[Volume XXV
THE CHICAGO BANKER
8
THE FARMERS' AND MECHANICS' NATIONAL BANK
OF PHILADELPHIA, PA.
427 CHESTNUT STREET
Capital .	.	$2,000,000.00
Surplus and Profits 1,270,000.00
Organized January i7, 1807
Dividends Paid . $12,637,000.00
OFFICERS :
Howard W. Lewis, President
Henry B. Bartow, Cashier	John Mason, Transfer Officer
Oscar E. Weiss, Assistant Cashier
ACCOUNTS Or INDIVIDUAL 8, FIRMS, AND CORPORATIONS SOLICITED PRESENT NUMBER OF STOCKHOLDERS ©30
STATE BANK OF CHICA60
ESTABLISHED 1879
S. E. Corner La Salle and Washington Streets
Capital -	-	-	$1,000,000
Surplus and profits (earned)	1,256,647
Deposits -	18,000,000
OFFICERS
Frank I. Packard, Asst. Cashier Henry A. Haugan, Asst. Cashier Samuel F,. Knecht, Secretary William C. Miller, Asst. Secretary
H. A. Haugan, President L. A. Goddard, Vice-President John R. Lindgren, Vice-President Henry S. Henschen, Cashier
YOUR CHICAGO BUSINESS RESPECTFULLY INVITED
in the United States of each particular one of the thousands of banks trying to stand alone, except to the extent that the clearing house certificates have made them cohere. Almost every bank wishes to withdraw its balance with other banks, and as this is an absolute impossibility, the panic reaches its crisis, currency payments are suspended, all currency is hoarded and passes to a really large premium, and the ingenious expedients to which we have referred, whether legal or not, are made use of with that general concurrence by the people and the banks which only exists in the face of a great national danger. The great national danger is that the panic may cause national ruin. But what is a panic? A widespread fear without cause. In most countries financial panic is caused by fear on the part of those who are not a part of the national finance—who are not bankers and such. But in the United States, whoever may start the panic, those who accentuate it most are the thousands of individual banks by their distrust of each other. We speak indignantly about the private individual who draws his deposit in currency and hoards it. But in time of panic the most active agency in drawing out currency and hoarding it, is the country bank. And it is not the fear of the failure of banks, but the fear of the disappearance of currency, which aggravates panics, and brings about disaster and terrible reduction in values. To sum it up, it would appear that the same elements which in the United States cause panics of the most ruinous character would not be apt to cause panic at all in better regulated countries. In such other countries, firstly, the reserved cash would be instantly available; secondly, the banks would not be likely to fear one another, but would cohere in meeting any panicky feeling on the part of the public; thirdly, the power of re-discounting or of issuing clearing house certificates would need to be used to but a small degree if only the demands of the public had to be met and not the demands of thousands of individual banks; fourthly, with these things assured and a reasonably flexible currency, no stoppage of currency payments would be likely to arise.
(Continued on page 41)
should be available between the banks and the people, and should surely be legal whether it is wisely issued or not.
But before leaving the subject of clearing house certificates let us consider how their use, and volume, and abuse, are affected by the existence of thousands of individual banks instead of a comparatively few׳ large banks with branches. Whether we have one system or the other the actual cash will accumulate largely in the few? great monetary centres. In the case of country banks the cash not needed goes to their reserve agents, while in the branch system the branches of any bank are practically one clearing house with a settled tendency to accumulate cash beyond the necessities, in money centres.
While retained in these centres, the cash, except to the extent of the reserves, will be employed in some manner so as to earn interest. Now, the extent of the reserves necessary on the one hand and the extent to which the surplus funds may be lent on the other is a matter of experience in both systems, but the experience is very different indeed. If w׳e take as examples a bank in a reserve city with one hundred banks as correspondents, and a single bank in another country with one hundred branches, we can readily see the difference. In times of strain the one hundred branch managers do not ask for cash from the head office unless it is actually needed; on the contrary, the moment contraction of loans begins they are a source of strength to the head office. The credit affected and the thing to be managed is one organism. Within this organism fear of each other by its component parts will not enter, and whatever courage its executive possesses will actuate every part of the organism. But in the other case there are a hundred organisms and no cohesion, except that, the skies being bright, all will cohere somewhat, not with each other, but with the one bank in the reserve city. And if the skies are overcast we have a hundred utterly selfish organisms all concluding that their balance with the bank in the reserve city would be better in their own vaults; in any event they would sleep better if it were there. And so wre have the extraordinary spectacle w'hich accompanies every panic
of necessity there is never likely to be unanimity of opinion so long as the decision depends on the judgment of several bankers. And therefore the illegal use of the cash reserves and the issue of clearing house certificates must always come too late to prevent the panic. They may alleviate and cure, but they are not available to prevent. Still they are such a natural and efficient means of making the banks who have abundant reserves help those who have not, that we may expect to see clearing house certificates or something closely akin to them in other countries where there is no great state bank to whom smaller banks may go with some show of right.
Until the latest panic these loan certificates were only issued in the largest money centres, but on this occasion they were issued by fifty-one clearing houses, and doubtless in the course of future panics they will become practically available to every bank. The wide extension of their use, however, raises a new question. Used in the real money centres and issued only in large blocks between banks they remain what they w'ere intended to be, mere loan obligations assisting banks to build up their reserves, and also enabling them to make additional loans to customers who but for such aid might fail. But the extension of their use to numerous cities and towns where actual cash supplies are nearly exhausted, and the issue of these loan certificates in small denominations to the general public as currency, in open defiance of law, while creditable to the ingenuity and audacity of the American people, are new features of an alarming character. There are dangerous expedients we praise ourselves for resorting to when heroic action is necessary for the general safety, but which are little better than crimes if they are repeated. An able banker* has referred to clearing house certificates as an “emergency circulation,” and as an “asset currency” that even he would approve of. I think much mischief will arise if these loan certificates are ever generally regarded as anything other than what they were originally—a species of rediscounts between banks. Currency, to be such,
*William A. Nash: “ Clearing House Certificates and the Need fora Central Bank.”—Annals Am. Acad. Pol. and Soc. Science, March, 1908.