CHAPTER XVI 1883 TO 1890 1884. DURING the period now under discussion the banks were a neglected factor in currency affairs of the country; the government seemingly having assumed the province of furnishing circulating media, no legislation relating to banks was enacted or seriously considered. Henry W. Cannon became Comptroller of the Cur- Crisis of rency in 1884, succeeding John Jay Knox. In May of that year a serious financial crisis, produced by conditions in the country generally, but practically limited in its manifestation to New York City, caused numerous suspensions, including two large national banks. The crisis was caused largely by undue expansion of loans induced by speculation in securities. The New York banks again issued clearing-house loan certificates to be used in settling debit balances, the first bearing date May 15, and the maximum amount being $24,915,000. They were practically retired by July 1. The fact that the certificates were promptly issued served to restore confidence in a short time, and prevented more serious consequences. stringency. The withholding of money from deposit in banks and Causes of savings banks, the strengthening of their cash resources by interior banks, which caused a corresponding reduction of their balances in New York, necessarily produced a stringency. Any degree of fear or anxiety which induces the wage-earners employed by our large stores, factories, railroads, and employers of labor gen Clearing house certificates. erally, to keep the money received from the pay roll instead of depositing or spending the same, materially and immediately affects the volume of money in circulation. The banks under the rigid currency laws were powerless to afford relief. They could not buy bonds required to be deposited as security for circulation without investing more money in bonds than they would receive circulation in return. Had they borrowed the bonds it would have required about forty-five days after depositing them before the circulation could be prepared for delivery. The banks protected and retained their cash reserves by suspending cash payments as between themselves, and using loan certificates in payment of clearing-house debits. The crisis thus proclaimed undoubtedly drove money into hiding and prevented the banks from strengthening their reserves by the usual receipts of currency. The important and valuable function which clearinghouse certificates perform, and the only one which justifies their use, is the temporary inflation of currency which they in a manner produce. A bank may deposit with the clearing-house $1,250,000 of its assets and receive $1,000,000 of loan certificates. It then can loan to its customers $1,000,000 and meet and pay the checks drawn against such loans, in the clearing-house exchanges, with the $1,000,000 loan certificates it has received. It may then deposit the assets taken for said $1,000,000 of loans with the clearing-house and receive $800,000 in loan certificates. It could then in turn loan its customers $800,000 and settle for the same through the clearing-house exchanges with the $800,000 of loan certificates received, and so on. This illustration is given to show the extent to which banks might extend accommodations to their customers without the use of actual currency. Of course the issuing or withholding of loan certificates rests wholly with the clearing-house authorities, and each particular application is determined by them upon its merits. The beneficial results which these loan certificates have produced rest wholly upon the fact that the banks while maintaining their reserves by retaining their currency have been enabled to extend to the public whatever assistance it may have required. A statement of the several issues of such certificates at New York appears on page 375. of bank cir culation. Their charters had been extended by the law of 1882, Contraction and the banks were recognized as a permanent part of our monetary system, but many things militated against the increase of their note-issues. As we have seen, the 3 per cent bonds, constituting a large portion of the public debt, were redeemable at the pleasure of the government, and were being rapidly retired with the large Treasury surplus and likely to be called at any time, hence were undesirable as a basis for note-issue, since, in case the bonds were redeemed, a bank would have to purchase and substitute others. All other issues of government bonds commanded high premiums, the 4 per cents standing at 129, which rendered the issue of circulation based upon them unprofitable. Another powerful factor in reducing bank circulation was the fact that the government was purchasing silver, coining silver dollars, and issuing certificates, at the minimum rate of $2,000,000 per month, and using all the power of the Treasury to force them into circulation in order to prevent going upon a silver basis. The crusade in favor of free coinage of silver monopolized the attention and sympathy of Congress to such an extent that it continuously refused to permit banks to issue circulation to the par of bonds, retaining the limit at 90 per cent notwithstanding the fact that the bonds commanded a premium of nearly 30 per cent. The entire absence Influence of silver pur chases. System inelastic. Cannon's proposed remedy. of elasticity, which every bond-secured currency must possess, as well as the growing premium on and lessening volume of United States bonds, induced economists to consider a bank currency without such bonds as security, which would be quite as safe and more responsive to business necessities. Comptroller Henry W. Cannon was the first official to discuss and recommend such a currency issue. He suggested as security a guarantee fund to be accumulated from the tax on circulation, the gain on lost notes, and the interest on the redemption fund in the Treasury. Examining and analysing the statistics of the 104 national banks that had failed up to that time, with a view to demonstrating the security to note holders under the proposed plan, he said: "The experience with these 104 banks shows almost conclusively that if their issues to the amount of 65 per cent of their capital had been secured by a deposit of bonds to an equal amount, the remaining 25 per cent might have been issued without other security than a first lien on the general assets; and if a safety fund had been in existence it would in the case cited have been drawn upon to the extent of $62,000 only upon a circulation amounting to $5,464,700. For a beginning, therefore, it might be safe to authorize banks to issue circulation amounting to 90 per cent of their capital, 70 per cent to be secured by an equal amount of United States bonds at par value, the remaining 20 per cent being issued without other security than a first lien on such assets. But if the law should provide for the accumulation of a safety fund in the manner suggested, then as such safety fund increased the percentage of circulation unsecured by bonds might be increased as the diminution of the public debt might require and the safety fund warrant." William L. Trenholm became Comptroller of the Currency in 1886. In that year Congress authorized banks, by a two-thirds vote, to increase their capital or change their |