power to act in such cases.

"1. under the national bank act no obligation due a bank is considered bad until interest is past due six months and not then if it is secured or in process of collection.

"2. the comptroller may appoint a receiver when he concludes that a bank is insolvent. but here again he has been hampered by the legal definition of insolvency, which is 'inability to pay current debts as they mature.'

"3. the making of a national bank report to the comptroller so long as it is in accordance with the bank's books, however erroneous it may be as to actual values, which alone disclose a bank's true condition, cannot be construed as a misdemeanor.

"these legal restrictions are presumably the reason why some banks have been permitted to persistently publish to the public the figures of their statements as rendered to the comptroller of the currency after they are known to have met with heavy losses and have failed to provide for them by charging them to profit and loss. that this has been permitted in some cases is notorious. the case of the chicago national bank and a recent one in a large central city [$6,000,000 of $8,000,000 surplus was charged off] are conspicuous examples because of their size. undoubtedly as a rule the published statements of the banks are reliable, but there are a few exceptions, with which, in view of the legal restrictions which govern his action, the comptroller finds himself unable to cope. these exceptions, however, frequently result in failures and catastrophes. the comptroller cannot legally take drastic measures with such banks until they perform some act of insolvency or when he believes their capitals to be impaired, which, being a matter of judgment in regard to the realizable value of their assets, is frequently difficult to prove.

"these disclosures in connection with the failures of these three banks showed the associated banks of chicago[pg 321] that statements so rendered, which up to that time had been all the clearing house committee had to rely upon and which, as published, form the basis of the standing and credit of banks with the public, could not be implicitly relied upon. it was therefore unanimously resolved to adopt a system of supervision, under which there would be some assurance that such conditions could never again develop in any bank connected with the chicago clearing house association. there was therefore organized a bureau of examination in connection with the clearing house.

"as to the practical working of clearing house examinations in chicago during the six years of their existence i can only say that it has proved in every way most satisfactory and successful. there has been neither friction nor unpleasantness. bank directors realize the great benefits derived and are unstinted in their praise of them. they are greatly assisted by these reports in keeping themselves informed on the condition of their banks and they readily co?perate with the clearing house committee in the correction or elimination of anything open to criticism. our experience has been that the banks have almost unanimously adopted every suggestion made by the committee. i cannot, of course, discuss such details as would show its efficacy. i can only say that the results have been most satisfactory to all concerned and that much good has been accomplished for the chicago banks individually and collectively.

"the organization, being entirely voluntary, partakes somewhat of the nature of a gentlemen's agreement, under which each bank binds itself to conduct its business under proper methods. the effectiveness of the method lies in the fact that they are all measured by the same standard, viz.: that their statements as rendered to the clearing house association must be satisfactory to the committee, in view of the examiner's reports upon them,[pg 322] otherwise they cannot continue to enjoy clearing house privileges."

mr. banker: from mr. wilson's statement about los angeles and mr. forgan's statement about chicago, it must be perfectly clear to all of you, as it now is to me, that if we had in this country, say thirty or forty commercial zones, or free check zones, like new england now has, that is thirty or forty financial centres, covering all the territory naturally tributary to them, and so compassing, or covering the entire country, and these zones, all organized precisely as the chicago clearing house association is organized for the examination of all the banks of the united states, bank failures would become a thing of the past.

mr. lawyer: well, let me see now, how you would insure that result, that is that bank failures would cease. the banks fail very often, possibly generally, because the officers of the banks have used the bank's assets in their own schemes, or those in which they are interested. but bank failures are very often due to fish paper, such as you described a few moments ago. how would you detect, check and stop that sort of thing? that is, how would you prevent too much paper from some one merchant, or manufacturer, getting into the banks?

mr. banker: don't you see, mr. lawyer, that if your examination covered all the banks in a commercial zone, your examiners would always know, or could very easily find out, just how much paper any business house had in the banks of that particular zone, couldn't they? don't you see that if they observed that a large amount of paper of some business house had been placed in the banks of that zone, that is, loans made, or paper sold, they would at once be placed upon their guard and inquiry, and would proceed to find out just how much paper that particular business house ought to have, or was entitled to have out, considering its capital, and the general character of its business? don't you see that these bank[pg 323] examiners could insist on knowing all about the financial condition of any business house in their particular zone, just as well as the banks themselves could and do insist upon knowing? if a business house should refuse the bank examiner the fullest possible information about its affairs, its days would be numbered as a borrower at the banks of that zone, would they not?

mr. lawyer: that is just the point. a business that is over expanding its credit by borrowing, or by selling its paper, will probably be working some other zone, or several of them at the same time.

mr. banker: you might naturally think so until you reflected upon the situation for a moment. don't you see that if you had, as i have just said, thirty or forty such commercial zones, all organized, and all united into one system, as perfectly as if they were one single institution, that they could within twenty-four hours know to almost a dollar how much any business house in the whole united states had outstanding so far at least as the banks were concerned in all of them—simply by telephoning or telegraphing to each other?

you must see that every one of these commercial zones would soon become the most comprehensive and the most perfect credit bureau in the entire world, and that taking them altogether, they could and would, by the most exhaustive methods, not even now fully appreciated, be able to check the whole commercial situation in the united states in an incomprehensibly short space of time. nothing is so essential today as to know the facts about the situation because of the enormous increase of trade, and consequent expansion of credit.

mr. lawyer: it does seem to me, after all, now that you have finished the details of your plan, that you have in it a perfect check upon the whole business of the banking world. humanly speaking, i see no loophole nor escape whatever.

mr. laboringman: that looks to me like an all-round scheme. it will certainly work like the colored man's[pg 324] fish trap, it will catch 'em, both "agoin' and acomin'," and would give this country the only practical scheme i've ever heard of for insuring bank deposits; for it does not seem possible to me for a bank to get into a position where it ought to fail. now, gentlemen, if there is one reform in this whole business that ought to be accomplished it is such an administration of these banks, as will practically prevent failures. don't you think so yourselves? this question is always coming home to the working people, because a bank failure is a tragedy in their lives.

mr. manufacturer: yes, mr. laboringman, i certainly do agree with you, and i believe that this plan of having all the banks of the entire country examined by bankers just as they are now being examined by the clearing houses instead of politicians, and finding out, as such clearing house examiners will, not only the condition of the banks, but the financial condition of every business house as well, will accomplish what you want. the laboring people are entitled to better protection than what has yet been given them. this goes to the very root of things.

mr. merchant: gentlemen, i have been listening with the greatest possible interest to the story of the growth of the american clearing house and the most marvelous thing about this matter to me is that this vast system which has not yet been correlated is the product of experience, and that there is not a single practice of this huge machine from the atlantic to the pacific as it is carried on, or operated, that is based upon a single statute. think of the clearing house associations in those twenty cities, actually examining, not only their own members, but every other bank that clears its checks through one of their members. why, gentlemen, today these bank examiners could cut off my credit at my bank without my knowing it by simply saying to the banks that my credit was too much extended, and that i ought to cut it down, and get into a safer position.

[pg 325]

mr. farmer: well, do you know, i am of the opinion that there is nothing so important in these days as to have someone going around and compelling these fellows to pull in their horns. they will never interfere with anyone as long as he keeps in sight of the shore. it's a good thing and will do more than anything i know of to keep our business ship on an even keel.

mr. manufacturer: when mr. farmer talked about pulling in their horns, i thought he was perfectly at home, and talked about something that he was familiar with; but when he gets to talking about a ship and keeping close to shore, it strikes me that he's getting out to sea. however, this proposed supervision and checking scheme strikes me just as it does him, as the most desirable, wholesome and healthy process by which we can go on in the future far more steadily, and in the end far more rapidly than we do now, with our ups and downs, and i am heartily in favor of it.

but, mr. banker, it occurs to me that if these thirty or forty zones you speak of are going to work so closely together, as you think, and have outlined, there will be sooner or later a tremendous business going on between them.

mr. banker: of course there will; and that suggestion brings me naturally to the fourth point i raised in connection with the development of our american clearing houses which was a combination of a part of their reserves for their own convenience.

you will remember that i called your attention to the fact that it was estimated by high authority that the banks belonging to the clearing house associations were now carrying upwards of two hundred million dollars of their reserves at the various clearing houses. it does not seem to me as though it was taxing the imagination very much to see how very easy it would be to apply the same principle to the thirty or forty financial centers that is now being applied to all the banks included in the clearing houses. of course i realize that the reserves will[pg 326] have to be upon a correspondingly increased scale, ranging from one billion to one billion and a half, as things now stand, and that they will all have to be actually combined, and perfectly mobilized, precisely as the reserves are, when a clearing house association fortifies itself, to protect all of its banks, and the commercial interests of any community in times of danger and panic.

mr. laboringman: what do you mean by clearing house certificates? i have seen these things mentioned time and time again in the papers, and i must say i could not get on to them. i supposed it was just some huggery-muggery of mr. banker, over there, for the purpose of getting the best of the dear people.

mr. banker: on the contrary, just the reverse is true. clearing house certificates, commonly so called, are issued only to protect the people's interest. they are issued for the common good, and are thoroughly appreciated by all those who understand their use, and the circumstances under which they are issued. mr. laboringman, you have just asked what a clearing house certificate is. we all know what a gold certificate is. it certifies that there are deposited in the treasury of the united states as many gold dollars as its face calls for, and the holder can go and get the gold dollars by presenting the certificate. in the early part of this evening, we learned that a clearing house certificate was issued by a clearing house whenever some bank deposited with it gold coin, gold certificates, silver certificates, or united states notes; that is, such a clearing house certificate is for such a deposit as is made, and entitles the holder to what it calls for, as was then stated. now, the popular name, clearing house certificate, is applied to something quite different from the exact, or technical, definition above given.

when we say that a clearing house has issued clearing house certificates, in ordinary, or popular, language we mean "clearing house loan certificates," because the public never have any occasion for discussing the[pg 327] usual clearing house certificates. the clearing house loan certificates are issued by a clearing house upon commercial paper, bonds, stocks or any satisfactory security. in 1907, collateral security amounting to $453,000,000 passed through the hands of the new york clearing house committee, of which $330,000,000, or 72.92 per cent, was commercial paper and $123,000,000, or 27.08 per cent, was bonds, stocks and short-time railroad paper.

mr. lawyer: mr. banker, if you will allow me, i think that mr. cannon has stated this phase of the question so well that i should like to read it right here. he says:

"clearing house certificates are of two kinds, those issued upon the deposit of gold coin (and in new york city and boston on gold and silver certificates and legal tender notes) and those issued upon the deposit of collateral securities. the former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. the latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the clearing house, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. the certificates issued upon the deposit of gold, etc., are termed 'clearing house certificates,' and those issued upon the deposit of collateral security are very properly termed 'clearing house loan certificates,' with which latter only are we here concerned.

"clearing house loan certificates may be defined as temporary loans made by the banks associated together as a clearing house association, to the members thereof, for the purpose of settling clearing house balances. such certificates are negotiable, as a rule, only among the members of the association, and are not in any sense to be regarded as currency. they are not even seen by the business community, and do not pass from[pg 328] bank to bank except in payment of clearing house balances.

"to obtain an intelligent understanding of the real character and purpose of such certificates it will be well to treat somewhat of the circumstances under which they are issued. in the course of the present century the united states has undergone periodical derangements of business affairs, when confidence was displaced by mistrust, when the payment of debts became difficult, when property values declined, and business houses failed; when industry and trade were paralyzed, and general stagnation ensued in all lines of enterprise. in such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. under our present currency system no adequate method is provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. hence it is left in a large measure to the financiers of each community to work out their own remedy, supplemented by such mutual assistance as a courteous regard for each other may dictate or as business relations may demand.

"quick to see the defects in our currency system, and the desirability of in some way supplying it, the bankers of new york, nearly fifty years ago, devised the scheme of issuing clearing house loan certificates as a method of relief from temporary stringencies. subsequently, nearly all the clearing houses in the great centers adopted the same device, and by their heroic resort to the measure they have at different times relieved the business community of untold disaster, for which invaluable service they have justly received the grateful recognition of the entire country.

"the great value of clearing house loan certificates[pg 329] lies in the fact that they take the place of money in settlements at the clearing house, and hence save the use of so much actual cash, leaving the amount to be used by the banks in making loans and discounts, and in meeting other obligations. the volume of currency, to all intents and purposes, is expanded by this means to the full amount of the certificates issued."

in the history of the past the denominations have varied from 25 cents to $100,000 in the different associations and in proportions varying from $50 to $100 of certificates to $100 of collateral deposited.

the total amount of its balances is not always paid in clearing house loan certificates by a bank to which such certificates have been issued. thus, for example, the debit balance of a given bank may be $500,000, which in ordinary times would be paid in money or gold certificates. in a time of panic a part of this sum—say $300,000—is paid in clearing house loan certificates and the remaining $200,000 in currency. another, with the same balance, might pay the whole in clearing house certificates, while still another would pay the full amount without the use of any certificates whatsoever.

the first issue of clearing house certificates occurred in 1860. in the autumn of that year there was a rapid shrinkage in bank deposits and a corresponding contraction in loans and discounts. the situation grew more and more serious as the end of the year approached. the presidential election was a disturbing factor of more than ordinary significance. immediately succeeding the election of abraham lincoln to the presidency the situation began to assume a critical aspect. distrust and uncertainty were universally felt.

in accordance with the authority thus given, the first issue of certificates was made nov. 23, 1860, and the beneficial effect was immediately felt. the banks rapidly extended their loans, deposits increased, and commercial paper, which formerly could not be sold for 20 per cent, was now freely marketed at 7 per cent and 8 per cent.[pg 330] as a result of the pressure the association passed a resolution in the following september, authorizing another issue of loan certificates, and on sept. 19, 1861, the first issue was made.

in 1863 the association issued certificates for the third time. the first bore the date of november 6th, and the largest amount outstanding at any one time was $9,608,000.

owing to the prolongation of the war, with the consequent unrest in business circles, the issue of certificates for the fourth time began march 7, 1864, and reached its maximum, $16,418,000, on april 20th of the same year.

no more loan certificates were issued until the year 1873, when for the first time the clearing house associations of other cities, seeing their great practical utility, began to avail themselves of their use. in the year mentioned the association at new york followed the precedent established in 1860, and the same course was taken by the clearing house associations at boston, philadelphia, baltimore, cincinnati, st. louis and new orleans. the panic which called forth such united action was one of unusual severity. it reached its climax in september, and so severe were its ravages that the new york stock exchange closed its doors on the 20th of the same month, for an indefinite period, but reopened them ten days thereafter.

the usual resolutions were passed by the clearing house association, authorizing the issue of certificates, and on september 22d the first issue was made. the amount was fixed at the outset at $10,000,000, which, with the announcement that the government would purchase the same amount of bonds, caused an immediate subsidence of the panic, and in less than three days its most acute stages were over. during the two months referred to, certificates to the amount of $26,565,000 were issued.

new orleans alone issued certificates in 1879, the[pg 331] amount being $54,000. new york alone issued certificates in 1884, the amount being $24,915,000.

the next certificates were issued nov. 12, 1890, and the issue ceased december 22d, amounting in the aggregate to $16,645,000; the largest amount outstanding at any one time was $15,205,000, on december 12th; and the last certificates were retired february 7, 1891, less than three months from the date of the first issue. boston and philadelphia followed. then came one of the memorable panics, 1893.

the issue was commenced june 21, 1893, and ceased september 6th of the same year, the total issue having been $41,490,000. the largest amount outstanding at one time ($38,280,000) was attained august 20th, which amount remained unaltered until september 6th. then followed philadelphia, baltimore, new orleans, cincinnati, buffalo, atlanta and birmingham. birmingham to protect its cash issued denominations all the way from twenty-five and fifty cents up to $1, $2, $5, $10, and all the larger amounts.

besides the loan certificates issued in 1893, there was a considerable amount of emergency circulation taken out by the banks in the southeast, under the title of "clearing house certificates," in cities where no clearing houses existed. in adopting the name of clearing house certificates, it was not the purpose of the banks to practice deception on the people, but to indicate what was really true and what the term would seem to imply, namely, that such certificates were temporary loans made by the banks associated together, and that the banks were pledged for their redemption. the denominations in the cities referred to were: albany, ga., $10, $5, and $1; chester, s.c., $10, $5, and $1; columbia, s.c., $50, $20, $10, $5, $2 and $1; danville, va., $100, $50, $20, $10, $5, $2, and $1; newman, ga., $10, $5 and $1; and rock hill, s.c., $5, $2 and $1. there is no doubt that the relief afforded in this manner was of great public assistance in the several communities where it was given, ef[pg 332]fecting results similar to those accomplished by the actual clearing house loan certificates in the great centres. business houses and corporations came to the relief of the situation and among them was the new bedford mfg. co., social mfg. co., hartford, conn., eagle and ph?nix mfg. co., columbus, ga., swift mfg. co., columbus, ga., arnold print works, north adams, mass., richmond locomotive works, richmond, va., minneapolis and northern elevator co., city of tacoma, city of richmond, city of johnstown, pa., loomis and hart mfg. co., chattanooga, tenn.

so much for panics up to our last. then came the panic of 1907. of this a prominent banker and economist has said: "the truth is that responsibilities for the panic of 1907 lie at the door of our currency system. no other adequate cause can be found. we do business by the modern system of bank credits, but we have failed to supplement this machinery with the means for readily converting bank credits into cash."

on oct. 26, 1907, new york issued clearing house loan certificates. on oct. 26, 1907, chicago also issued clearing house loan certificates. on nov. 6th, chicago issued clearing house checks for $1, $2, $5, $10, amounting to $7,500,000. these checks were secured by clearing house loan certificates.

on november 16th, philadelphia issued clearing house certificates and the business houses issued pay checks for wages which were cleared through the clearing house.

during the fall many cities issued clearing house checks in small denominations which were used for currency. canton issued pay checks for $1, $2, $5 and $10, amounting to $200,000, which had no security back of them.

in november pay checks in denominations of $2, $5, $10, $20 were issued to the fourteen banks of the clearing house of cincinnati.

[pg 333]

cleveland followed chicago in denominations of $1, $2, $5, $10.

fargo, dakota, issued $5, $10, $20, $100 and $500.

los angeles issued october 30th "clearing house certificates or scrip," designed as a circulating medium for the general use of the public.

mr. cannon records the action taken by the associated banks of group no. 2 of the ohio bankers' association, which includes twelve counties, and is worthy of comment since it offers the first concrete example of the possibilities of the banks of any particular section of any state, uniting in an effort to overcome the disastrous consequences resulting at times from false rumors in panic periods.

mr. merchant: now, gentlemen, why all this frightful agony, this terrific straining, this ever-recurring tragedy and universal ruin, simply because we persist in being utterly ignorant of the simplest economic truths which our own actions on every such occasion have demonstrated—that there is absolutely no difference between a bank book credit and a bank note credit, except that the people want something that passes current in greatly increased quantities, when loaning stops or credit is checked. you have only to go to scotland, and note the fact that there has been in operation there two hundred and seventeen years the vital principle involved, the conversion of bank book credits into bank note credits, and the current redemption of all bank credits in gold coin, whenever called for.

why, gentlemen, if the man who wants to find the cure would only shake the moss from off his back, and take time to read what i am going to submit to you now, or pull the cobwebs out of his eyes and go up to montreal, or toronto, or any canadian city, and see the bank notes come into the clearing houses, with the checks and drafts, he would wonder why he had been such a complete idiot all his life, when our nearest neighbor was enjoying perfect immunity from our troubles.

[pg 334]

l. carroll root, an american economist and historical student of the first rank, after a most thorough and exhaustive investigation of banks and banking in new england before the war, concludes his comment as follows:

"when the national banking system appeared upon the scene it found the channels of circulation in new england filled by a state bank currency of well recognized soundness.

"in general, it was a currency based upon the 'banking principle.' it was issued against general assets—not against the deposit of bonds. it was secured in addition, in most of the states, by the further liability of officers and stockholders, or by a first lien upon all the assets of the bank, or both. it was limited—rather loosely, we would now say—to one hundred and twenty-five or one hundred per cent of the capital. but though issued under the legislation of six different states, it was in reality a single currency system—made so through the agency of a commercial enterprise, established and carried on without the aid of law. the bills of banks in any one part of new england passed at par in every other part; and for years the notes of new england banks had been enjoying an extended circulation in the west, where its reputation found for it ready acceptance. at home, too, its valuable points were appreciated and its forced transference to the national system a matter of regret.

"the history of new england bank currency, thus closed, is significant for two developments which characterize it:

"first, the steady growth, under the teachings of experience, of the system as to the issue and regulation of bank currency, which has since then become generally approved among the english-speaking peoples of the new world. in one direction after another special opportunities for fraud or exploitation of a confiding public by rash banking developed their legitimate disasters and prompted the invention of remedies 'to fit the crime.'[pg 335] conditions were so nearly alike throughout the new england states that each was prompt to suffer from any financial disease affecting any other, and equally prompt to adopt, with such improvements as its own enterprise might suggest, the remedies which had been found effectual elsewhere. as a result, the complete system, at the time of its practical suppression by the national bank act, was utilizing nearly every expedient to secure safe and conservative banking that were then or have since been incorporated in our own national banking system, or in that of canada—the two great plans which have since been matured.

"a second feature was the development of redemption facilities and methods. starting with absolute chaos, assisted by no law, progressing tentatively as each necessity prompted the invention of new means to meet it, the result was a carefully buttressed and easily working system, under which, to an extent never approached in its efficiency by any plan elsewhere created by law, the bank note currency of new england was made elastic, safe and ideally convenient and inexpensive in use.

"for a full generation before the war, the amount of ultimate loss to noteholders was too small to be reckoned as an appreciable percentage on the amount of currency outstanding, while the delays and minor inconvenience in the prompt cashing of the bills of broken banks were the result rather of the imperfect communication and exchange facilities of those days than of material defects in the banking system itself; indeed, so satisfactory had been the workings of what is known as the 'suffolk bank redemption plan'—that the need even of the most modest guarantee fund for instant redemption of broken bank bills was not felt until after the panic of 1857; and even then the total loss was petty when compared with the total circulation, and such as the most moderate plan of subsidiary guarantee would have forever obviated."

mr. manufacturer: that is most astonishing, actually astounding; they went through identically the same[pg 336] experiences during the first fifty years of this country that we have been going through during the last fifty, and they perfected a banking system which we killed by the 10 per cent tax on bank notes. now we are gradually, whenever necessary, even in defiance of law coming back to the same principle of credit currency, for certainly, whatever may be said of the clearing house loan certificates, generally speaking, all those $1, $2, $5, $10, $20, $50 and $100 clearing house checks were nothing but a pure credit currency, and we do not seem to have sense enough to see it, and adopt that principle.

new england redeemed all her currency at the suffolk bank at boston, the financial centre of that commercial zone. new england did before the war, precisely in the redemption of her bank currency what she has been doing since 1899, in redeeming new england checks at boston. we must take our hats off to new england. all we want to do is to adopt the currency system which she worked out, and her free zone system for check redemptions.

canada obtained her original banking law by copying the statutes of massachusetts before the war. she has improved upon them in detail, but the great underlying principle is the same.

mr. merchant: the total amount of certificates in one form or other, cash checks, etc., issued in 1907, was stated by the comptroller of the currency to be $248,279,700. it is a most interesting fact to note that just prior to the panic hon. charles n. fowler, then chairman of the committee on banking and currency, of the house of representatives, introduced a bill for the purpose of allowing the banks to issue $250,000,000 of bank notes of the pure credit currency character, and urged its adoption, as a measure of relief for the impending crisis. you will note the amount was only one million and three quarters in excess of the amount actually issued, or an estimate within three-fifths of one per cent of the amount actually used.

[pg 337]

never before in the history of the country was such license taken by the banks of the country as in 1907 in using bank credits in the form of cash checks indiscriminately; but they demonstrated this great economic truth that the nearer they approached to a pure credit currency, the nearer right they were. and they demonstrated this fact also to the satisfaction of every intelligent man on this question; that, if this country had been blessed with a credit currency redeemed through the clearing houses every day, precisely as these clearing house certificates and pay checks were, the panic of 1907 would never have marred the commercial history of this country.

with all of our own experience before us, from the establishment of the banks of virginia in 1803, is our stupidity to continue. and are we now to do something possibly more than stupid when we are naturally, even in defiance of law, as we have seen, finding our way out? if left alone, we shall soon adopt these same principles, now in practice in scotland, ireland and canada? principles which, without statutory laws, gave new england, before the war, the most perfect banking system that has ever existed anywhere in this world, all things considered.

mr. farmer: then why in thunder don't we adopt it now? i suppose we are through with the clearing house now, aren't we? i hope so, for i am due at the farm. they are waiting for me.

uncle sam: just hold on a minute. if i understand the facts, you are all wrong about one thing, and this includes both mr. cannon and mr. hallock. the first clearing house on this continent was not at new york at all, but it was established at boston, where i held my first tea party, and it was started in 1818, thirty-five years before new york got to going. it only took two clerks to do the business for the first six years. by 1855, just two years after new york started, it took seventy clerks to do the business, and the redemptions amounted to four hundred million dollars per year. transactions in[pg 338] new england in those days were comparatively very small, and the business was carried on as it is in france today, very largely with bank notes instead of checks. you remember, we learned one night that the bank of france owed $1,000,000,000 (one billion) in notes, and only one-tenth as much, or only $100,000,000 subject to check; and that if a bank could issue notes, as freely as take deposits, the habits of the people would always determine whether the amount of bank notes was greater than the deposits.

from 1840 to 1860 the note issue of the 510 banks in new england ranged from $30,000,000 to $57,000,000, and averaged $43,000,000, while the deposits ranged from $15,000,000 to $47,000,000, and averaged only $31,000,000, or the note issue was nearly 50 per cent greater than the deposits. the note issue then was the main feature of the banking business, precisely as it is at the bank of france, and they started a clearing house to clear the bank notes and it was called "the suffolk bank," where all the new england bank notes were cleared, precisely as new england checks and drafts are cleared today. new england was a free bank note zone before the war precisely as it is a free check zone today. all notes were par at boston, as all checks are par today, and the suffolk bank, where the bank notes were cleared, was just as much a clearing house as the one they have in boston today, for clearing the checks and drafts. there is not the slightest difference between the two, and the fact that no one of you men recognized it as a clearing house, convinces me that you do not yet fully comprehend and appreciate the fact that there is not the slightest difference between deposits subject to check, and a true credit currency, or a bank note issue. this is the great fundamental, economic truth, and unless you understand and recognize it, you might as well quit now.

mr. banker: i thoroughly appreciate what you say, uncle sam, and i think we all do, but you have driven this matter home, so that i don't think we will ever[pg 339] forget it, or fail to apply it under such circumstances again, will we, boys?

mr. laboringman: no, never. that discovery of uncle sam's was a centre shot, a real bull's eye.

uncle sam: the result of this evening's talk is then, as i recall it:

first: there is no statutory authority for any clearing house, either in england or the united states.

second: the first clearing house started in london in 1775. the second clearing house started in boston in 1818 under the suffolk bank. the third started in new york in 1853.

third: clearing country checks was established in london in 1857. new england became a free zone for country checks in 1899.

fourth: clearing houses without any authority of law have adopted the following functions: (a) they have fixed charges for services; (b) they have provided reserves for their convenience; (c) they have forced all those banks, which are members, and all those clearing through them to submit to examinations; (d) they have not only issued clearing house certificates for use in settling balances, but for circulation as currency in denominations of $1, $2, $5, $10, $20, $50, $100, to meet the demands of trade.

if you'll give them fifty years more, and will not interfere with them, they will in actual defiance of law re?stablish the currency system of new england before the war and now in operation in canada.

it's too late to detain you a minute longer. you may go now, but remember that it took your uncle samuel to discover the important historical fact that the first clearing house established in this country was the suffolk bank at boston.

good night.