We are
told by high authorities that the acceptance of branch
banking is unlikely. Americans tell me that the
small local bank is of more use to the business man.
It is more ready to accommodate him. It takes
business risks in a way that the great joint- stock
bank, with its hard and fast rules, and its five
hundred offices uniformly governed from the head
office will not and could not do. Well, we are not
unfamiliar with this view, even in England. We
can understand and respect it. The English form of
joint-stock banking is safer and more conservative,
but something is lost, perhaps, in exchange for the
greater stability. There are those who regret the
old private banks, though I, for one, think OUT
modern system necessary, in view of the increasing
complications of the money market.

Now I come to the reserve law, which has been
at the bottom of the trouble in more ways than one.
For the purpose of this law the National banks are
divided into three groups : country banks, city banks,
and central reserve city banks. City banks are re-
quired to keep as reserve against their deposits 25
per cent, of legal tender money ; country banks,
15 per cent. I suppose this was only intended as a
minimum limit, but, as so often happens in legisla-
tion, what was intended as a minimum tends to
become a maximum. As a matter of fact, the banks
trade very close to the 25 per cent, limit in normal
times, and when difficulty arises they are soon forced
down to it, and then they suspend further accommo-
dation, and the difficulty becomes acute. The re-
serve, though a good asset in case of liquidation, is
no good so long as the bank is a going concern. It
is useless for banking purposes. That would be bad
in any case, but what makes it worse is that the
banks are allowed to reinvest portions of their re-
serves. The country banks may deposit three-fifths
of their reserves with the banks in the reserve cities ;
and the banks in the cities may deposit half of their
reserves with the banks in the central reserve cities.
There are forty reserve cities, and three central re-
serve cities, viz. : New York, Chicago, and St. Louis.
Something very similar existed here before the great
amalgamations. The country banks invested their
reserves with their London agents, the London agents
invested theirs with the Bank. We have got rid of
one stage of this system for diminishing the ultimate
reserve. It exists in full force in the United States.
The following illustration, given by Mr. D. R. Forgan,
of Chicago, will serve to show how it works out in
practice :

" The law requires a National bank in Troy, N.Y.,
to carry 15 per cent, reserve. Only 6 per cent., how-
ever, need be in its own vault. The other 9 per cent,
may be with its reserve agent in New York City.



190 PAPERS ON CURRENT FINANCE

If the deposits of the Troy bank are $1,000,000, it
keeps $60,000 at home and $90,000 in New York.
The $90,000 in New York, however, is not money.
It is merely a credit on the books of the New York
bank against which a reserve (allowing for legal
deductions) of not more than $20,000 is kept by the
New York bank.

" When the Troy bank, becoming alarmed, deems
it prudent to have a larger proportion of its reserve
at home, it telegraphs the New York correspondent
to send it, say, $20,000. That does not seem an
unreasonable request to the Troy banker only
$20,000 out of $90,000. But when the Troy bank
withdraws $20,000, it withdraws all the reserve
there is in the world against its deposits except what
is in its own safe ; and the New York bank is left
with a credit on its books of $70,000, against which
no reserve now exists. When that transaction is
multiplied by thousands and becomes general, it is
simply an impossibility for the New York bank to
stand it." *

A single institution in New York lately carried
fifteen millions sterling of interior bank reserves. In
October 1907, out of the total reserves of 6,178 country
banks, eighty-five millions sterling was deposited in
distant banks, and only some forty millions sterling
kept in hand as cash. Many American authorities

1 Mr. D. R. Forgan, Chicago, quoted by Mr. Alex. D. Noyes, Bankers'
Magazine, March, 1908.



THE AMERICAN CRISIS 191

think that these rights of redepositing reserves
ought to be restricted ; it is also suggested that the
city banks ought not to be allowed to pay interest
on bank deposits, which would check the practice.
But, as things are, it is clear that the central reserve
cities are liable to a very dangerous drain ; and that
is exactly what happened at the time of the crisis.

I have spoken of certain points in the United States
system which seem to be open to criticism. But
it has its good points. The statistical information
is all that can be desired. The returns are very full,
and apparently universally made by all the banks.
Mr. 1 Holden, in a very interesting paper on the de-
preciation of securities, observes that the statistics of
the United States and Canada are the only statistics
from which we can get complete comparisons as to
the relative reserve position in different years, and
that the absence of such figures for English banks
was a matter to be regretted. Then, the holding
of cash by the United States banks is another strong
point ; I need not repeat the figures already given
as to this. Their position is at least twice as strong
as our own in this respect, even apart from the huge
holdings of their Treasury.

What does this all point to ? The moral has been
well expressed by Mr. Boissevain, who sums up a
very careful estimate in his valuable study of Money
and Banking in the United States in words worth

1 Now Sir Edward Holden.



192 PAPERS ON CURRENT FINANCE

quoting : " It cannot fail to strike us that the material
foundations on which the banking fabric is built up
in the United States need not be considered in any
way inferior to those of the United Kingdom, nay,
in more than one respect are even firmer. And yet
it cannot be gainsaid that whilst, broadly speaking,
the English banking system may be held up as an
example of a strong and efficient organisation, the
banking system of the United States, on the other
hand, has been proved to suffer from grave defects,
and in case of emergency to be entirely inadequate."
The nature of these defects will appear very clearly
if we glance at the history of the recent crisis.



HISTORY OF THE CRISIS.

Trade in 1906 had been exceptionally active,
though one cannot say that the development was
not warranted. But the resources of the market
had certainly been strained. Private extravagance
had caused a shortage in the supply of loan capital ;
indeed, Mr. Noyes 1 says that " a surprisingly large
portion of the community had got into debt for its
private expenditure." The worst feature in the
general situation was the extent to which specula-
tion had been carried by Wall Street and Chicago
operators. Ex-Secretary Cortelyou declared that

1 " A Retrospect of the American Panic," Bankers* Magazine, March,
1908.



THE AMERICAN CRISIS 193

" the crux of the situation was that the bankers of
New York had been using the vast deposits from
every quarter of the United States to finance opera-
tions on the Stock Exchange." The result was the
so-called " Harriman boom," in which record prices
had been manipulated. The severe stringency of the
autumn of 1906 had brought prices nearer to normal
figures, especially in the third quarter of 1907, but
there had been no adequate liquidation. To quote
Mr. Noyes : " This extravagant speculation, coming on
top of a general strain on local capital resources, had
made possible a situation where at least $400,000,000
of interior bank money was borrowed by New York,
and certainly as much more of European capital,
provided by the Continental bankers in a measure,
but chiefly by the London banks, in their remarkable
infatuation of 1906 regarding the American situation.
When the Bank of England put its foot down, towards
the end of 1906, and forced the London banks to
abandon their policy of indefinite expansion of credit
to America, the resources behind this abnormal use
of credit began to disappear, but the indebtedness
remained. Only, it had to be assumed by our own
banks. Similarly, toward the middle of the year,
the Western capital placed in New York began to
go home again. The consequences of such a move-
ment, under such circumstances, are not difficult to
understand." It was in a situation thus strained,
and requiring the most careful handling, that certain



F.C.F.



194 PAPERS ON CUERENT FINANCE

special abuses became notorious, completely des-
troyed public confidence in the banks, and precipi-
tated the worst crisis of our time. I cannot better
describe these events than by summarising for you
the graphic account given by Professor Sprague in
the article to which I have already referred.

The immediate origin of the crisis may be traced
to the failure of certain brokerage firms on October
16th, 1907, who had been attempting to corner the
stock of a copper company. Mr. F. A. Heinze's
brother was involved. Now, Mr. Heinze controlled
the stock of the Mercantile National Bank, of which
he was president ; and the resources of this bank
were used to further his copper speculations. Dis-
trust naturally set in, and deposits were withdrawn.
The Clearing House intervened, Mr. Heinze resigned,
and the bank was reorganised, thereafter causing no
disturbance. But another director of this bank,
Mr. C. F. Morse, who was a director of seven banks,
of which he completely controlled three, seems to
have become suspect ; and, on the 19th October, two
of these banks had to appeal to the Clearing House.
Assistance was granted on condition of the retirement
of Mr. Morse and others. Two millions sterling were
at once put up, and this difficulty was disposed of
by October 21st. The total deposits of these banks
were only six millions sterling.

The fundamental weakness illustrated by these
early episodes of the crisis was the fact that it was



THE AMEKICAN CRISIS 195

not unusual for a few capitalists, of no great standing,
actively engaged in speculative industrial schemes of
their own, to gain control of a group of banks, through
stock-ownership on a margin. Shares sufficient to
give a controlling interest in a bank were bought ;
they were then pawned, and another controlling in-
terest was bought with the money raised ; and so
on, until a whole chain of banks was controlled by
quite a moderate capital. This practice had been
known to exist for more than six years past, accord-
ing to a statement in The Nation. The possibilities
of danger involved were obvious ; but so far the
banks had acted vigorously and promptly, and the
disturbance seemed to be localised.

The real difficulties began the next week in con-
nection with certain trust companies. These com-
panies, as I have said, were not subject to National
bank law. The Clearing House attempted to impose
conditions on them ; but, sooner than submit, most
of them left the clearing. It was the troubles of one
of those which remained, the Knickerbocker Trust,
that brought on the second stage of the crisis. Its
president, it may be noted, was associated with the
Morse enterprises. On Monday, October 21st, the
National Bank of Commerce refused to continue
clearing for this trust. Next day the company had
to suspend, but not before it had paid out 1,600,000,
nearly one-seventh of its total deposits. It is said
that this bank might have been saved ; and that,



196 PAPEKS ON CURRENT FINANCE

if it had been, the crisis would have been averted.
It reopened in March, 1908, so that its affairs could
hardly have been hopeless. But there is a general
irrepressibility about American banks. It used to
be said of our country banks that, like cats, they
had nine lives. The same perverse and inexplicable
vitality seems characteristic of their American counter-
parts. The whole system suspends payment for over
two months, and then resumes as if nothing had hap-
pened. The suspension of this bank, however, proved
to be critical. The next Wednesday, October 23rd,
a run began on the Trust Company of North America,
the second in size of these companies, with deposits
of 13,000,000. The president of the Knickerbocker
Trust was one of its directors. It paid out over four
millions in two days ; and in two weeks nearly seven
millions, or more than half its deposits. During the
first two days New York was threatened with a general
panic. There were a few small bank failures, loans
were almost unobtainable, and the fall in stock
exchange prices was alarmingly violent. The trust
was ultimately assisted, after an examination by a
committee of trust presidents, and a transfer of the
control ; but action was unduly slow. It will be
observed that in cases where assistance was given,
it was considered necessary to change the control.

The strain on the New York clearing bankers was
very severe. The trust and the country reserves
were placed with them, and they had to find the



THE AMERICAN CRISIS 197

money, and at the same time to move the crops.
Some writers have complained that New York also
had to finance Canada ; but this was the natural
consequence of their habit of holding the call money
of the Canadian banks. 1 On the other hand, they
received 5,000,000 of Government deposits, with
the result that their loss for the critical week ending
October 26th was only 2,750,000, and they still
held a reserve of 52,000,000.

The worst was over so far as New York was con-
cerned. Savings banks insisted on the sixty days'
notice, and withdrawals of deposits diminished. Clear-
ing House loan certificates were issued. Before this,
brokers could get no money at call. One bank would
be afraid to lend, because it did not know whether
others would assist. But as the local troubles began
to subside, the panic spread to the country, and New
York, as the chief reserve centre, continued to feel
the strain. The failure of the Westinghouse com-
panies seems to have been the occasion of the new
development. Unable to renew floating indebted-
ness, they went into the hands of receivers. The
Pittsburg Stock Exchange closed ; there were runs
on banks in Montana and Nevada ; and upon a trust
company in Ehode Island, with deposits of 5,000,000.

1 The Canadian banks do not appear to draw more than 3,000,000
as a rule on their foreign bank balances and call money in the autumn.
The movement of the Canadian crops is mainly financed through bills
against exports. The necessary circulation is provided by an extra
issue of some 3,000,000 or 4,000,000 of notes.



198 PAPERS ON CURRENT FINANCE

All of these were obliged to suspend payment. There
was a general lack of confidence in the banks, such
as we have not seen in England since 1826. It was
not without foundation. " Seven times during the
last century the banks suspended payment in some
measure at least, and there has been a currency pre-
mium, the last, in 1893. There is a well-grounded
belief among the people that it will be difficult to
secure cash during periods of economic disturbance/'
Hence hoarding sets in, partly for the absolute needs
of business, partly to secure the premium, " an ever-
present source of weakness." This, by the way,
shows the extreme danger of permitting these habi-
tual suspensions, with currency premiums as their
inevitable consequence.

The banks do not seem to have seriously attempted
to weather the run which now set in. During the
fortnight ending November 2nd, the New York banks
had sent 8,500,000 to interior banks. But they had
engaged 6,000,000 from Europe, with more in pros-
pect ; and their reserve was still 45,000,000, an
amount which we should think very large. How-
ever, they had already ceased to pay depositors
except at their own discretion. On October 31st,
3 per cent, was paid for currency in New York, and
a premium of varying amount, sometimes over 4 per
cent., continued till the close of the year. Not only
individuals, but corporations and banks, had to buy
money at the premium with certified cheques. The



THE AMERICAN CKISIS 199

New York banks reserve figures show how little help
the banks gave. From November 2nd to November
23rd their reserves only diminished by some
2,000,000 ; after November 23rd, they increased week
by week, until they had reached over 50,000,000,
when the premium disappeared. In striking con*
trast to this, we find the reserve of the Bank of Eng-
land dropping from 24,000,000 to 17,000,000 in
the first fortnight of this period, and of course
without a thought of suspension. Thus, in Professor
Sprague's words, with which it is not easy to disagree,
" the New York banks proved themselves wholly
unequal to the duties of their position as the central
reserve banks of the country."

It may be conceded that the general anticipation
of a premium on currency made the position very
difficult for them. But they seem to have found
their main excuse for inaction in the Reserve Law ;
and, strange to say, this excuse was generally accepted
by American public opinion. As soon as the reserves
fell below the limits laid down by the Reserve Law,
they felt justified in suspending payment. At the
worst point they were 11,000,000 below the legal
limit ; but they had restricted payment long before
this point was reached ; and even at the worst they
held 45,000,000 odd of reserve. Now, the only
penalty provided by the law was that the Comp-
troller of the Currency may close a bank which has
exceeded the legal limit. But he can only do this



200 PAPERS ON CURRENT FINANCE

after due notification, and thirty days' grace are
allowed the bank, after notice, to bring its reserve
up to the legal requirement. It is practically certain
that at such a time the Comptroller would have
ignored any breach of the law brought about by
carefully considered and organised assistance on the
part of the banks. Apparently, the requisite organi-
sation did not exist, and individual banks were
afraid to act on their own initiative. Suspension
was really resorted to as a precautionary measure
before any serious runs had been made on the system
as a whole. When the reserve movements are studied
in detail, it appears that as between August 22nd
and December 3rd, 1907, the country banks increased
their holdings by more than half the sums lost by
the reserve banks ; and probably the Trust com-
panies and State banks absorbed the other half.
At any rate, we have the astonishing fact that the
banking system as a whole held more cash at the end
of a two months' panic than at the beginning. It
is an axiom in Europe that the only way to allay
a panic is to pay out freely at the outset. The
American banks actually hoarded.

Hoarding, indeed, was one of the most charac-
teristic features of the crisis. The Secretary of the
Treasury estimated that 60,000,000 had disappeared
from the usual channels of currency into hoards ;
Mr. Noyes thinks 20,000,000 was hoarded in New
York city alone. " This money was locked up in
the space of a very few weeks, and the greater part
of it in the space of a few days." A striking incident
was the demand for safe deposit boxes. Thirty-three
companies in New York, from Tuesday to Friday,
October 22nd-25th, let out 789 safes, or six times
their usual number. Nine companies suddenly in-
creased their lettings from 40 to 228. These com-
panies said that most of the hoarding among their
customers was done by business men and manufac-
turers who drew the money for immediate use for
pay-roll and wage disbursements. The suspension
of the banks soon put a stop to hoarding, as far as
the public was concerned ; and in many cities, e.g.
San Francisco and St. Louis, the safe deposit com-
panies agreed to rent no more boxes for any purpose.
But the banks were hoarding all the time. Many
of the country banks, only required by law to hold
6 per cent, of their deposits as cash in hand, were
actually holding more than 15 per cent.