terest which must be paid at the greater rate each year until their maturity. The benefits of this plan both to the holder of the bonds and to the Government are apparent. The holders would receive in the shape of fifteen per cent. premium on their bonds a portion of their interest in advance, which would be available to them for loans at rates greatly exceeding the rate at which the Government can borrow money, or at present less than three per cent. The Government would by this use of its surplus be enabled to save a portion of the interest which it would otherwise be compelled to pay hereafter. The principal objection to this proposition is that the Government would pay to the holders a large premium upon their bonds, but it is evident that in two or three years after the three per cents are paid, if there is no reduction in the revenues, the surplus will enormously increase, unless the long bonds are then purchased by the Government at a rate to be fixed by the holders thereof, which will be a rate much higher than that now proposed.

This was a favorite proposition with the Comptroller for a number of years. The correctness of his views was subsequently proved in the years when the Government in order to use its surplus was compelled to pay high premiums for four and a halfs and fours in order to relieve itself of its surplus money. If the proposition had been adopted in 1882 or 1883, it is now extremely easy to realize what benefit it would have proved to the Government. It may be said, however, that such a proposition which, on the face of it, seemed to be a gratuitous benefit to one class of people would meet with opposition in Congress sure to defeat it. The kind of legislation which gives a present good in exchange for a future one, is difficult to obtain from a popular legislative assembly. The average voter could not be made to see but that the immediate payment to bond holders far outweighed the more distant benefit to the Government. The idea was afterwards embodied in the Aldrich bill before the Senate. The time had, however, gone by for the greatest benefits to be received from its enactment into law.

COMPTROLLER'S OPPOSITION TO TREASURY NOTES AND SILVER CERTIFICATES.

The Comptroller also in the report of 1883 combated the proposition that Treasury notes and silver certificates should be substituted for the retired bank-note currency. He contended that as the Government already was embarrassed by its surplus revenues it would be embarrassed still more were an additional issue of Treasury notes to be authorized. It would place in the Treasury circulating notes to swell its resources, when already the most important subject before Congress is the reduction of a redundant revenue and the employment of the surplus of an overflowing Treasury. If it were possible to issue additional Treasury notes when the revenues of the Government are so much greater than the expenditures, and simultaneously with the yearly ad

dition of silver dollars now authorized by law, it is evident that such steps would lead from a gold to a silver standard. The gold balance belonging to the Treasury is large, but the silver balance has increased rapidly, and the laws now in force will continually increase the silver and reduce the gold. The issue of additional Treasury notes will weaken the Treasury, and be likely to create doubts on the part of some of the holders as to the ability of the Government to pay gold on demand, and the Government by declining to pay in gold, thus taking from the holder the option of payment, may at any time bring the nation upon the silver standard, advancing the prices of products and demonetizing the entire gold coin of the country. In such a crisis the reserve of gold in the Treasury will be continually diminished on the one hand by the presentation of its notes for payment, while its revenue, on the other hand, will not be increased by customs duties paid in gold, as at present, but by the return of silver dollars and silver certificates, which will sooner or later drive every dollar of gold coin out of circulation, bringing upon the country a much greater contraction than that which the issue of Treasury notes is now proposed to avert.

OVER-CERTIFICATION OF CHECKS.

In August, 1883, it was rumored that the failure of a firm of brokers had resulted in a loss to the stockholders of the Wall Street National Bank by an over-certification or acceptance of checks, and an examination by the Comptroller proved an over-certification of the checks of the firm in excess of their account to the extent of nearly $200,000. Legal steps were taken against the bank, the teller who certified the checks was indicted and held for trial. The bank, to avoid forfeiture of charter and appointment of a Receiver, went into voluntary liquidation and converted into a State bank. The Comptroller recommended the establishment of a stock clearing-house to enable the business which caused over-certification of checks to be done as readily by other methods.

LEGISLATION OF 1883-1884.

During the first session of the Forty-eighth Congress, meeting in December, 1883, three bills looking towards the increase of National bank circulation were introduced in the Senate. One by Senator McPherson giving the banks the right to take out circulation to the par value of the bonds on deposit. One by Senator Sherman giving circulation on bonds bearing interest in excess of three per cent; viz., fours, four and a halfs and Pacific railroad sixes, to the amount of ninety per cent. of the par value of the bonds plus the interest that would accrue up to the time of their redemption in excess of three per cent. Thus a four per cent. $10,000 bond in 1884 would have twenty-three years to run until 1907. The interest over three per cent. would be one per cent., or $100 per annum, amounting in twenty-three years to $2,300.

This added to the par value ($10,000) of the bonds would give $12,300 as a basis for circulation. Ninety per cent. of this would be $11,070. As time passed and the bond approached maturity the interest in excess of three per cent. would diminish. The $11,070 of circulation, although ninety per cent. of the security in 1884, would be a greater per cent. as the security diminished. Mr. Sherman's bill therefore provided that the circulation should never exceed ninety-five per cent. of the security calculated in any year. Another bill embodying the Comptroller's suggestion to exchange fours and four and a halfs for threes, paying a premium to the holders of the former from the Government surplus, was introduced by Senator Aldrich. None of these bills became laws, although the McPherson bill was favorably reported to the Senate by the Finance Committee to which all these measures were referred, and finally passed the Senate and was favorably reported by the House Committee on Banking and Currency.

XII

HISTORY OF THE NATIONAL BANKING SYSTEM, 1884–1891.

Henry W. Cannon appointed Comptroller-Panic of 1884-Action of clearinghouse-National bank failures in New York - Form of clearing-house loan certificates Over-certification of checks - New York law-Legal-tender certificates -Interest on deposits-Demand loans as a resource in panics-Comptroller's report for 1885-Liquidation of failed banks-W. L. Trenholm appointed Comptroller - Decrease in National bank circulation - Organization of National banks from 1882-1887 - Redemption of three per cent. bonds -- Comptroller's report for 1887-- Government deposits in National banks-Surplus revenues used in the purchase of bonds National bank failures in 1888 - E. S. Lacey appointed Comptroller - Suburban banks - Indian Territory banks -Legislation recommended - Reduction of circulation - Panic of 1890 - Failures of Panama Canal Company and the French Copper Syndicate - Baring failure -Action of banks in New York, Boston and Philadelphia - Bond purchases.

THE CRISIS OF 1884.

In April, 1884, Henry W. Cannon succeeded John J. Knox as Comptroller of the Currency. Almost immediately upon his assuming office Mr. Cannon had to encounter the difficulties of the financial crisis of May, 1884. In his report for that year the Comptroller said :

"Owing to the large number of mercantile failures which had occurred during the year 1883, considerable financial uneasiness was felt at the beginning of 1884, and the year opened inauspiciously by the appointment of a Receiver for the New York and New England Railroad. Following closely upon this were the troubles of the Oregon and Transcontinental Company, and the appointment on January 12 of a Receiver for the North River Construction Company. The months of February, March and April were characterized by many commercial failures, rumors affecting the credit of various corporations and a further depreciation in the price of stocks and bonds, and, in fact, of all products and commodities.

This feeling of uncertainty and uneasiness as to values culminated on May 6 with the failure of the Marine National Bank, of New York city, whose President was a member of the firm of Grant & Ward. The failure of this firm immediately followed, and owing to the prominence of some of its members and its large liabilities, exceeding $17,000,000, its failure caused great excitement that had not subsided when, on May 13, the President of the Second National Bank, of New York, was discovered to be a defaulter to the extent of $3,185,000. Although this defalcation was immediately made good by the directors of the bank, and did not therefore result in its suspension or failure, such a shock was given to credit and to the confidence of the public in all institutions and firms supposed to have loaned money upon such railroad and other securities as had greatly decreased in value or whose managers were supposed to be directly or indirectly interested in speculation in Wall Street,

that there was great pressure to sell stocks and securities, and an active demand upon the banks for deposits. This condition of affairs came to a crisis on May 14, in the suspension of the Metropolitan National Bank, the failures of Donnell, Lawson & Simpson, Hatch & Foote, and several other bankers and brokers. These failures were followed on May 15 by that of the Newark Savings Bank and the suspension of Fisk & Hatch and others. Failures and suspensions continued through the months of May and June, including those of the Wall Street Bank, the Philadelphia and Reading Railroad, the West Shore Railroad, C. K. Garrison, M. Morgan's Sons, and of other bankers and brokers.

The suspension of the Metropolitan National Bank on May 14 caused great excitement. All stocks and securities called upon the New York Stock Exchange were greatly depreciated under the pressure to sell, and it was practically impossible for banks to collect their call loans, as their borrowers could not obtain money by the sale of their securities except at ruinous sacrifices; neither could they borrow elsewhere; and it was impracticable and impolitic to throw upon the market the mass of securities held as collateral for the call loans of the associated banks. If it had been done it is probable that a suspension of gold and currency payments by the banks throughout the country would have followed in the general panic that would have been inevitable.

ACTION OF CLEARING-HOUSE BANKS.

In this emergency the members of the New York Clearing-House Association, realizing that an immediate demand for deposits would be made by their country correspondents, called a meeting at the clearing-house on the afternoon of May 14, and the following plan for settling balances at the clearing-house was unanimously adopted:

Resolved, That in view of the present crisis, the banks in this association, for the purpose of sustaining each other and the business community, resolve:

That a committee of five be appointed by the chair to receive from banks, members of the association, bills receivable and other securities to be approved by said committee, who shall be authorized to issue therefor to such depositing banks, certificates of deposit bearing interest at six per cent. per annum, not in excess of seventy-five per cent. of the securities or bills receivable so deposited, except in case of United States bonds, and said certificates shall be received in settlement of balances at the clearing-house.

After consultation with the officers and directors of the Metropolitan National Bank, a committee of examination was appointed to visit the bank and to ascertain if some plan could not be arranged to permit it to open again for business. The greater part of the securities of the bank were found to be of such a character that loan certificates could safely be issued upon them, and in this way the Metropolitan National Bank was enabled to resume business on May 15 and settle its balances at the clearing-house. The prompt action of the associated banks and the resumption of the Metropolitan National Bank greatly assisted in allaying excitement and staying the panic, and although confidence was not immediately restored, and the banks in New York were largely drawn on by their country correspondents, reducing their reserves for a time below the legal limit, and although on account of the great depreciation of values, and stringency of the money market occasioned by the want of confidence, other failures of State banks, private bankers and mercantile firms occurred in New York and throughout the country, there was no suspension of gold and currency payments at any point, and the issue of loan certificates was confined to the banks of New York city, and these banks were soon enabled to collect their loans and made good their reserves."