Report to the New York Clearing House Association of a Committee upon Reforms in the Banking Business by New York Clearing House Association
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Title:Report to the New York clearing house association of a committee upon reforms in the banking business.

Author:New York Clearing House Association.

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Print Source:Report to the New York clearing house association of a committee upon reforms in the banking business.

New York Clearing House Association.

1 p.l., 58 p. 23 cm.

[New York,

1873]

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NEW YORK CLEARINHOS ASSOCIATION OF A ommift~~~ upon }~~~~~cform~~~~ in ih~~ ~~ PRFS8,-Ty,NTF, VOT-EMBf~R, 1873. 4 .

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The Committee Appointed by the New York Clearing House Association, “To carefully consider and report what Reorms are required in the practical operations of Banks with each other and with the public, to increase the security of their business,’ respectfully report That, in order to reach the object sought by the reso lution, it is necessary briefly to review the condition and practical working of the banking system in this city before the commencement of the late panic. Banks are the natural depositories of the current capital of the nation, passing into and out of active industry and commerce. The balances held by them are for the time specially reserved by their owners from permanent investment, and kept subject to immediate command. They constitute a main portion of the wealth of the community which is not yet ready to be consolidated into fixed capital or immovable forms. The custodians of such funds are consequently bound by the very nature of their trust, to preserve them in their integrity, and to apply them only in such ways as will prevent them from falling into inactivity, and, also, to hold such proportion in ready cash in hand, as long experience has proved to be necessary, to meet immediate demands in every possible emergency. And it may be confideitly affirmed that a bank, or banker, who faithfully meets all these obligations, renders a full equivalent for any benefits which can be honorably derived from the custody of such a trust. XL 7s c1 .4 r ! I i

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2 No institution can, in the long run, purchase deposits of money payable on demand of the owners, and at the same time secure to itself a just and proper compensation for the business, without violating some of the conditions indispensable to the public safety. It must either use them in ways that are illegitimate and perilous, or use them in excess. This has been abundantly proved by innumerable instances in years past, and the practice of paying interest for such deposits was unanimously condemned by the bank officers in 1857, as one of the principal causes of the panic at that period, for the reasons given in a printed report, of which a copy is annexed hereto, and to which, with the consequent resolutions of the associated banks then adopted, your Committee most respectfully invite attention. The creation of many new institutions, since the late civil war began, which have considered it expedient to purchase public favor, and thus divert to themselves business from established channels, has revived the custom of paying interest upon deposits, and has also led some of the older banks, -in self-defence, to yield more or less to the pressure in the same direction, while it has induced others to adopt newer methods of obtaining patronage equally per nicious. And thus a sharp and degrading competition has not only prevailed among banks in this city, but has been excited as a necessary consequence in other places, where the far reaching enterprise of some of our associates has led them in pursuit of business, not only from institutions but from all classes of society. Banks throughout the country have been aroused to enlist in the same destructive prac tices toward each other, and in defence of their various localities.

A premium has been unnecessarily given for business which, left to itself, would fall without cost into r

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its natural channels, and adjust itself to such localities as the convenience of the people and the best interests of the country require.

Without such rivalry the resources of the nation would be so diffused among the banks as to give increased finan cial strength and stability to every part, and not only re move a great cause of irritation, but add to the comfort, efficiency and profit of all. The evil results of paying interest upon current deposits, avowed when the internal commerce of the nation was con ducted upon a specie basis, are greatly aggravated when it is carried on by an irredeemable currency, which has a fixed and invariable volume, and which flows to and from the commrercial centre with the changes of the seasons. Such a currency is superabundant in summer, and instead of being then naturally absorbed and diminished by redemption, it accumulates in banks, which cannot keep it idle without loss of the interest paid to its owners. Legitimate commerce does not then demand it.

It is still subject to instant call. There is consequently no resource but to loan it in Wall street upon stocks and bonds, in doing which so much of the nation’s moveable capital passes for the time into fixed and immovable forms of investment, and its essential character is instantly changed.

Loans are made with facility upon securities which have no strictly commercial quality, new and unnecessary enterprises are encouraged, wild speculations are stimulated, and the thoughtless and unwary are betrayed into ruinous operations. The autumnal demand finds the resources of the nation unnaturally diverted from their legitimate channels, and they can only be turned back with difficulty and public embarrassment. Such has been our well known experience year after year. Interest upon money has, as a consequence, fluctuated widely from three and four per cent per annum in sum 3 I

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4 mer, to fifteen and twenty per cent. in the fall and winter upon commercial paper, and upon stocks at times to one half and even one per cent. a day. Vicissitudes like these are utterly destructive to all legitimate commerce, and institutions whose operations tend to such results are enemies to the public welfare. Deposits which are derived from strictly commercial operations cannot fluctuate so widely, from time to time, as to produce disturbance in the community; and banks which confine their business to them, as they naturally arise, are always reliable and regular in their treatment of their dealers, and can be conducted with ease and comfort to their managers and safety to the public. On the contrary, deposits which are purchased by payment of interest, or otherwise, and which must, therefore, of necessity be largely loaned “on demand,” are the cause of continual agitation and solicitude to those who hold them in charge. They are certain to be withdrawn at the season of the year, and at the moment most inconvenient to the banks and to their dealers. This fact is best illustrated by the following figures: The average deposits of the sixty Clearing House Banks for 10 weeks from 5th July to 6th Sept., were………………………. $232,228,000 The lowest amount reached since the panic, was, 143,170,000 Showing a total reduction of………… $89,058,000 Of the above amount during the 10
weeks, twelve interest paying banks held……………….$111,585,000

The lowest total reached by them since the panic…………… 52,669,000

Showing a loss in 12 banks of $58,916,000 and in the other 48 banks of……………. $30,142,000

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5 and were it not for the fact that several of the forty-eight banks are more or less involved in the same practice, this disparity would be still more apparent. When the late panic commenced, the sixty banks composing the New York Clearing House were indebted for about two hundred millions of deposits. Of this amount three institutions (paying interest to their country depositors) owed about fifty millions, and including these, twelve banks of similar character owed about one hundred millions; that is to say, twelve institutions held one half of the aggregate deposits, and the other forty-eight, their associates, the other half. The proportionate reserve of legal tender notes in the associated banks was also greatly in favor of the latter number, for the obvious reason, that banks which pay interest upon money can least bear to have any amount of it idle. The active demand first came, as it usually comes, for that portion of deposits due to country banks, who, in addition to their annual necessities, had been disturbed by failures of several city bankers, holding large balances of money due to the interior. These deposits were to a great extent loaned upon stocks and bonds in Wall street, payable “on call,” with the confident belief that they were there earning more than the interest paid for securing them, and were available as promised. But, from the very nature of the case, the rapid withdrawal of deposits from the banks made the “call” from every direction simultaneous, and closed every resource from which the “street” derived its power to respond.

Borrowers upon stocks were deprived both of their facilities of borrowing, and of all power to sell their securities. The necessary result occurred.

Banks which found themselves in this dilemma had no alternative but to ask the assistance of their associates, and the conflagration was so rapid and violent that every con I

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6 sideration of fraternal sympathy, self-preservation and public safety, compelled a general and earnest cooperation; and the majority, who had for long years conducted their business upon sound principles, and who had patiently submitted to’the loss of valuable accounts, drawn from them by their associates, by practices against which they had continually protested, instantly responded to the call by placing their resources at command of those who had done so much towards producing the calamity.

Making common cause, the weak with the strong, to avert a universal catastrophe. An expedient was found by which the stronger banks placed themselves under the unequal burthen, and equalized the pressure, by gathering in their resources and placing them at the disposal of the weaker, who were thus furnished with means to meet the demands of their depositors and to save themselves from public exposure, and their dealers in city and country from disaster and ruin. Meanwhile the public confidence in institutions had become so greatly impaired that the ” legal tender reserve” was reduced from thirty-four millions, on the 20th September, to five millions eight hundred thousand on the 14th October-an amount of ready money never before paid out in the same time. Interior banks, whose ready means in hand had always been merely nominal, but whose resources consisted chiefly of credits upon the books of interest paying banks in the principal cities, were under the necessity of calling back their deposits in a medium never before required, and to these the associated banks were asked to respond, as well as to the demands of timid dealers at home. Your committee take this occasion to congratulate the associated banks upon the liberal and excellent spirit in

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7 which this crisis has been met, and upon the happy escape from a most imminent danger which threatened them, and with them, the country at large. It is not too much to say that had it been less boldly, promptly or unanimously encountered, the results must have been more disastrous and widespread than any that have occurred during the present generation.

While the banks have intelligently recognized the errors of their associates, by which the late financial complications were aggravated and the community imperiled, there has been no disposition whatever to deal in harsh reproaches. On the contrary, the magnitude of the trust is deeply felt, and the utmost good feeling prevails; an earnest desire and a unanimous determination are expressed on every side to reform existing abuses, and to reorganize the Clearing House upon a basis of mutual support and uniformity of business. Late experience has again demonstrated the fact that the banks in the association are necessarily dependent one upon the other in times of peril, as well as in the trusts which the large operations of the Clearing House daily impose, and that the entire body inevitably suffers from the errors and indiscretions of a single member.

No institution, therefore, has a moral right to conduct its affairs with the publie in defiance of the general conviction of its associates, or to introduce private terms of dealing with its customers which are in conflict with the best interests of all. Bank officers have no right to be sharp personal competitors for public patronage, nor merely laborers for dividends on behalf of a limited constituency. They are in a most important sense trustees for the whole community, and public administrators of great interests, which forbid the least departure from principles which long experience has sanctified. With these general considerations, your Committee pro

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8 ceed to the more practical questions submitted to them, viz.: “What reforms are required in the operations of banks with each other and the public to increase the security of their business;” and, first and most prominent, they recommend that the banks entirely discontinue the payment of interest upon deposits, whether directly or indirectly. THE RESERVE.

The requirement of a “legal reserve” is now engaging special public attention, and much impatience is expressed at the law which compels Banks to hold a definite ratio of legal tender notes to liabilities. The practical difficulty consists in attaching a rigid and inflexible rule of law to a mobile fund, which is held for the purpose of meeting sudden contingencies, and which is, therefore, in its very nature, a variable quantity. It is impossible clearly to prescribe by statute the circumstances or the exact periods during which the reserve should be increased or diminished. There seems an intrinsic absurdity in a law requiring that a “reserve” must be always kept, which was created on purpose to be used, or that a bank officer who draws upon his reserve, under circumstances for which it was intended, is false to the oath which he takes to obey the law. But the fact that a military commander cannot be definitely instructed when he may employ his reserve force, is not regarded as a reason why that important portion of an army organization should be abandoned, or be reduced in number or efficiency. So long as Bank debts are subject to cash payments, so long must the bgation be either imposed or assumed, of keeping sufficient cash in hand to pay whatever portion can possibly be presented. It must always be remembered that, in the absence of any important central institution, such as exists in other commercial nations the r,

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9 associated banks are the last resort in this country, in times of financial extremity, and upon their stability and sound conduct the national prosperity greatly depends. In claim ing for them that, in taking faithful care of the active capital of the nation with which they are entrusted, they render a full and equitable compensation for its proper use, your Committee point to the consequent and para mount duty of the banks to hold such proportion of that fund in actual possession in cash as the extremest needs may demand. It has been suggested that the federal principle which our association has applied to banking, through the use of “loan certificates” in two important crises, might be used effectively in regular business, by keeping two separate accounts, viz: ” Cash” and “Bank Credit,” each payable in kind, to avoid a “run” upon Banks in times of panic; and much speculative study throughout the world is given to the question how the idea of “clearing,” as used through banks, may be indefinitely extended to effect the smaller exchanges of the community, so as to dispense in a great measure with large reserves of ready money. But in the present condition of economic science, and especially in this important exigency, your Committee recommend that we accept the teachings of practical experience, and pursue the well beaten track which trade and commerce universally recognize. Experience of older commercial nations has shown that the volume of ” reserve” should be in the proportion of one fourth to one third the direct liabilities of a bank, and whenever it is there found receding from this amount, restrictive measures are taken to replenish it. Our own association in 1857 established a minimum ratio of twenty p e r cent in coin, which was for the time carefully ob 2

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to10 served, and again in 1860 increased this minimum to twentyfive per cent. The present abnormal condition of the currency increases the difficulty inherent in this subject. The law permits the reserve to consist of coin and legal tender notes, and at the same time compels banks to receive as money the notes of national banks, which in legal payments are not money; so that, for practical uses as “reserve,” we are troubled by a species of money which is above, and by another which is below, the standard quality. And it affords a striking commentary upon our present anomalous condition, that the money of the world, which is now freely coming into the country from legitimate commerce, cannot be absorbed into our banking system, but is necessarily repelled as a cause of serious embarrassment The opinion that has largely prevailed, that because the business of this country is now conducted upon a basis of irredeemable paper, that therefore there can be no suspension of payments, has been most effectually dispelled, and the contrary is established, that a currency, from its nature, limited. in volume, is subject to sudden and special dangers, and therefore requires special protection. Recent experience has shown how rapidly thirty-four millions may be withdrawn from our associated institutions, and, for practical uses, how inadequate is the reserve held by country Banks. That reserve, as fixed by law, is fifteen per cent. of liabilities, and three fifths of it may consist of deposits in Banks in the larger cities, who may subdivide it by placing one half their own reserves in Banks in the City of New York, where again it is subject to a further reduction, from the fact that these last are only required to hold twentyfive per cent. of their own liabilities, of which these deposits form part. The aggregate held by all the National Banks of the United States does not finally much r __z

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11 exceed ten per cent of their direct liabilities, without reference to the large amount of debt which is otherwise dependent upon the same reserves. When we consider that a portion of this final reserve may consist of coin, which, under present circumstances, has no practical power in an extremity, and a further fact that the interest paying Banks, which have always held the larger part of those reserves, have been forced by their position continually to disregard the law, it is manifest that the requirement, in its real operation, has not worked against the public welfare, or against the true interests of the Banks themselves. The abandonment of the practice of paying interest upon deposits will remove a great inducement to divide these reserves between cash in hand, and deposits in cities, and make the Banks throughout the country what they should always be, financial outposts, to strengthen the general situation.

The Associated Banks of New York, the ultimate resource in financial emergencies, are deprived by usury laws, of the power, which is so effectively used by the principal Banks in Europe, of protecting or augmenting their resources by adjusting the rate of interest to the necessities of the occasion-a power which, if practicable, Congress might safely confer upon the Clearing House Committee, in consultation with the Secretary of the Treasury, with great advantage to the country; as also the power of deciding when the time or the emergency has arisen in which the public interest required a relaxation of the rigid legal requirement in respect to the reserve to be held by Banks in New York city. If the legal or financial necessity exists to maintain a certain reserve, it is manifestly the duty of every institution to carry its just proportion, and no Bank, whether incorporated under National or State Law, can honorably evade its full share of this burthen. 4

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12 Your Committee therefore recommend that all the Associated Banks, while they strictly follow the requirements of the National Currency Act, by keeping on hand, either in Coin or Legal Tender Notes, an amount not less than twentyfive per cent. of their total liabilities to the public, be required always to hold at fifteen least per cent. in Legal Tender NIotes, subject only to such modifications as the Clearing House Committee may, from time to time, unanimously determine. A suggestion has been made, which your Committee consider worthy of notice, because it has heretofore proved an important restriction to excessive expansion, and because it may assist in preventing many of the evils referred to-that no institution be allowed to loan more than two and a half times its Capital and Surplus.

CERTIFICATION OF CHECKS. The practice of certifying checks upon Banks as “good,” has proved a great public convenience, and has for that reason grown into extensive use. Your Committee approach its consideration with some embarrassment. The custom originated in the natural inquiry of Bank tellers respecting the standing and credit of their dealers, and for many years it had little significance, otherwise than as giving clerical information. Checks so marked were not regarded as binding upon institutions in the nature of an official acceptance, and were, therefore, not entered upon their books. It was only since about the year 1850, that a new and influential institution deemed it expedient to define the character of an act then vague and uncertain, bye charging such checks to the accounts of their drawers; since when they have been legally regarded as formal obligations, and have become the medium of the most important transactions. If such writing

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13 certified to a real fact, that the Bank actually had in pos session, and due from it to the drawer of the cheek the stated sum, which it thus agreed to transfer to another party, no possible injury, but great good would ensue. But when a Bank binds itself to transfer what it has not, but only expects to have, it assumes for its dealers, without reason, all the contingencies incident to human transactions, and places its shareholders under perils which they never intended to assume. The power of certifying checks is necessarily entrusted to clerks or subordinate officers, who are employed to perform the ordinary and more mechaniceal duties of the Bank, and who are supposed to be strictly limited in giving to every dealer, only what has before been received from him. Alnd the power of bestowing credit is reserved for abler and more experienced men, themselves personally identified with the interests they administer, who gravely deliberate upon every transaction, and decide with the light of their united wisdom. But the practice of certifying uncovered checks, as pursued in some institutions, entirely reverses this established order, and while the responsible council is carefully deliberating over smaller credits, a non-commissioned officer is freely bestowing them in larger volumes, without security, upon comparatively irresponsible men. So extensively has this practice been pursued by several institutions that the amount of such cheeks, which have passed daily through the Clearing House, has reached in some instances to twice and three times, and in one or two, to four and five times their capital stock, and this through long periods of time.

Every Bank in the Association is directly involved in the risks attending this practice. It multiplies excessively the sums which such institutions pass through the Clearing House, and the consequent balances of the exchanges

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14 with their associates, which the capital of such Banks can never adequately guarantee. The most striking commentary upon the dangers of this practice, was afforded during the late panic, by the dealer of a Bank who had largely received such favors, and who, seeing by its application to others, that his own checks were in peril, declined, under advice of counsel, to cover them by a deposit, until otherwise assured that the Bank could respond to these very obligations. No sufficient reason, in the opinion of your Committee, can be given why a corporation should place itself, without compensation and special security, between two parties dealing with each other, and become the guarantor of either, in transactions entirely personal to themselves, simply because one or the other is a depositor in the institution. We have already stated that the safe custody of money payable “on demand” is full compensation for its legitimate use, and the risks attending such a business are all that properly appertain to the profession of a Banker. And if the rule be invariably observed of certifying checks only when the drawer has the full amount at his credit in the Bank, no one can be injured or offended when he is treated in all respects like every other of his fellow dealers. The restriction suggested will work favorably to every interest-to the Banks, their shareholders, and their associates, by diminishing the risks now so widely incurred and it also conforms to and confirms the law which Congress has established upon this subject in respect to National Banks.

Your Committee, therefore, recommend that in no case shall a check or other obligation be certified by a Bank, unless the amount of it is first found regularly entered to the credit of the dealer upon the books of the institution. -4

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15 INDIRECT EXCHANGES. A custom has grown up among the Associated Banks, and has greatly increased within the last few years, of engrafting upon themselves, and thus admitting to the bene fits of the Clearing House, other institutions and individuals, who, while not eligible to regular membership, participate in all its advantages without sharing its expenses, incurring its responsibilities, or submitting to its regulations. Over all these the Association has no possible control. They consist of Banks, and corporations of various character and objects, in this city and vicinity, many of whom attract to themselves deposits of active capital from the commercial community by extraordinary rewards, and use it for purposes and enterprises which are illegitimate in regular banking. The Associated Banks thus find themselves surrounded by diligent competitors in their proper business, which increase their risks, while they lean upon them for support. By keeping a satisfactory balance in Bank, for which interest is frequently paid, these institutions avoid the necessity of any money reserve whatever, and not only invest all the resources at their command in profitable or unprofitable enterprises, but have a claim upon their patron Bank for assistance in time of need. The Banks are thus deprived of a large portion of commercial deposits that would naturally come to them, and incur increased and indefinite risks, and the public are unconsciously placing their ready means where they are subject to unusual hazards. Any Bank in the city, worthy of public confidence, may become a regular member of the Clearing House Association, and the Banks which compose it are bound, in duty to themselves and to the public, to withhold the 4

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16 special support of this body from any who cannot submit to, or safely pass through the necessary examination which entitles them to credit. And your Committee can see no valid reason why Banks outside this city should receive the benefit of the New York Clearing House, when they share none of its burthens, and submit to none of its regulations. They, therefore, recommend that no Bank shall receive upon deposit, from its city dealers, checks or drafts other thas upon Banks members of this Association.

RECEIVING OUT-OF-TOWN CHECKS AS CASH - DEPOSITS. Among the various devices introduced to attract mercantile accounts, and to secure deposits of country banks, is that of receiving and crediting immediately as cash, checks and drafts upon places out of this city-a practice which was commenced as a special inducement by one institution, but which, as the natural consequence of unfair competition, has been followed and extended by others, until it embraces points far and near throughout the whole country. It has been carried on with such utter disregard of the laws of exchange, and of the time necessary to effect returns, that the former and regular methods of making payments in, and remittances to this city, is greatly changed. Interior merchants, finding that checks upon their own localities are readily accepted as cash in New York, prefer that mode of payment, and they are naturally encouraged to do so by their Banks at home, who receive the benefit; so that our own institutions are not only deprived of deposits, which by the laws of trade naturally belong to them, but they are daily encumbered by a miscellaneous

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17 mass of checks, which occasion serious embarrassment, loss of time, great risk, clerical labor and expense in collect ing, entirely caused by this unnecessary diversion of business from its natural courses. Some of the interest paying institutions, which have by this expedient enlarged their correspondence with interior banks, have with them adopted peculiar methods of facilitating such collections, which they regard as advantageous to themselves, but by which they are continually extending this evil. City merchants, whose business is chiefly with the country, now accept such checks freely from their customers, because their banks will accept them from them, and many of the accounts which, from their amount, dealers regard as very valuable to their banks, the latter find by experience to result in actual loss. Instead of being the natural depositories of country banks for the business of legitimate commercial exchanges in the city, such Banks are thus made ours. The. subject is the cause of continual irritation and discord between banks and their customers, and between the banks themselves. Your Committee, in considering this evil, can perceive no remedy but by its total abolition, and they therefore recommend that the Clearing -Hotse Committee be required to establish monthly a schedule of min,tmum rates at which the Associated Banks shall receive on deposit, checks and drafts upon places out of this city, and to which every bank shall be bound strictly to adhere. Having now considered the prominent evils which exist, the removal of which your Committee consider as indispensable to the harmonious intercourse between banks bound 3

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18 together by common interests, and having recommended for their removal 1st That payment of interest upon deposits, either directly or indirectly, be entirely prohibited. 2d. That each bank, while it observes the requirements of the law of Congress respecting a reserve fund, be required to carry at all times an amount of legal tender notes, equal to at least fifteen per cent of its liabilities to the public. 3d. That no bank shall’certify a check as good until the full amount of it shall appear upon its books from a deposit, regularly entered to the credit of the drawer. 4th: That no check or draft shall be received by a bank upon deposit at par as cash, drawn otherwise than upon one of the banks composing the Clearing House AssociatiorL 5th. That all checks and drafts upon places out of the City of New York shall only be taken at rates of discount established monthly by the Clearing House Committee. They now proceed to state how the observance of these rules may be effectively secured. It is well known that in some of these, the sentiment of the Association has been repeatedly expressed, and resolutions of reform have been adopted, but which have gradually fallen into neglect. Your Conmmittee believe that late occurrences have produced a deeper ccnvicticn, Loth in the A,cciation and in -4

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19 the public mind, of the inter-dependence of the banks upon each other, and of the wrong which any one mem ber imposes upon the entire body, by unsound or irregular practices. They, however, recommend as an effectual security for the future: That the Constitution of the Clearing House be changed into articles of association, which shall be signed by the officers of every bank, or member, and ratified by its Board of Directors.

And your Committee respectfully submit for consideration the accompanying instrument, which has been compiled from the present Constitution of the Clearing House Association, wvith such changes and amendments as present circumstances have suggested. Your Committee also recommend that the Clearing House Committee shall procure a tablet, containing in large and very legible impressions, the rules which are to be observed by each member in dealing with the public, as follows:

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20 0O! THIE 9bsoxte X]3anIks OF THE CITY OF NEW YORK WITH THEIR DEALERS. 1
o Bcanc sha1l pay, or proczre to be paid interest zpon deposits. Xo Check shall be certifted 7,tatl the full arnouzt is filrst deposi’ted. Checks u,pon ssoci’ated Banks only, received0 on deposit. 4. Checks zupon places out of Xew York City received at rctes of discozout, fixed by Clear in.I HTouse Coormwnittee. 5. Checks will be takem at depositor’s risk arcnd collected throzt_h the Clearizm Hooutse. 6. Checks not -ood, will be returned to the depositor the day followimr. Banks not strictlylobserving these Ruleslwill be exclud ed from the Clearing House Association. These shall be appropriately framed, and always kept conspicuously suspended in the banking-roorn of each insti, ution for public informatioin, I . - 2.

S. 4

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21 With these regulations, the public are always informed of the terms upon which alone they may conduct their business uniformly with every bank that has the facilities and the support of the Clearing House Association.

With these always in view, no person worthy of credit at a bank can ever ask a deviation from them, and no institution can retain the confidence of any respectable dealer after it is thus known to have compromised its integrity. By these important changes, many of the evils which have grown up in the business community, and which have their origin in the vicious practices of banks, will expire, the Banks will resume their rightful position as safe and substantial supports of legitimate commerce, and their officers will be relieved from the anxieties which, in the present unnecessary competition, continually pursue them. All which is respectfully submitted by GEORGE S. COE, Pres’t Am’n Exchange Nat’l Bank.

W. L. JENKINS, Pres’t Bank of Am7erica J. M. MORRISON, Pres’t Manhattan Bank. MOSES TAYLOR Pres’t National City Bank. F. D. TAPPETS Pres’t Gallatin National Bank. JOHN E. WILLIAMS, Prese’t Metropolitan National Bank. J. L. EVERITT, Cashier National Broadway eank. ROB’T BUCK, Cashier Pacific Bank. JOHN Q. JONES, Pres’t Chemical National Bank I I 1: -1I Co,mmi

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ARTICLES OF ASSOCIATION. The undersigned Banks in the City of New York, in order to facilitate their regular business with each other and with the public, hereby agree to unite in an Association to be called “THE NEW YORK

CLEARING HOUSE ASSOCIATION,” and to observe the following rules and regulations: ARTICLE 1. ThIe objects of the Association shall be the effectiug at one place of the daily Exchanges between the several Associated Banks, and the payment at the same place of the balances resulting from such Exchanges. But the Association shall be in nowise responsible in regard to such Exchanges, nor in regard to the balances resulting therefrom, except so far as such balances shall be actually paid into the hands of the Manager. The responsibility of the Association is strictly limited to the faithful distribution by the Manager among the creditor Banks, for the time being, of the sums actually received by him; and should any loss occur whilst the said balances are in the custody of the Manager, they shall be borne and paid by the Associated Banks in the same proportion as the other expenses of the Clearing House, as hereinafter provided for . 4. -L -4

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ARTIcLE 2.-Each Bank belonging to the Association shall be represented at all meetings thereof by one or more of its principal officers, and shall be entitled to one vote. ARTICLE 3.-A general meeting of the Association shall be holden at the Clearing House on the second Tuesday in December in each year, at 12 o’clock, M. At every annual meeting a Chairman shall be elected, by ballot, to preside at that meeting and all subsequent meetings during the year. Whenever he shall be absent a Chairman pro tern. shall be appointed. At the same meeting a Secretary shall also be elected by ballot. Special meetings shall be called by the Clearing House Committee whenever they may deem it expedient, or whenever they shall be thereto requested by any seven of the Associated Banks. ARTICLE 4.-At all meetings of the Association a quorum for the transaction of business shall consist of a majority of the whole number of Associated Banks. A fine of three dollars shall be imposed upon every Bank not represented at roll call at each duly called meeting of the Association. The fund created by such fines shall be appropriated in such manner as may be directed by the Chairman of the Association. I

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24 ARTICLE 5.-At every annual meeting a Standing Committee of seven Bank Officers shall be elected by the majority and by ballot, to be called the “Clearing House Committee,” whose duty it shall be to procure from time to time a suitable room or rooms for the Clearing House; to provide proper books, stationery, furniture, fuel, and whatever else may be necessary for the convenient transaction of business thereat; to appoint a Manager annually, and such clerks as may be necessary; to establish rules and regulations to be observed at the Clearing House in cases not provided for in these Articles, subject to the approval of the Association, and generally to supervise the Clearing House affairs. This Committee shall have charge of the funds belonging to the Association shall draw on each Bank for its quota of the expenses, and shall also, at the first meeting of the Association after their election, submit detailed estimates of the expenditures that will be required for the Clearing House during the current year. This Committee shall receive and consider any complaint made against a member of the Association for infraction of its rules, and shall have power, for cause by them unanimously deemed sufficient, to suspend any Bank from the privileges of the Clearing House until the pleasure of the Association thereupon shall be ascertained. In case of such suspension, this Committee shall forthwith

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25 call a general meeting of this Association, to take such matter into consideration. This Committee shall each month, or oftener if necessary, prepare and issue for the use of the Associated Banks a schedule of minimum rates at which checks and drafts, payable at places out of the City of New York, shall only be received on deposit, and to which every Bank shall conform. ARTICLE 6.-The salary of the Manager shall always be fixed by the Association. The salaries of the clerks shall be fixed by the Clearing House Committee. The Manager shall give a bond, with sureties, in the sum of ten thousand dollars, and each clerk in the sum of five thousand dollars, to be approved by said Committee. ARTICLE 7.-The Manager, under control of the Clearing House Committee, shall have immediate charge of all business at the Clearing House, so far as relates to the manner in which it shall be transacted; and the clerks of the establishment, as well as the settling clerks and the porters of the several Associated Banks, while at the Clearing House, shall be under his direction. The Clearing House Committee shall have power to remove the Manager, or any of the clerks, whenever, in the opinion of the Committee, the interest of the Association shall require. 4

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26 ARTICLE 8.-The hour for making Exchanges at the Clearing House shall be 10 o’clock, A. M., precisely. Between the hours of 12-‘ and 1I o’clock P.

M., the debtor Banks shall pay the Manager at the Clearing House the balances against them, either in actual coin, United States legal tender notes, or ill the certificates hereinafter mentioned, except fractional amounts. At 1 o’clock, P. M., or as soon thereafter as the amounts can be made up and proved, the creditor Banks shall receive from the Manager, at the same place, the respective balances due to them, provided all the balances due from the debtor Banks shall have been paid. The Association, by a vote of three fourths of those present at a meeting called for that puiloose, may change the hour for making the exchanges and the settlement of balances. ARTICLE 9.-Should any one of the Associated Banks fail to appear at the Clearing House at the proper hour, prepared to pay the balance against it, the amount of that balance shall be immedi ately furnished to the Clearing House by the several Banks exchanging with the defaulting Bank, in pro portion to their respective balances against that Bank, resulting from the exchanges of the day; and the Manager shall make requisitions according ly, so that the general settlement may be accom plished with as little delay as possible. The re spective amounts so furnished the Clearing House In

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27 on account of the defaulting Bank will, of course, constitute claims on the part of the several responding Banks against that Bank; but, as before stated, the Association shall in nowise be responsible therefor. ARTICLE

10.-Errors in the Exchanges, and claims arising from the return of checks, or from any other cause, are to be adjusted directly be(tween the Banks who are parties to them, and not through the Clearing House-the Association being in no way responsible in respect to them. ARTICLE

11.-Reclamations for errors and deficiencies in specie or United States legal tender notes received at the Clearing House, contained in bags or packages, sealed and marked in conformity with any rules established upon that subject by the Clearing House -Committee, shall be made by one o’clock P. If, on the following day, by the receiving Bank, directly against the Bank whose mark the sealed bag or package bears. Notice of such error shall be sent to the Bank iimmediateiy upon discovery, the Association not being responsible for the contents of such sealed bags or packages. All checks, drafts, notes, or other items in the Exchanges, returned as “not good” or “missent,’” shall be returned the same day directly to the Bank from whom they were received, by 2: o’clock, P. M., and the said Bank shall immediately refund to the Bank returning the I

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28 same the amount which it had received through the Clearing House for the said checks, drafts, notes, or other items so returned to it, in specie or legal tender notes. But checks, drafts, notes, or other items to be returned for endorsement or informality may, after being certied by the Bank returning it, be returned tlhrough the Exchanges the following morning, not exceeding $5,000 in amount to any one Bank. ARTICLE 12.-Every Bank, member of the Clearing House Association, shall, every Saturday, before 12 o’clock, M, furnish a weekly statement of its condition to the Manager, for publication, showing the average amount of 1 st. Loans and Discounts. 2d. Specie. 3d. Legal Tender Nlotes. 4th. Circulation. 5th.

J)eposits. And shall also furnish for the information of the Association such other items as may be called for by the Clearing House Committee.

ARTICLE 13.-The Associated Banks may from time to time appoint one of their own number, or the Assistant Treasurer of the United States at New York, to be a Depository, to receive in special trust, such coin, or United States legal tender notes, as any I I

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29 of the Associated Banks inay choose to send to it for safe keeping. The Depository shall issue certificates in exchange for such coin or United States legal tender notes, in proper form, and for convenient amounts.

Such certificates shall be negotiable only among the Associated Banks, and shall be received by them in payment of balances at the Clearing House.

Such special deposits of coin or United States legal tender notes are to be entirely voluntary, each Bank being left perfectly free to make them or not, at its own discretion. The coin or notes thus placed on special deposit, are to be the absolute property of such of the Associated Banks as shall, from time to time, be the holders of the certificates, and are to be held by the Depository, subject to withdrawal, on the presentation of the proper certificates, at any time during banking hours. Any member of the Clearing House Association who shall pay or deliver to any party, other than a member of the said Association, the certificates of deposit of the Clearing House Depository, or any other certificates which may be authorized by the Association shall be subject to a fine of $100 (one hundred dollars) for each certificate so paid or delivered. ARTICLE 14.-A Committee of five Bank Officers shall be appointed at every annual meeting, to whomr all applications for admission into the Association shall be referred for examination.

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30 ARTICLE 15.-New members may be admitted into the Association at any meeting thereof on the recommendation of the Committee on Admissions. Such new members shall signify their assent to these Articles of Association in the same manner as the original members, and shall pay an admission fee according to their respective capitals, as follows: Banks whose capital does not exceed $500,000 shall pay….$1,000 Exceeding $500,000, and not exceeding $1,000,000…….. 2,000 CC 1,000,000, ” ” C 2,000,000……..

3,000 2,000,000, “. 3,000,000…….. 4,000 3,000,000, ” ” “

5,000,000…….. 5,000 5,000,000………………………………

7,500 Any Bank, memnber of the Clearing House Association, increasing its capital, shall pay, in addition to the above, a sum to correspond with these rates. But no new members shall be admitted, except by a vote of three fourths of those present-such vote to be taken by ballot. Provided, however, that it shall be competent, by a’ vote of three fourths of those present, to impose such conditions as the Association may deem expedient at the time of such admission. ARTICLE 16.-For cause deemed sufficient by the Associated Banks, at any meeting thereof, any Bank may be expelled from the Association, and debarred from all the privileges of the Clearing House,

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provided a majority of the whole number of Associated Banks vote in favor thereof. ARTICLE 17. Any member of the Association may withdraw therefrom at pleasure-first paying its due proportion of all expenses incurred, and signifying its intention to withdraw, to the Clearing House Committee.

ARTICLE 18.-The expenses of the Clearing House, not including the expense of printing for the several Banks (which last mentioned expense shall be apportioned equally), shall be borne and paid by the several Banks belonging to the Association according to the average amount which they shall have sent to the Clearing House for the preceding year; and in the same proportion, if more funds become necessary. ARTICLE 19.-At every annual meeting a Committee of five Bank Officers shall be elected, to be called the Committee of Arbitration, whose duty it shall be to hear and determine all disputes that may be submitted to them by both parties thereto-any member of the Association being one. Such Committee shall record a brief abstract of each case referred to them, together with their decision therein, in a book to be provided for that purpose, which book shall be kept gl I

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32 at the Clearing House, open to the inspection of all members of the Association. ARTICLE 20.-No member of the Clearing House Association shall be allowed to make the exchanges for, or redeem the checks of or upon any other Bank or Banks not members of said Association, nor of any corporation, association, firm or individual. ARTICLE 21. The Chairman of the Association shall be eligible for two successive years, and, after an interval of one year, shall be again eligible in like manner. At least two new members on each of the Committees shall be elected each year, and those who have served the longest shall be first retired. If all have served the same length of time, then two shall be retired by lot; and, after an interval of one year, such members shall be again eligible.

ARTICLE 22.-Every Bank, member of this Association, agrees to conform to the following rules in its business with the public: 1. That it will not pay, or procure to be paid, interest, or any bonus or sum of money what ever, directly or indirectly, upon any deposit, or balance due to a Bank or other corporation, association, firm or individual. 2. That it will prohibit its officers and agents from I -4

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33 certifying checks or other obligations of its dealers, unless the amounts shall first appear regularly entered upon its books to the credit of such dealers. 3. That it will not receive upon deposit as Cash, from its dealers, checks drawn otherwise than upon Banks which are members of this Asso ciation. 4. That in receiving and crediting checks and drafts upon places out of New York City, it will conform to the schedule of rates established by the Clearing House Committee. And that an infraction of these rules shall be con sidered cause for expulsion from this Association. ARTICLE 23.-Each member agrees to carry an average “reserve”

fund in legal tender notes, equal in amount to at least fifteen per cent.

of its liabilities to the public, subject only to such modifications as the Clearing House Committee shall decide the public exigencies may require. ARTICLE 24.-These Articles of Association shall go into operation on the first of January, 1874. They shall be signed by every Bank composing the Association, and shall be confirmed by its Board of Directors. A certified copy of the vote or resolution of the Board authorizing such signature, shall, with 5 t

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34 the original articles, be deposited for safe keeping with the Chairman of the Clearing House Committee. ARTICLE 25.-Amendments to these articles may be made at any meeting of the Association, by the vote of a majority of all the members thereofnotice of the proposed amendments having been given at a previous meeting.

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0 0 co 06 0 mjI (S CIO CO

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.4

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At a meeting of Officers of the Banks in the City of New York, convened at the rooms of the Clearing House Association, at 3 o’clock P. M. on the 5th March, 1858, at which thirty-nine Banks were represented, THOS. TILESTSON
was chosen Chairnian, and J. L. EVERITT, Secretary. The Committee previously appointed to confer with the various Banks in this City, relative to the “discontinuance of the practice of allowing interest on current deposits, presented their Report, of which the annexed is a copy: On motion of Moses Taylor, President of the City Bank, the Report was unanimously accepted, and adopted as expressing the sentiments of the meeting (with but a single dissenting voice). The following Resolutions, presented by A. E. Silliman, President of the Merchants’ Bank, were then unanimously adopted: Whereas, forty of the forty-six Banks composing the New York Clearing House Association have already united in a written agreement no longer “to allow interest on deposits or balances of any kind, either directly or indirectly, provided all the Banks composing such Association shall concur in said agreement;” and whereas an almost entire unanimity on the subject has thus been expressed; Resolved, That the great importance of the project proposed, and the respect which we entertain towards those members

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38 of the Association who have not yet signed the agreement, require that we give them further opportunity so to do; and to that end it shall remain open until the 15th day of March, instant; and in the meantime those who have already signed the same do bind themselves in good faith to adhere consistently to the spirit of said agreement. Resolved, That under the immediate pendency of this matter, it is the sense of this meeting that no member of this Association who has subscribed to said agreement can, without the violation of good faith and honorable dealing, and no member who has not signed will, under the circumstances of the case, endeavor to attract, or consent to receive an account coming from any other member of this Association, by a promise to allow interest on deposits, either directly or indirectly. On motion of J. Punnett, Cashier of the Bank of America, the following Resolution was unanimously adopted: Resolved, That a Committee of three be appointed by the Chair, to wait upon the Banks who have not signed the agreement with a copy thereof, and urgently and respectfully request that they will reconsider the question, and unite with the other Banks inl signing the same. The following gentlemen were appointed that Committee, viz: JAS. PUNNETT, of the Bank of America. JAS.

GALLATIN, of the National Bank. WM. F. iHAVEMEYER, of the Bank of North America. After some discussion, foltowing the passage of the above Mr.

Punnett proposed a further Resolution, viz: Whereas, The experience of the past year has shown that the aggregate specie reserve of the Banks of this city has at times been smaller than was consistent with that caution

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39 and prudence which should at all times be observed by the Banking Institutions of this city; therefore, Resolved, That a Committee of five Bank Officers be appointed to consider the measure of each Bank holding at all times not less than a certain fixed percentage of coin to its liabilities, and to report to the adjourned meeting on the 15th instant.

The Chair appointed as that Committee, A. E. SILLIMAN, of the Merchants’

Bank. F. DEMING, of the Union Bank. W. J. LANE, of the Fulton Bank. H. L.

JAQUES, of the Metropolitan Bank. JOHN A. STEVENS, of the Bank of Commerce. On motion, adjourned, to meet at the same place on Monday, the 15th instant, at 3 o’clock P. M. J. L. EVERITT, Secretary. -N

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REPORT. AT a meeting of several Bank Officers, called together a few weeks since to consult upon the practice which has generally prevailed among our City Banks of allowing interest on Deposits, the undersigned were appointed a Committee to confer with all the Banks of this city connected with the Clearing House, and invite them to unite in a written agreement to discontinue the practice. The Committee, in the first place, called the attention of every Bank to the subject by a printed notice, requesting their views as to the expediency of abolishing the practice. When a large number had responded favorably, your Committee prepared and presented to each Bank, for signature, the following agreement, viz: “The Banks in the City of New York, composing the Clearing House Association, do hereby agree not to allow interest on Deposits or Balances of any kind, either directly or indirectly, provided all the Banks composing such Association shall concur in this agreement. This obligation may be annulled only by a vote of two thirds of the Banks hereunto subscribing, at a meeting specially convened for that purpose, in pursuance of a written notice.

“And they further agree, that they will not hereafter vote for the admission of any Bank to the New York Clearing House Association until such Bank shall have become bound by this agrees~nmi.) .. 6

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41 Forty of the forty-six Banks which form the Clearing House Association have signed this agreement.* Such a majority, both in respect to numbers and relative importance, certainly entitles their united opinion to the most considerate regard. The Committee desire at this time to state briefly some of the reasons which have actuated them and others in their movement on this subject. They believe that the custom of allowing interest on current deposits is unsound in principle, unsafe in practice, and that it operates injuriously, both upon the Banks themselves and upon the commercial community. Because: 1. Such deposits represent that portion of the floating capital of the country which is held temporarily in reserve from productive investment, waiting to be employed by its owners, as prudence and opportunity shall dictate. They indicate to some extent the measure of discretion in the financial operations of the country, and serve to mark the bounds within which it has been deemed wise to limit cornminercial transactions. Such deposits bear the same relation to the business of country Banks that specie does to our city Banks, and are not legitimately the subject of profit or interest to their owners in the one case more than in the other. They both constitute, from the nature of the case, the amount of capital on hand, necessarily idle for the moment, and therefore not legitimately the subject of direct profits. All effort, therefore, to derive interest from such deposits, may * Of the remaining six: One has expressed its entire concurrence in the action of the majority, and its willingness to sign, if required, for unanimity. One has not had opportunity fairly to present the subject to its Board. One has expressed its assent, with a slight modification. Leaving the minority substantially but three. 6

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be considered as an overworking of capital to its peril; and implies a permission on the part of its owners, that the very reserve which constitutes their credit and safety, and which they themselves have deemed it prudent to withhold from use, may be placed in jeopardy by others. It is clear, also, that if the principle be correct, of deriving direct profits from reserve floating capital, and if it were carried to its logical result, there would be no reserve power whatever. The whole financial system of the country would be expanded to its utmost limit, and be subjected momentarily to destruction. As such deposits constitute the credit and stability of the country at large, its conservative power for sudden contingencies, they should be considered an inviolable trust, free from all risk, and consequently from direct profits. Those, therefore, who insist upon receiving interest on such reserve capital, so far relinquish the idea of holding it in reserve; but it becomes at once a special risk, and they, therefore, so far depart from the line of safety. 2. Were there no extraneous influences brought to bear upon them, it is certain that this reserve fund, at command of country Banks, would naturally be divided, mainly, into two kinds, viz: specie in their vaults, and deposits in New York, for the purposes of exchange; and that there would consequently be scattered throughout the interior a multiplicity of substantial resources for supplying the drain from our commercial centres, and affording a more secure basis for the financial operations of the country. Now, no one can deny that the payment of interest on deposits in New York necessarily tends to increase the one portion of the reserve referred to at the expense of the other; and from the fact that deposits in New York are equally 40

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43 available to those who command them in any portion of the land, they have come to be regarded as equivalent to, and have nearly superseded the use of specie, as a conservative resource; so that the practice of paying interest on deposits in New York, is operating continually as a process of exhaustion of the specie strength of the country. Nor can it be sa,id that the pernicious influence which operates to imipoveri.-hl the interior, ceases its work. same cause whiclh iirnniturally diaws the specie to the continues of necessity to effect its expulsion hence, and pels its exportation. 3. No Bank, in the opinion of your Committee, can allow interest on deposits payable on demand, without danger alike to itself and to the public. The profit is more nominal than actual-apparent than real.

Take, for example, the case of a Bank paying four per cent. interest (the rate which customi has established) on bank or bankers’ balances, to the amount of one million of dollars, and allow of this, say 20 per cent., to strengthen the specie reserve, and the following result would be shown Interest paid on ain’t of deposit,…….. $1,000,000, is $40,000 Deduct 20 per cent. for reserved specie,..200,000 $800,000 Interest on the above $800,000, at 7 per cent,……$56,800

Leaves……………………………………….. $16,000 On the other hliand, suppose a Bank has deposits without interest to the amin’t of……….. $300,000 Deduct reserve for specie…………….. 60,000

$240,000 On which interest at 7 per c nt, is.cen.,…..$16,800 thus The citv, com

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44 This result is attained without allowing for increased loss on the larger amount discounted, or for additional clerk hire, and other expenses, which more than double the amount of business necessarily involves. Were these considerations and the losses incident to the larger volume of business and risks allowed for, a sum even less than $250,000, WITHOUT interest, would be shown to be equal to a deposit of $1,000,000, drawing 4 per cent. interest. It is clear, therefore, that whatever profit is derived from business of this character, must of necessity be made by placing the largest possible proportion of such deposits on interest, or, in other words, by encroaching, in disregard of the highest prudential considerations, upon the amount which it is everywhere acknowledged should be retained for specie reserve. A Bank having committed this first error of paying interest on its deposits, is therefore compelled, by the necessities of its position, to take the second false step, and expand its operations beyond all prudent bounds. And it may be truly stated that, city arranged -in the order of their perity for the last four years, the the average would largely consist of a custom, allowed interest on deposi 4. Your Committee also insist that Banks are, properly, lenders of capital, and not borrowers, and that it is not one of their legitimate functions to disturb the natural current of trade by borrowing at one price to lend at a higher. Such transactions constitute speculation in money, and stimulate a tendency in the community which is dangerous to all, and which ultimately reacts on the Banks themselves with destructive power. From the nature of their organization they should be conservative.

They are intentionally restricted in their operations within prescribed limits, which mark the were the Banks in this actual profits and prosmajority of. those above those who have -not, as

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45 bounds that long experience has fixed as commercially safe to themselves and to the community; and they cannot afford, for an apparent profit, to foster a principle which, in its final issue, will return injury for injury with accumulated force. Banks are designed to become permanent institutions, and, therefore, have the highest motives to regard every influence which they exert upon the financial operations of the community, whose commercial character alone gives such institutions all their stability and life. Banks in this city have also a common interest, and can not be isolated. The discredit or weakness of one operates to the prejudice and injury of all, and therefore it cannot be safely conceded that any member has perfect freedom to carry into practice those principles of business which are generally acknowledged as inherently pernicious, or injurious to the whole. The experience of the last year has strikingly demonstrated the fact of mutual dependence; and we may remind some, that the practice of paying interest on deposits was confessedly a prime cause, in more than one case, of recent embarrassment. Besides, a certain amount of specie in this city is indispensable to the safety of the commercial community and to the existence of the Banks. Now, having established an equitable principle upon which that amount should be based, it is neither safe to itself, nor even honorable towards the others, that any Bank should embody in its practice a principle of business which prevents it from carrying its relative proportion of this specie reserve.

The practi. cal assumption, that because others are more constitutionally conservative, or posses a higher sense of their obligations to society, and that therefore their fears will compel them to provide the amount required for the common safety, cannot be too strongly condemned. The known fact that such a

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46 position may be effectually assumed, ought, in the opinion of your Committee, to induce every member of this Association cheerfully to acquiesce in an agreement which at once removes the temptation and necessitv of a departure from sound principles. No consideration of profit, in special cases, can for a moment compare with the benefits which every Bank would derive from the comfort and pleasure, and the profit, also, of doing business free from the existence of this radical evil. 5.

In reply to the objection that a discontinuance of interest would divert capital to other cities, your Committee would remark: That if the Banks in other cities do not, as we believe they would, accept the testimony of our experience, we can well afford to give them opportunity to learn from their own, confident that they will, sooner or later, reach the same result. If the payment of interest on deposits serves to attract capital unnaturally to this city, it is plain that it must produce unsteadiness in business, and thus operate unfavorably both upon the Banks and the community, inasmuch as that capital which flows out of its natural channel must, in the nature of things, suddenly return again, and can only be held with great uncertainty as to its repayment. It is, in fact, sure to be withdrawn at the very moment least convenient for the Banks to pay. All such forced deposits operate as a source of annoyance to the public, by promoting a feverish money market and fluctuating values. The necessity for holding them at instant command, and at the same time of keeping it employed at remunerative prices, has given rise to the system of “loans on call,” which constitutes another evil, the legitimate outgrowth of the payment of interest on deposits, and which it is believed is universally regarded as obnoxious. In fact, the Banks, having borrowed money “on call, with interest,” are compelled

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47 to loan in the same manner; and thus the system is diffused throughout the entire community, causing the unnecessary rise and fall of stocks, the inflation or contraction of our money market, and aggravates the multiplied evils, both financial and moral, of the Stock Exchange. The Banks thus become instruments of evil, to direct capital into the destructive channels of speculation, to which it would not naturally flow, because they have borrowed money which cannot profitably be used to sustain the legitimate commerce of the country. But your Committee believe that the danger of diverting any considerable amount of substantial deposits from our Banks is greatly over-estimated, because this city has become the financial centre of the country at large,; and must continue to be the main depository of its surplus funds, without such factitious inducements. The well known fact that a deposit in New York is as valuable as specie in any portion of the United States, has secured the legitimate surplus deposits to this city, as the result of an inevitable law of trade. Nothing, therefore, but unhealthy competition among our banks has led to the payment of interest, and such competition is a gratuitous and self-inflicted injury, imposed on the Banking system by its own members.

The proposed agreement to abolish the practice, amounts then, to nothing more or less than a unanimous resolve to cease from destructive warfare on each other. 6. It is worthy of considerate attention, as directly bearing upon our subject, that, by the rapid improvements made in travel and intercourse, this country and the commercial world are daily becoming more and more a unit in their operations and influences, and that financial changes are everywhere becoming more sudden and simultaneous. The experience of the last year has strikingly proved this, and it must daily become still more apparent as these improvements advance.

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48 For the same reason the transitions of floating capital from point to point are dailv becoming more rapid and certain. The whole tendency of these improvements, is also towards the centralization of commerce and capital at such leading points as London and New York. Formerly, it was safe to assume that stagnation of business and release of capital would occur in one locality while there was activity in another, so that an average amount of deposits could be relied upon as permanent in New York.

But as the world’s intelligence and consequent activity in commercial operations are everywhere simultaneous, and the financial current is more rapid and extensive, the focal points require a larger comparative reserve to meet contingencies of business, as they increase in power and magnitude. As an illustration of this truth, and of the transient character of these deposits, it may not be amiss to remind the officers of our City Banks that, during the week of financial excitement in this city, in October last, the exaggerated reports of which were carried with the speed of lightning to every part of the land, this new medium of communication with equal rapidity filled our Banks with imperative orders for the immediate return of their deposits in specie. The necessity for holding a larger proportionate amount of specie, therefore, precludes the possibility of paying interest on deposits without a continually increasing hazard. For the same reason any unsound principles or pernicious practices in the monetary institutions of New York, are not confined in their influences within their own walls, nor even in the city or country which permit them, but they enter at once, as elements, into the subtle atmosphere of trade, and tend, sooner or later, to produce those violent commercial revulsions which for the last year have so universally prevailed. The respon

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sibility of greatly retarding, if not of preventing the recurrence of such calamities, is thus continually bearing more directly upon our City Banks.

They are therefore bound, by every consideration of self interest and humanity, to ponder every measure proposed for the common good, with views and aims reaching beyond the merely temporary advantage supposed to be derived by any particular institution. 7. The example of Banks in Great Britain has been cited to show the correctness of the principle of paying interest. But, so far as your Committee are aware, the practice of allowing interest by Joint Stock Banks (only instituted in 1834) differs widely from the system which prevails with us. They discriminate between a current and an interest account, not allowing interest on the former.

Since the developments in Liverpool and Glasgow, during the recent crisis, of the ten dency to wild and unwarrantable banking in their institutions, it would hardly be safe to take Great Britain as a perfect model for our future financial operations, although we are glad to be instructed by the true exponents of sound principles in any country. Besiaes, the Banks there, other than the Bank of England, are not the point of last resort, whence the whole nation is to be supplied with coin. Their Banks bear about the same relation to the Bank of England as our country Banks do to those of this city. It may well be doubted whether a better system than that created in this State, under the Free Banking Law of 1838, and the several acts amendatory thereof, exists either in this country or in England. But the Bank of England, in which the specie strength of the country is mainly concentrated, has never allowed interest on deposits. It is also instructive to remark that, in a recent discussion in Parliament on the bill to legalize the suspension of the Bank Charter Act, the very practice of paying interest on 7 40 PI

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deposits, even in the modified form there allowed by Joint Stock Banks, was severely censured by the Chancellor of the Exchequer, as a principal cause of the financial embarrassments in Great Britain. The very fact, also, that the Banks in New York contain, to a greater degree than any other, the concentrated deposits of the nation, and in that respect, as the ultimate resort of specie reserve, bear the same relation to this country as the Bank of England does to the United Kingdom, and that in its long career that Bank has never adopted the practice, might well be adduced to confirm the opinion which our own experience has taught us. The fact, also, that in our united body we occupy that important relative position in this nation renders it the more necessary that now, in a time of tranquillity, with the memory of the evils of divided views, which prevailed during the recent crisis clearly before us, we should unite in establishing such principles of action as shall protect ourselves and the public, as far as may be, against the recurrence of similar misfortunes.

The moral as well as financial responsibility of the Managers of our Banks is thus daily enlarging, and both duty and interest require us to yield something of what may seem temporarily advantageous to any specific interest, if we can thereby unite in establishing such simple and fundamental principles as will make us’ a conservative rather than a destructive power in the nation, and prevent the degrading competition which has hitherto tended to distract our councils. It is also evident that no just parallel can be drawn be tween a new country like our own, where capital is greatly disproporticned to the material necessities and commercial activity of the nation, and those of older European countries where it comparatively abounds. Here (and the disparity be 60

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51 comes still more evident’as we recede from the Atlantic coast to the far interior, from whence much of our Bank deposits are derived) there can hardly be said to exist a reserve of capital, in any just sense, as it is understood in Europe certainly, none which can be retained in any reliable average amount, by any rate of interest which even the most adventurous of our City BPtnls has ever allowed. Besides this, the well known characteristics of our nation for enterprise and adventure, and the value of mloney, and the multiplied and multiplying demands for its investment, ever prevent a reserve of capital on deposit in New York, excepting such as the necessities of trade imperatively demand, and such, therefore, as must of necessity pass through our Banks, whether interest on them be allowed or not. 8. Interest has been hitherto allowed mainly on accounts from abroad, which are the least valuable portion of a Bank’s deposits, because, They fluctuate most and are least reliable at the active period of the year. They come when we want them least, and go when needed most.

They are attended with more labor in correspondence, and more risks from the incidents of business, such as endorsing and guaranteeing endorsements, and from forgeries and accidents of every kind. If, therefore, the principle be correct of allowing such interest, it has always been unequally applied, and other depositors are entitled to rights which they have not received. Banks should occupy high moral ground, and cannot discriminate with their dealers, when the conditions are equal I

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52 without degrading their institutions and their profession. For the same reason, your Committee must insist that the objection which is made to uniting with us, on the part of any Bank, “that it has but few accounts to which interest is allowed,” is not sufficient to justify its position; for if they are right with the few, it has less sacrifice to make, and is wrong with the many from whom interest is withheld. Those Banks only are really consistent who have either paid no interest at all, or have made it a rule of general application, under equal conditions of value. : The Committee desire but to refer to the further objection, that the agreement, if made, will not be faithfully kept, and to say, in reply, that they are unwilling to believe that any Bank officer who has deliberately signed this agreement, especially with the concurrence of his Board, has done so with any other than an honorable intent, or entertains a serious doubt of the good faith of others. But if it were so, the Clearing louse Association has created a community of inter est among our Banks, limited in numbers, and possessing means of general and special information with regard to the transactions of its respective institutions which give it an in fluence in this regard, and constitute it a moral tribunal for offences against the common good, which no member of the Association would more than once venture to defy. Surely no advantage which could accrue to a gentleman in official re lations, however weak his moral sense, could be sufficient to tempt him to incur the odium of public exposure before his professional friends. And if it were possible to believe that such a character existed in a place of honorable trust, the public and private benefits derived from his exposure and expulsion may well repay the effort which we make for higher objects. Hiaving thus endeavored to show that the practice of the payment of interest on deposits by our City Banks is

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53 1. Inherently unsound; 2. That it tends to weaken the legitimate commerce of the country, and to disturb the regularity of the business of the city; 3. That no Bank can safely and profitably practice it; 4. That it tends to interfere with the efficiency and sta bility of our Banks, and with the harmony of their intercourse with each other; 5. That its discontinuance will not divert any substantial deposits from this city 6.

That the reasons for its discontinuance are daily in creasing 7. That it has, under like conditions, no fair precedent in older countries; 8. That, as it exists here, it has been unjustly applied Your Committee, in conclusion, have only to repeat their firm convictions that this agreement, if consummated, will promote the highest public benefit, and ensure the greater prosperity and stability of the Banks in this city; and that no simple measure can be adopted, of a public or legislative character, that will-so effectually secure the good of the country at large, withoutt he least admixture of evil. They, therefore, on behalf of the very large majority of their associates who agree with them in these views, confidently appeal to the good sense of the minority, with this weight of opinion against their position, and leave with them the serious responsibility of defeating a measure which is deemed so important and vital to the interest of the commercial and financial community. New York, March 4, 1858. WM. A. BOOTH, JOHN E. WILLIAMS, E. W. DUNHAM, PARKER HANDY, ‘ Committee. i

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NEW YORK, March 18th, 1858. At a Meeting of Bank Officers of this city, held at the Rooms of the Clearing Hlouse Association, on Monday, 16th inst., fortyvtwo Banks being represented, the following Preamble and Resolitions were adopted, viz: Whereas, the almost unanimous sentiment of the Banks in New York has been expressed against the principle of paying interest on current deposits, as unsafe to themselves and to the community; and whereas, we believe that the present is a peculiarly auspicious time to correct this evil, therefore, Resolved, That we, on behalf of our respective institutions, do agree, that we will not hereafter consent to receive an account, and allow interest on the same.

Resolved, Tha+ in order more effectually to accomplish a reform which we believe is demanded alike by the best interests of the commercial community and our own, we hereby appoint a committee of five members, to whom shall be communicated all information touching the practical working of this agreement, and who shall be required to call a meeting, for mutual counsel and protection, by written notice, whenever, in their opinion, the operations of any Bank, or other causes, make it necessarv. And whereas, in the opinion of this Association, it is impracticable for any institution in this city, engaged in the business of legitimate banking, to pay interest on deposits, and at the same time to carry the relative proportion of specie reserve which experience has proved to be required for its own safety and public good-therefore, Resolved, That in furtherance of the end proposed by our agreement, to discontinue the payment of interests on deposits, and in accordance with the recommendations of the Report of the Con, ‘I

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mittee on that subject, we also agree, each, to keep on hand at all times an amount of coin equivalent to not less than twenty per cent. of our net deposits of every kind, which shall be made to inelude certified checks and all other liabilities (except circulating notes) deducting the daily exchanges sent to the Clearing House. The following named gentlemen were appointed a Committee in accordance with the above, viz: WM. A. BOOTH, WM.

F. HAVEMEYER, J. L. EVERITT, J. T. SOUTTER, WM. T. HOOKER. Your concurrence in these Resolutions is respectfully solicited, and you are requested to communicate your decision to the undersigned on or before the 31st instant. J. L. EVERITT, Secretary 55w

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tpon a subsequent occasion, in November, 1860, the Banking Association was convened by the recurrence of a financial crisis, when the plan of relief by the issue of Loan Certificates and the equalization of ready money, then originated by a member, was first presented. The following is a copy of the proceedings of the Association: In order to enable the Banks of the City of New York to expand their loans and discounts, and also for the purpose of facilitating the settlement of the exchanges between the Banks, it is proposed that any Bank in the Clearing House Association may, at its option, deposit with a Committee of five persons-to be appointed for that purpose-an amount of its bills receivable, United States stocks, Treasury notes, or stocks of the State of New York, to be approved by said Committee, who shall be authorized to issue thereupon to said depositing Bank, certificates of deposit, bearing interest at seven per cent. per annum, in denominations of five and ten thousand dollars each, as may be desired, to an amount equal to seventy-five per cent. of such deposit.

These certificates may be used in settlement of balances at the Clearing House, for a period of thirty days from the date hereof, and they shall be received by creditor Banks, during that period, daily, in the same proportion as they bear to the aggregate amount of the debtor balances paid at the Clearing iHouse. The interest which may accrue upon these certificates shall, at the expiration of the thirty days, be apportioned among the Banks which shall have held them during the time. The securities deposited with said Committee as above named shall be held by them in trust as a special deposit,

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57 pledged for the redemption of the certificates issued thereupon. The Committee shall be authorized to exchange any portion of said securities for an equal amount of others, to be approved by them, at the request of the depositing Bank, and shall have power to demand additional security, either by an exchange or an increased amount, at their discretion. The amount of certificates which this Committee may issue as above shall not exceed $5,000,000. This agreement shall be binding upon the Clearing House Association when assented to by three fourths of its mem bers. Resolved, That in order to accomplish the purpose set forth in this agreement, the specie belonging to the associated Banks shall be considered and treated as a commnon fund for mutual aid and protection, and the Committee shall have power to equalize the same by assessment or otherwise. For this purpose statements shall be made to the Committee of the condition of each Bank on the morning of every day, before commencement of business, which shall be sent with the exchanges -to the Manager of the Clearing Itouse, specifying the following items, viz: 1. Loans and discounts. 2. Deposits.

3. Loan certificates. 4. Specie. RPsoLvFD, That after the 1st of February nexst, every Bank in the clearing House Association shall have on hand, at all times, in specie, an amount equal to one fourth of its net l iabilities, and any Banlc whose specie shall fall below that proportion shall not naake loans or discounts until their position is reestablished; and we, as members of the Clearing House Association, agree that we 8

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will not continue to eechange with any Bark which shall show by At two successive weekly statements that it has violated this agreement. The Chairman appointed the following named gentlemen as the Committee: MosEs TAYLOR, of the City Bank. JAMES PUNNETT, of the Bank of Amnerica. R. W.

HIOWES, of the Park Bank. A. S. FRASER, of the Seventh Ward Bank. CHARI,s P. LNVERICH, of the Bank of New York. Adjourned. JOHN A. STEVENS, Chairman. WV. F. HOOKEFR, Secretary. ~8

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