THE UNIVERSITY OF CALIFORNIA Graduate School of Management Library ^t^ v The Romance and Tragedy of Banking Problems and Incidents of Governmental Supervision of National Banks By THOMAS P. KANE Deputy Comptroller of the Currency NEW YORK THE BANKERS PUBLISHING CO. itti Copyright, 1922, by The Bankers Publishing Co. CAMBRIDGE. MASS.. U. *. A GSMgmt, Library Q55-T \\V3r mi TO MY ASSOCIATES AND CO-WORKERS IN THE OFFICE OF THE COMPTROLLER OF THE CURRENCY, AND IN THE FIELD SERVICE, THIS BOOK IS AFFECTIONATELY DEDICATED 1680352 The Romance and Tragedy of Banking CONTENTS Pago INTRODUCTION - - 1 CHAPTER I. THE NATIONAL BANK ACT AND ITS ORIGIN 5 Origin and passage of the National Bank Act CHAPTER II. THE CURRENCY BUREAU 18 Organization of the National Currency Bureau Tenure of office of the Comptroller of the Currency Composition of the Currency Bureau National Bank Circulation first printed under contract Profit to Government from circulation more than entire cost of bureau. CHAPTER III. HUGH McCULLOCH 28 Biography of Hugh McCulloch, the first Comptroller of the Cur- rency McCulloch's annual reports McCulloch's circular letter to the banks McCulloch's appointment as Secretary of the Treasury Selection of McCulloch to organize the bureau First national bank organized. CHAPTER IV. FREEMAN CLARKE 86 Biography of Freeman Clarke First failure of a national bank Clarke's annual report to Congress Bank failures during Clarke's administration Failure of the Venango National Bank of Frank- lin, Pennsylvania Proposed removal of the bureau to New York. CHAPTER V. HILAND R. HULBURD 47 Biography of Hiland R. Hulburd Payment of interest on bank balances Operation of the Reserve laws National Bank Circula- tion vs. Government Issues Bank note redemption agency ix CONTENTS Page Instances of theft in connection with currency shipments Greut Chicago fire of 1871 and its effect upon the banks Bank failures during Hulburd's administration Amendments to the laws enacted. CHAPTER VI. JOHN J. KNOX 71 Biography of John Jay Knox Knox's annual reports Panic of 1873 and its causes Resumption of specie payments The Freed- mans Savings and Trust Company Real estate loans by national banks Interpretation of the banking laws Banking conducted on widely different lines than formerly Bank failures during Knox's term Failure of the National Bank of the State of Missouri Charges preferred against Knox by United States Attorney Knox's reply to charges Failure of the First National Bank of Washington, D. C., and of Jay Cooke & Company Inadequacies of the law and recommendations for amendments Amendments to the law enacted. CHAPTER VII. HENRY W. CANNON 115 Biography of Henry W. Cannon Panic of 1884 Cause of the financial troubles of 1884 Failure of the Marine National Bank Failure of the brokerage firm of Grant & Ward Legislation recommended. CHAPTER VIII. WILLIAM L. TRENHOLM 131 Biography of William L. Trenholm Unprecedented reduction in circulation Trenholm's circular letter to the banks Plan for National Currency reform Failure of the Fidelity National Bank Peculiar construction of the law Criticism of official supervision of the banks The Chicago wheat deal Suggested amendments to the law Heterogeneous currency system Amendments to the law. CHAPTER IX. EDWARD S. LACEY 151 Biography of Edward S. Lacey Monetary stringency of 1890 Failures during Lacey's administration Failure of the Keystone CONTENTS Page National Bank Failure of the Spring Garden National Bank Failure of the Maverick National Bank Necessity for some lim- itation on the discount of commercial paper Suggested amend- ments to the law. CHAPTER X. A. BARTON HEPBURN 178 Biography of A. Barton Hepburn National bank failures dur- ing Hepburn's administration Failure of the National Bank of Guthrie, Oklahoma Annual report of Hepburn Amendments to the law recommended. CHAPTER XI. JAMES H. ECKELS - 187 Biography of James H. Eckels Panic of 1893 The model receiver Ex-convict receiver and examiner Suspensions during the panic of 1893 Shrinkage in assets and liabilities Cause of the panic of 1893 Most important bank failures during the panic of 1893 The Zimri Dwiggins chain of banks The Chemical National Bank and its branch in the Exposition grounds at Chicago The National Bank of Kansas City, Missouri Failure of the National Bank of Illinois Amendments to the law recommended. CHAPTER XII. CHARLES G. DAWES 215 Biography of Charles G. Dawes Liquidation of receiverships Second assessment of stockholders National bank failures during Mr. Dawes' administration Failure of the dlobe National Bank Defalcation in the First National Bank of New York City The Currency Laws Preferment of stockholder to depositor Cur- rency legislation suggested Amendments to the laws recom- mended by Mr. Dawes Reserve Cities with a population of 25,000 Amendment to the banking laws enacted. CHAPTER XIII. WILLIAM B. RIDGELY 248 Biography of William B. Ridgely Extension of corporate exist- ence of national banks Robbery of the Merchants National Bank of Lowell, Massachusetts The Baltimore and San Francisco fires Failure of the Chicago National Bank Legality of the action of the Clearing House Banks Indictment, trial and con- viction of John R. Walsh The Bigelow defalcation Culpability xi CONTENTS Pace of the bank examiner Bank failures during Mr. Ridgely's administration The failure of the Citizens National Bank of Oberlin, Ohio The celebrated Cassie A. Chadwick The Andrew Carnegie notes Obligations of Directors Failure of the National Bank of North America and the Amsterdam National Bank of New York City Indictment, trial and conviction of Charles W. Morse Trial and acquittal of F. Augustus Heinze, indicted on the same charges Failure of the Farmers and Drovers National Bank of Waynesburg, Pennsylvania Ridgely's policies of administration The crisis of 1907 Failure of the Aetna Banking and Trust Company of Butte, Montana, and branch at Washington, D. C. Secretary Shaw's ruling in regard to reserve requirements Brief panic in Wall Street Life of receiverships Ridgely's annual reports Amendments to the banking laws. CHAPTER XIV. LAWRENCE O. MURRAY 801 Biography of Lawrence O. Murray Murray's first official act Bank examiners and bank examinations Difference between an examination and an audit Failure of the National City Bank of Cambridge, Massachusetts Rotation of examiners Bonding of examiners Instances of dishonesty on the part of examiners National Monetary Commission and Mr. Murray's peculiar attitude ibefore the Commission Fee system of compensation Instances of excessive and undue concentration of loans made by banks Faultiness of Mr. Murray's knowledge of banking laws Murray's famous twenty-nine questions The poetical critic Murray's mismanagement President Taft on so-called reforms Examiners' fees Characteristics of Murray's administration Failures during Murray's term Change of location of small suburban bank A chicken bank. CHAPTER XV. INTERIM 407 Interim between expiration of Murray's term and appointment of John Skelton Williams Failure of the First-Second National Bank of Pittsburgh Failure of United States Trust Company of Washington, D. C. Deposit of U. S. Treasury funds in Munsey Trust Company by Mr. Williams The Miss Lottie M. Taylor incident The Federal Reserve Act and date of passage in House and Senate. CONTENTS Page CHAPTER XVI. JOHN SKELTON WILLIAMS 443 Biography of John Skelton Williams Aldrich-Vreeland Emer- gency law The Riggs National Bank controversy Bill of com- plaint filed by Riggs National Bank Court's ruling on powers of Comptroller Extension of charter of Riggs National Bank Indictment of officers of Riggs National Bank for perjury Trial of case Origin of Riggs National Bank General activities of Comptroller Williams Mr. Williams' anti-usury campaign Theft of postage and currency McFadden's suit to enjoin the Comp- troller Last official act of Comptroller Williams. CHAPTER XVIL DANIEL RICHARD CRISSINGER 491 Biography of Daniel Richard Crissinger Malcontents Commer- cial value of title "First National" Theodore Roosevelt's methods First official act of Comptroller Crissinger Modification of form for reports of condition Suit to forfeit the charter of the First National Bank of Hagerstown, Maryland Stock dividends Enforced liquidation of Fort Dearborn National Bank of Chicago, Illinois Extension of charters Branch banks or branch offices Proposed abolition of office of Comptroller of the Currency and consolidation of Bureau with Federal Reserve Board Status of Federal Reserve Board. ILLUSTRATIONS Page THOMAS P. KANE - 1 HUGH McCuLLocH - 23 FREEMAN CLARKE - 85 HlLAND R. HULBURD 47 JOHN JAY KNOX - 71 HENRY W. CANNON 115 WILLIAM L. TRENHOLM - 131 EDWARD S. LACEY - 151 A. BARTON HEPBURN 173 JAMES H. ECKELS - 187 CHARLES G. DAWKS 215 WILLIAM B. RIDOELY 248 CASSIE CHADWICK - 263 ASSIGNMENT OF THE $500,000 NOTE 264 BOGUS TRUST AGREEMENT 264 ASSIGNMENT OF THE $260,000 NOTE 264 FORGED CARNEGIE NOTE FOR $250,000 266 FORGED CARNEGIE NOTE FOR $500,000 - 266 LAWRENCE O. MURRAY - 801 JOHN SKELTON WILLIAMS 448 DANIEL R. CRIBSINGER - - 491 THOMAS P. KANE Deputy Comptroller of the Currency INTRODUCTION SOME years ago at a banquet given by the Bankers' Associa- tion of the District of Columbia, I sat next to an eminent jurist of the District Bar. During the course of the evening our conversation drifted to the subject of the Currency Bureau and its management, and after relating to him some of the difficul- ties and situations which frequently confront the Comptroller of the Currency in his supervision of the national banks, he remarked that there must have come to my knowledge during my long con- nection with the service many incidents similar to those related which would make a very interesting narrative if assembled in book form. This suggestion, therefore, is responsible for the publication of this volume, and is my apology for writing it. It is not an essay on banking and currency, nor a discussion of financial or economic theories. It is simply a narrative of events of more or less importance and interest in the history of the National Cur- rency Bureau with some original deductions and comments. It contains many unvarnished truths, plainly told, with no attempt at literary excellence. It deals with men and measures, methods and motives in connection with the administration of the bureau, with no intention of contrasting one administration with another or of drawing invidious distinctions between them. It endeavors to right some wrongs where injustice has been done and to correct some erroneous impressions as to the powers and duties of the Comptroller of the Currency. In May, 1886, I was tendered and accepted the position of Secretary to the Comptroller of the Currency, by William L. Trenholm, of South Carolina, who a month previously had been appointed Comptroller. I was sworn in and entered upon the dis- charge of my duties May 16, 1886. Thus began a period of service in the Bureau of the Currency, which continued uninterruptedly for more than thirty-six years, undisturbed by political or other changes in Federal, depart- mental or bureau administration. 2 ROMANCE AND TRAGEDY OF BANKING What little measure of success I may have attained in the bureau with which I have been connected so long, I owe wholly to a faithful and conscientious discharge, to the best of my ability, of such duties as were assigned to me from time to time in the various positions which I held, and to an appreciation of my serv- ices by all of the official superiors under whom I have had the honor to serve, and whose confidence and esteem, I am proud to say, I possessed to the fullest extent during their respective terms of office and since their retirement from the service, with a single exception. It has been my privilege and my pleasure to know personally every Comptroller of the Currency from Hugh McCulloch, who organized the bureau in 1863, and was its first Comptroller, down to the present Comptroller, Mr. Crissinger, with the exception of Freeman Clarke and Hiland R. Hulburd, the second and third Comptrollers, and to have served five of them in the confidential capacity of secretary. These five were William L. Trenholm, Edward S. Lacey, A. Barton Hepburn, James H. Eckels and Charles G. Dawes two Democrats and three Republicans. Upon the recommendation of Mr. Dawes, I was appointed Deputy Comptroller on June 29, 1899, to succeed Lawrence O. Murray. When Mr. Murray resigned as Deputy Comptroller, Mr. Dawes, who was then Comptroller, was absent in the West. Some of the chiefs of division and others connected with the Comptrol- ler's office were applicants for the place, and requested me to recommend them to Mr. Dawes for appointment to the vacancy. I wrote to Mr. Dawes at Chicago, advising him of Mr. Murray's resignation, who were applicants for the vacancy, and what I knew of their relative merits and qualifications. The only reply I received from him was a request to ask Mr. Murray not to make public his resignation until he returned to Washington. The morning following Mr. Dawes' return I met one of the applicants in the corridor of the Treasury Department, who had spent the evening before at Mr. Dawes' house and inquired of him who was to be the new deputy. He replied that while he knew, he was not at liberty to say, but that I would learn as soon as Mr. Dawes came to the office. When Mr. Dawes arrived at the office he said to me on entering the room: "Get me a stenographer, I want to ROMANCE AND TRAGEDY OF BANKING 3 dictate a letter to the Secretary of the Treasury." As I had always done his stenographic correspondence I thought the request unusual, but sent for one of the office stenographers. Mr. Dawes commenced his letter to the Secretary by informing him of the resignation of Mr. Murray and concluded by recommending me for the vacancy. I was completely surprised when I heard my name mentioned, and told Mr. Dawes that I was not an appli- cant for the place and had not thought of myself in connection with it. He replied that that was one of the reasons why he had recommended me, and the other was that he believed me to be better qualified for the place than any one of those who had applied for it. This brief narrative of how I became connected with the Bureau of the Currency and my subsequent advancement grade by grade to the second position in rank in the bureau, many times and for long periods acting as its head, is not presented in any spirit of egotism, but simply as an introduction to what follows in the line of reminiscences of the bureau and a discussion of the principal events of each administration since the establishment of the national banking system, viewed at short range from the van- tage ground of the opportunities afforded by thirty-six years' connection with the Comptroller's office, a close association with nine Comptrollers, and a personal acquaintance with all of the Comptrollers but two since the Currency Bureau was established. THOMAS P. KANE. WASHINGTON, OCTOBER, 1922. CHAPTER I The National Bank Act and Its Origin IT never has been definitely determined who is entitled to the most credit for having originated the National Bank Act. Like all important instruments of this character, it is con- ceded to be the product of several minds. It was originally a war measure, and grew out of the urgent necessities of the Government to replenish the public treasury by creating a market for its bonds through the inducement offered banks to obtain circulation based upon the security of such bonds. The paramount purpose of the Act was to secure a uniform national banking system of currency, without the creation of a great central institution like the old United States Bank. Opposition to such an institution was wide- spread and deep-seated and the sponsors of the various plans which took final shape in the National Banking Act were careful to point out that the objections to the United States Bank had been duly considered and had been avoided by them. In August, 1861, O. B. Potter of New York submitted to the Secretary of the Treasury a scheme to permit state banks and bankers to issue notes secured by United States bonds. He said that none of the objections urged against a United States bank could lie against the plan proposed. It would give to the Govern- ment no power to bestow favors and would not place a dollar in the Government's hands to lend. It was impossible, there- fore, it was claimed, to see how such a system could be made use of for political ends. Samuel Hooper, a member of the House of Representatives from Massachusetts, who was an active agent in the attainment of the end sought, said in support of one of the early measures proposed, which did not become a law, that it secured all the benefits of the old United States Bank without many of those objectionable features which aroused opposition. It was affirmed that, by its favors, the govern- 6 ROMANCE AND TRAGEDY OF BANKING incut enabled that bank to monopolize the business of the country. Here no such system of favoritism exists * * * It was affirmed that frequently great inconvenience and sometimes terrible disaster resulted to the trade and com- merce of different localities by the mother bank of the United States arbitrarily interfering with the management of the branches by reducing suddenly their loans and some- times withdrawing large amounts of their specie, for poli- tical effect. Here each bank transacts its own business upon its own capital, and is subject to no demands except those of its own customers and its own business. It will be as if the bank of the United States had been divided into many parts, and each part endowed with the life, motion, and similitude of the whole, revolving in its own orbit, managed by its own board of directors, attending to the business interests of its own locality; and yet to the bills of each will be given as wide a circulation and as fixed a value as were given to those of the Bank of the United States in its palmiest days. In the National Banking Act as passed in 1863 it was believed that the desired result had been obtained. As far back as the days of Alexander Hamilton and Albert Gallatin, the question of creating a uniform state bank currency was frequently discussed, but none of the plans of the distin- guished financiers of those days seemed to contemplate govern- mental assumption of responsibility for the redemption of such note issues. Secretary Dallas in 1813 advocated a uniform state bank cir- culation with governmental supervision of the banks, and many of the features of his plan were similar to those contained in the National Bank Acts of 1863 and 1864. In 1837, the State of Michigan adopted a banking law which required the banks to deposit with the State Government bonds and mortgages as security for their circulating notes, but this law was subsequently declared by the State courts to be unconstitu- tional. The Free Banking Law adopted by the State of New York in 1838 was also analogous to the national banking laws, and many of the provisions of the latter were taken therefrom. There was ROMANCE AND TRAGEDY OF BANKING 7 one radical difference, however, between the State and the National law in respect to circulation. While the State law required security for circulation to be deposited, the State gov- ernment did not guarantee or assume responsibility for the re- demption of the circulation beyond the amount realized for the securities held when sold. In his annual report for 1861, Secretary Chase suggested two plans for providing the country with a circulating medium. The first contemplated the gradual retirement from circulation of the notes of private corporations and the issue in their stead of United States notes, payable in coin, on demand, in amounts suf- ficient to meet the business needs of the country. The second plan contemplated the preparation by the Gov- ernment and delivery to banking institutions for circulation, under governmental supervision, of notes to be secured by a pledge of United States bonds. Secretary Chase urged the adoption of one or the other of these plans as a measure of currency reform and as a means of replenishing the public treasury. He stated the principal features of the second plan to be as follows : First. A circulation of notes bearing a common im- pression and authenticated by a common authority. Second. The redemption of these notes by the associa- tion and institution to which they may be delivered for issue. Third. The security of redemption by the pledge of United States stocks and an adequate provision of specie. Without undertaking to outline in detail either plan, Secre- tary Chase expressed the hope that Congress would give the latter suggestion careful consideration, as he believed it would not only furnish the country with a safe and uniform circulating medium, but would impart such value and stability to government securi- ties as would make it possible to obtain the additional loans re- quired by the Government at fair and reasonable rates, especially if the public credit were supported by sufficient and certain pro- vision for the payment of interest thereon and the ultimate redemption of the principal. 8 ROMANCE AND TRAGEDY OF BANKING The first plan suggested by Secretary Chase in his report for 1861, was evidently based upon the assumption that the war was to be of short duration, and while this plan had already been partly adopted by the authorization of the issue of Treasury notes, it soon became manifest to the Secretary that the possibili- ties of disaster which might result from a continuance of this expedient outweighed any advantage that could be derived there- from. He therefore renewed in his report for 1862 the recom- mendation he made in his report of the previous year for the enactment of a national banking law, and recounted the benefits to be derived by the Government and the people from the issue of a banknote currency of uniform design and value, based upon the credit of the nation, setting forth at the same time his objections to the issue of United States notes as a permanent system of circulation. The Secretary's report was referred by the House of Repre- sentatives to the Committee on Ways and Means and by that Committee to a sub-committee composed of Hon. E. G. Spaulding of New York, chairman; Mr. Hooper of Massachusetts, and Mr. Corning of New York. A national bank bill was drafted by Mr. Spaulding in Decem- ber, 1861, and reported to the full committee for consideration, but so much opposition to the measure was developed in com- mittee at that time that it failed to receive favorable action. In the first place, it was not believed that a bill of that nature could be passed without a prolonged discussion, and, in the second place, if it did pass, it was not thought that it could be made available quickly enough to afford the Government the relief it so urgently needed to meet the expenses of the war. The attempt, therefore, appears to have been temporarily abandoned by Mr. Spaulding, who introduced instead the Legal Tender Act of February 25, 1862. On July 11, 1862, Mr. Hooper introduced in the House of Representatives a bill to provide a "National currency secured by a pledge of United States stocks," etc., and received authority by resolution of the House to have printed a limited number of copies of this bill. ROMANCE AND TRAGEDY OF BANKING 9 On February 2, 1863, a bill was reported to the Senate from the Finance Committee by Senator Sherman, entitled "An Act to provide a national currency, secured by a pledge of United States bonds, and to provide for the circulation and redemption thereof." This was the same bill, with some changes in details, that was introduced in the House of Representatives by Mr. Hooper sev- eral months previously. In reporting this bill to the Senate, Senator John Sherman said: We are about to choose between a permanent system, designed to establish a uniform national currency based upon the public credit, limited in amount, and guarded by all the restraints which the experience of men has proved necessary, and a system of paper money without limit as to amount, except for the growing necessities of war. In the consideration of such a question, we should surely sacrifice all local interests, all pride of opinion and while acting promptly under the pressure of events, we should bring to our aid all the wisdom of united coun- sels and all the light which the experience of former gen- erations of men can give us. Referring at the same time to the expedient previously re- sorted to, of issuing United States notes, he said : Another practical objection to these United States notes is, that there is no mode of redemption. They are safe. They are of uniform value, but there is no mode pointed out by which they are to be redeemed. No one is bound to redeem them. They are receivable but not con- vertible. They are debts of the United States, but they cannot be presented anywhere for redemption. No man can present them, except for the purpose of funding them into the bonds of the United States. They are not convertible. Thej' lack that essential element of any currency. They can only be used during the war. The very moment that peace comes, all this circulation that now fills the channels of commercial operations will be at once banished. They will be converted into bonds, and then the contraction of prices will be as rapid as the inflation lias been. The issue 10 ROMANCE AND TRAGEDY OF BANKING of government notes can only be a temporary measure, and is only intended as a temporary measure to provide a nation- al currency. But, it is asked, why look at all to the interests of the banks? Why not directly issue the notes of the government, and thus save to the people the interest on the debt rep- resented by the notes in circulation? The only answer to this question is that history teaches us that the public faith of a nation alone is not sufficient to maintain a paper currency. There must be a combination between the interests of private individuals and the govern- ment. After debating this bill for ten days, it passed the Senate by a vote of 23 ayes to 21 nays. And, but for the personal appeals made for the bill by Secretary Chase and Senator Sherman, it undoubtedly would have failed of passage in the Senate, as Sen- ator Anthony was known to be opposed to it, and Senator Sher- man says in "John Sherman's Recollections" that "Senator An- thony voted for the bill because Secretary Chase convinced him that it was necessary to carry on the war." After passing the Senate, the bill went to the House of Repre- sentatives, where it remained on the Speaker's table from the 12th to the 19th of February, a motion to refer it to the Com- mittee of the Whole having been defeated. Mr. Spaulding, who is credited with having prepared the original draft of the bill, opened the debate upon it in the House, and in the course of a long speech said : I shall vote for it, not that it would afford any con- siderable relief to the treasury in the next two or three years, but because I regard it as the commencement of a permanent system for providing a national currency that would, if wisely administered, be of great benefit to the people and a reliable support to the government in the future. The bill passed the House of Representatives on February 20th, by a vote of 78 ayes to 64 nays, and became a law on Febru- ary 25, 1863, with the approval of the President. ROMANCE AND TRAGEDY OF BANKING 11 This Act, however, while admirable in design, was very crudely constructed, and contained numerous defects. It was, as Hugh McCulloch stated in his book entitled "Men and Measures of a Half Century," very unsymmetrical in arrangement and glar- ingly inconsistent in many of its provisions. It was full of am- biguities and many words of different significance were used as interchangeable terms, making their meaning uncertain and diffi- cult of interpretation. To correct these numerous defects and to supply omissions, which the practical operation of the law soon demonstrated to be essential, it became necessary within fourteen months from the date of its passage to revise the entire act by the adoption of the Act approved June 3, 1864, under the same title. This latter act, with such amendments thereof as have since been enacted, constituted the national banking laws. The title, however, was changed by the Act of June 20, 1874, which pro- vides that the Act entitled "An act to provide a national cur- rency secured by a pledge of United States bonds, and to provide for the circulation and redemption thereof, approved June 3, 1864, shall hereafter be known as 'The National Bank Act.' ' The Act of 1863 authorized the issue of circulation to any State bank existing at the time of its passage, which was the owner and holder of United States bonds, to the amount of fifty per centum of its capital stock, under the same conditions as cir- culation was issued to national banks, except that the amount of such issues could not exceed fifty per centum of the capital stock of the bank or the market value of the bonds deposited. This privilege was not conferred upon State banks by the Act of 1864, and no circulation ever was issued to State banks under the Act of 1863, as no such bank ever availed itself of this provision. Fifty-nine years have gone by since the adoption of the Na- tional Bank Act, and 12,230 banks have been chartered under its provisions, including 2292 State banks converted into na- tional associations 1 . It never was a perfect measure. Perfec- tion was not claimed for it at the time of its enactment by any of its most ardent supporters. It was born during a period of in- 'June 30, 1922. 12 ROMANCE AND TRAGEDY OF BANKING ternal strife, and necessity was its parent. That it did not develop perfection and improve with age is due altogether to the environ- ment of its birth and want of proper legislative nourishment and attention as it grew to maturity. But notwithstanding its many imperfections, it stood the test of time and furnished to the nation the best banking system it had ever known. The National Bank Act was not afflicted with any incurable maladies, as some theoretical financiers represented it to be. Its ailments were from time to time thoroughly diagnosed and were well understood. Its principal weakness was due to a sluggish circulation, which would readily have responded to treatment if the proper legislative remedies had been applied. The principal remedies necessary to the perfection and per- petuation of the system were (1) the injection of such elasticity into the circulation of the banks as would have enabled it at all times to automatically expand and contract in proportion to the legitimate business demands made upon it; (2) the adoption of such additional safeguards as would have added to the security of depositors and other creditors, increased confidence in the soundness and stability of the banks, and minimized liability to failure, and (3) such an enlargement of the corporate powers of the banks as would have enabled them to transact some of the business which had become necessarily incidental to commercial banking subsequent to the enactment of the original act. The Federal Reserve Act, approved December 23, 1913, reme- died some of these delinquencies by providing a circulating medium sufficiently elastic to readily supply the periodical de- mands for additional currency for crop moving purposes and increased industrial or commercial activity, and for the automatic retirement of this currency when no longer required for legitimate business. It provided also for the mobilization of bank reserves and their availability when needed. These and other provisions of the Federal Reserve Act have immensely improved and strengthened the laws relating to cur- rency issues, and otherwise enlarged the scope of powers of the banks along the lines above suggested. CHAPTER II THE National Currency Bureau, or the Office of the Comp- troller of the Currency, as it is generally known, was estab- lished May 9, 1863, by the appointment and qualification of Hon. Hugh McCulloch as Comptroller, and the selection by him of a working force consisting of three clerks, two copyists and one messenger. The messenger was John Joy Edson, who subsequently became one of Washington's most prominent citi- zens and business men and was President of two of its principal and most successful financial institutions. No bureau of the several executive departments of the Federal government has borne a closer or more important relation to the business interests of the country at large than the National Cur- rency Bureau, and no bureau officer is vested by law with greater responsibilities or more independent powers of action than the Comptroller of the Currency. It evidently was the desire and intention of the f ramers of the National Bank Act to make the office of the Comptroller a non- political office and to remove it as far as practicable from the influences incident to the quadrennial changes in party or politi- cal administration of the Federal government. To this end the term of the Comptroller was fixed by the original and the amend- atory acts at five years, and he was required to report annually direct to Congress, instead of to the head of the Treasury De- partment, as other department bureau officers are required to do. The purpose of this latter requirement was to enable the Comptroller to present to Congress for consideration his inde- pendent views and recommendations in regard to the conditions and necessities of the banking interests and currency needs of the country, free from censorship by his official superior, the head of the Treasury Department. The impression seems to prevail that the provision in the statute fixing the tenure of office of the Comptroller of the Cur- Lt 14 ROMANCE AND TRAGEDY OF BANKING rency at five years prevented the removal of this official during his term, except by impeachment. Such, however, is not the case. The Act of February 25, 1863, contained a provision that the Comptroller "shall hold his office for the term of five years, unless sooner removed by the President by and with the advice and con- sent of the Senate." When the bill to amend this act was before the Senate for consideration, in April, 1864, it was proposed to amend this sec- tion by striking out the words by and with the advice and con- sent of the Senate and make the provision read, shall hold his office for the term of five years unless sooner removed by the President. A study of the debate in the Senate on this proposed amend- ment may prove of interest as showing the intent of the legislators in connection with this provision of law as finally adopted. This debate will be found in the Congressional Globe of April 26, 1864, as follows: Senator Grimes : I should like to inquire why the com- mittee propose to make this change. I remember that this clause was put in the bill of last year upon great considera- tion, in order to prevent this officer from being a mere political officer, as he doubtless will be, if he is to be turned out without any consultation with the Senate. I should like to know what change has come over the spirit of the dream of the Finance Committee on that subject. Senator Fessenden: The reason why that clause was stricken out by the Committee on Finance was simply this : That provision is in the original bill that we passed last year. It was put into the original bill because it was thought advisable that this office should be in a very particular degree independent of political changes and political con- siderations. There seemed to be a necessity for a degree of permanency and a degree of independence in this officer that did not apply to others, and it was agreed to. When it came up this year in the same shape the attention of the committee was called to it, and we came to the conclusion that there might be difficulties in such a case even in carry- ing that out. In the first place, it is establishing a new rule. It is ques- tionable whether the President has not the power of ap- ROMANCE AND TEAGEDY OF BANKING 15 pointing this officer and removing him, even if this provision should remain in the bill. It has been held in all other cases that the power of removal was a necessary consequence of the power of appointment; that when the President ap- pointed an officer who was provided for by law that was all very well; but he might at any time appoint another in his place, as the power of appointment was vested in him, and that power of appointment necessarily involved the power to remove the incumbent when the President ap- pointed a new officer. On the contrary, it is said with regard to an office cre- ated by Congress, Congress has the right to fix such limita- tions upon it with reference to the power of removal as it sees fit. That is a doctrine that has never been acceded to herefore. At any rate, this made an exception to all rules, even with regard to military officers. The President has always exercised the power to strike any man from the list of officers in the army if he saw fit to do so, as we have with a view rather to acknowledge that power and to induce its exercise in the present condition of the country, made a special provision of law, I believe, on that subject. The difficulty in this case is this: If you provide that the Comptroller of the Currency shall only be removed by and with the advice and consent of the Senate, it may happen that in the recess of Congress this officer may be unfaithful. He will wield an immense power in the country over all these banks with this accumulated capital, and he could in the course of a very short time, if he were disposed to do so, produce the most disastrous effects upon the cur- rency of the country by his own motion. It will be difficult to say that the President should not have the power to remove him if he was found to be exercising the power of his office in that way. There is that danger always, and that, perhaps, was the great argument that made the con- struction of this power what it is; that necessarily, as Congress is not always in session, the President must have the power of removal in order to guard against evils that might follow from unfaithful officers who would otherwise hold their positions contrary to the interests of the govern- ment. It is desirable at all times, if this provision is re- tained, that the President shall have the power to suspend 16 ROMANCE AND TRAGEDY OP BANKING for a time for sufficient cause the powers of the Comp- troller of the Currency until the meeting of Congress, and then report to Congress the reasons why he has thus sus- pended him. This matter, however, came up this morning in the Com- mittee on Finance, and it was thought advisable on the whole to leave the amendment stand, as we originally re- ported it, striking out this clause, presuming that the House of Representatives would insist (as it usually does) upon its own views in relation to this important amendment of the bill, and it would result in a committee of conference, when something could be arranged between the two commit- tees that would be effective in relation to it. For myself, while I see the force of the argument that this office ought to be in a great degree independent, I also see the force of the argument that the power of suspending him should exist in the President, because otherwise during a recess of Congress the great interests of the community might be left to the mercy of the Comptroller of the Cur- rency, if he should happen to be an unfaithful man. We thought the clause, as it stood, might be unsafe in that particular at some future time, and on the whole, we con- cluded to strike out the clause, thinking that it would result in an arrangement with reference to it that might obviate the difficulties on both sides. Senator Buckalew: I desire to move an amendment to the amendment of the committee. I move to insert the follow- ing words in place of those proposed to be stricken out: "up- on reasons to be reported by him to the Senate," so that the clause will read: "And shall hold his office for the term of five years, unless sooner removed by the President, upon reasons to be reported by him to the Senate." Senator Fessenden: I think that would hardly meet the difficulty, because it makes his reasons conclusive whether the Senate likes them or not. It leaves the power of re- moval just exactly where it should be, if this clause should be stricken out altogether, only the Presi- dent is compelled to report his reasons to the Senate. If the reasons are satisfactory to himself they are to operate. They might not be satisfactory to the Senate, but still that would produce no effect upon the act itself. I think, there- ROMANCE AND TRAGEDY OF BANKING 17 fore, that the amendment to the amendment would not cure the evil. Senator Pomeroy: The effect of it would be that if the Senate did not approve of the reasons given by the President they could refuse to confirm the successor appointed to the previous Comptroller. Senator Fessenden: That would only make confusion. It is necessary that the office should be filled. Senator Howard: I hope the Senate will concur in the amendment of the committee conditionally, for I regard it as a well settled law that under the Constitution of the United States the President has the absolute power of appointment and the equally absolute power of removal. I am not able to see what authority we have to annex any conditions or limitations to the President's power of removal from office. If he has the power of appointment, and if the power of removal is an incident to the power of appoint- ment, then we have nothing to do with it, and we can only leave the responsibility to the President himself. Suppose we should adopt the amendment suggested by the Senator from Pennsylvania, and the President should see fit to remove this officer without giving to Congress any reasons whatever, what would be the result in law? Would he, or would he not be actually removed? Would he remain in office because the Persident had not given reasons for his removal, or what would be his condition? I should really like to understand from the honorable Senator from Pennsylvania what would be the logical consequences. I think that the reasons given by the honorable Chairman of the Committee on Finance for the amendment which that Committee has suggested, are perfectly satisfactory and perfectly conclusive. Let us leave to the President his full responsibility for exercising the laws and hold him to that responsibility before the people. The bill passed the Senate and was referred to a conference committee of the two Houses, and finally became a law with the provision in regard to the tenure of office of the Comptroller, reading as follows : 18 ROMANCE AND TRAGEDY OF BANKING Shall hold his office for the term of five years, unless sooner removed by the President, upon reasons to be com- municated by him to the Senate. This provision of law has remained the same to the present time, and although the Comptroller is appointed for a term of five years, he virtually holds his office at the pleasure of the Presi- dent, and may be removed at any time, for reasons which the President may deem sufficient. Composition of the Currency Bureau The Currency Bureau is composed of seven divisions, each of which has a chief and a corps of clerks with distinct and well defined duties. The regular working force of the office, Janu- ary 1, 1922, including chiefs of divisions, numbered two hundred and twenty-seven. In addition to this office force, on January 1, 1922, there were employed in the field, one hundred and ninety-seven national bank examiners and two hundred and ninety assistant examiners en- gaged in the examination of banks, who make full and detailed reports to the Comptroller of the condition of the banks exam- ined, on specially prepared blanks. There were also employed in the Chief Examiners' offices, one hundred and ten clerks en- gaged in clerical work in connection with the examination of the banks. The Federal Reserve Act requires each bank to be examined not less than twice in each calendar year, but many banks are examined more frequently according to the condition shown by the previous report. Examiners' reports are treated as confi- dential communications, are carefully guarded, and copies are never furnished except to the bank itself and to the Federal Re- serve Bank of the district in which the bank is located. In addition to the reports of examination received from each bank examiner, every bank is required by law to make five reports of condition each year, for a past date fixed by the Comptroller, without previous notice, sworn to by the cashier of the bank, or 19 the president, and attested by at least three directors, on forms prescribed and furnished by the Comptroller. These reports are carefully examined by the clerks of the office, and systematically tabulated, first by States, and reserve cities, and finally totaled for the United States. These abstracts contain a vast amount of valuable statistical information of great interest to bankers, statisticians and writers on financial subjects generally, both in this and other countries. The bureau is well organized, the personnel is efficient, and the systematic manner in which the work is handled, with the use of labor-saving devices, enables the force to dispose of the vast and constantly increasing volume of business with promptness and despatch, so that the current work of the bureau may be said to be always up to date. National Bank Circulation First Printed Under Contract The Bureau of Engraving and Printing, in which all national bank notes and other securities of the Government are now printed, was organized in 1862, under authority of an Act of Congress, approved July 11, 1862, entitled "An Act to authorize an additional issue of United States notes, and for other purposes." This Act authorized the Secretary of the Treasury, if he deemed it expedient to have the United States notes engraved and printed by contract, to cause them, or any part of them, to be engraved, printed and executed in such form as he should pre- scribe at the Treasury Department in Washington under his direction, and to purchase and provide all the machinery and materials and to employ such persons and appoint such officers as may be necessary for that purpose. The printing of national bank currency was commenced in 1863. The first notes were printed in that year. At that time all Government securities were printed in New York City by the Continental, American and National Bank Note Companies. The notes printed by these companies were delivered to the Treasury Department in an unfinished condition. After being entered on the books in the office of the Comptroller of the Currency the}* were sent to the Bureau of Engraving and Printing, where the 20 ROMANCE AND TRAGEDY OF BANKING seal of the Treasury Department was placed on each note. The Bureau of Engraving and Printing was at that time located on the upper floor of the Treasury Building. The Act of June 20, 1874, required that all notes printed after the approval of that act should bear the charter number of the bank issuing the notes. All notes on hand in the Comp- troller's vault at that time were sent to the Bureau to have the charter number of the banks placed thereon before issues were made. The Bureau of Engraving and Printing was removed to the building adjoining the one it now occupies in 1875. All engraving and printing connected with Government securities was then transferred to that bureau from New York City and since that time has been executed under the direction of the Secretary of the Treasury, commencing at the beginning of the fiscal year July 1, 1875'. A new series of national bank notes was then adopted, known as the Series of 1875. The seal upon these notes was changed from the original saw-tooth seal to the round seal with scalloped edges, and the legend "Series of 1875" was printed across their face in red ink. This series of notes continued to be issued until the passage of the Act of July 12, 1882, providing for the exten- sion of charters of national banks, when the Series of 1882 was adopted, and this series was issued to all new banks organized after that date as well as to the banks extending their charters. The Act of April 12, 1902, provided for a further extension of the corporate existence of the banks, when the present series of notes, known as the Series of 1902, was adopted and were issued to all banks re-extending their charters as well as to all new banks organized since that date. When the Series of 1882 notes was adopted the only entirely new design was that of the notes of the five dollar denomination, containing the vignette of President Garfield. The other notes, of the denominations of ten, twenty, fifty and one hundred dol- lars, were made from the original plates of the old series, amended by inserting on the margin of the note the charter number of the bank in six places and changing the seal of the Treasury Depart- ROMANCE AND TRAGEDY OF BANKING 21 ment from the small scalloped seal to the larger one of practi- cally the same design. As the notes authorized by the original act, of a higher de- nomination than one hundred dollars, had been practically dis- carded by the banks, on account of the cost of maintenance, notes of these denominations have not been printed since 1882. The Act of May 30, 1908, authorized the issue of notes of the denomination of ten thousand dollars, but none of this amount ever has been ordered by the banks and no designs for this denomi- nation ever have been prepared. Previous to the passage of the Act of June 20, 1874, national banknote plates were engraved and the circulation printed there- from at the expense of the Government, but a provision in that Act required each association thereafter organized to reimburse the Treasury Department the cost of engraving the plates, since which time the banks have paid for their plates. The National Currency Bureau has been the source of consid- erable revenue to the Government since its establishment, and has been more than self-sustaining. The receipts from tax on circu- lation and other sources from 1863 to June 30, 1921, amounted to over $155,188,318.23. The operating expenses of the bureau during the same period amounted to over $20,965,820, leaving a net balance or profit to the Government of over $134,222,498, or an annual average profit of over $231,418, during the fifty-eight years of the bureau's existence. First Bank Organized It is generally conceded, and the fact is borne out by the records of the Comptroller's office, that the first bank to open for business under a national bank charter was the First National Bank of Davenport, Iowa. The charter number of this bank was fifteen. The earliest paper on file in the Comptroller's office pertaining to this bank- bears date of May 29, 1863. The bank was chartered on June 24, 1863, and opened for business June 29, 1863. In the history of this bank, prepared by Hon. A. F. Dawson, a former member of Congress, and later president of the bank, 22 ROMANCE AND TRAGEDY OF BANKING it is stated that application for a national charter was made on February 24, 1863, and was received at the Treasury Depart- ment on February 26, 1863. The first bank to receive a certificate of authority to begin business as a national association was the First National of Philadelphia, Pa. This bank was given Charter No. 1, dated June 20, 1863, but it did not open for business until Julv 11, 1863. HUGH McCULLOCH First Comptroller of the Currency, 1863-1865 CHAPTER III Hugh McCulloch HUGH McCULLOCH was appointed Comptroller of the Currency, March 9, 1863, and held the office until March 8, 1865. He was born at Kennebunk, Maine, December 7, 1808. In 1824 he entered Bowdoin College, but on account of ill health he was obliged to leave the institution in 1826. He subsequently engaged in teaching school, and later studied law. In McCulloch's "Men and Measures of a Half Century," he gives a very interesting account of how he was selected to be the first Comptroller of the Currency and the circumstances under which he accepted the appointment. He states that in 1862 he went to Washington for the purpose of opposing the establish- ment of the national banking system, upon the ground that it might prove greatly prejudicial to the State banks. He was at that time president of the State Bank of Indiana, one of the larg- est banking institutions in the country, the main office of which was located at Indianapolis. His connection with this bank began in October, 1835, when he was appointed cashier and manager of the Fort Wayne branch of this institution. He was a lawyer by profession and previous to his acceptance of the cashiership of this bank had had no banking experience. When the Bank of the State of Indiana was organized in 1857, to succeed the State Bank of Indiana, he was chosen as its first president and con- tinued his connection with this institution in that capacity until he resigned in April, 1863, to accept appointment as Comptroller of the Currency. Although Mr. McCulloch was originally opposed to the national banking system his opinion underwent a complete change after the bank act became a law, and, because of this fact, he stated, the tender of the position of Comptroller of the Currency to him by Secretary Chase was not only wholly unexpected, but was exceedingly embarrassing. 23 24 In a letter written to a friend, published in The Bankers Magazine, he said: The national system of banking has been devised with a wisdom that reflects the highest credit upon its author, to furnish the people of the United States a national bank note circulation without the agency of a national bank. It is not to be a mammoth corporation with power to in- crease and diminish its discounts and circulation, at the will of its managers, thus enabling a board of directors to con- trol the business and politics of the country. It can have no concentrated political power. Nor do I see how it can be diverted from its proper and legitimate objects for partisan purposes. It will concentrate in the hands of no privileged persons a monopoly of banking. It simply authorizes, under suitable and necessary restrictions a num- ber of persons, not less than five, in any of the states or territories of the Union, to engage in the business of bank- ing, while it prevents them from issuing a single dollar to circulate as money which is not secured by the stocks and resources of the government. It is, therefore, in my judg- ment, (as far as calculation is regarded,) not only a per- fectly safe system of banking, but it is one that is eminently adapted to the nature of our political institutions. In referring to his conference with Secretary Chase, at the time he was tendered and accepted the appointment of Comp- troller, McCulloch states that when the interview was about to terminate he said to the Secretary that he had but one request to make, and that was that as he would be responsible for the proper organization and management of the bureau, which was likely to become a very important one, he desired to have the selection of his clerks. To this request, he quotes Secretary Chase as saying : "Manage the bureau in your own way. When you need clerks, and as you need them, send their names to me and they will be appointed." This understanding, McCulloch said, was fully car- ried out, and that in no instance while he was Comptroller was an appointment made for the bureau which was not on his recommendation. ROMANCE AND TRAGEDY OF BANKING 25 While this rule has been adhered to generally since Mr. Mc- Culloch's time, there have been some notable exceptions and irri- tating consequences resulting from interferences by subordinate officials of the Secretary's office with the personnel and manage- ment of the bureau, more or less frequent and successful accord- ing to the flexibility or rigidity of the vertebrae of the occupant of the Comptroller's chair, for the time being, and the degree of his insistence, not only upon an observance of the rule established by McCulloch, but of the provision of the national banking laws which conferred upon the Comptroller the authority to "employ from time to time the necessary clerks, to be appointed and classi- fied by the Secretary of the Treasury, to discharge such duties as the Comptroller shall direct." This right and privilege was recognized by every Secretary of the Treasury since the Cur- rency Bureau was established whenever the Comptroller insisted upon the exercise of his prerogative by appealing to him against the arbitrary interference of some subordinate official of his office. While some very able and experienced men have occupied the position of Assistant Secretary of the Treasury, there was a time for awhile when these positions became an exceedingly attractive school of finance from which a number of very bright and excep- tionally capable young men, with no previous experience in bank- ing or finance, were graduated in remarkably short periods as expert financiers and bankers, with the honorary degree of "Ex" as indicating their principal specialty and main reliance for rec- ognition in the busy financial and commercial world. When these young men first entered the service of the Depart- ment, they became thoroughly imbued with the idea that every- thing in connection with the Department's business methods needed reforming, and they immediately set to work to suggest or inaugurate changes of various kinds which, while invariably in- volving the Government in considerable unnecessary expense and generally disturbing the public business, contributed nothing toward improvement in methods or economy in public expendi- tures, but in some instances amounted to pure vandalism in the destruction of public property, wastefulness of public funds, and demoralization of the service generally. 26 ROMANCE AND TRAGEDY OF BANKING McCulloch's Annual Reports During the twenty-two months of McCulloch's incumbency of the office of Comptroller of the Currency, he made two annual reports to Congress. The first report was devoted almost entirely to a review in detail of the National Bank Act passed in 1863. He pointed out its numerous defects, recommended the repeal of a number of its provisions, the amendment of others, and the en- actment of additional legislation to supply omissions which the practical operation and administration of the law had shown to be necessary. These suggestions were largely adopted in the 1864 revision of the act. The second report of Mr. McCulloch was devoted principally to a discussion of the paper issues of the Government, and the note-issuing function of the national banks. While defending the course of the Government in resorting to the issue of United States notes, endowed with lawful money quali- ties, as a great public necessity at that time, he expressed the view that when the Civil War ended and the necessities which led to the issue of this form of money had ceased to exist, these notes should be promptly retired. His objections to such Government issues were stated with great clearness and force. Paper money, he said, had been found to be useful and an absolute necessity in all commercial countries in the transaction of business, and as a substitute for coin, but that all such money should be convertible into coin. Its issue should be regulated by, and should not exceed in volume the legiti- mate demands of healthy trade. While admitting the imperfections of the circulation furnished by the national banks, he contended that all of the objections that were raised to banknote circulation applied with equal, if not greater, force to Government note issues, as the volume of the former is restricted by law, and is liable for redemption, while the latter is regulated only by the necessities of the Government or the interests of the political party in power, having no relation to the needs of trade and commerce. He contended that no kind of paper money is without its objections. While its use may be and is a commercial necessity, ROMANCE AND TRAGEDY OF BANKING 27 no form of paper currency that has yet been contrived is as unob- jectionable as national bank circulation. Mr. McCulloch expressed his regret that so many national banks were being organized in states in which before the passage of the National Bank Act there was no deficiency in banking facilities. The purpose of the National Bank Act, he said, was not to destroy State banks, but to absorb them, and he expressed the hope that other states would follow the example of Massachu- setts, Connecticut and Pennsylvania and adopt laws granting authority to State banks to convert into national associations, without any disturbance or discontinuance of their business. It appears from this that Mr. McCulloch, like many others at that time, was under the impression that although the National Bank Act authorized the conversion of State banks issuing circu- lation into national associations, without the formality of liqui- dation and reorganization, the authority of the state was also necessary. While in many instances this contention was not maintained by state authorities and no objection was interposed to such conversions, the question does not seem to have been judi- cially determined until 1876, when, in the case of Casey v. Galli, 94 U. S., 673, the Supreme Court of the United States held that "No authority other than that conferred by Act of Congress is necessary to enable a State bank to become a national banking association." In April, 1867, an act was passed by the Legislature of the State of New York authorizing any national bank in the state to become a state banking institution by conversion and by virtue of such conversion be absolved from all allegiance to the Federal authorities and responsibility as a national bank. The question of the power of a national bank to convert into a state institution under authority of this act was referred to the Attorney General of the United States, who, in an opinion ren- dered May 19, 1869, held that it is not within the power of the Legislature of a state to alter, modify, add to, or diminish the powers, duties or liabilities created or conferred upon a banking association established under an Act of Congress. National banks, he said, are distinct bodies corporate, deriving their exist- 28 ROMANCE AND TRAGEDY OF BANKING ence from the United States, and they cannot be merged or in any manner identified with a state institution without authority of Congress, except by liquidating and winding up their affairs and incorporating anew under the state laws. A State bank may under authority of a provision in the Na- tional Bank Act convert into a national association, but a national association cannot convert into a State bank. Mr. McCulloch recommended an enactment fixing a uniform rate of interest for national banks, and a tax on State bank cir- culation, at such a rate as would make it unprofitable for such banks to issue circulation, and thereby contribute toward making national bank circulation what the bank act intended it should be a uniform currency for the whole country. In concluding his report for 1864, Mr. McCulloch suggested the removal of the Currency Bureau from Washington to Phila- delphia or New York. He stated that it was of the greatest im- portance that the national currency system should be independent of politics and freed from political influences. He expressed the opinion that the bureau should be an independent department of the Government, and he believed that this could best be accom- plished by separating it entirely from the Treasury Department, and locating it in one of the principal financial centers of the country. It is exceedingly doubtful, however, in the light of later events, whether the bureau would have been as free from political and financial influences, or at least from the suspicion of such influ- ences, if this suggestion of Mr. McCulloch had been adopted, as it has been by remaining a bureau of the Treasury Department, located in Washington, and operating in harmony with that de- partment, especially if the point of location had been New York City, with the environment of Wall Street. The only conceivable advantage to be derived from a change of location of the Currency Bureau from Washington to New York was the increased facilities that might be afforded for the redemption of circulation. As about fifty per cent, of the national bank notes sent to Washington for redemption come from New York City, the expense and delay of transportation back and forth would be avoided. But at the time Mr. McCulloch made 29 this suggestion a change of location of the bureau did not have even this consideration to commend it, as New York City was then a redemption city. McCulloch's Circular Letter to the Banks One of the most notable documents ever issued from the Comp- troller's office was a circular letter addressed by McCulloch, in 1864, to the managers of national banks. This circular contains so many excellent suggestions and is so replete with wholesome advice in regard to sound banking methods and management that it can be very profitably read and closely followed by many bankers of the present day, as a safe guide in the conduct of their banking business. The following are some of the salient features of this circular : The business of a bank should be carefully and promptly conducted. The books at the close of each day should exhibit the amount of cash on hand, and the exact condition of the bank. In large banks all the books should be balanced daily. In small banks, weekly, or oftener; and as often as every quarter a careful examination of its affairs should be made by committees of the directors appointed for this purpose, and a report of the result of these examinations entered upon the minutes. The officers of the bank, other than the president, should be appointed to hold their office during the pleasure of the hoard, and bonds should be executed accordingly. This will obviate the necessity of requiring annual bonds from these officers, and will prevent the occurrence of a time when they will not be under bond. Presidents being annually elected or appointed will, of course, be required to give annual Ixjnds, and whenever an official is reappointed a bond should he required of him. No loans should be made that are not secured beyond a reasonable contingency. Nothing should be done to foster and encourage speculation. Facilities should be given only to legitimate and prudent transactions. Discounts should be made on as short time as the business of the customer will permit, and payment of all paper at maturity should be 30 ROMANCE AND TRAGEDY OF BANKING insisted upon, no matter whether the bank needs the money or not. A note or a bill should never be renewed merely because the bank may not know where to place the money with equal advantage if the paper is paid. In no other way can the bank properly control the discount line, or make it at all times reliable. Distribute the loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally in- judicious and frequently unsafe. Large borrowers are apt to control the bank, and when this is the relation between a bank and its customers, it is not difficult to decide which in the end will suffer. Every dollar that a bank loans above its capital and surplus it owes for, and its managers are therefore under the strongest obligations to its creditors, as well as to its stockholders, to keep its discounts constantly under its control. A bank should treat its customers liberally, bearing in mind that it prospers as its customers prosper, but the customers should never be permitted to dictate its policy. If the propriety of discounting an offering is doubted, give the bank the benefit of the doubt and decline it. If the bank has any reason to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you. The risk in such cases is greater than the profits. In business, know no man's politics. Manage the bank as a business institution, and let no political partiality or prejudice influence your judgment or action in the conduct of its affairs. Pay the officers such salaries as will enable them to live comfortably and respectably without stealing, and require of them entire services. If an officer lives beyond his means, dismiss him, even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. A man cannot be a safe officer of a bank who spends more than he earns. The capital of a bank should be a reality, not a fiction, and it should be owned by those who have money to lend, and not by borrowers. Every banker under the national system should feel that ROMANCE AND TRAGEDY OF BANKING 31 the reputation of the system, in a measure, depends upon the manner in which his particular institution is conducted, and that, as far as his influence and his management extend, he is responsible for its success. It should be the chief aim, therefore, of the managers of the banks, to make their respective institutions strong, not only to keep their capital from being impaired, but gradually to create a surplus that will be a protection to their capital and to their creditors in the trying times that will sooner or later happen to all banking institutions. There are few items that will have a better look upon the balance sheet, and none that is better calculated to give aid and comfort to the managers of a bank, and to secure for it the confidence of the people, than a large surplus fund. Create, then, a good surplus, if even for a short time the stockholders have to be kept on short commons in the way of dividends to do it. Pursue a straightforward, upright, legitimate banking business. Never be tempted by the prospect of large re- turns to do anything but what may be properly done under the National Currency Act. "Splendid financiering" is not legitimate banking, and "splendid financiers" in banking are generally humbugs or rascals. If the rules laid down by McCulloch in this circular were strictly followed by bank managers, bank failures would be few and far between and losses to depositors and stockholders would be reduced to a minimum. Appointment as Secretary of the Treasury Mr. McCulloch resigned the position of Comptroller March 8, 1865, to accept appointment as Secretary of the Treasury, and served in the latter capacity until March, 1869. He was again appointed Secretary in October, 1884, by President Arthur, to fill the unexpired term of Secretary Gresham, who resigned to become a Circuit Court Judge of the United States. In referring to his second appointment as Secretary of the Treasury, Mr. McCulloch, in his "Men and Measures of Half a Century," took occasion to express himself in the following com- plimentary terms of the personnel of the Department, and his 32 ROMANCE AND TRAGEDY OF BANKING appreciation of the valuable services rendered the Government and himself by his official subordinates during his connection with the Department : I was glad to see among officers and clerks who called at my offices on the morning that I entered upon the dis- charge of my duties as Secretary, a number of familiar faces, although nearly fifteen years had passed since I had left the Department. I shall alwaj^s hold in kind and grate- ful remembrance the men who served with me while I was Comptroller of the Currency and Secretary of the Treasury, in a very interesting and trying period of our financial history. An immense amount of work was done in that Department during the civil war and for some years after, and although it was done by men who had to learn as they worked, the record shows that it was fairly well done. Faithfully served as the Government was in the field, it was no less faithfully served by the officers and clerks in the public offices in Washington. There were among them men holding subordinate positions who were competent to fill the highest; men whose services could not be dispensed with without detriment to the Government; such men as would in Great Britain be retired with a pension when they were no longer able to perform their necessary work, instead of being turned out, as many have been, to give place to hungry applicants. Thoroughly familiar with the details of the business of the Department himself, a most industrious worker, McCulloch read- ily recognized and appreciated ability, loyalty and industry in others, and unselfishly accorded credit where credit was due. Selection of McCulloch to Organize the Bureau The selection of Mr. McCulloch as the first Comptroller of the Currency to organize the Bureau and start the machinery of the national banking system in operation was a most fortunate one, as no man of that time was better equipped to undertake so difficult a task. He cherished to the end of his life an exalted opinion of the dignity and importance of the Comptroller's office, ROMANCE AND TRAGEDY OF BANKING 33 and regarded his work in the Currency Bureau and the launching of the national banking system as his greatest achievement. He was a familiar figure around the Comptroller's office for years after his retirement from public life, and those who served under him always entertained for him the greatest admiration and esteem. He never ceased to take a deep interest in the welfare of the Bureau and the improvement and success of the national banking system, and no one realized or appreciated more than he the responsibilities of the Comptroller. On one occasion, during a temporary vacancy in the Comp- trollership, he strolled into the office, as he was in the habit of doing every now and then, for the purpose of paying his respects to the Comptroller and seeing some of his old friends. On this occasion the Deputy Comptroller was in charge of the Bureau. Introducing himself, McCulloch said to the Deputy, "Well, young man, you have a very responsible position." "Oh, I don't know," the young Deputy replied, "I don't see anything in the job that a man of ordinary intelligence could not learn in a few days." This inconsiderate remark of the Deputy did not please McCulloch, and was so repugnant to his conception of the importance and responsibilities of the position that he was taken completely aback, and politely wishing the Deputy a good morning, left the room without another word, and thus ended the interview. Mr. McCulloch was a sturdy character, a practical and ex- perienced banker and financier; broad-minded and conservative in all things, but positive and tenacious in his views, especially on banking and finance; a close student of the problems of govern- ment and of all public questions that affected the welfare of the nation. The closing chapter of his "Men and Measures of a Half Cen- tury," written many years ago, contains views that are well worth reading by all thoughtful men in their application to the condi- tions which prevail at the present time. He devoted considerable thought to the subject of unrestricted suffrage, the laxity of our laws relating to the elective franchise; the steadily increasing hostility between the poorer classes and the rich and between cap- ital and labor; the growing concentration of wealth in the hands of a few whose gains have not been wholly the result of legitimate 34 ROMANCE AND TRAGEDY OP BANKING business, but through monopolies and combinations of various kinds, which were then fast becoming the controlling power. Mr. McCulloch retired from active public life in March, 1885, at the close of President Arthur's administration, and died at his country home near Washington, D. C., where he passed a large part of the last years of his life, May 24, 1895, at the ripe age of nearly eighty-seven years. FREEMAN CLARKE Comptroller of the Currency, 1865-1866 CHAPTER IV Freeman Clarke FREEMAN CLARKE, of New York, the second Comptroller of the Currency, was appointed by President Lincoln, March 21, 1865, to succeed Mr. McCulloch, but resigned July 24, 1866, having retained the office only sixteen months. Mr. Clarke was born at Troy, N. Y., March 22, 1809, and was sixty-five years of age at the time of his appointment as Comptroller. He engaged in mercantile pursuits for awhile and subsequently turned his attention to banking. In 1837 he was elected cashier of the Bank of Orleans at Albion, N. Y. In 1845 he removed from Albion to Rochester and became president of the Rochester Bank, treasurer of the Monroe County Savings Bank, and subsequently president of the Monroe County Bank. He also held the office of treasurer and director of the Rochester, Lockport and Niagara Falls Railroad Company, president and treasurer of the Rochester and Genesee Valley Railroad Com- pany, director of the Mobile and Ohio Railroad Company, treas- urer and director of the House Telegraph Company, and a direc- tor of the Western Union Telegraph Company. He was one of the first directors of the Fourth National Bank of New York City, and also a trustee and subsequently vice-president of the Union Trust Company of New York. He was vice-president of the Whig State Convention in 1850. In 1852 he was a delegate to the Whig National Convention, and was vice-president of the First Republican Convention in New York State in 1854. He was a Presidential elector in 1856, and in 1862 was elected a rep- resentative from New York to the Thirty-eighth Congress, serv- ing on the Committees on Manufactures and Invalid Pensions. In 1867, after leaving the Comptroller's office, he was elected to the New York State Constitutional Convention. In 1870 he was again elected a representative from New York to the Forty- second Congress, in which he served on the Committee on Appro- 36 ROMANCE AND TRAGEDY OF BANKING priations, was re-elected in 1872 to the Forty-third Congress, and was a member of the Committee on Foreign Affairs. He died at Rochester, N. Y., June 24, 1887. There is very little to be said of Mr. Clarke's administration as Comptroller of the Currency, as he remained in office a very short time, and nothing occurred during his brief term of any particular moment, except the steady growth and development of the national banking system. During his term, over two hun- dred and eighty-three new banks were added to the system and seven hundred and thirty-one State banks were converted into national associations. The first failure of a national bank occurred during Mr. Clarke's administration. This was the First National Bank of Attica, N. Y., for which a receiver was appointed April 14, 1865, the date of the assassination of President Lincoln, although the death of the President had no bearing whatever upon the closing of the bank. The failure was due to injudicious banking and in- solvency of large debtors. This was a small bank, with capital of $50,000, and total assets of only $208,106. It is evident from this failure that the good advice which Mr. McCulloch gave in his circular letter of instructions to bank man- agers, hereinbefore quoted, to "distribute the loans rather than concentrate them in a few hands," was not heeded by the man- agers of this institution, and disaster was the consequence. Unfortunately, the same may be truthfully said of many other banks in the long line of failures that have occurred since the in- auguration of the national system. The loans of a bank should be diversified as fully as possible and not concentrated, as is so often the case, in a few or affiliated interests, to such an impru- dent extent that the failure of one individual or interest may seri- ously impair the surplus of the bank, or threaten the institution with an impairment of its capital, if not insolvency. It has been repeatedly asserted that no national bank ever failed whose managers conducted its business within the pro- visions and limitations of the national banking laws. While this statement is true so far as violations of law by the managers of banks that have failed is concerned, it is not, however, impossible for a bank to fail whose affairs have been conducted entirely ROMANCE AND TRAGEDY OF BANKING 37 within the limitations of the statute. Failures may occur, with- out the law having been violated, through injudicious banking within the restrictions of law, but beyond the limitations of pru- dence and safety, as will be shown further on in this volume. Clarke's Annual Report to Congress The principal topics discussed by Mr. Clarke in his first and only report as Comptroller of the Currency, were the evils result- ing from a redundant and irredeemable currency and an adjust- ment of the tariff so as to prevent a drain upon the gold resources of the country by an excess of imports over exports. A discussion of the tariff, while seemingly out of place in a report of the Comptroller of the Currency, had a direct bearing in this instance upon the subject under consideration by Mr. Clarke the resumption of specie payments. The unwritten history of the Comptroller's office is authority for the statement that the Comptroller and the Secretary of the Treasury were not in harmony in their views on the tariff ques- tion, and that the relations between the Comptroller and his dep- uty were also strained, which made the position of the former decidedly unpleasant and led to his early resignation and retire- ment from the service, and the appointment of the Deputy Comp- troller, Hiland R. Hulburd, his successor. Bank Failures During Mr. Clarke's Administration There were two other national bank failures during Mr. Clarke's administration, the Venango National Bank of Franklin, Pa., and the Merchants National Bank of Washington, D. C. The former was placed in the hands of a receiver May 1, 1866, and the latter May 8, 1866. The capital stock of these banks was $300,000 and $200,000 respectively. On the date of failure of the Merchants National Bank, a resolution was adopted by the House of Representatives direct- ing the Committee on Banking and Currency to make an investi- gation of the cause of the failure of these two banks, and to report to the House the amount of Government money deposited 38 ROMANCE AND TRAGEDY OF BANKING therein, with a recommendation for any additional legislation found to be necessary to protect the public and the Government in their dealings with national banks. The report of the Committee shows that the Merchants Na- tional Bank was organized in September, 1864, by eleven share- holders, all of whom were resident business men of Washington, except one, who resided in Prince George County, Maryland. William Bayne, a brother of L. P. Bayne, of the firm of Baync & Company, of Baltimore, was its first president. Shortly after the bank was chartered, it was designated a public depositary, and security to the amount of $100,000 was deposited with the United States Treasury for public moneys. At the time of the failure, the public money on deposit in this bank amounted to $765,572. The house of Bayne & Company of Baltimore was the principal debtor of the bank. The liabilities of this concern to the association amounted to a sum nearly equal to the public money deposit, for which the bank held no security whatever. The largest part of the indebtedness was for seven- thirty United States bonds, which had been transmitted by the bank to this company. These bonds were issued under authority of the Act of July 17, 1861, and bore interest at the rate of seven per cent. The amount of the issue was $139,999,750. While the books of the bank falsely showed this company's indebtedness to be only $283,586, even this large liability was concealed from the Comptroller of the Currency by reporting it as only $20,900 and representing the difference as bonds in bank. The committee reported that the testimony taken proved the management of the bank to have been in the highest degree illegal, improvident, reckless and dishonest; that its failure was caused by extravagant and unreasonable credits allowed to Bayne & Company without security, and the failure of this firm necessar- ily involved the bank. Before the failure of the bank, William Bayne, its first president, had been succeeded by Leonard Huyck, the former cashier. It appears from the testimony that a most pernicious system had been adopted and followed by Huyck in connection with Oscar King, one of the directors, and another party named H. G. Fant, by which they undertook to procure deposits of public 39 moneys by Government disbursing officers, for which the director and his associate received interest for having influenced them to open accounts with the bank. King was the bondsman of a United States Paymaster, whose deposit he procured. A member of the firm of Bayne & Company, also a director, was the other bonds- man. It was shown by the testimony that King induced this pay- master to make a deposit amounting to over $500,000, for the purpose of assisting the bank, which was known to be embar- rassed. Of the $765,572 of public moneys deposited in the bank at the time of the failure, all but $7308 was paymasters' or dis- bursing officers' accounts. It appears from the testimony that the officials making the deposits had no knowledge of the payment, to the director and his associates, of interest on their accounts and that they derived no benefit from the deposits. The payment of interest on these accounts appears to have been arranged by the president of the bank, without the knowledge or concurrence of the cashier or the board of directors. In April, 1866, at the time of the impending failure of Bayne & Company, King suggested to the cashier of the bank the possi- bility of procuring a large deposit from Paymaster Paulding of the Army. The Government funds to the credit of this officer were then on deposit in the First National Bank of Washington, a designated public depositary. Under the regulations of the Pay Department of the Army the transfer of these funds, or any part of them, from one designated depositary to another was prohibited without the authorization of the Department. It was then proposed to have the officers of the First National Bank make the transfer, but neither the president nor the cashier of the bank would agree to this. Paymaster Paulding already had a very large deposit in the Merchants National Bank, and with a view to saving this deposit by assisting the bank in its emer- gency he requested the cashier of the First National Bank to look into the condition of the former institution and to ascertain whether or not it would be safe for him to increase his deposit. The cashier made inquiry as to the condition of the Merchants National Bank, and learning that its chief asset was the indebted- ness of Bayne & Company, declined to advise Paymaster Pauld- 40 ROMANCE AND TRAGEDY OF BANKING ing one way or the other, leaving it to his discretion to act upon his own responsibility, with the understanding, however, that if his checks were presented at the First National Bank they would be honored. On the same day the Paymaster's checks were pre- sented by the cashier of the Merchants National for two hundred thousand dollars, and were paid and placed to the credit of Bayne & Company through different concerns in New York, except such as were paid in cash for Bayne & Company's benefit. It also appears from the testimony that $50,000 was secured from Paymaster Robinson by transfer of public moneys to his credit in the Bank of the Metropolis, upon representations made to him that the Merchants National was embarrassed and needed assistance. This amount was apparently used by the cashier of the Merchants National to pay his individual debts to the cashier of the Bank of the Metropolis and to the bank itself, instead of for the purpose of supplying the Merchants National with the additional currency which its officers represented it needed so badly. The day following this $50,000 deposit Paymaster Robinson became uneasy as to the safety of the funds in this bank, and transferred his entire balance, amounting to $51,252, to the credit of the Treasurer of the United States. It also appears that the $200,000 deposited by Paymaster Paulding was remitted to Bayne & Company, under an agreement that the large amount of securities held by that company would be released and returned to the bank, but the only securities that appear to have been returned were 850 shares of the stock of the Washington, Georgetown and Alexandria Railroad Company, which the cashier of the bank took possession of, claiming them to be his individual property. The cashier was the treasurer of this railroad company. He testified before the committee that he, as treasurer of the railroad company, issued to Bayne & Company 2850 shares of the stock of the company, of the par value of $285,000, under a promise of Bayne & Company to return to him genuine certificates to replace this issue, but that the stock never was returned, consequently there was an over- issue of the stock of the railroad company to that amount. ROMANCE AND TRAGEDY OF BANKING 41 In October, 1865, there was a change in the officers of the bank. William Bayne resigned as president, and the cashier, Leonard Huyck, was appointed to succeed him, and Charles A. Sherman was made cashier. In January, 1866, C. W. Boteler, one of the original organizers of the bank, was appointed vice- president. Mr. Boteler testified that although the By-Laws of the bank required weekly meetings of the board of directors, practically no meetings were held. Whenever a quorum of the board happened to be present on meeting days Mr. Huyck would inform them that there was no business for them to transact. Although a Finance Committee, composed of the president, the vice-president and the cashier, were authorized to transact all the business of the board, Mr. Boteler, the vice-president, finding that he was not consulted in regard to loans or other important business of the bank, had a resolution passed by the board pro- hibiting any loans being made except by the unanimous consent of the Finance Committee. Notwithstanding this fact, it appears that the president of the bank continued to act as though the bank were his own and neither consulted Mr. Boteler nor the cashier in regard to his transactions. This bank seemed to have started upon an iniquitous career from the very beginning. The name of J. B. Stewart appears as one of the original subscribers for 600 shares, or $60,000 of the capital stock. Stewart testified that he never subscribed for any shares, that he never signed the organization certificate, had never owned or transferred any stock, nor attended any meetings of the stockholders or directors, and that he never knew any of the stock of the bank stood in his name until he saw a published list of the stockholders at the time of the failure. The notary public before whom the organization certificate bearing Mr. Stewart's signa- ture was acknowledged testified that at the time of the acknowl- edgment of the signatures to the certificate he looked around and saw that all of the signers were present, except Mr. Stewart, and that he certified that Mr. Stewart was present because Mr. Oscar A. Stevens, who signed Stewart's name to the paper, was present, and as Stevens often attended to business for Mr. Stewart he assumed that it was all right and certified to Stewart's personal acknowledgment of his signature. 42 ROMANCE AND TRAGEDY OF BANKING Stewart testified that when the bank commenced business he opened an account with it and arranged to draw for money as he should require it, depositing 950 shares of stock of the Wash- ington, Alexandria and Georgetown Railroad Company as secur- ity, and that he also deposited with the bank for safe keeping $169,000 of bonds of the Union Pacific Railroad Company whicli he held in trust. These bonds, Stewart stated, he learned shortly before the bank failed had been sent by Huyck, the president, to Bayne & Company, and by that firm hypothecated for loans from various banks in Baltimore without his knowledge or consent, and when he called at the bank after the failure to pay his loan secured by the railroad stock he found that this stock had also been abstracted and disposed of in the same manner as the bonds. It is plainly evident from this testimony and other facts brought to light by the Investigating Committee that this bank from the very outset was, as stated by the committee, in the hands of a reckless, unscrupulous and dishonest management. The report of the committee in commenting on the indiscrimi- nate depositing of public moneys by disbursing officers in banks of their own selection severely censured Paymaster Paulding for using public funds to save the Merchants National Bank and Bayne & Company from failure. In regard to the deposits of the other disbursing officers, the committee stated that while it did not appear that such deposits were made for an unlawful purpose or that the disbursing officers received any benefit directly or indirectly from them, the only reason for making some of these deposits appeared to be a desire on the part of these disbursing officers to gratify a vanity in patronizing the banks by displaying the control they exercised over the public moneys to their credit. One of the disbursing officers testified that the only inducement that influenced him to withdraw money from the Treasury Department and deposit it in the Merchants National Bank was that he thought the First National Bank of Washington had more than its share of public money, and wishing to see the public funds more fairly distrib- uted among the national banks, he withdrew $25,000 from the Treasury and deposited it in the Merchants National Bank only a few days before its failure. ROMANCE AND TKAGEDY OF BANKING 43 The committee, as a result of the conditions revealed by this investigation, reported a bill which became a law, taking from disbursing officers all control in the selection of banks in which to keep the public funds intrusted to them. The committee ex- pressed the opinion, however, that the Treasury Department had given a construction to the law not contemplated by the com- mittee, which seemed to take away much of its efficiency. The report of the committee concluded with a recommenda- tion for the adoption of a resolution submitted directing the Sec- retary of War to institute such legal proceedings as should be deemed necessary for the punishment of the managers of the Merchants National Bank, and others who aided or abetted them in committing a breach of trust by misapplying the public money intrusted to them for safe keeping, and also such proceedings as should be found necessary to recover any portion of such money. The committee also sent a circular letter to each and every national bank designated as a public depositary, requiring the bank to prepare and forward to the Committee on Banking and Currency a statement showing the amount of money standing to the credit of the United States or the United States Treasurer, any disbursing officer or agent of the United States, the name of such officer or agent, and the amount to the credit of each as shown by the books of the bank in May, 1866. An assessment of one hundred per cent, was levied by the Comptroller upon the stockholders of the Merchants National Bank to pay the debts of the association, but only $16,488 of the $200,000 liability was collected. The total collections by the receiver from all sources amounted to $312,992, while the amount of the claims proved against the bank Avas $669,513, on which they received dividends of only 24.70 per cent. The receivership was finally closed May 14, 1883. Failure of the Venango National Hank The failure of the Venango National Bank of Franklin, Pa., was investigated by the same committee. This bank was a desig- nated public depositary. At the time of its failure the public moneys on deposit amounted to about $291,467, while the securi- 44 ROMANCE AND TRAGEDY OF BANKING ties held by the Treasury Department to protect such deposits amounted to only $50,000. This bank seemed to have been operated in the interest of Cul- ver, Penn & Company of New York, in the same manner that the Merchants National Bank was managed for the benefit of Bayne & Company of Baltimore. Their transactions with each other were very similar and the results were the same. Bayne & Company failed owing the Merchants National Bank several hundred thou- sand dollars. The bank failed in consequence. Culver, Penn & Company failed owing the Venango National Bank over $600,000. The failure of the bank followed. Both banks wholly disregarded the law in respect to the limit of loans. Bayne & Company hy- pothecated or sold securities of the Merchants National Bank. Culver, Penn & Company did likewise with Government bonds belonging to the Venango National Bank, deposited with the firm for safe keeping. One hundred per cent, assessment was levied upon the stock- holders of this bank by the Comptroller to make up the deficiency in its assets to meet its liabilities, but only $1245 was collected from this source out of a total stock liability of $300,000. The total claims proved amounted to $434,531, but the total collec- tion from all sources amounted to only $122,240. The dividends paid on the proved claims aggregated only 23.37 per cent. The receivership was finally closed February 2, 1885. In the course of the investigation of these two bank failures it was developed that many of the State banks that had converted into national associations did not make proper effort to with- draw their old circulation, but in many instances continued to pay it out and keep the old State bank notes in circulation, thereby receiving the benefit of both their State and National bank circulation. In some instances such banks reported to the Comptroller that the old circulation had been withdrawn when it was actually being paid out. Banks in Massachusetts, Rhode Island, New York and New Jersey were reported as engaged in this practice. Some banks were reported as not engaged in a legitimate banking business but were organized as national asso- ciations simply for the benefit of the circulation privilege. Such ROMANCE AND TRAGEDY OF BANKING 45 banks were mostly owned by brokers and private bankers and were operated in conjunction with their office business. One bank of this character in Michigan was a designated depositary of the United States, but when it was examined the only account on its books was a credit of $17,083 to the Treas- urer of the United States, for which the Government held $50,000 of United States bonds as security. The committee expressed the opinion that the national bank- ing laws, as they existed at that time, did not confer the power to correct and prevent many of the objectionable practices and abuses that the banks were found to be engaged in, and a bill was therefore reported to give to the Comptroller of the Cur- rency the necessary authority to restrain banks which he knew to be improperly managed. The facts revealed by the investigation of the causes which led to the failure of these two banks and subsequently of other national institutions demonstrates that speculation, dishonesty and injudicious management in banking has not been confined to any particular period in the life of the national system, but that banking in the early years developed traits of character in indi- viduals and banking methods as unwholesome and pernicious as any that have been discovered in later years. Removal of the Currency Bureau to New York No amendments to the National Bank Act were passed dur- ing Mr. Clarke's administration. But he renewed the recom- mendation of his predecessor, Mr. McCulloch, for the separation of the Currency Bureau from the Treasury Department and its removal to New York City. He expressed the opinion that both the interests of the Government and the banks would be subserved by such a change. He claimed that the location of the bureau at the financial center of the country would not only be a great convenience to those who were engaged in the banking business, but would be more economical to the Government and to the banks in the saving of express charges for transportation of money, time, risk and loss of interest. Mr. Clarke did not urge as one of the reasons for a change of location, as did his prede- 46 ROMANCE AND TRAGEDY OF BANKING cessor, that the bureau would be freer from political and finan- cial influences by its removal from Washington, and it is not believed that either he or McCulloch, if living today, would enter- tain the same views as to the necessities for a change of location of the bureau or its separation from the Treasury Department as they expressed at the time they made this suggestion. HILAND R. HULBURD Comptroller of the Currency, 1867-1872 CHAPTER V Hiland R. Hulburd HILAND R. HULBURD, the third Comptroller of the Currency, was appointed February 1, 1867, and served until April 3, 1872. Mr. Hulburd was born in 1829, at Worthington, near Colum- bus, Ohio. His father was a Presbyterian clergyman of consid- erable note. Mr. Hulburd graduated at an early age from the Western Reserve College at Hudson, Ohio. He studied law in the office of Anthony Howard Dunlevy of Lebanon, Ohio, and was admitted to the bar. In 1865 he was appointed registrar of the Banking Department of the State of Ohio. On August 1, 1865, he was appointed Deputy Comptroller of the Currency under Hugh McCulloch, and acted as Comptroller during the vacancy in that office from July 24, 1866, to February 1, 1867, when he was appointed Comptroller. After his retirement from the Comptrollership until the date of his death he spent most of his time in New York City. Dur- ing the last years of his life he was connected with oil interests in Pennsylvania and had an office in New York City. He lost his life in the burning of the steamer Seawanhaka on Long Island Sound, June 28, 1880. Although the national banking system was in its infancy dur- ing Mr. Hulburd's incumbency of the office of Comptroller his annual reports to Congress, six in number, are replete with inter- esting matter and compare favorably with the best that have emanated from the Currency Bureau. Subsequent experience demonstrated the soundness of his views on banking questions and practices and the correctness of his conclusions in regard to the subjects discussed. Payment of Interest on Bank Balances In his earlier reports Mr. Hulburd devoted a good deal of attention to the practice which prevailed to some extent among 47 48 ROMANCE AND TRAGEDY OF BANKING the banks at that time of paying interest on bank balances. He criticised and condemned this practice in severe terms, and quoted the Chancellor of the Exchequer of England as declaring in his comments on the causes which led to the crisis of 1857, as "one eminently liable to abuse, and containing within it the elements of danger." Notwithstanding the criticisms of Mr. Hulburd, however, this practice, which he so strongly condemned in 1867, steadily increased with the growth of the national system until it became almost a universal custom among the banks, the evil effects of which, as he predicted, were shown in some of the panics of later years. The contention of Mr. Hulburd was that country banks should keep deposits with city banks only for the purpose of facilitating exchanges in carrying on their own legitimate busi- ness, and that the funds so placed should not be allowed to exceed the amount actually necessary for the current demands of their business. He contended that The payment of high rates of interest on bank balances attracts all the spare capital from the country to the commercial centers. It is drawn away from the country where it is needed to the business centers where the rate of interest is higher. The cities then come in competition with the country and compel borrowers in the country to pay higher rates for loans. He quoted M. Pereire, the President of the Credit Mobilier of France, as saying that "Banks are instituted only to lower the rate of interest and they fail in their mission when they do not fulfill that character." Mr. Hulburd said : The city banks by the payment of interest offer a premium for deposits, the volume of which should be regulated only by the ebb and flow of trade. An artificial stimulant is applied, in order to accumulate funds in excess of the natural demand. So long as the country banks can employ their means more profitably at home, they will do so, but when their own trade is dull they will ROMANCE AND TRAGEDY OF BANKING 49 send their money to the business centers. And it so happens that the city banks will secure the greatest abundance of means exactly at the time when they have the least use for them. But, as they pay interest for such deposits, they must be used. The city banker becomes a broker, seeking after investments. He must get more interest than he pays, or he will lose money. He must loan it on call, for it is payable on demand, and it always will be demanded when he wants it the most. Deposits are the reserve of the country, and the deposits of the country banks at the centers of trade are their reserves for all demand liabilities. Banks were requir- ed by law to keep a reserve of fifteen per cent, of their deposits, three-fifths of which may consist of balances due from the city banks. Forbidden to use their reserve in their own business, they remit it to New York, where it is not held in reserve, but is loaned to stockbrokers and speculators. Receiving interest on the amount under the name of a deposit, they really loan it on call to the city banks, which in turn loan it at a higher rate of interest. A bank may know the character of its individual deposits, and may be able to judge with some degree of accuracy of the extent to which it would be safe to use them. But of the deposits of another bank and of the causes that may create a demand by its customers, no reliable estimate can be formed further than that such deposits reach their maxi- mum at the dullest season of the year, and their minimum at the season of the greatest activity in business. Bank balances are working balances, not surplus capital seeking investment. They ought not greatly to exceed the amount necessary for the convenient transaction of business. The city banks are equally interested with the country banks in preserving healthy and natural relations between the centers of trade and their tributaries. Any influence that interferes with such relations cannot be beneficial, and the allowance of interest is an unnecessary interference, the termination of which would promote the interest of both parties to the arrangement and secure greater safety to the public whose reserve funds are at stake under the practice alluded to. Mr. Hulburd, therefore, was of the opinion that the funds required by law at that time to be held in reserve by country 50 ROMANCE AND TRAGEDY OF BANKING banks for the protection of depositors should not be loaned to the city banks on interest. But the practice that he complained of in 1867 continued and prevailed to a far greater extent in later years. Country banks deposited their surplus funds with city banks, not for the purpose of facilitating exchange in carry- ing on their legitimate business, but largely, if not wholly, for the greater interest rates they derived therefrom. Operation of the Reserve Laws To more clearly illustrate the operation of the old law in this respect let it be assumed that a country bank having net deposits of $1,000,000 was required to maintain a reserve in lawful money of fifteen per cent. $150,000. Two-fifths of this amount, $60,000, was required to consist of cash in bank, and the remaining three-fifths, $90,000, might consist of balances due from approved reserve agents in reserve cities. Now this country bank had on hand $90,000 of its own notes, or the notes of other national banks, which could not be counted as reserve. In order to make these notes available for reserve purposes the bank sent them to its reserve agent and received credit for a like amount as lawful money reserve. The reserve city bank from which this credit was due was required to carry a reserve against this deposit of twenty-five per cent., or $22,500. One-half of this amount, or $11,250, might consist of a balance due from its reserve agent located in a cen- tral reserve city. The bank could not count any part of the $90,000 of national bank notes received from the country bank as reserve so it sent the entire amount to its central reserve city agent, received credit therefor, and counted $11,250 of such credit as part of the lawful money reserve required to be held against the $90,000 deposit of the country bank. The central reserve city bank was required to carry a reserve in lawful money of twenty-five per cent., all of which was required to be held in its own vaults. No part of the national bank notes received from its reserve city correspondent could be counted as reserve, so the whole amount was shipped to Washington for re- demption and the bank received in exchange therefor an equal amount of legal-tender notes. ROMANCE AND TRAGEDY OF BANKING 51 The $90,000 notes of the country bank were redeemed and charged by the Treasurer of the United States to the bank's five per cent, redemption fund and such of the notes as were fit for use were returned to the country bank and new notes were issued in place of those destroyed as unfit for circulation. Then the process above described was renewed in an endless chain operation. Now how much lawful money reserve was actually held against this $1,000,000 of deposits in the country bank? As has been stated, the amount required by law was $150,000. The country bank held six per cent., or $60,000 The reserve city bank held twelve and one-half per cent., or 11,250 And the central reserve city bank held twenty- five per cent., or 22,500 Total $93,750 Instead, therefore, of a reserve of $150,000 being held against the $1,000,000 of deposits, only $93,750 was actually held, or a fraction over nine per cent, instead of fifteen per cent., as the law- required . There is still another feature of this law which was misleading in its operation and created a fiction in bookkeeping. The original $150,000 reserve required to be carried by the country bank against the million dollars of deposits was shown on the books and in the reports and published statements of the three classes of banks at a total of $180,000, as follows : The country bank reported : Due from reserve agent $90,000 The reserve city bank reported: Due to country bank $90,000 Due from central reserve city bank 90,000 The central reserve city bank reported : Due to reserve citv bank 90,000 Total $180,000 $180,000 52 The payment of interest by city banks on balances due coun- try banks in excess of exchange requirements was, therefore, not the only incentive to the concentration of bank deposits in the city banks. The reports of condition of national banks for August 22, 1907, the date of the last call previous to the panic of 1907, show that on that date the amount due to banks and bankers from national banks in New York City alone aggregated over $465,000,000 and in addition thereto over $145,000,000 was due country banks, which had been placed in New York City banks to be loaned for account of the former. Some authorities and writers on banking and currency strongly advocated the concentration of funds at the principal financial center of the country, and predicted that New York City would eventually become the financial center of the world, but the panic of 1907, and other financial disturbances, demonstrated in a very practical manner the evil results of such concentration under the then existing system of currency. No commercial bank should pay interest on deposits subject to check or withdrawal on demand, either to banks or individuals, but competition with trust companies and other banking institu- tions operating under State authority has forced national bank- ing institutions into many undertakings not authorized or con- templated by the National Bank Act and foreign to the legitimate functions of commercial banks. The payment of liberal and, in many cases, excessive rates of interest by trust companies and State banks has compelled many competing national associations operating in the same place or locality to offer like inducements for deposits and, in order to find profitable employment for such surplus funds, to make loans or investments of a more or less hazardous or speculative character. The policy of allowing interest on deposits subject to check and payable on demand is foreign to the spirit of sound commer- cial banking and the tendency of such a practice is not to materi- ally increase the earning power of the bank, but to greatly en- danger the safety of the funds of depositors. ROMANCE AND TRAGEDY OF BANKING 53 National Bank Circulation v. Government Issues Although the national banking system had been in operation less than five years when Mr. Hulburd was appointed Comptrol- ler, it appears that the question was then being agitated of doing away with the note-issuing function of the national banks and the substitution of Government issues instead. It was claimed in behalf of this proposed change that by the payment of interest by the Government on the bonds deposited by the banks as security for circulation, the banks were receiving a bonus from the Government for issuing the currency, and by issuing its own notes the Government could save this bonus, which at that time amounted to about eighteen millions of dollars per annum. While admitting the plausibility and popularity of this con- tention, Mr. Hulburd proceeded to show the evils that would result from such a policy and the inflation of currency which it would produce. The withdrawal of the note-issuing privilege from the banks, he said, would result in nine out of every ten of the banks wind- ing up their business, not because the privilege was considered absolutely essential to the business of banking, but because the banks would not submit to the restrictions imposed upon them by the banking laws without the compensatory privilege of issu- ing circulation. He claimed that they would liquidate and re- organize under State authority, or do business as private bankers, and thus rid themselves of Federal control or interference with their business. He then pointed out the disastrous effects upon the business of the country that would surely follow the sudden winding up of a large number of national banks, and the substitution of Gov- ernment issues for the national bank currency. The government, he said, can issue its own notes only in payment of its debts, and that no relation existed between the amount that might be re- quired and issued for that purpose, and the amount of currency necessary to supply the demands of the legitimate business needs of the country. He said it would be an iron currency, without elasticity and with no relation between supply and demand. 54 ROMANCE AND TRAGEDY OF BANKING He then discussed in detail the origin, character and purpose of the legal-tender issues of the Government as disclosed by the debates in Congress when the bill to provide for their issue was under consideration. He quotes Mr. Spaulding, who introduced the bill in January, 1862, as saying that he offered it as a war measure, a measure of necessity, and not of choice, to meet the most pressing demands of the Treasury, to sustain the Army and Navy and our Government, and to preserve our nationality. He also quoted Senator Fessenden, of Maine, who reported the bill from the Finance Committee, as saying that the com- mittee thought in giving this enlarged power to the Secretary of the Treasury, the country should be assured that it was not to be resorted to as a policy, but that it really was what it pro- fessed to be only a temporary measure to enable the Govern- ment to meet extraordinary conditions. Senator John Sherman was quoted as saying that the measure could be justified only upon the ground of necessity and that if he did not feel that the necessity existed he would shield himself behind the question of its constitutionality and vote against it. Senator Sumner, of Massachusetts, supported the measure also upon the grounds of urgent necessity. He said the soldiers in the field must be paid and fed. This admitted of no failure or postponement. Whatever may be the national resources, they were not then within reach, except by summary process. "Re- luctantly, therefore, and painfully," he said, "he would consent that the process should issue." The bill passed February 5, 1862, authorizing the issue of legal-tender notes to the amount of $150,000,000. On July llth following, another $150,000,000 was authorized, and on March 3, 1863, $150,000,000 more, making a total of $450,000,000. In discussing the bill providing for the last issue, Mr. Spauld- ing said that he was averse to any considerable further issue of legal-tender notes and would consent to it only as an imperative necessity. Too large an issue, he said, would tend to inflate prices, but he did not see how that could be avoided. He could not see how the soldiers were to be paid or the Government car- ried on otherwise. ROMANCE AND TRAGEDY OF BANKING 55 In February and July, 1862, provision was made for the con- version of these issues into five-twenty bonds whenever the holders should present them at the United States Treasury for that pur- pose, and to quiet public apprehension as to any further issues, Mr. Hulburd stated that a clause was inserted in the Act of June 30, 1864, limiting the total issues to $400,000,000, and such additional amount, not exceeding fifty millions, as may be tem- porarily required. Mr. Hulburd declared that the entire theory of continuing and augmenting the issue of United States notes to pay the debts of the Government in the same kind of paper money in which they were contracted was an after-thought and a cunning device, and that no subject had been more obscured by crude theories and empirical schemes than this method of paying the public debt. Contrasting this form of circulation with the paper issues of the Government during the period of the Revolutionary War, he stated that the Continental Congress issued bills which were receivable for taxes. The thirteen colonies were pledged to redeem these bills and as their credit began to fail, Congress declared that whoever should refuse to receive this paper as gold and silver should be deemed an enemy to the liberties of the United States. But interest was stronger than patriotism, and as the amount increased, its value went rapidly down until, at last, the sum total having reached two hundred and fifty millions, it became so utterly worthless, about the year 1780, that it ceased to circu- late. Austria, Russia, France and England tried the same ex- periment with like results, and Mr. Hulburd stated that there is not a single example on record of the power of creating money out of cheap materials having been exercised by a sovereign state for any length of time or through any season of public difficulty, without having been abused by over-issues. The experience of this country during the last years of the Civil War and immedi- ately following its close was but a repetition of the experience of other countries in other times. In concluding the report for 1867, in which these subjects were discussed, Mr. Hulburd said: 56 ROMANCE AND TRAGEDY OF BANKING We still have $8,000,000 of gold and silver in the coun- try waiting to be called into active service. Give these millions their place. Make room for them by calling in the legal- tender notes, the great disturbing element of our currency, and the most expensive debt the government has incurrd gradually if you please, but surely. Enforce rigidly the redemption of national bank notes. Retain for the federal government supervision and control of the currency of the country through the national banks, and we may yet realize the great desideratum a safe, uniform currency, convertible into coin at the will of the holder. Banknote Redemption Agency In his report for 1868, Mr. Hulburd urged upon Congress the establishment of an agency for the redemption of national bank notes at the principal center of trade. He stated that while objection was made to the location of such an agency at New York City on the ground that it would render the country banks tributary to New York, he did not believe that this objection was well founded, but if it were true, it could be readily obviated by authorizing the organization of a national bank in New York City, without circulation privileges in which every national bank should be required to become a stockholder. Such bank to have a capital of from one to twenty millions and be made the redemp- tion agency for the whole country and the clearing-house for all national bank circulation. It was suggested that this bank should be owned, controlled and managed by the banks themselves, with two departments, one for banking purposes, and the other for the redemption and ex- change of national bank circulation. The latter department was expected to pay all the expenses of redemptions and exchanges, and in addition thereto, yield a revenue for the bank's stock- holders. This plan, Mr. Hulburd contended, would not only insure the prompt and certain redemption of all the circulation, but would make it actually convertible at all times. Mr. Hulburd also expressed the opinion that the establish- ment of such a bank would remedy the evils resulting from the ROMANCE AND TRAGEDY OF BANKING 57 practice of payment of interest on country bank balances by making such balances immediately available for reserve, instead of being loaned on call to speculators and brokers. This idea of a central redemption agency was subsequently partly carried into effect by the creation of the National Bank Redemption Agency and its location in the Treasury Depart- ment in Washington as a division of the United States Treas- urer's office. Instances of Theft in Connection With Currency Shipments In 1864 a number of packages of notes shipped to western banks were found on reaching their destination to be short of the required amount by one sheet in each package, each sheet con- taining four notes. Similar shortages were subsequently discov- ered at intervals of several months. For a period of nearly a year following these discoveries no additional losses were re- ported. In the fall of 1865, sheets of money began to be missed from the packages of notes in the vault of the Bureau, and in December of that year a package containing $4500 in fifty and one hundred dollar notes of the National City Bank of Lynn, Mass., was missed. These thefts ceased again until about May, 1867, when a package containing $12,000 in fifty and one hun- dred dollar notes of the First National Bank of Jersey City, N. J., disappeared. Investigation was made at the time each of these thefts oc- curred, and efforts were made to discover the culprit, but without success, until the last package was taken. The theft of this pack- age was discovered almost immediately after its disappearance, and a prompt investigation led to the arrest of a colored messen- ger, who was employed in the Issue Division of the Comptroller's office. It appears that while some changes were being made in the room of the division, this messenger was sent into the vault with some books and during the short time he was in there concealed a money package under his vest. He had been previously granted leave of absence for several days, and after stealing the package left Washington for the South, where he put some of the notes in 58 ROMANCE AND TRAGEDY OF BANKING circulation after clumsily affixing signatures to the notes other than the names of the president and cashier of the bank. The aggregate of the notes stolen amounted to $17,560. The messen- ger was arrested and indicted, but escaped conviction on legal technicalities. It was shown at the trial of the case that other employees of the Comptroller's office had access to the vault in which the money was stored, and the evidence offered was not con- sidered sufficient to fasten the theft upon him. A motion was also made to quash the indictment on the ground that it recited that money had been stolen, when as a matter of fact, incomplete na- tional bank notes, it was contended, are not strictly money until signed by the officers of the issuing bank. The Act of July 28, 1892, settled this contention by provid- ing for the redemption of all lost or stolen notes, or notes put in circulation without signatures or upon the forged signatures of the officers of the bank. It is believed that this messenger was responsible for all the thefts reported, as no further shortages occurred after his dis- missal from the office. Occasionally sheets of notes were misplaced or small discrep- ancies were found by counters of worn-out or mutilated notes sent in for redemption, but these shortages were generally accounted for. About the time these money shortages were being discovered, a package of vault currency was missed at the close of the day's business, which gave the clerks of the Issue Division several hours of anxiety and trouble. The entire force of the Division was de- tained as late as ten o'clock at night while search was being made for the missing package. A young man, an employee of the Di- vision, had an important social engagement for that evening which he was prevented from keeping because of his detention at the office and he naturally became considerably exasperated. After the vault had been thoroughly searched for the missing package, without results, this young man in temper gave one of the desk chairs which was in his way, a kick, upsetting it, and the lost money package fell off the chair on the floor. Upon inquiry as to how the package came there it was learned that an absent- minded money counter had used the package during the day as a KOMANCE AND TRAGEDY OF BANKING 59 cushion, her chair being too low for her desk, and had covered it over with some brown wrapping paper which concealed it from view, and had forgotten placing it on the chair. The comments of the clerks who had been detained so late in the search for the package, especially those of the young man who was compelled to break his social engagement, may be better imagined than described. Great Chicago Fire of 1871 The great Chicago fire in 1871 occurred during the closing year of Mr. Hulburd's administration. The buildings in which seventeen of the eighteen national banks in that city were located were totally destroyed. The loss on the buildings and the furni- ture and fixtures of the banks was estimated at about $176,000, and on discounted paper at about $600,000. The bills receivable held by the banks at that time amounted to over $21,000,000, and their liabilities to correspondent banks and depositors to over $26,000,000. The contents of the vaults, however, when opened, were found to be in a good condition, and notwithstanding the great destruction of property the banks re- sumed business in eight days after the conflagration, in tempo- rary quarters which they secured in dwellings remote from their former locations. At the close of the first day's business the de- posits of customers and correspondent banks exceeded the dis- bursements, instead of balances being largely withdrawn as was anticipated. A glowing tribute was paid Mr. Hulburd by his successor in his first annual report to Congress, for the skillful manner in which he handled the Chicago situation at that time, and the valu- able service he rendered in bringing about so early a resumption of business. Bank Failures During Hulburd's Administration In the report of Comptroller Hulburd for 1866, three banks are listed as having been placed in the hands of receivers during the three years of existence of the national banking system. The 60 ROMANCE AND TRAGEDY OP BANKING cause assigned for the appointment of receivers for these banks was failure to redeem their circulating notes on demand. As no holder of a national bank note ever lost, or could lose a dollar by reason of the failure of the issuing bank to redeem its circulation, the notes being absolutely secured by a deposit of United States bonds in the Treasury of the United States, re- deemable at par by the Government, it would seem unreasonable and unnecessary to close a bank because of failure to redeem its circulating notes when presented at the bank for that purpose. In the table of failures, whicli appears in the reports of the Comptroller for subsequent years, containing a list of receivers appointed for insolvent banks from the beginning of the national system, a different cause than the failure to redeem circulation is assigned for the closing of the three banks above referred to. "Injudicious banking and failure of large debtors," are the rea- sons given in one case, and "injudicious banking" in the other two. In explanation of these apparent discrepancies, it appears that in the early years of the system when a bank became insol- vent, or subject to a receivership for some other cause, it was the practice to obtain and present for redemption at the bank's coun- ter one of its circulating notes. By agreement between the bank and a representative of the Comptroller's office, the bank would refuse to redeem the note and the note would then be protested, thus affording a statutory ground for the appointment of a receiver. This was a friendly kind of a proceeding and brought the Comptroller well within his statutory right to close and take pos- session of the association, as the law specifically provides for the appointment of a receiver upon failure of a bank to redeem its circulation on demand. Comptrollers in those days were scrupulously conservative in the exercise of the supervisory powers conferred upon them by law, and in order to avoid any question of their right to close and take possession of an association resorted to the procedure described. They recognized the fact that the same laws that govern the national banks and define their corporate powers prescribe also the duties and powers of the Comptroller of the Currency and ROMANCE AND TRAGEDY OF BANKING 61 limit his authority, and that the Comptroller has no more right to disregard the law by transcending his powers or neglecting to perform his duties than the banks have to exceed their corpo- rate powers or to violate the restrictive provisions of the statutes under which they were organized and operate, and from which they derive their powers. As a rule, such of the mistakes as Comptrollers of earlier years are alleged to have made, and for which they have been severely censured and criticised in the public prints from time to time, whether justly so or not, were not attributable to a too rigid enforcement of the banking laws, or an arbitrary assump- tion of powers not conferred upon them by the statutes, but rather as the result of undue leniency extended to refractory asso- ciations in permitting them to engage in questionable or unlawful practices and undertakings not authorized or contemplated by the National Bank Act, and to temporizing with unsatisfactory or dangerous conditions which called for prompt and decisive cor- rective measures in order to avert inevitable losses that would im- peril the safety of the association or reduce it to a condition of insolvency. Comptrollers, as a rule, have been ultra-conservative in their dealings with the banks, and the mistakes that they have made in the administration of the banking laws have been mostly those of omission rather than of commission. There were sixteen national bank failures during Mr. Hul- burd's term of service. The largest of these was the Ocean Na- tional Bank of New York City, which was placed in the hands of a receiver December 13, 1871. The capital stock of this association was $1,000,000, divided into shares of the par value of fifty dollars, and its total liabilities about $3,250,000. An assessment of forty per cent, was levied upon the stock, of which amount $348,961 was collected. The creditors were paid one hundred per cent, of their claims with interest from the date of closing, and the trust was finally closed April 20, 1892. Theodore M. Davis was appointed receiver of this bank by Mr. Hulburd. In 1875, charges were preferred against the re- ceiver and others in connection with the administration of the trust. The receiver was charged with having disposed of some 62 ROMANCE AND TRAGEDY OF BANKING of the securities of the bank at less than their actual or market value and as having been personally interested in the purchase of these securities. Under authority of a resolution adopted by the House of Representatives in 1874, Forty-third Congress, the Committee on Banking and Currency made an exhaustive investigation of these charges and submitted a voluminous report of the testimony taken and of the conclusions based thereon. The investigation covered the period from December 12, 1871, the date of failure of the bank, to October 31, 1873, the date of the last general statement made by the receiver. It appears that Mr. Davis, the receiver, was charged with entering into a combination or conspiracy with James A. Ayer and Isaac H. Knox, of the firm of Boorman, Johnston & Com- pany, to defraud debtors of the bank who had deposited certain bonds and stocks, known as the first, second and third mortgage bonds of the Portage and Lake Superior Ship Canal Company, a corporation chartered by the State of Michigan, for the purpose of constructing a canal to connect the waters of Lake Superior with Portage Lake. These stocks and bonds were held by the bank as collateral for loans amounting to about $561,000. It was alleged that the receiver disposed of a large amount of these securities at auction, at ruinous rates, to Isaac H. Knox, an alleged confederate of the receiver, and that through a con- spiracy, the lands and property of the company upon which these securities were issued, were about to pass into the hands of a com- bination in which the receiver was interested, the debtors claim- ing that the lands and property were worth millions more than the indebtedness of the company to the bank. The evidence taken by the committee shows that the company was insolvent and could not pay its indebtedness to the bank and others, and that unless the securities held could in some way be made valuable the bank would lose the whole amount of the loan of $561,000. It appeared further that this could be done only by the completion of the canal, which would require a large addi- tional loan. The company claimed that a loan had been nego- tiated, the amount of which would have been sufficient to pay the indebtedness to the bank in full, but the receiver and those who 63 were operating with him defeated the negotiations and prevented the representatives of the company from obtaining the money. It was claimed that the loan was negotiated through some English parties and that it was based upon the security of rich mineral lands which constituted part of the 400,000 acres granted to the State of Michigan by the General Government. The receiver denied that he or any person authorized by him in any manner interfered with any negotiations that the com- pany, or anyone acting for the company, were making for a loan on these lands, and the committee reported that the testimony failed to support the allegations made against the receiver in this respect. Another complication, however, was disclosed by the evidence. The debts of the company due the bank, which were secured by the collateral in question, were all subject to the plea of usury, and by the laws of New York such a defense would defeat not only the collection of the interest, but also the principal of the debt. The committee reported that the company was willing to waive the plea of usury, if time were given it to negotiate a loan with which to pay its debt to the bank, but if time were not given and the company were pressed for payment, usury would be pleaded. The receiver had no confidence in the company's abilit} 7 to negotiate the loan, and he therefore formed a syndicate to pur- chase the securities in order to insure the payment of the debt to the bank. This syndicate was composed of Dr. James C. Ayer, Isaac H. Knox and himself. Aycr and Knox were large creditors of the canal company. The object of this syndicate was to raise money with which to complete the canal and other works as well, and pay the debts due to themselves and to the bank. The terms of the syndicate were submitted by the receiver to his counsel, who expressed the opinion that the contract was valid and binding and believed to be for the best interests of the bank, its creditors and stockholders. In furtherance of the syndicate plan and to defeat the plea of usury, the receiver commenced an action against the largest debtor of the bank, who also was one of the largest stockholders in the canal company, and forced him into bankruptcy. He then 64 ROMANCE AND TRAGEDY OF BANKING applied for and received an order from the court to sell certain of the securities in question which were held by the bank. The evidence showed that the securities were regularly advertised for sale and sold to the highest bidder, in open market, when some of the owners of the canal were present and protested against the sale, and that Isaac H. Knox, without any collusion with the re- ceiver, purchased $268,000 of the second mortgage bonds at an average price of twenty-seven cents. Sales of the same kind of bonds were made by other parties during October, November and December, 1872, and in July and December, 1873, in New York City, at an average price of only a fraction over twenty cents. The committee reported that all these sales, so far as the testi- mony enabled them to judge, were fair and in accordance with general usage. The evidence showed further that through the efforts of the receiver, the canal work had all been completed, and to do this it required the expenditure of from four to five hundred thousand dollars, all of which sum was raised by Mr. Knox and Mr. Ayer. Following the completion of the canal, proceedings were com- menced and a decree obtained from the Circuit Court of the United States for the State of Michigan for the sale of all the lands of the canal company, the proceeds of which were to be ap- plied to the payment of the company's debts. Messrs. Ayer and Knox declared most positively that the re- ceiver was not in any way interested in the syndicate except as receiver and for the benefit of the bank. In concluding their report, the committee expressed the opinion that the receiver was not censurable for the course he had pursued, but, on the contrary, he apparently acted in good faith and did what he considered to be for the best interests of the creditors and stockholders of the bank. During the second session of the Forty-sixth Congress, this whole matter was the subject of further investigation by the Banking and Currency Committee of the House of Representa- tives, under authority of a resolution adopted June 4, 1879, and the report submitted by Mr. Buckner of the committee, under date of May 19, 1880, contains a most scathing denunciation of the receiver's course in connection with the canal company. ROMANCE AND TRAGEDY OF BANKING 65 The report reviews at length the testimony taken by the com- mittee of the Forty-third Congress, but reaches a wholly differ ent conclusion. The report condemns the action of the receiver in depreciat- ing the value of the canal company bonds previous to their sale to the syndicate by publicly proclaiming that they were without value and that the debt to the bank was wholly unsecured. These bonds, it was claimed, had been selling from fifty to seventy-five cents up to that time, and the opinion publicly ex- pressed by the receiver that the land grant would fail and thereby make the security invalid, necessarily depressed the price of the bonds and militated against the interests he was bound to protect and advance. Such conduct, the committee said, could not be justified by any theory creditable to his sagacity or his fidelity, and that it was his duty to have observed silence and to have dis- posed of the bonds as rapidly and advantageously as possible under authority of the court. It was the opinion of the committee that this departure from a faithful discharge of his duties to the creditors and owners of the bank was the inception of a plan well matured and skillfully executed by which the receiver would ultimately obtain the con- trol and ownership of the property and franchise of the canal company for himself and his friends. The exact terms of the syndicate agreement, it was stated, were not made known to the committee which first investigated this matter in 1874, having been excluded upon the ground that it might affect the litigation pending at that time. At the time of the second investigation, in 1880, this litiga- tion had been concluded. The canal company had been placed in bankruptcy, its property had been sold, and a new company had been formed with Mr. Davis, the receiver of the bank, as its presi- dent. This company was then the owner of the property and in possession of it. The committee then took up the question of the authority of the receiver to make the stockholders and depositors of the un- fortunate bank a party to an agreement to, as the report ex- pressed it, "wreck the canal company." Section 5234-, of the Revised Statutes of the United States, was quoted as containing 66 ROMANCE AND TRAGEDY OF BANKING the full measure of the powers and duties of the receiver of a national bank. This section provides that the receiver "shall, under the direction of the Comptroller, take possession of the books, records and assets of every description, of such associa- tion, collect all debts, dues, and claims belonging to it, and upon the order of any court of competent jurisdiction, may sell or compound all bad or doubtful debts, and on a like order may sell all the real and personal property of such association on such terms as the court may direct," etc. It was contended by the committee that the receiver's plain and only duty and authority under the section of the law quoted was to have applied to the court for an order to compound or sell the debts of the canal company to his trust, but that no such application was made to the court and no order to compound or sell was obtained. The testimony before the committee showed, according to the report, that the receiver applied for an order to compound a particular debt due the bank, which was granted, but the only evidence that he acted under authority of the court in making the syndicate contract and in using the assets of the bank in this illegal arrangement was in the proceedings of the bank against one Alfred Wild, a debtor of the bank, to put him in bankruptcy, in which Wild had obtained an injunction to stay the sale of some of the canal bonds pledged for the payment of his debt to the bank. The receiver was charged by the committee with gross per- version of the facts in attempting to justify his illegal action by the approval of the court in a proceeding in which his syndicate plan was not adjudicated or passed upon by the court. The report of the committee on the previous investigation of this matter, it was stated, did not approve the receiver's course, but attempted to justify it on the ground "that he had seen fit in his own way to save the debt, which, in the end, would pay all depositors and leave a surplus to be divided among the stock- holders." In other words, the committee said, it was a case of the end justifying the means, although the means resorted to were unauthorized and contrary to law. The receiver, the committee stated, also fortified himself behind the fact that two Secretaries of the Treasury and the ROMANCE AND TRAGEDY OF BANKING 67 Comptroller of the Currency had approved his syndicate plan, but the committee denied that the? e officials had any authority as executive officers of the Government to confer upon the receiver any power to do that which the law had vested in the judicial departments. The committee expressed the opinion that if the receiver had obeyed the law and had not subordinated the interests of the bank to his own purposes, quite as much or more might have been realized on the bad and doubtful debts due the bank, much less interest would have accumulated against the bank, and the stock- holders would have escaped with little or no assessment to make good the deficiency in assets to meet liabilities to creditors. The committee concludes its report as follows : There is no leading fact in evidence before the com- mittee that is not consistent with this theory of his conduct as receiver. And back and behind all this is the indisputable fact that to accomplish his ends, he found it necessary to disregard the plain and reasonable provisions of law enacted for his guidance, and to throw the responsibility of his acts upon officers who had no more power than he to disobey or to recommend disobedience to its positive injunctions. The officer who violates the commands of the law, enacted to direct or control him and to protect the rights of others, cannot complain that all reasonable and fair presumptions are made against his official acts. If he undertakes to dis- charge the duties imposed upon him by law in his own way and not in the way pointed out by that law, he assumes responsibilities that are not to be evaded, although the motives of his action may appear to have been far more creditable than those which seem to have controlled the receiver of the Ocean National Bank. The committee declared that but for the fact that the re- ceivership was so near its final closing, a resolution would have been reported to the House recommending the receiver's removal from office, and expressed the opinion that the assessed stock- holders, or any of them, could, without additional legislation, prosecute an action against the receiver to recover from any of the assets of the bank remaining in his hands the amount of the 68 ROMANCE AND TRAGEDY OF BANKING assessment which they were forced to pay, or to institute a suit on his official bond for a breach of its conditions. This report was signed by Hon. A. H. Buckner and seven other members of the Committee on Banking and Currency. Hon. W. W. Crapo and Hon. S. B. Chittcnden, members of the committee, also signed it, but with the following qualifi- cations : We concur in the above report, so far as it condemns the departure from the directions given in the national banking law to receivers in the liquidation of the assets of national banks. It was the duty of the receiver of the Ocean National Bank. to comply strictly with the terms of the statute in the disposition of the assets placed in his hands. Instead of doing so, he exercised a discretion which, even if well intended, was unwise and in violation of law. The conclusions expressed by the majority and minority mem- bers of this committee as to the powers and duties of a receiver of a national bank are absolutely sound, and it would be well for every receiver of such a bank to follow strictly this wholesome admonition. And this advice applies with equal, if not greater force, to Comptrollers of the Currency. The acts of the receiver are sub- ject to the approval of the Comptroller and all failed banks are liquidated under his general directions. If the receiver and the Comptroller adhere strictly to the law in the liquidation of the affairs of insolvent banks, even then their acts will be sometimes, and frequently have been, subject to the criticisms of those whose interests are or have been affected thereby. But when they dis- regard the well-defined rules prescribed by the statute for the liquidation of a trust, they assume a responsibility for which they are individually liable under their bonds. The conditions complained of and condemned by the Banking and Currency Committee in 1880 have not been without their parallel in later years, as far as they relate to methods pursued in the liquidation of receiverships and the handling of insolvent banks contrary to the manner prescribed by law, and some of ROMANCE AND TRAGEDY OF BANKING 69 these methods would not stand the test of the courts or Congres- sional investigation. In dealing with the property rights of others in the liquida- tion of failed banks the closer the Comptroller of the Currency adheres to the plain letter and spirit of the national banking laws, and requires his subordinates to do likewise, the less liable he will be to mistakes, criticism and responsibility for the results, even though such results may not be as satisfactory as those which, in his judgment, might have been reached through some other course or procedure which, if successful, would not ma- terially benefit the creditors of the failed bank, but if unsuccess- ful would subject him to censure. The Comptroller of the Cur- rency is no more justified in embarking in experimental methods in the liquidation of an insolvent national bank, because of the possibility of attaining better pecuniary results by pursuing a course other than that prescribed by law, than the banker was in the first instance in making the unlawful and speculative ven- tures in anticipation of greater possible profits which involved the bank in the losses which made the receivership necessary. The worst feature of this kind of administration is the danger- ous precedent and bad example it sets for the younger officials of the Government service, who are trained in an atmosphere im- pregnated with a disregard of legal restrictions, and are taught to believe that administrative policy and business expediency are superior to law and order and that the end sought to be accom- plished justifies the means. In no Bureau of the several executive departments did this policy prevail to so great an extent as in the Currency Bureau during the administration of President Taft, but without his knowledge and contrary to his emphatically expressed public utterances on the subject. Amendments to the Laws Enacted During Mr. Hulburd's administration, the law was amended to provide a penalty for imitating national bank circulation; for the refunding of excessive tax on circulation; restricting State taxation of shares of national bunk stock; prohibiting loans on 70 ROMANCE AND TRAGEDY OF BANKING the credit of United States or national bank notes and the with- holding of such notes from circulation; requiring reports of con- dition and of earnings and dividends to be made to the Comp- troller; prescribing a penalty for false certification of checks; and for embezzlement, abstraction, misapplication, etc., of any moneys, funds or credits of a bank ; making false entries in the books of the association, in reports to the Comptroller, etc. ; for the retirement of circulation by liquidating banks ; and providing for the organization of banks to issue gold notes. This latter Act provided that upon the deposit of any United States bonds, bearing interest payable in gold, with the Treasurer of the United States, in the manner prescribed by the national bank act, the Comptroller of the Currency was authorized to issue to such associations circulating notes to an amount not exceeding eighty per centum of the par value of the bonds depos- ited, redeemable upon presentation in gold coin of the United States, and the banks issuing such notes were required to carry a reserve against them of not less than twenty-five per centum of the circulation outstanding, in gold or silver coin of the United States. There were ten associations organized under this Act, nine of which were located in California, and one at Boston, Mass. The Act of February 14, 1880, authorized the conversion of all such banks into regular currency associations. Seven of these banks reorganized as currency associations and three went into voluntary liquidation, the last one in February, 1880, since which date there has been no national gold bank. JOHN JAY KNOX Comptroller of the Currency, 1872-1884 CHAPTER VI John Jay Knox JOHN JAY KNOX, the fourth Comptroller of the Currency, was appointed April 25, 1872, to succeed Mr. Hulburd, and served until April 30, 1884. He was born at Knoxboro, Oneida County, New York, in March, 1828, and graduated from Hamilton College, New York, in 1849. After graduation, he entered the Bank of Vernon, New York, of which his father was president for over twenty years, and later assisted in the organization of banks at Syracuse and Binghamton, N. Y., under the free banking law of New York State. Subsequently, he went to Minnesota and started a pri- vate bank at St. Paul with his brother, who afterward was Public Examiner for the State of Minnesota. At the outbreak of the Civil War, he wrote an article advo- cating the passage of a national banking law, which was pub- lished in Hunt's Merchants' Magazine. This article attracted the attention of Secretary Chase and others, and when Mr. Knox visited Washington after the passage of the National Bank Act he called upon Secretary Chase, who introduced him to Mr. Mc- Culloch, which led to his appointment as a clerk in the office of the Treasurer of the United States. Shortly afterward he was transferred to the Secretary's office as a disbursing clerk. He resigned after about three years' service to accept the position of cashier of the Exchange National Bank of Norfolk, Va. He did not retain this position very long, but re-entered the service of the Treasury Department as a clerk and was shortly there- after detailed by Secretary Chase to make an examination of the San Francisco Mint. He also examined the Sub-Treasury at New Orleans, in which he discovered a shortage of $1,100,000. This shortage was reduced by recoveries to about $680,819.53. Proceedings were instituted against the former Assistant Treas- urer, but upon trial he was acquitted. Mr. Knox remained in 72 ROMANCE AND TRAGEDY OF BANKING charge of the Sub-Treasury and acted as Assistant Treasurer for several months. The discovery of this shortage was followed immediately by the failure of the First National Bank of New Orleans, in May, 1867. Thomas P. May, who had been the United States Assist- ant Treasurer at New Orleans, resigned that position to accept the presidency of this bank several months previous to its failure. He was a director, but not president, at the date of suspension. While president he was its sole manager, and as a director he was equally potent in the conduct of the bank's affairs. Subse- quently it was discovered that he was largely in arrears to the United States as Assistant Treasurer, and the deficit increased under his successor, apparently for his benefit. The total defal- cation of both amounted to the sum above stated. When the defalcation was discovered by Mr. Knox the bank suspended. In 1867, Mr. Knox was appointed Deputy Comptroller of the Currency, and while holding this position had supervision of the mint and coinage correspondence. He revised and codified the laws relating to mint and coinage, covering a period of about eighty years' legislation, and drafted a bill for the Secretary of the Treasury embodying this codication, which was submitted by the Secretary to Congress, with some modifications, and later was enacted into law and has since been known as the "Coinage Act of 1873." Mr. Knox has the distinction of having held the office of Comptroller of the Currency for a longer period than any of his predecessors or successors, having served twelve years as Comp- troller and over five years as Deputy Comptroller, from March 12, 1867, to April 24, 1872. He resigned as Comptroller to accept the presidency of the National Bank of the Republic of New York City, which position he retained until his death, which occurred in New York City, February 9, 1892. Mr. Knox was a practical banker and financier. He was an ardent lover of figures and took special delight in delving into and analyzing statistics. On one occasion he prepared an address for delivery before the American Bankers' Association, entitled "Dry Statistics," which he declared to be more interesting to him than any novel. A large part of the analytical deductions of the ROMANCE AND TRAGEDY OF BANKING 73 tables contained in his numerous reports to Congress he worked out personally. He was a great writer, and much of his time while Comptroller was occupied in the preparation of addresses and articles for the public prints on banking and currency subjects. Besides his twelve annual reports to Congress, which contain invaluable statistical information in regard to banking in the United States, and discussions of monetary and banking ques- tions, he was the author of a history of the various forms of paper money issued by the Government, entitled "United States Notes," and at the time of his death was engaged in completing a "History of Banking in the United States," which was revised and completed by Bradford Rhodes, editor, and Elmer H. Young- man, associate editor of The Bankers Magazine of New York, and published by Bradford Rhodes & Company in 1900. When Mr. Knox assumed charge of the Currency Bureau in 1872 the national banks chartered numbered only 1971, and when he retired in 1884 this number had increased to 3170. During that period the banks adhered more closely to the provisions and limitations of the banking laws in the character of the business they transacted and the scope of their operations than they do at the present time. Many of the questions and conditions which subsequent Comptrollers have had to deal with were unthought of in Mr. Knox's time, so that supervision of the banks was not nearly so onerous then as it has been in subsequent years, and he had more opportunity to indulge in his favorite pastime of writing essays on banking and currency questions and delving into statistics than Comptrollers of later years have had, whose time has been fully absorbed in handling the steadily increasing volume of business and correspondence that has come before the Bureau, leaving them little opportunity for special work. Mr. Knox, like his predecessor, Mr. McCulloch, had an ex- alted opinion of the dignity and importance of the office of Comp- troller of the Currency. He was exceedingly sensitive in regard to official etiquette, and resentful of any interference with or infringement upon his statutory prerogatives. At one time a chief clerk of the Treasury Department issued an order prohibit- ing any visitors from calling upon any officer or employee of the 74 ROMANCE AND TRAGEDY OF BANKING Department during business hours without first obtaining his per- mission. As the story goes, Mr. Knox disregarded this order, and when the chief clerk learned of this he sent for him to come to his office. The assurance of this official so aroused Mr. Knox's indignation that he sent him word that if he wanted to see him he could find him at his desk. When the chief clerk called upon him a brief and breezy interview followed, ending in Mr. Knox ordering the presumptive chief clerk out of his room and curtly inviting him to mind his own business. Mr. Knox was very highly regarded by the officials of the Treasury Department with whom he came in contact, and partic- ularly by the subordinate officers and clerks of the Currency Bureau, to whom he was ever kind and considerate, and no stronger or more deserving tribute could be paid to his memory and characteristics, or expressions of the esteem with which he was held by the bankers and business men of New York City, among whom he spent the last years of his life, than that con- tained in the closing lines of a resolution adopted by the Cham- ber of Commerce of that city at the time of his death, which reads as follows : Patriotic in his impulses, strong in his convictions, thoughtful but reserved, modest yet courageous, a deep thinker, an able financier, an agreeable companion, a kind friend, an upright citizen, and a courteous Christian gentleman. Such is our judgment of his character, and so shall the record stand. Mr. Knox's Annual Reports Of the twelve annual reports made to Congress by Mr. Knox during his long service as Comptroller, perhaps the most inter- esting, at least the one that seemed to be most in demand, is the report for 1876, in which he reviewed other systems of banking before the establishment of the national system, beginning with the Bank of North America at Philadelphia, organized in 1780. This was the first bank that had any direct fiscal relations with the Government. The First and Second Banks of the United ROMANCE AND TRAGEDY OF BANKING 75 States were briefly sketched by Mr. Knox, and the struggle which led to the dissolution of the latter. This report also contains an interesting chapter on the First Bank of Massachusetts, incorporated in 1782, and the Suffolk system of redemption of banknotes. The Bank of New York, which began business in 1784, under articles of association drawn by Alexander Hamilton, who was one of its first directors, and other banks subsequently organized, are concisely described, together with the politics of that period, which appeared to be a controlling factor in the procurement of bank charters in the early days of the Republic. These subjects were followed by a discussion of banking in general as conducted throughout the States of the Union before the national banking system was established, and the whole question is presented in a concise and convenient form, which makes the volume a most interesting book of reference for students of banking in the United States prior to the Civil War. The Panic of 1873 The first of the most important events that occurred during the administration of Mr. Knox was the panic of 1873. Much has been written on the subject of panics and their causes, and various theories have been advanced as to their origin, but hardly any two writers agree in whole as to the conditions which produce such periodical outbreaks or the remedies neces- sary to prevent their recurrence. The same general conditions that have preceded and culmi- nated in panics have existed at other periods and have been suc- cessfully passed over without any material disturbance. Every panic that has occurred during the existence of the national banking system has found its precipitating cause in some bank or business failure occurring at a time when conditions throughout the country were favorable to disturbance. The same initial dis- turbance happening at another period would probably not have extended beyond the city in which it occurred. The panic of 1873 was no exception to this rule. Whatever may have been the underlying conditions which made the time 76 ROMANCE AND TRAGEDY OF BANKING propitious, this disturbance started in New York City in the fail- ure of the Warehouse Security Company, which suspended Sep- tember 8th. This company was organized for the purpose of making advances to dealers in grain and produce, but it became involved in the financing of the Missouri, Kansas and Texas Rail- road. This failure was followed immediately by the suspension of the banking house of Kenyon, Cox & Company, which became similarly involved through the indorsement of paper of the Can- ada Southern Railroad, to the extent of about $1,500,000. Sev- eral of the smaller stock-brokerage firms suspended at the same time and were followed in quick succession by the failure of Jay Cooke & Company, Fisk & Hatch, the Union Trust Company, the National Trust Company, and the Commonwealth National Bank, of New York, and by the First National Bank of Wash- ington, D. C., with which the Cooke family were connected. The New York Stock Exchange closed its doors for the first time in its history and remained closed for a period of ten days. The panic rapidly extended to other large cities and soon became general throughout the country. Currency payments were sus- pended, at first by the New York banks, and later by the banks in other large cities, and legal-tender notes commanded a premium of from one-fourth of one per cent, to three per cent, over certi- fied checks. The New York Clearing House Association resorted to the expedient of issuing clearing-house certificates in denomi- nations of five and ten thousand dollars, bearing interest at seven per cent. Between September 22, the date of the first issue of these certificates in 1873, and November 20, the date of the last issue, $26,565,000 were issued, all of which were redeemed and canceled in less than four months from the date of the first issue. These certificates took the place of cash in the settlement of balances between the clearing-house banks, and their issue had the effect of restoring confidence of the banks in each other and the resumption of currency payments, which had been suspended for about forty days. This panic occurred in the midst of prosperity, preceded by four or five years of general activity in all lines of industry. There had been an abundant harvest. The marketable value of the products of the year were estimated to be equal to, if not ROMANCE AND TRAGEDY OF BANKING 77 greater than that of the several previous years, and there was every indication of a good fall trade which had already set in. What, then, was the cause of this panic? In his annual report for 1873, Mr. Knox ascribed the under- Iving cause to be as follows : The money market had become overloaded with debt, the cost of railroad construction for the preceding five years being estimated to have been $1,700,000,000, or about $340,000,000 annually, while debt based upon almost every species of property, state, city, town, manufacturing cor- porations, and mining companies, had been sold in the market. Such bonds and stocks had been disposed of to a considerable extent in foreign markets, and so long as this continued the sale of similar securities was stimulated and additional amounts offered. When the sale of such se- curities could no longer be effected abroad, the bonds of rail- roads and other enterprises of like nature which were in process of construction were thus forced upon the market, until their negotiation became almost impossible. The bank- ers of the City of New York, who were burdened with the loan, could not respond to the demands of their creditors, the numerous holders of similar securities became alarmed and the panic soon extended throughout the country. The banks of New York City, Mr. Knox stated, were largely responsible for bringing about the conditions which led to this panic. Their intimate relations with the transactions of the Stock Exchange contributed in a great measure toward creating and fostering the fictitious valuations attained at home and abroad for railroad and other corporate securities, and when a foreign market could no longer be obtained for them they were unloaded upon an already surfeited home market, which collapsed under the strain and the panic followed. While the acute stage of this crisis was of short duration, the country at large did not fully recover from the business prostra- tion resulting therefrom for several years, and, as Mr. Knox stated, not until after the resumption of specie* payments. 78 ROMANCE AND TRAGEDY OF BANKING Resumption of Specie Payments The next important event that occurred during Mr. Knox's administration of the Currency Bureau was the resumption of specie payments on January 1, 1879. The Act of January 14, 1875, provided for and required the coinage of silver in denominations of 10, 25 and 50 cents, of standard value, to be issued in redemption of an equal number and amount of fractional currency of similar denominations, until the whole amount of such fractional currency outstanding should be redeemed. This Act also repealed the limitations upon the aggregate amount of circulation of national banking associations and its distribution equally among the States and Territories. The Secretary of the Treasury was required to redeem the legal-tender, United States notes, in excess of $300,000,000, to the amount of 80 per centum of the sum of national bank notes issued to new banks or banks increasing their circulation, and to continue the redemption of such notes until the amount outstand- ing was reduced to $300,000,000. The Secretary was also re- quired, on and after January 1, 1879, to redeem in coin United States legal-tender notes then outstanding upon their presenta- tion for redemption at the office of the Assistant Treasurer in New York, in sums of not less than $50, and the Secretary was authorized to issue bonds of the United States as described in the Act of Congress approved July 14, 1870, to provide for such redemptions. The Legislative, Executive and Judicial Appropriation Act of June 21, 1879, contained a provision authorizing the Secre- tary of the Treasury to use for the immediate payment of pen- sions the legal-tender currency in the Treasury of the United States for the redemption of fractional currency. There is still outstanding in fractional currency about $1,998,368.50 1 , a large part of which never will be presented for redemption. 'June 30, 1922. ROMANCE AND TRAGEDY OF BANKING 79 In commenting upon the resumption of specie payments in his report for 1878, Mr. Knox said that as the time approached for resumption, strong opposition developed and desperate efforts were made to secure a repeal of the Act, on the ground that while it was conceded by those who opposed resumption that the Treas- ury and the banks could readily redeem their circulating notes, it would not be possible for the banks to provide for the redemp- tion of their deposits in gold. Notwithstanding this opposition and the pessimistic predic- tions of those who were opposed to the attempt at resumption, and the return of the Government to the Hamiltonian idea of paying its debts in the currency of the world, resumption was successfully consummated, and, as Mr. Knox stated in his report for 1878, while the banks of the country at the date of resump- tion held more than one-third of the outstanding Treasury notes, they had so much confidence in the ability of the Secretary of the Treasury to successfully maintain resumption, that none were presented by them for redemption. At the same time the people held more than $300,000,000 of the issues of the national banks, based upon the bonds of the nation, and preferred such notes to the coin itself. There was no demand, therefore, for the payment of the notes of the Government, and the gold coin in the Treasury increased more than thirty-six millions in the ten months succeed- ing the date of resumption. The Freedman's Savings and Trust Company The most disastrous bank failure that occurred while Mr. Knox was Comptroller was that of the Freedman's Savings and Trust Company, which suspended June 29, 1874. While this institution was not under Federal supervision at any time during its active existence, the liquidation of its affairs after failure was finally placed in charge of the Comptroller of the Currency. During the progress of the Civil War, when the colored sol- diers became a considerable element in the military service of the United States, it became necessary to make some provision for the safekeeping of their pay and bounty moneys for their benefit 80 ROMANCE AND TRAGEDY OF BANKING and that of their families. To meet this exigency, military sav- ings banks were established at Beaufort, S. C., and Norfolk, Va., centers at that time of colored troops. The subsequent emanci- pation of the race increased the necessity for and suggested the advisability of establishing some financial agency which would more fully meet this demand, and Congress, under date of March 3, 1865, passed an Act constituting Peter Cooper, William C. Bryant, and forty-eight others, a body corporate, under the title of the "Freedman's Savings and Trust Company," to re- ceive on deposit such sums of money as should from time to time be offered by or in behalf of persons who had heretofore been held in slavery in the United States, or the descendants of such persons, and to invest the same in the stocks, bonds, Treasury notes, or other securities of the United States. No capital stock was required, but in lieu thereof, the Charter Act authorized and required not exceeding one-third of the de- posits to be retained in a readily convertible form, for the pur- pose of meeting withdrawals and to defray the operating expenses of the company. The principal office of this institution was located in Wash- ington, D. C., opposite the north front of the Treasury Depart- ment, in a four-story brownstone building owned by the com- pany. After the bank failed, this building was purchased by the Government for the sum of $250,000. For some years thereafter it was occupied by the Department of Justice and the Court of Claims and was then demolished to make room for the new De- partment of Justice building to be erected on the site. The sum appropriated by Congress, however, was not deemed sufficient for the erection of a building adequate and suitable for the Depart- ment's needs, so the site remained vacant until 1918, when a build- ing was erected thereon by the Government for the use of the Treasury Department and is connected with the main building by a tunnel underneath Pennsylvania Avenue. At the date of the failure of this company it had thirty-four branch agencies in active operation, located at the principal cen- ters of colored population in Southern States, except one each in New York, Philadelphia and Baltimore. ROMANCE AND TRAGEDY OF BANKING 81 During the ten years of its active existence, the deposits in this institution aggregated over $57,000,000, and its depositors numbered over 70,000. From 1865 to 1870, the bank seemed to have been honestly and successfully conducted by the trustees in charge of its affairs, and apparently enjoyed the full confidence of its depositors, in the knowledge and belief that their deposits were required by the Charter Act to be safely invested in the stocks, bonds, treasury notes and other securities of the United States. In May, 1870, however, Congress amended the act of incor- poration empowering the trustees to invest one-half of the de- posits received "in bonds or other notes secured by mortgages on real estate in double the value of the loan." This amendment opened the door to the wild speculation in real estate which immediately followed, and to other culpable transactions which soon absorbed the funds of the bank and led to the failure of the institution. When this proposed amendment was under consideration in the Senate in 1870, Senator Cameron of Pennsylvania vigorously opposed its adoption for the reasons, he said, that The worst thing to loan money upon by an institution of which a number of persons have the direction is real estate. If I had money to loan and did not care about using it soon and wanted to invest it for a long time, I might think it very well to loan it upon bond and mortgage, be- cause I should myself estimate the value of the property which was offered to me according to my own judgment. But it is not so in a board of ten or fifteen directors. Mortgages are all right, in their way. They are good security for money, but, the trouble is, money once in them stays there. They have no commercial value. They have no quotation. Banks loaning their money upon them would soon absorb their capital and find themselves exceedingly embarrassed in case of distress or a panic. They are not readily converted, and it is only idle capital that seeks such investments. Banking capital is of a different charac- ter. If tied up in mortgages or other investments, its usefulness becomes paralyzed and the law defeated under 82 ROMANCE AND TRAGEDY OF BANKING which the bank was organized. This is the direct cause of the unfortunate condition of the early banks in Kansas, and in many other of the extreme western states and ter- ritories. They loaned money to settlers at fabulous rates and took mortgages upon their farms in violation of law. They soon came to grief and found their vaults full of mortgages upon real estate that would not pay twenty-five cents on the dollar and their money all gone. He contended further that the principle proposed was a dan- gerous one, and should not be incorporated into any banking institution. He stated that it had been his experience that when- ever a bank like the Freedman's Savings and Trust Company in- vested its funds in real estate it went to destruction. This prophecy was fulfilled four years later by the failure of this bank. At the time this radical change was authorized in the char- acter of the securities to be taken for loans, the deposits amounted to at least $2,000,OCO. Had the original Act been allowed to remain as it was and the requirement in respect to investments been complied with, as they undoubtedly would have been, the face value of the United States securities which the bank then should have had, would have exceeded the sum stated by a very large percentage, and their market value would have been much greater, but at the date of failure of the bank only $400 in United States securities were found among the assets. On June 29, 1874, the bank having been ascertained to be in- solvent, was closed by a vote of its trustees, who appointed three Commissioners to wind up its affairs. These Commissioners served from July 11, 1874, to February 21, 1881, on which later date, by Act of Congress, all the remaining assets of the bank were transferred to the custody and supervision of the Comptroller of the Currency, who was placed in charge of the liquidation of its affairs, and was allowed compensation of one thousand dollars per annum. At the time of the failure of this company there were 61,131 depositors, to whom there was due $2,939,925.22. Five dividends were declared, amounting to sixty-two per cent, of the deposit ROMANCE AND TRAGEDY OF BANKING 83 liabilities, aggregating $1,822,753.62. Payment of these divi- dends was made from time to time, and at the close of the year ended December 1, 1920, $1,733,475.71 of the above-mentioned amount had been paid and the affairs of the bank finally closed. Repeated efforts have been made to secure an appropriation by Congress for the payment of the remaining thirty-eight per cent, due the depositors, and bills have been introduced from time to time and favorably reported in one or the other House. In 1888 a bill passed the Senate authorizing the payment to depos- itors of African descent the difference between their claims and the dividends yielded by the assets of the company, but failed of favorable action in the House of Representatives because of the restriction in the bill to the payment of colored depositors only. While this institution was intended to be a colored people's bank exclusively, and the Charter Act authorized the receipt of deposits only "by or on behalf of persons heretofore held in slav- ery in the United States or their descendants." a large propor- tion of the depositors were white. The reason given for accepting deposits from the white people was that the officers of the company did not feel that it was in- cumbent upon them to inquire when a deposit was tendered by a white person, whether it was being made on behalf of a colored person. So every deposit that was offered was received without question. This institution was not under Federal supervision and the United States Government was in nowise responsible for its man- agement. The only ground upon which the Government can be urged to assume its remaining liabilities is one purely of senti- ment. The creditors have no legal claim upon the Government. But it is contended that illiterate colored people were induced to deposit their money in this bank in the belief that it was a Gov- ernment institution and that the Government assumed responsi- bility for its liabilities. A considerable number of the depositors in this company, however, were intelligent white people, and many of the colored depositors were as intelligent and as well informed in regard to the character of the institution and the Govern- ment's connection with it as the average depositor in a national bank. So far as the Government's relations with this institution 84 ROMANCE AND TRAGEDY OF BANKING are concerned the creditors of an insolvent national bank have a more equitable claim on Congress for an appropriation to pay the bank's liabilities than have the depositors in the Freedman's Savings and Trust Company. The Government docs undertake to assume supervision over national banks, but it had no super vision whatever over this institution. If Congress should appropriate the money necessary to pay these claims, it will be found very difficult to distribute this fund among the colored creditors or their heirs. Most of the original colored depositors are dead, and because of the inability of their heirs to prove their claims for balances due, it was almost impos- sible to distribute any considerable amount of the remaining funds in the hands of the Commissioner since the repeal of the bar to further payments, and during the later years the larger part of such fund was consumed in the payment of the salary of the Com- missioner and clerical expenses. The small amount due many of these colored depositors would not warrant the expense of prov- ing a claim. At the time of the failure of this institution more than fifteen thousand of the depositors had to their credit an aver- age balance of not more than five dollars. As a great many of these depositors are dead and most of them left several heirs, some of whom have also died, the death of the depositor and any deceased heir would necessarily have to be proven by the surviv- ing heirs to entitle them to receive the balance due. It is exceedingly doubtful, therefore, whether the class of col- ored depositors in this institution intended to be relieved by such an appropriation would be benefited thereby. And as far as the other depositors are concerned, the Government would establish a very bad precedent in assuming for their benefit the liabilities of an institution for whose management and solvency it was in nowise responsible. Real Estate Loans by National Banks Frequent efforts were made to secure an amendment of the national banking laws to permit loans to be made upon the secur- ity of real estate. Bills of this nature were introduced from time ROMANCE AND TRAGEDY OF BANKING 85 to time and passed the House of Representatives, but failed of favorable action in the Senate. The original Bank Act, approved February 25, 1863, con- ferred authority upon national associations to loan money "on real and personal security." The Act of June 3, 1864, contained the same provision when the bill was reported to the House and Senate, but during the debate on the bill the words "real and" were eliminated, and the provision as finally adopted read "by loaning money on personal security." When an amendment was offered to the bill to strike out the words "real and," Mr. Brooks, a representative from New York, said that the banks in the State of New York for a considerable time discounted notes and loaned money on the security of real estate mortgages. Experience, however, he said, soon taught the bankers that this was a dangerous system of banking, and the western states which copied the original banking law of New York suffered greatly thereby. New York bankers, he said, were also taught that the use of real estate in commercial banking was unsafe. Mr. Brooks stated further that the principle of commercial banking requires two immediately available securities: First, the drawer of the note; second, the endorser. If a mortgage on real estate, he said, is given as security, the mortgage has to be fore- closed and all the laws in relation to the transfer of the realty have to be gone through with before the real estate can be made available for the purpose of converting the security on the market. Mr. Washburne, of Illinois, stated that the provision author- izing commercial banks to loan money on realty was a vicious sys- tem of banking, and one which he could not sanction. Mr. Boutwell, afterward Secretary of the Treasury, said that he had supposed that commercial banks empowered to loan money on real estate had almost ceased to exist in the commercial world. Mr. Hooper, of Massachusetts, who was in charge of the bill, stated that he was perfectly willing to accept an amendment to strike out the objectionable provision, and upon his motion the words "real and" were stricken out of the bill and the section amended to read "by loaning money on personal security." This 86 ROMANCE AND TRAGEDY OF BANKING amendment was adopted without division and remained the law up to the passage of the Federal Reserve Act, December 23, 1913, which provides as follows : Any national banking association not situated in a central reserve city may make loans secured by improved and unencumbered farm land, situated within its Federal reserve district, but no such loan shall be made for a longer time than five years, nor for an amount exceeding fifty per centum of the actual value of the property offered as security. Any such bank may make such loans in an ag- gregate sum equal to twenty-five per centum of its capital and surplus or to one-third of its time deposits and such banks may continue hereafter as heretofore to receive time deposits and to pay interest on the same. The Federal Reserve Board shall have power from time to time to add to the list of cities in which national banks shall not be permitted to make loans secured upon real es- tate in the manner described in this section. There is no doubt that the elimination from the National Bank Act of 1864 of the power to make loans upon the security of real estate removed a dangerous principle from the banking laws, and contributed largely to the safety and success of the national banking system. The subsequent pressure from time to time for the privilege of making real estate loans came largely, if not wholly, from banks of the smaller capital class, or what were known as fifteen per cent, reserve or country banks. Since the passage of the Act of March 14, 1900, authorizing the organization of banks with a capital of twenty-five thousand dollars, a considerable number of banks of this class have been organized and many of them were converted State institutions, or reorganized State or private banks. Before their admission to the national system, many of them had been accustomed to making loans upon the security of real estate, and when they became national associations they nat- urally felt the restraint of the law prohibiting such loans. They were induced to nationalize in the first place because of the greater advantages which they thought the national system af- ROMANCE AND TRAGEDY OF BANKING 87 forded over state and private banks. At the same time, while reaping whatever benefits were to be derived from incorporation under national authority, they desired to continue the business of making loans on mortgage security and to exercise other powers not permitted by the national banking laws. Many national bankers do not regard real estate mortgage loans with favor, and will not avail themselves of the privilege of making such loans, now that they are permitted by law to a lim- ited extent. The demand for such a privilege did not, therefore, come from this class of bankers. Of all the banks in the national system, it is most essential that the very banks that were most clamorous for the privilege of making real estate loans should keep their assets in a quickly convertible form. Under the national banking laws banks have been permitted to take real estate mortgages to prevent loss on debts previously contracted in good faith, and to acquire title to the property, if necessary, in satisfaction of debts, but the statute requires that realty so acquired shall be disposed of within five years. Banks have found it very difficult in the past to dispose of real estate within the limit of time prescribed by the statute without incur- ring considerable loss. The result is that more or less realty of an unproductive character accumulates on their hands. If, therefore, under the limited privileges above referred to, banks have accumulated so much real estate during the course of their existence and have found it so difficult to realize on mort- gage loans, or to dispose of either the realty or the mortgages, is there not great danger that in permitting loans to be made directly upon real estate security the amount invested in such loans, and the realty that will be taken in addition thereto as security for or in satisfaction of bad debts, will absorb and tie up such a large proportion of deposits in this inconvertible forjrn as to bring about a similar condition of affairs in many banks as existed in the Freed man's Savings and Trust Company, and with like results. Notwithstanding the experiences of the past, many national bankers who favor real estate loans claim that real estate mort- gages are the very best security to be obtained in their respective 88 ROMANCE AND TRAGEDY OF BANKING localities, and are eminently better than stocks, bonds or com- mercial paper. In some sections of the country this may be, and no doubt is true, provided such loans are limited to a safe per- centage of the actual value of the real estate mortgaged, and restricted in the total amount of such loans. But in other locali- ties the reverse would be the case. In sections of the country where the actual value of farm lands is unsettled and more or less speculative, mortgage loans will be the very worst kind of an investment for banks to make. The persistent pressure upon the Comptroller's office before the passage of the Federal Reserve Act for a more liberal inter- pretation of the law in respect to real estate loans, also had its effect in later years, and through liberal administrative rulings based upon strained interpi'etation of the statutes many loans were permitted to be made upon real estate mortgages by indirect methods which formerly were held to be unlawful. Interpretation of the Banking Laws The rule laid down by the Supreme Court of the United States for interpreting the national banking laws is, that "the intent, not the letter of the statute, constitutes the law." The same court has also held that "while Section 5136, United States Re- vised Statutes, does not in plain terms prohibit a loan on real estate, the implication to that effect is clear, and what is implied is as effectual as if it were expressed." It cannot be disputed that the intent of the National Bank Act of 1864 was to prohibit loans being made upon the security of real estate mortgages, and as the courts have declared that what a bank is prohibited from doing directly it cannot lawfully do indirectly, it follows that when real estate loans were made in- directly in a form to evade or circumvent the restrictions of the statute, they were as much in contravention of law as if made directly, and no administrative ruling or distorted interpretation of the law can legalize an unlawful transaction. The question of good faith enters largely into all transactions involving loans indirectly secured by liens on realty, and the facts, ROMANCE AND TRAGEDY OF BANKING 89 not the form of the transactions, determine their legality or illegality. Examinations of national banks and supervision by the Comp- troller of the Currency should be as practical as possible, and practical experience as to the numerous subterfuges resorted to bv banks to circumvent the law in respect to real estate loans, is a safer guide for the examiner and Comptroller to follow in deter- mining the good faith of a transaction than legal theorizing, which, while usually following the letter of the statute, generally loses sight of its intent or spirit. Especially is this true in the light of the fact that it has been impossible to obtain a unanimous opinion of an Appellate Court upon anv question involving an interpretation of the old provision of the national banking law in regard to real estate loans even by so eminent a body of jurists as composes the Supreme Court of the United States, which upon this very question rendered a divided opinion. Until the position of the Comptroller's office on this subject was amended in later years to conform to the views of bankers who desired to make real estate loans, it was held, and very prop- erly so, that it was unlawful for a bank to purchase or discount a real estate mortgage note, even though the mortgage did not run directly to the bank and the endorser or assignor of the note was alleged to be financially responsible for the loan without re- course to the mortgage. In other words, a note in this form was held to be simply two- name paper secured by collateral, the collateral being the real estate mortgage. The owner of the note, in the event of non- payment by the maker at maturity, could proceed to collect the loan from the endorser, or convert the security by foreclosure. In many cases of this kind the latter course was necessary, as the endorser of the note was frequently financially irresponsible, and the bank knew it at the time the loan was made and would not have made it but for the mortgage security back of the note. While this question never has been directly before the courts, there is sufficient authority in support of the position that the assignment of a mortgage note carries with it an assignment of the mortgage, to be found in the dictum of the courts. In the 90 ROMANCE AND TRAGEDY OF BANKING case of the First National Bank of Mankato v. Pope et al, the Supreme Court of Minnesota held that where a promissory note secured by a mortgage on real estate is endorsed and transferred to a purchaser without formal assignment of the morgage, the security follows the note as an incident thereto, and the purchaser becomes the equitable owner of the mortgage, acquiring an inter- est which enables him to deal with it for all purposes. Ranking Conducted on Widely Different Lines Than Formerly Banking today is conducted upon widely different lines to what it was when the Bank Act of 1864 was enacted, and the law has not kept pace with the constantly changing conditions. Com- petition with trust companies and other banking institutions op- erating under State authority, more liberal in the scope of cor- porate powers conferred, forced many competing national asso- ciations doing business in the same locality into undertakings not contemplated by the national banking laws and foreign to the legitimate functions of a commercial bank. The powers conferred upon trust companies and savings banks to make loans upon real estate security, induced many national associations to make loans upon like security by resorting to indirect methods to evade the restrictions of the statute. This was particularly true of locali- ties where mortgage loans were the principal securities dealt in by savings banks and trust companies. While the national banking laws should be construed as broadly and as liberally as is possible consistent with the intent and spirit of the statutes, it is the sworn duty of an administra- tive officer to enforce an observance of the law as it exists and not endeavor to twist it out of shape either to meet his own views or the wishes of bankers as to what it should be. Unfortunately there has been too much of a disposition in later years in the administration of the Currency Bureau to change existing law by administrative regulations or rulings, un- warranted by any reasonable construction of the statutes, to meet the demands incident to competition between national and State institutions. In no respect was this fact more patent than in its application to real estate loans. Official rulings in this connec- ROMANCE AND TRAGEDY OF BANKING 91 tion practically nullified the prohibitive provisions of the statutes and conferred upon the banks privileges which had been denied them, up to that time, by Congress since 1864. Under such interpretations of the law, the bar to real estate loans was removed, and indirect methods of circumventing the statutes were recognized as legitimate, notwithstanding the dec- laration of the Supreme Court of the United States that what a bank is prohibited from doing directly it cannot lawfully do in- directly. National Bank Failures During the twelve years that Mr. Knox presided over the affairs of the Currency Bureau, there were seventy-three national bank failures. The largest of these was the National Bank of the State of Missouri at St. Louis. This bank had a capital of $2,500,000. Its total liabilities at the time of failure were about $5,400,000. It was chartered in October, 1866, and was placed in the hands of a receiver June 23, 1877. The cause of its failure was fraudulent manage- ment, excessive loans to its officers and directors, and deprecia- tion of securities. There was collected by the receiver from its assets $2,846,622, and from its stockholders by assessment $245,108, of which amount there was returned to the shareholders in cash $26,720, and the depositors and other creditors were paid one hundred per cent, of their claims with interest. The receiver- ship was finally closed March 26, 1888. In commenting upon this and other failures of that year, Mr. Knox, in his annual report for 1877, stated that the most fruitful cause of bank failures was the unlawful use of the funds or credits of these associations by their officers and directors, and that in most instances this was accomplished through malfeasance or crime by the discount of notes in which the bank had no interest. He therefore recommended in this connection the passage of an Act prohibiting a bank from borrowing money upon its own obligations, or from lending its credit, and also from obtaining rediscounts upon its bills receivable, unless specifically authorized by resolution of its board of directors, under the seal of the bank. 92 ROMANCE AND TRAGEDY OF BANKING This, lie thought, would have the effect of putting other banks upon their guard when applied to for such favors. The National Bank of the State of Missouri was the successor of the Missouri State Bank, which was chartered in 1857 with an authorized capital of $5,000,000 and was converted into a national association on October 31, 1866. The manner in which this old and reputable institution was converted into a National bank and subsequently wiped out of existence by the wrecking of the latter association will prove inter- esting reading. It appears from the published history of this case that in 1857, when the Missouri State Bank was chartered, the State- subscribed for $1,000,000 of the capital stock and issued bonds in payment therefor. The stock was also distributed among indi- vidual subscribers and was later increased to $3,500,000, making the institution the largest bank in point of capital stock and tho leading bank west of the Allegheny Mountains at that time. An Act of the State Legislature was passed in 1866 author- izing the Governor to receive proposals for the purchase of the State's interest in the bank, and State bonds were authorized to be received in payment for the stock. The market value of these bonds at that time was about seventy cents on the dollar, with four years' accrued interest. The Act required the proceeds of the sale of the bank stock to be reserved as a permanent State school fund. The bids for the purchase of the stock were opened by a Com- missioner at the Planters' House in St. Louis, in November, 1866. There were only two proposals received for the stock, and one of these was from Robert A. Barnes, president of the bank. The other bidder was James B. Eads. The market value of the stock at this time had been depreciated to about sixty-five dollars a share of the par value of one hundred dollars. At the time of the sale, the State owned about 10,863 shares of the stock of the bank. Owing to some alleged irregularity in regard to the pro- posals, the bid of Eads was accepted, although it was said that Barnes was ready to pay more for the stock than Eads offered for it. Eads, it appears, represented a pool that had been formed for the purchase of the stock, but not having the funds to pay ROMANCE AND TRAGEDY OF BANKING 93 for it the pool borrowed State bonds from various parties with which to exchange for the stock, as authorized by the Act of the Legislature. The largest amount of these bonds was borrowed from the Bank of Commerce of New York City. These bonds were borrowed for a period long enough to enable the pool to make the arrangements necessary for the conversion of the State bank into a national association and to elect themselves directors of the latter institution. Upon securing a charter for the national association, they immediately opened negotiations with the Bank of Commerce of New York for a loan of a sufficient amount to enable them to pay for the bonds which they had borrowed to make payment to the State for the stock, and to carry the indebtedness thereby in- curred as long as they desired, agreeing at the same time to retain control and possession of the management of the National Bank of the State of Missouri. These negotiations were begun prior to the purchase of the stock from the State, but did not take active form until after the purchase was completed. The price paid by the Eads pool for the bank stock owned by the State was $108.50 per share. During the time the Bank of Commerce was engaged in aid- ing the pool in the purchase of the bonds with which to make payment to the State, A. R. Barnes, then president of the State Bank of Missouri, employed the Bank of Commerce to procure bonds for him to enable the State Bank to become the purchaser of the 10,863 shares of stock that the State owned. The Bank of Commerce undertook to procure the bonds for Barnes, but it appears said nothing to him concerning the negotiations of tho Eads pool for the same purpose. At this time, Eads and his associates had no connection with the Bank of the State of Mis- souri officially. On September 26, 1866, before Eads and the pool had any official connection with the bank, and before that institution had become a national bank, the pool applied to the Bank of Com merce for a loan to the State Bank of Missouri of $1,000,000. The Bank of Commerce accepted the proposition in a resolution unanimously passed by its board of directors, although Mr. 94 ROMANCE AND TRAGEDY OF BANKING Eads presented no credentials whatever from the State Bank of Missouri showing his authority to negotiate a loan for that bank. The State Bank was converted into the National Bank of the State of Missouri on October 30, 1866, and the seven mem- bers of the Eads pool became the sole directors of the national association. In December following, the proposed loan, although alleged to be exclusively for the personal use of the seven direc- tors, was contracted for in the name of the national bank, with the seven directors as sureties for the bank. This money, it was charged, was appropriated by the pool on receipt, and the bank never had the use of a dollar of it. The loan, it is reported, was kept standing for eleven years, and in- terest at the rate of three per cent, was paid by the pool from the dividends on their million dollars' worth of stock. The largest part of this loan was repaid to the Bank of Com- merce, but at the time of the failure of the National Bank of the State of Missouri, there remained due a balance of $413,750, in- cluding interest up to the date of settlement, less $94,121.71 due from the Bank of Commerce, which had in the meantime also been converted into a national association under the title of the National Bank of Commerce. A suit was instituted by the latter bank in the United States District Court at St. Louis, for the re- covery of this balance, and judgment was awarded the plaintiff for the sum of something like $445,518, by direction of the pre- siding judge, who held that the evidence clearl} 7 showed that the $1,000,000 was borrowed by the Eads pool for the Bank of Mis- souri and subsequently loaned to the directors of the bank after its conversion into a national association, and that he could see no basis in the evidence which would justify the jury in finding that the plaintiff bank knew that the directors of the defendant bank intended to make any fraudulent use or disposition of the money. He stated further that if the jury were to find to the contrary that he would deem it his duty to set aside their verdict, and he therefore instructed them to find a verdict for the plaintiff. In the course of the arguments by the defendant's counsel, the judge expressed the view that it would have been a very wise provision for Congress to have inserted in the law a section pro- hibiting banks from borrowing money at interest for the purpose ROMANCE AND TRAGEDY OF BANKING 95 of relending, as no bank doing business on that principle was a safe institution. The receiver of the failed National Bank of Missouri took an appeal of this case to the Supreme Court of the United States, but the appeal never was heard, as the claim of the National Bank of Commerce was compromised by the payment by the re- ceiver of the sum of $200,000, Mr. Eads contributing $50,000 of this amount. The other complications which contributed toward the failure of this bank were the general stagnation in business, the shrinkage in value of all kinds of securities, the large and unlawful advances to enterprises in which some of the directors were interested, in- cluding bridge and jetty constructions and injudicious manage- ment generally. At the time of the failure, the City of St. Louis had on deposit in the bank over $257,953. About six weeks before the failure, the bank was examined by a special examiner from Washington, and as a result several changes were made in the board of directors. At the first meet- ing of the board after its reorganization a thorough examination into the condition of the association was made, under the super- vision of the new board, on the completion of which it was unani- mously voted to close the bank and wind up its affairs. Several months after the suspension of the bank and the ap- pointment of a receiver, the Federal Grand Jury being in session in St. Louis, a resolution was adopted by the jury requesting the United States Attorney to make an investigation of alleged crimi- nal violations of law by the officers of this bank. The United States Attorney advised the jury that the affairs of the bank had then been in the hands of the Comptroller of the Currency for eighteen months and if any criminal violations of law had been discovered in the management of the institution the receiver and the Comptroller were doubtless aware of the fact, and that until complaint was made by them, or either of them, he did not feel warranted in taking any steps toward an investi- gation. In December, 1878, two creditors of the failed bank called at the office of the United States Attorney and made complaint against the president of the bank, charging him with criminal secure the co-operation of the State Banking Department failed, and the national bank had to be examined independently as usual. This examination developed no material improvement in the sit- uation. While some of the loans that had been previously criti- cised and required to be reduced had been curtailed, others had taken their place, and at that time the total loans of the national bank to the several Walsh corporations amounted to over $6,800,000, while some of the loans had been shifted to the bond account. The condition disclosed by this examination convinced the Comptroller that it was absolutely necessary to secure a simul- taneous examination of the three institutions before the real con- dition of the national bank could be determined, and negotiations were again opened with the State Banking Department to that end, and an arrangement finally effected for an examination of the three banks on December 9, 1905. It was thought that this joint examination would disclose transfers of cash or securities from the State to the national bank at the time of the previous examination of the latter, and vice versa, at the time of the examination of the State institutions, but such did not prove to be the case. No shortage of cash or securi- ties in either institution was disclosed, nor anyhing to indicate any manipulation of the assets or accounts, or any false entries. Aside from the large amount of loans made by the Chicago National Bank to the Walsh concerns, the bank seemed to be well managed, its other loans carefully and conservatively made, and its books and accounts accurately and well kept, always reflecting the true condition of the association. The simultaneous examination of the three banks, however, developed the fact, as was suspected, that in addition to the large loans by the Chicago National Bank to the Walsh interests, loans had been made by the Home Savings Bank and the Equitable Trust Company to the same interests to an amount greater in proportion to their capital stock and deposits than the loans made by the national bank, and the aggregate of the loans made by the three institutions amounted to between fifteen and sixteen millions of dollars. The Home Savings Bank, which had about $4,272,000 255 of deposits, had $3,836,000 of these loans, and the Equitable Trust Company, with deposits amounting to $4,805,000, had over $4,250,000 of them. This knowledge of the total liabilities of the Walsh interests, acquired through this joint examination of the three banks, made the situation much more critical and demanded immediate and decisive action on the part of the Comptroller. If the amount of the indebtedness to the Chicago National Bank alone had represented anything like the total liabilities of the Walsh concerns, there would have been reasonable probability of Mr. Walsh being able to continue the sale of the bonds of his corporations and from the proceeds of such sales pay his liabili- ties to the bank. But with the increased amount of these liabili- ties, as shown by the examination of the three institutions, and with practically all of the funds of the two State banks loaned to the Walsh enterprises, any sudden demand made upon the State banks by their depositors would have necessitated their being sup- plied with funds by the national association, as the Equitable Trust Company had only about five thousand five hundred dollars and the Home Savings Bank about twelve thousand dollars in cash at the time of their examination, but they had on deposit with the Chicago National Bank fifty-four thousand dollars and one hun- dred and twenty-nine thousand dollars respectively. At this stage of the situation, the State authorities were un- willing to allow the State banks to continue doing business, unless something was done to strengthen their financial condition, and the Comptroller did not deem it safe to permit the national bank to open for business on Monday morning, with the certainty that it would meet with trouble, if either of the State institutions became involved, or a run was started upon them by their depositors. This was the condition of affairs which existed on Thursday, December 14, 1905, and the Comptroller, after a conference with the bank examiner by telephone, instructed him to take no action until after the close of business at noon on the following Satur- day, when the time locks had been set on the vaults to prevent their being opened before Monday morning, then to call a meeting 256 ROMANCE AND TRAGEDY OF BANKING of the Clearing House Association and advise them of the situa- tion. In the meantime, the Comptroller left Washington for Chi- cago, so as to direct matters at close range. He arrived in Chicago on Sunday, December 17, and arranged at once for a conference with Mr. Walsh and the directors of his bank, at which there were also present the attorneys for the Clearing House Association and the National and State bank examiners. This conference lasted from ten o'clock Sunday morning through the night until seven o'clock on Monday morning. At the beginning of the conference the Comptroller announced his determination not to permit the national bank to open for business on Monday morning unless some satisfactory arrange- ment was made to insure the payment in full of all demands that might be made by the creditors upon the bank. This conference resulted in an agreement in writing between the Chicago National Bank and the Clearing House Association, representing thirty-three Chicago banks, under the terms of which the latter banks purchased from the Chicago National Bank all of its assets, except cash and exchange, partially securing them- selves by obtaining the guarantee of the directors of the Chicago National Bank to the extent of their individual resources. The First Trust and Savings Bank of Chicago was appointed by the associated banks agent to receive and liquidate the pur- chased assets, under the direction and approval of the Chicago Clearing House Committee. This arrangement was entered into only after a long and con- tinued discussion. A representative of every bank in Chicago, which was a member of the Clearing House Association, was pres- ent at the meeting. The Comptroller did not attempt to dictate any of the provisions of the agreement, or to impose any condi- tions, except to insist that the creditors of the Chicago National Bank must be fully protected, otherwise he would place the asso- ciation in the hands of a receiver on Monday morning. The First Trust and Savings Bank continued to act as agent for the clearing house banks under this agreement until some time in 1907, when it was considered advisable to sell to John R. Walsh and Company, certain of the railroad and other securities ROMANCE AND TRAGEDY OF BANKING 257 to facilitate their liquidation, the consideration being the prom- issory note of Walsh and Company, secured by the assets pur- chased and the guarantee of the directors of the Chicago National Bank. The assets not sold to Walsh and Company, under this agreement, were retained by the associated banks and continued to be administered by the First Trust and Savings Bank as agent of the associated banks. Participation certificates were issued to the associated banks, representing their pro rata interest in the assets of the Chicago National Bank. These certificates were issued in two series, designated as Series A and Series B. Series A represented the interest of the associatd banks in the assets covered by the promissory note of John R. Walsh and Company, secured, as before stated, and Series B represented the interest of the associated banks in the remaining assets which were being administered by the First Trust and Savings Bank. This plan was followed until January, 1910, at which time a ten per cent, dividend was declared on both series of certificates, and a settlement was arranged with John R. Walsh and Company whereby the assets purchased by him and his associates were taken back by the associated banks and the promissory note canceled. This settlement included the releasing of the directors of the Chi- cago National Bank under their individual guarantee, in consid- eration of their transferring certain of their personal assets to the First Trust and Savings Bank as trustee for the benefit of the associated banks. At this juncture Series A and B participation certificates were called in and new certificates were issued in lieu thereof, des- ignated Series C. These certificates were dated February 1, 1910, and aggregated approximately nine million dollars. They were issued to the associated banks to cover their interest in all the remaining assets of the Chicago National Bank. A notable coincidence in connection with the conference on the night of December 17, was the fact that there were three ex- Comptrollers of the Currency and one Comptroller present. The three ex-Comptrollers were Messrs. Lacey, Eckels and Dawes, each of whom was at that time president of a banking institution in Chicago. 258 ROMANCE AND TRAGEDY OF BANKING Legality of the Action of the Clearing House Banks Notwithstanding the undoubted wisdom of the course pursued by Mr. Ridgely and the associated banks of Chicago in thus averting a disastrous bank failure and a serious disturbance to the financial and business interests not only of Chicago but of other sections, the legality of the action of the clearing house banks in entering into an agreement with John R. Walsh and the directors of his bank to pay the creditors of the three banks, was questioned by some, and the Comptroller and the banks were subjected to criticism. But the situation was critical and called for prompt action. There was no time to waste in quibbling over legal tech- nicalities. The Comptroller believed that the national banks that were members of the Clearing House Association had legal right to purchase from the directors of the Walsh banks their pro rata share of the assets of these institutions. The only possible legal objection that could be raised to their doing so was whether any bank in the combination, in assuming a pro rata share of the lia- bilities of the Walsh banks, exceeded the limitations of law in respect to loans. This question, however, was considered so un- important compared with the tremendous interests at stake that neither the Comptroller nor the banks gave it any consideration. It would have been inexcusable for the Comptroller to have allowed a question of this nature to have interfered with the con- summation of the arrangement agreed upon. When the magnitude of the liabilities of the Walsh interests to the national bank and the other banking institutions became a matter of public information, the Comptroller was further criti- cised for having permitted this condition to continue so long before corrective measures were taken. When these excessive loans became known to the Comptroller through the reports of the national bank examiners, he did everything in his power to have them reduced to the legal limit, not only by correspondence with the directors of the bank, as the evidence at the Walsh trial demonstrated, but by personal conference with the officers and directors of the association, without material effect. The sole power conferred upon the Comptroller of the Cur- rency to enforce a compliance with the law in regard to the limit ROMANCE AND TRAGEDY OF BANKING 259 of loans was not a corrective but a destructive measure. He could no doubt have compelled the Walsh bank to reduce the excessive loans under a threat of forfeiture proceedings, but he would have destroyed the offending association by instituting such a suit. The statutory provision authorizing the Comptroller to insti- tute a suit to forfeit the charter of a national bank for violating the law has never been construed as mandatory. It always had been interpreted as vesting in him a discretionary power, and no Comptroller ever felt that he would have been justified in resort- ing to so drastic a measure without first endeavoring to have the wrong corrected by other methods. The wisdom of this policy was forcibly exemplified in the case of the Walsh bank. Had the Comptroller instituted a suit to forfeit the charter of the Chicago National Bank when it became known to him that the law had been violated, a receiver would have been the result, as a run would have been started on the bank as soon as it became known that such a suit had been entered, and in order to protect the interests of all depositors alike and pre- vent a preference of one creditor over another it would have been necessary for the Comptroller to have appointed a receiver for the institution even before the suit to forfeit the charter of the association could have been heard and determined. The closing of this bank would have been followed immediately by the closing of the two State institutions, and three receiverships would have been necessary; the assets of the three institutions would have depreciated in value and the creditors, instead of receiving pay- ment in full and without any material delay, would have had to await the receipt of their deposits through the slow process of installment dividends from the respective receivers, extending over a period of several years, and undoubtedly other business failures would have followed, or at least serious embarrassments would have been occasioned in consequence of the large amount of money that would have been tied up indefinitely in the three banking institutions. All three difficulties were avoided, however, by the wise course pursued by the Comptroller, aided by the clearing house banks. All of the creditors of the three institutions were paid in full 260 ROMANCE AND TRAGEDY OF BANKING without delay, and no serious consequences or embarrassments were experienced. The Chicago National Bank was placed in liquidation by reso- lution of its shareholders adopted August 12, 1913, to take effect on the fifteenth of the same month. The associated banks which assumed its liabilities to depositors and took over a portion of its assets in payment therefor, returned to the bank in 1907 the remaining assets, amounting in value to about $168,000, from which the board of directors declared a dividend to the stock- holders of $15 per share. John R. Walsh, the president of the bank, and the controlling spirit in the three affiliated banking institutions, was indicted for misapplication of the funds of the national association and other violations of law. He was placed on trial in November, 1907, and was found guilty January 19, 1908. Every legal means known to his counsel was resorted to to have the verdict set aside. Appeal was made to the higher court and finally to the Supreme Court of the United States, consuming nearly two years, but without avail. He was then sentenced to serve a term of five years and entered the Leavenworth penitentiary in January, 1910. After being incarcerated for about a year and nine months, through the efforts of his friends he was paroled on account of failing health, and died in Chicago, October 23, 1911, nine days after his release from prison, at the age of seventy-four years. The Bigelow Defalcation On April 24, 1906, the Comptroller's office was startled by the receipt of a telegram from Milwaukee, Wis., stating that Frank G. Bigelow, the president of the First National Bank of Mil- waukee, was a defaulter to the extent of one million four hundred and fifty thousand dollars, an amount in excess of the combined capital, surplus and profits of the bank. Bigelow had been president of the American Bankers' Asso- ciation, was widely known among the bankers of the country, and had been prominent and active in every movement affecting bank- ing and financial interests. ROMANCE AND TRAGEDY OF BANKING 261 When the shortage was discovered, a meeting of the board of directors of the bank was called, at which Mr. Bigelow was pres- ent. When confronted with the accusation against him he calmly informed the directors that he had a painful confession to make to them and admitted that he had misappropriated the funds of the association. An examination of the books of the bank, he stated, would show that he owed the institution nearly a million and a half dollars. The money, he said, had been lost in specula- tion in wheat and stocks, that none of it could be recovered, and all that he could offer the bank in return for the loss was personal securities of the value of about three hundred thousand dollars. At first some of the directors of the bank were disposed to make good the loss and conceal the defalcation from the public, through fear of the effect of the disclosures upon the bank, but after deliberation they finally concluded, for the protection of the depositors, to make up the shortage and report the defalcation to the Federal authorities. A resolution was therefore adopted by the board removing Bigelow from the presidency of the bank, and a warrant was sworn out for his arrest. There was nothing novel in Bigelow's method of concealment of his large shortage. He manipulated the accounts with corre- spondent banks and with approved reserve agents. The collection accounts and balances with reserve agents were made to appear several hundred thousand dollars larger than they were. The defalcation was discovered not by the bank examiner, nor by any officer or director of the bank, but by an employee, whose suspi- cions were aroused by some questionable entries in the books, and he communicated his suspicions to one of the directors. An inves- tigation was immediately instituted, which led to a discovery of the shortage and the confession of Bigelow. When the amount of the defalcation was ascertained, the directors heroically came to the relief of the bank and the protec- tion of its depositors by immediately signing an agreement pledg- ing themselves to advance and pay to the bank the sums set oppo- site their names, as it might be needed for the payment of depos- itors. The respective sums subscribed by each director varied in amount from ten thousand to six hundred thousand dollars, and aggregated one million six hundred and thirty-five thousand. 262 ROMANCE AND TRAGEDY OF BANKING Before the news of the defalcation was made public, the direc- tors secured from Chicago one million dollars, thus fortifying the bank against a run and saving the institution from suspension. A run, however, was started as soon as the shortage became known, not only on this bank but upon other banks in Milwaukee, and in about two hours' time nearly a million dollars was withdrawn from the First National. At the same time, while there was a long line of depositors at the paying teller's window withdrawing their money, many friends of the institution manifested their confidence in its officers and the solvency of the bank by making deposits at the receiving teller's window. Bigelow at one time was rated a millionaire. He was promi- nent in business and social affairs in Milwaukee, and was a mem- ber of several clubs and civic organizations. He freely admitted his defalcation when confronted, offered no apology for his wrongdoings, and was sentenced to and served a term in the penitentiary. Culpability of the Bank Examiner The failure of the bank examiner to discover this shortage was the subject of considerable public criticism. He was summoned to Washington by the Comptroller and instructed to bring with him all of the verification returns covering his several examina- tions of this bank, as it was not understood why this shortage was not discovered, if bank balances had been properly verified. These returns showed a number of discrepancies in the accounts of cor- respondent and reserve banks, and an attempt to reconcile any one of them would have led to a detection of the shortage. When asked for an explanation as to why he neglected to reconcile these differences, the examiner stated that he relied upon his assistant to do that work for him, and that his instructions to him were that if he found any differences in the returns to call his attention to them and to file all others. He stated that his clerk had neg- lected to perform this duty and that when the defalcation was discovered, and the manner in which it was effected disclosed, he examined the verification returns of some of the banks whose accounts were reported to have been manipulated and learned for CASSIE CHADWICK Copied from an original photograph made about 1897, and secured through the courtesy of C. A. Farnesworth of the Union Trust Co., Cleveland ROMANCE AND TRAGEDY OF BANKING 263 the first time of these discrepancies, and that his clerk had not brought them to his attention, but filed them away without exami- nation. The Comptroller, however, held the examiner responsible for the negligence of his irresponsible clerk and required him to tender his resignation. Bank Failures During Mr. Ridgely's Administration During Mr. Ridgely's administration eighty-three national banks were placed in the hands of receivers. The most sensational of these failures was that of The Citizens National Bank of Oberlin, Ohio, which suspended November 28, 1904. This was not a large bank. Its capital stock was only sixty thousand dollars, and its deposits a little over four hundred thousand dollars, but for absolute imbecility of management it perhaps has no parallel in the history of national bank failures. This bank was wrecked by a woman, the celebrated Cassie A. Chad- wick, a female Napoleon of finance, who succeeded in completely deceiving not only the officers of the bank as to her financial worth but every one else with whom she had any business dealings. The wrecking of this institution and the pathetic end of its aged president was due to his having violated the law to a small extent in the first instance by making a loan of $13,000 to this woman, which was $7,000 in excess of the limit of a loan that this bank could lawfully make. This loan was negotiated for her by two individuals whom the president of the bank knew, who repre- sented to him that they were engaged in a deal with Mrs. Chad- wick, involving the sum of thirty thousand dollars, and that they had in their possession gilt-edged collateral to amply secure the loan. Relying upon their representations, and without seeing or obtaining possession of the securities, the president of the bank made the loan. This loan was paid at maturity and its prompt payment paved the way to the greater extension of credit which followed. This woman had more or less business dealings with the president of the bank and the cashier personally from that time on until about August, 1903, when she applied for a loan of eighty thousand dollars. In the meantime she appeared to have satisfied the president that she was the owner in equity of five 264 ROMANCE AND TRAGEDY OF BANKING million dollars of United States Steel five per cent, gold bonds, with the right of the income therefrom. She produced docu- mentary evidence showing that she was the owner of bonds, stocks and other securities in the hands of a prominent and wealthy citizen of Pittsburg, no less a personage than Mr. Andrew Car- negie, as trustee, to the amount of over ten millions of dollars. These documents were in legal form, neatly prepared and bore every evidence of being genuine, even to the signature of Mr. Carnegie and others. This loan of eighty thousand dollars was made and was sub- sequently increased to ninety-three thousand dollars to cover in- terest and charges, solely upon the confidence of the president of the bank in the truth of Mrs. Chadwick's representations. When the president of the bank found that the loan was liable to run for some time he bethought himself of security, and ob- tained from Mrs. Chadwick an assignment of two hundred and thirty thousand dollars of the steel bonds, with power of attorney attached and a statement from a prominent banker in a nearby city that he held in trust for her securities to the amount of three million dollars free of any lien whatever. She also exhibited to the president of the bank a will which she had prepared, making him the executor of her estate, in which all her securities were listed and described. Subsequently she obtained additional loans from the bank, ranging in amount from four to thirty-five thousand dollars, which she claimed was necessary for her to have temporarily to satisfy pressing creditors, pending a settlement of her liabilities in full. Finally she made an assignment of her alleged five millions of securities in the hands of her trustees to the president of the bank, individually, canceling the previous assignment to the bank of two hundred and fifty thousand dollars, which latter assign- ment was surrendered to her. The next move of this supposedly wealthy adventuress was to send by mail to her dupe, the president of the Oberlin bank, a check on a trust company in New York City for eleven thousand dollars, with a request for a New York draft in exchange. Her request was promptly honored, but the check proved to be worthless. -T^W ^ <<>. ^&& *0^ -^< n+-Ja**O( bO / 1 ' 0V ' ' < ///< < < c-kjivt .'*l4*0' ' ^ /?<>-'' S0fl . / ..'M' 1 '-'- VY * ' '#///* S/f/f/'fs/ Forged Carnegie Note for ^500,000, and Indorsements ROMANCE AND TRAGEDY OF BANKING 267 as Madam De Vere, a clairvoyant, who formerly resided at Toledo, Ohio, and who had served a term of nine and one-half years in the Ohio penitentiary for forgery. After her release from the penitentiary she is reported to have married a Dr. Chadwick, of Cleveland, and subsequently to have begun her career as a financier. Her method of operation seemed to be of the endless chain variety, borrowing from one creditor to pay another and by promptly meeting her obligations in this manner at maturity she acquired a financial standing and credit which enabled her to maintain and enlarge the scope of her operations until the end of the chain was reached in the collapse of The Citizens National Bank of Oberlin. The reputed wealth on which she based her operations and secured credit consisted of the following so-called securities, bear- ing the alleged signature of Andrew Carnegie: Two notes held by The Citizens National Bank of Oberlin for $500,000 and $250,000 respectively. One note for $500,000. A certificate for $5,000,000. A certificate of trusteeship for securities held by a trust com- pany in Cleveland for $7,500,000, making a total of $13,750,000. all of which proved to be forgeries. At the time of her dealings with the Citizens National Bank of Oberlin, she lived at Cleveland, Ohio. Her home, it was stated, was furnished elaborately, but displayed no special taste. Her parlors were filled with carvings, statuettes and ornaments im- ported from Europe, and numerous paintings adorned the walls, giving the interior of her home the appearance of wealth, but the furnishings appear to have been selected without discrimination or any definite plan of arrangement. After the failure of the bank she was indicted, tried at Cleve- land and convicted for defrauding the institution and was sen- tenced for a term of years to the same penitentiary in which Madam De Vere had been confined years before, where she died while serving sentence. Thus closed the career of probably the most notorious and successful bank swindler known in the annals of the national bank- ing system. 268 ROMANCE AND TRAGEDY OF BANKING The deluded president of the wrecked bank died before Mrs. Chadwick's trial and conviction, a victim of his own folly, caught in the meshes spread for him through his violation of the banking laws and the sacred obligation of his oath of office. The first false step in his dealings with Mrs. Chadwick was in making the original loan of thirteen thousand dollars, which was seven thou- sand dollars in excess of the legal limit. Each succeeding increase of credit was extended in an effort to secure and recover the previous loan, until the aggregate of her liabilities reached a point where the bank and himself individually became hopelessly in- volved, and the inevitable result followed. How many bankers who have read the story of this failure and the causes which led to it, will profit by the lesson it teaches? Every president, and every cashier who is a director of a national bank, is required by law to take and subscribe to an oath that he will not knowingly violate or willingly permit to be violated any of the provisions of the national banking laws. The president of The Citizens National Bank of Oberlin subscribed to this oath and his violation of it brought disaster upon his institution, loss to his depositors and stockholders, and financial ruin and dishonor to himself. There are presidents and cashiers of national banks who, while scrupulously honest in all their business dealings with their fellow men and religiously true to every trust reposed in them, deliberately violate their oaths of office with apparently no more compunction of conscience than had the president of the Oberlin bank. How such men reconcile themselves with their consciences it is difficult to imagine. Bank failures that have not been due to violations of law are very rare, and if every officer and director of a bank should be true to his oath of office, temporary suspensions occasionally might become necessary under extraordinary conditions, but in- solvency would not intervene, and the creditors and stockholders would not suffer loss. Because, if the officers and directors of the bank restrict the loans to any one individual or interest to the limit fixed by law, and do not undertake to circumvent its re- strictions by indirect methods, the loss upon any single loan would not be sufficient to seriously affect the bank or impair its ROMANCE AND TRAGEDY OF BANKING 269 solvency. It is the excessive loan, no matter in what form it may be made, that does the damage, and no officer or director can make such a loan, directly or indirectly, without violating his oath of office and inviting the consequences that follow. Obligations of Directors On one occasion a prominent member of Congress, who was at that time president of a national bank, called at the Comp- troller's office for a conference in regard to several excessive loans that had been made by his bank with his knowledge and consent. These loans had been freely criticised by the Comptroller and their reduction to the legal limit was insisted upon. He took exception to the criticisms on the ground that the loans were con- sidered perfectly safe, as all such loans are claimed to be, and in addition were well secured. He contended that they were the very best loans in the bank and that it was necessary for his bank to extend the accommodation in order to retain the business of these customers. The attention of this law maker was called to the fact that following his election as a director each year he had taken an oath that he would not violate or knowingly permit to be violated any of the provisions of the national banking laws. He admitted that these loans exceeded the legal limit and that they were made in violation of law with his knowledge and approval, and in answer to an inquiry as to how he reconciled himself with his conscience in thus deliberately violating the law, he replied, after some hesitation, that "he had not considered the matter in that light before." He was told that Congress made the laws and that it was the sworn duty of the Comptroller to enforce an observance of them without exception, and that the Comptroller had no power to waive a provision of the statute or to relieve or absolve him from the obligation of his oath of office. He finally declared that he would have the loans reduced to the limit and that thereafter while he was president of the bank he would not make or permit to be made any loan in excess of the legal limit. This incident is related simply to illustrate the conception that some officers of banks have of the obligation they assume, 270 ROMANCE AND TRAGEDY OF BANKING morally and legally, when they swear once each year that they will not wilfully violate or knowingly permit to be violated any of the provisions of the national banking laws. Unfortunately, they are not all as scrupulously honest in this respect as the director referred to, or as the Quaker directors of a national bank in Pennsylvania, who qualified their affirmation not to vio- late the law by adding the words "except as to the limit of loans." Arthur B. Spear, cashier of the Oberlin bank, was indicted and convicted for making false entries in the books of the asso- ciation for the purpose of deceiving the bank examiner and the Comptroller. Spear certified that according to the records of the bank Mrs. Chadwick had a certain deposit in the bank when the fact was she did not have any. It was alleged at the trial of Spear that he made the false entries by direction of the presi- dent, but that he had not profited in any way by the transaction. Beckwith, the president, having died before the trial of Spear, the brunt of the affair fell upon the latter. He was sentenced to the penitentiary for a term of seven years, but his sentence was commuted by the President before completion. In the liquidation of the bank under the receivership, the losses on assets compounded or sold under order of the court, amounted to $246,561. An assessment of one hundred per cent, was levied upon the stockholders, of which amount $47,171, or over seventy-six per cent., was collected, and seventy-seven per cent, was paid to the depositors and other creditors, amounting to $236,928.41. The receivership was finally closed June 30, 1913. Failures of the National Bank of North America and the Amsterdam National Bank of New York City The failures of the National Bank of North America and the Amsterdam National Bank of New York City, which occurred during the last year of Mr. Ridgely's administration, while not involving very large interests, were of no less importance because of the prominence of the parties concerned and the intimate rela- tion of these failures to the panic of 1907. ROMANCE AND TRAGEDY OF BANKING 271 These banks were not large institutions, measured by the standard of what constitutes largeness in New York City, and neither bank was insolvent when it was closed. The capital of the National Bank of North America was $2,000,000. Its deposits amounted to $6,890,000, and its total liabilities to $13,326,000. It was placed in the hands of a receiver by the Comptroller on January 27, 1908, after the adoption of a resolution by its board of directors requesting him to make an examination of the bank, and to take temporary charge of its affairs, if, in his judgment, the situation warranted such action. This resolution of the directors was not adopted because of any belief on their part that the bank was insolvent. But on account of the extreme difficulty experienced in realizing on the assets rapidly enough to enable them to meet the demands of depositors, which had been very heavy and persistent during the several previous days, and the fear of further large withdrawals, they deemed it best in the interests of the association to tempo- rarily suspend operations and thus prevent a sacrifice of the assets, which otherwise would have been necessary, as the Clearing House Association had refused to extend to the bank any further assistance. The persistent run upon this institution which necessitated its suspension was due wholly to a lack of confidence in the man- agement, of which Charles W. Morse was the controlling factor. Morse was known to be intimately associated with F. Augustus Heinze, who at that time was very much in the public eye, having acquired an unenviable reputation in connection with his pro- longed contest with the Standard Oil Company in Montana over a deal in Amalgamated Copper. He had been accused of having manipulated the courts and the Legislature of that State in his own interests, and of other dishonorable transactions in mining and banking, and Thomas W. Lawson made him the object of criticism in his articles on "Frenzied Finance." Morse, Hcin/c and their associates had the reputation of being speculators, or, at least, of being engaged in operations of very questionable merit. They jointly owned or controlled a number of small bank- ing institutions in New York, National and State. It was assumed, as a matter of course, that the speculative operations 272 ROMANCE AND TRAGEDY OF BANKING in which they were known to be engaged, were being financed by these banks, and this suspicion was not calculated to inspire con- fidence in the management of the banks or in the stability of the institutions with which they were connected. Consequently, on the first indication of a financial disturbance, these institutions were the object of distrust and attack, and the panic of 1907 forced them to succumb. That the National Bank of North America was not insolvent when it was closed was fully demonstrated by the rapid liquida- tion of its affairs under the receivership. Its creditors were paid in full with interest from the date of closing, and cash and assets amounting to $2,387,750 were returned to the stockholders. The receivership was finally closed October 31, 1908, within eight months from the date of suspension. New Amsterdam National Bank The New Amsterdam National Bank was closed under similar circumstances and liquidated with like results. The capital of this association was $1,000,000, its deposits $3,269,000, and its total liabilities $5,984,000. The bank was not insolvent when it was closed. This institution was known as the theatrical bank of New York City. Its depositors and customers consisted largely of actors, race track men, gamblers, saloon-keepers and sports- men. The bank was placed in the hands of a receiver January 30, 1908. Its depositors were paid in full with interest from the date of closing, and the receivership was finally terminated April 14, 1909, after turning over to an agent of the stockholders cash and assets amounting to $1,027,612. After the elimination of F. Augustus Heinze from the Mer- cantile National Bank and the closing of the National Bank of North America and the New Amsterdam National Bank, the Federal authorities at Washington put expert accountants on the books of these three institutions for the purpose of ascer- taining whether any criminal violations of law had been com- mitted by Heinze, Morse and others in connection with their management of these banks. As a result of these investigations Heinze and Morse were indicted by the Federal Grand Jury for ROMANCE AND TRAGEDY OF BANKING 273 misapplication of the funds of the Mercantile National Bank and falsification of the books of the National Bank of North America in connection with certain loans made upon the stock of the American Ice Company, a Morse concern. Morse was tried first. His trial covered a period of several weeks, and resulted in a verdict of guilty. He subsequently resorted to every known means and legal technicality to secure a new trial, but without avail, and was finally sentenced to a term of fifteen years in the penitentiary at Atlanta, Ga. After serving about two and a half years of his sentence, Morse was pardoned by President Taft because of failing health, it having been represented to him, and substantiated by medical experts after an examination, that he would live but a few months if his incarceration in prison were continued. Heinze was more fortunate. He was tried some months later and acquitted. The original indictment of Heinze in 1909 con- tained a number of counts, many of which were stricken out by the court on the trial of the case upon technical grounds. The court held that the indictment charging misapplication of the funds of the Mercantile National Bank was defective because it did not charge conversion of such funds, and that the word "con- version" was necessary as supplying the legal measure, which the court was unable to find in the indictment for "willful mis- application." In 1910 Heinze was again indicted on practically the same charge, the indictment alleging that the purpose of the misap- plication of the funds of the bank was to inflate the stock of the United Copper Company. The indictment was again found to be faulty and was quashed. The Government then appealed from the decision of the court to the Supreme Court of the United States, under the Act of Congress of March 2, 1907, authorizing an appeal by the Government in criminal cases involving points of law. On December 5, 1910, the Supreme Court reversed the decision of the United States Circuit Court of New York and held that the various counts in the indictments referred to charg- ing Heinze with misapplication of the funds of the bank were sufficient. But as the transactions covered by the indictments on which the Supreme Court ruled were practically the same as those 274 ROMANCE AND TRAGEDY OF BANKING covered by the indictment on which Heinze was tried and acquitted during the previous spring, no further action was taken by the Government, and Heinze escaped punishment. The Farmers and Drovers National Bank of Waynesburg, Pa. The Farmers and Drovers National Bank was placed in the hands of a receiver on December 12, 1906. This was a very old and reputable institution. It was originally organized in 1835, and became a national association on February 25, 1865. Before its conversion into the national system it had the reputation of having been a strong, successful and conservatively managed institution. The capital of this bank was $200,000 and its deposits were nearly $500,000. It was not a large bank, but for rascality of management it has not been surpassed. For some time before its failure it was known by the Comp- troller's office to have been freely rediscounting its bills receiv- ables and otherwise borrowing money. The national banking laws limited the liabilities of a bank for borrowed money to an amount not exceeding the capital stock of the association. When the reports of the bank examiner showed that the liabilities of this bank of the nature indicated largely exceeded the capital of the association, strenuous measures were resorted to to secure a reduction of the amount to at least the legal limit. There was no evidence furnished or obtainable upon which to base a sus- picion that the bank was insolvent, and without such evidence, or well-grounded suspicion, the Comptroller had no authority under the law to close and take possession of the association. The bank was practically in charge of an examiner for some time before it was closed, for the sole purpose of securing a reduction in the large line of rediscounts, and it was supposed that reason- able progress was being made in this connection, when it was discovered that the books of the bank did not reflect its true condition in respect to the extent of these liabilities. The exam- iner was then promptly instructed to close its doors pending a thorough investigation to determine its true condition. On November 12, 1906, the date of the last report of con- dition made by the bank previous to the date of its closing, the ROMANCE AND TRAGEDY OF BANKING 275 notes and bills rediscounted were reported as $349,4-74.61, or $149,474.61 in excess of the capital stock of the association, and the amount due to banks and bankers was shown to be only $3,674.71. Upon taking charge of the bank one month later, the exam- iner who had been appointed temporary receiver, found that the rediscounts were several hundred thousand dollars greater than the amount reported and that the books of the bank were so grossly falsified as to be wholly unreliable. Numerous notes were presented to the receiver soon after his appointment, bearing the endorsement of the Farmers and Drovers National Bank, which had been rediscounted in good faith by other banks, but did not appear as a liability of the Waynesburg bank upon its books. Several months before this bank was closed, information was received by the Comptroller from outside sources that the bank was borrowing money freely and that its published reports of condition did not correctly show these liabilities. The examiner was advised of this fact and instructed to make a thorough investigation of the bank's condition in this respect. His exam- ination covered a period of from twelve to fourteen days. At the commencement of this examination the cashier, who was the sole manager of the bank, informed him that the bank had no liabilities for rediscounts other than those shown by its books. During the progress of this examination evidence was obtained through the examination of other banks, which completely refuted this statement of the cashier. When he was confronted with the evidence of these rediscounts and asked why they did not appear upon the books of the bank, the cashier produced a private book which he kept in his desk, the existence of which was previously unknown to the examiner. An examination of this record showed rediscounts largely in excess of those theretofore discovered by the examiner, but even this record did not contain a complete list of such liabilities. Outside investigation was continued by the examiner, without any clue or assistance from the cashier, until liabilities for rediscounts were uncovered aggregating the enor- mous sum of nearly $620,000, not a dollar of which appeared upon the books. One of the cashier's plans of operation was to make a deposit with a bank, shift all balances to that bank. 276 ROMANCE AND TRAGEDY OF BANKING then borrow from it as much as possible, checking out the account and leaving an overdraft. When this condition of affairs was discovered by the exam- iner he required the cashier to give the bank security in the nomi- nal value of at least three hundred thousand dollars to cover any losses on the rediscounted paper, or any liabilitity of the cashier individually resulting from his acts. While the cashier was criminally liable under the law for falsification of the books of the bank and reports made to the Comptroller, there was no evidence of insolvency of the associa- tion, and there was no reason to believe at that time that the rediscounted paper was not collectible. But as the cashier was found to be wholly unreliable and unsafe, the next and only course for the Comptroller to pursue was to demand his resig- nation or removal from the bank, pending the presentation of the evidence of criminal violations of law against him to the United States Attorney and placing the bank in a condition to with- stand the effect of the disclosures which would follow his arrest. This demand was promptly made, insisted upon, and complied with on August 27, 1906, but was not carried out in good faith by the directors of the bank, who, secretly and without the knowl- edge of the examiner or the Comptroller, elected him vice-presi- dent of the association, and continued him in a position which enabled him to still carry on his nefarious operations, and it was not known by the Comptroller that this action had been taken by the board until the name of this cashier appeared as vice- president in the next report of condition of the bank made some time later. Under such a condition of affairs, with deception practiced upon him at every turn, and the records of the bank's trans- actions wholly unreliable, it was absolutely impossible for the examiner to determine the true condition of this bank during its active existence, and it was months after the association had been placed in the hands of a receiver before the extent of its lia- bilities on rediscounted paper could be definitely ascertained, and then only through the slow process of awaiting the filing and proving of claims of creditors. ROMANCE AND TRAGEDY OF BANKING 277 Many of the notes found in the bank were later proven to be forgeries when presented by the receiver for collection, and a number of those that were genuine were claimed by the makers to have been paid at maturity, but were carelessly left in the bank after payment, thus demonstrating the loose methods which prevailed, not only on the part of the bank in the conduct of its business but by some of its customers in their dealings with the institution. Much of the rediscounted paper that was not forged was in the names of makers who were financially irresponsible and con- sequently was uncollectible. As is usual in such cases, the examiner and the Comptroller were severely criticised and censured for not discovering during the active existence of this bank the conditions which were dis- closed subsequent to its closing, and the Comptroller was charged with having a knowledge of these facts for months before he took possession of the association. Mr. Ridgely was Comptroller at the time and the criticisms referred to were directed against him. It was charged editorially by some of the newspapers that the bank was permitted to con- tinue in business long after it was known by the Comptroller to be in a most unsatisfactory condition, in order to subserve the interests of some of the officials of the bank who were candidates for political office at the approaching election. Allegations of this character and of a similar nature are usually without any foundation in fact, and display the ignorance or malice of those responsible for them. Whenever a national bank fails, no matter from what cause, the examiner and the administrative officials charged with the duty of supervising the banks are criticised with more or less severity by the press and the public in general and by the depos- itors and stockholders of the failed institution in particular. The examiner is usually held responsible for not promptly discov- ering and reporting the unsatisfactory conditions which led to the failure, or administrative officials are censured for undue leniency, while, as a rule, the facts are that there was neither negligence nor incompetency on the part of the examiner nor undue forbearance on the part of the supervising officials. As 278 ROMANCE AND TRAGEDY OF BANKING before stated, sincere and intelligent criticism of the manner in which public officials discharge their duties are generally whole- some and productive of beneficial results, but erroneous criticism is not only harmful in its effect but is unjust to those against whom it is directed, and when applied to bank examiners or to those charged with the administration of the banking laws, is generally based upon ignorance or misconception of the law, or the facts, or both, and is therefore misleading and accomplishes no good purpose. Bank examiners are not infallible, and they do not always discover and size up a condition as it really exists, but instances of this kind are the exceptions and not the rule. Their estimates as to the real condition of a bank are generally reasonably accurate. Their powers are limited. They may sug- gest where they have no authority to direct, and if their advice or suggestions were followed by bank officers they would always be found to be on the side of safety and in the interest of good banking. Ridgely's Policies of Administration Mr. Ridgely's administration of the Comptroller's office was not characterized by any spectacular, sensational, or demagogic methods. His policy was to require the banks to observe the law and to enforce such observance by every lawful means within his power. He respected the law himself and did not exceed his statutory authority in dealing with the banks by an arbitrary assumption of powers which the law did not confer upon him. Neither did he seek to evade responsibility or criticism by throw- ing the blame upon the examiner when the examiner was not at fault. He invariably supported the examiner in his efforts to honestly and courageously perform his duty, and the examiners who served under him were confident that they would receive such support no matter what influences might operate against them. He applied the same rules of supervision and construction of the law to all banks alike, large and small, without distinction and without fear or favor. He recognized the defects in the statutes, so far as enforcible remedies were concerned, but did not arro- gate to himself legislative powers by the adoption of unauthor- ized administrative regulations. He administered the law as he ROMANCE AND TRAGEDY OF BANKING 279 found it on the statute books and not as he thought it should be. Its defects he recognized and pointed out to Congress and suggested the remedies, as the law requires the Comptroller to do in his annual report to that body, and until such remedies were supplied by legislative enactment he was content in the consciousness of having performed his duty, regardless of criti- cism, confident that any investigation of his official course would sustain him and place the responsibility where it belonged. An investigation of Mr. Ridgely's course of action in con- nection with the Farmers and Drovers National Bank of Waynes- burg, or any other failed bank during his administration of the Comptroller's office, will show no just grounds for criticism. Rinehart, the cashier of this bank, who was responsible for the wrecking of the institution, was indicted, convicted and sen- tenced to a term of twelve years in the penitentiary, but only partially paid the penalty for his crime. He was pardoned by a too merciful President before serving out his term. The losses on assets sold and compounded under order of the court amounted to $1,356,281.90. The stockholders were assessed one hundred per cent, on their stock holdings, of which amount $149,271 was collected. The creditors have received dividends aggregating sixty per cent, of their claims, amounting to $1,050,121. The Crisis of 1907 For ten or twelve years immediately preceding the panic of 1907, there was a steady increase in prices generally and in all forms of commercial and industrial activities, legitimate and speculative. Large sums of money were required and used in the development and equipment of railroads, oil and mining prop- erties, and manufacturing and business undertakings generally, and large blocks of stocks and bonds of a highly speculative character were forced upon the market, a considerable portion of which were of a fraudulent and criminal nature. It was impossible under such a condition of affairs to draw the line absolutely between legitimate and conservative enter- prises and speculative ventures which absorbed credits and tied up in the form of fixed and unproductive investments such a large 280 ROMANCE AND TRAGEDY OF BANKING proportion of the working capital of the country that there was not sufficient left to meet the demands of legitimate business and to finance the enterprises which had been undertaken. As is usual under such conditions, the tightening of the money market was the first symptom of approaching danger and the first indication of liquidation manifested itself in the stock market by a decline in stock and bond quotations. Loans became diffi- cult to obtain or to renew, and interest rates increased. It was, of course, natural, and probably inevitable, that under such a condition of expansion it required only an incident to produce or precipitate a first-class panic, involving not only speculative and fraudulent ventures, but also legitimate and con- servative undertakings as well. The immediate incident which precipitated the panic of 1907 was the collapse of the corner in the stock of the United States Copper Company, which had been engineered by the firm of Otto Heinze & Company, composed of the brothers and associates of F. Augustus Heinze, of Montana. In the summer of 1907, F. Augustus Heinze made his appearance upon the financial stage in New York City, having obtained control of enough stock of the Mercantile National Bank of that city to secure his election to the presidency of that institution. The Mercantile National Bank was a very old and reputable institution. It was originally organized as a State Bank in 1850, under the name of the Mercantile Bank, and was converted into a national association April 15, 1865, under the title The Mer- cantile National Bank. The capital stock of this association at the time Heinze secured control was $3,000,000. Its total re- sources and liabilities were $31,359,358 respectively, and its deposit liabilities were over $22,000,000. After acquiring control of the management of this bank Heinze appears to have employed the resources of the institution to a considerable extent in furtherance of his copper enterprises and speculations, until the creditors of the bank became sus- picious and distrustful of his operations and commenced to with- draw their funds. The failure of the copper corner brought matters to a crisis, and the bank, being unable to meet its clear- ings, was compelled to appeal to the Clearing House Association ROMANCE AND TKAGEDY OF BANKING 281 for assistance. An examination of the association was made by a committee of the Clearing House for the purpose of determin- ing its condition, which showed that it was not only solvent, but had a large surplus intact after eliminating every loan to the Heinze interests which was considered doubtful or worthless. The Clearing House Association therefore determined to support the bank, upon the condition that Heinze and his entire board of directors would resign and retire from the management of the association. On the morning of October 21, 1907, the bank opened for business under an entirely new board of directors, Heinze and his associates having been eliminated. The support of the Clearing House Association, however, did not prove suf- ficient. Withdrawals continued, and a run was started upon the Knickerbocker Trust Company, which was believed to be in a badly extended condition and was under suspicion because of the relations of its president, Charles T. Barney, with Charles W. Morse in his speculations. The capital of the Trust Company was $1,200,000, and its deposits were over $48,000,000. The run upon this institution continued with such persistency that the company was compelled to close its doors on October 22. The suspension of this insti- tution seriously aggravated the situation and added to the spirit of unrest which prevailed, resulting in protracted runs upon a number of banks and trust companies, and the failure of ten State banks, two trust companies and one national bank in New York City and vicinity. The Mercantile National Bank was unable to recover from the strain to which it was subjected under the Heinze-Morse regime and was compelled to go into voluntary liquidation in January following. These successive failures led to the issuing of Clearing House certificates by the New York City banks, and similar action was followed by nearly all the banks in all the large cities throughout the country. If this banking crisis had not been precipitated in New York City by the suspicion and distrust of Heinze, Morse and their associates, although conditions were ripe for a panic, it is reason- able to assume that the liquidation that had been going on in the stock market would have proceeded more slowly and quietly and 282 ROMANCE AND TRAGEDY OF BANKING that nothing more serious than a gradual decline in business activities would have occurred, instead of the widespread panic which followed. Aetna Banking and Trust Company of Butte, Mont. F. Augustus Heinze had also been connected with the Aetna Banking and Trust Company of Butte, Mont., which had a branch office in Washington, D. C. This branch had been in operation for some time before banks in the District of Columbia, other than national and trust companies, organized under Fed- eral laws, were placed under the supervision of the Comptroller of the Currency. When all banks in the District of Columbia, no matter under what authority organized, were by Act of Con- gress placed under the Comptroller's supervision, the Washing- ton branch of the Aetna Bank and Trust Company was the first of this class of banks to be examined by the national bank exam- iner, because of numerous inquiries the Comptroller had previ- ously received from time to time as to its financial standing and methods of operation. It did not take the examiner more than a half hour after entering the bank to discover that it was not only hopelessly insolvent, but that its operations were fraudulent in the extreme and criminal, and the examiner was instructed to immediately close its doors and take possession of its assets, if any could be found, pending his appointment as receiver. By the Act of Congress approved June 25, 1906, amendatory of the Code of the District of Columbia, all banks and trust com- panies organized under the laws of any of the States of the Union, having an office or banking house located within the District of Columbia, for the receipt of deposits or savings, were made sub- ject to the provisions of the national banking laws in respect to making and publishing reports of condition, the same as national banks are required to make and publish, and the Comptroller was authorized to examine and take possession of any such bank, company or corporation, for the same reasons and in the same manner that he was authorized to examine and take possession of a national bank. ROMANCE AND TRAGEDY OF BANKING 283 As the Aetna Banking and Trust Company was not a national bank, and did not operate under the national banking laws, it was necessary to prepare a special form of commission in appoint- ing a receiver for the Washington branch, and the Comptroller's counsel was instructed to prepare a form that would meet the requirements of law. After looking into the law on the subject, counsel advised the Deputy Comptroller, who at that time was acting Comptroller, that he had no authority under the law to appoint a receiver for the branch bank, unless he was satisfied that the parent bank at Butte, Mont., was insolvent, as the parent bank was liable for the debts of the branch, and if the former was solvent, the branch was not insolvent. The Deputy Comptroller advised his counsel that he did not know what the condition of the parent bank at Butte was, but he did know that the Washington branch was nothing but a fraud, and a swindle upon the people of Washington, who were deposit- ing their money in it, and that it was his purpose to place it in the hands of a receiver. Counsel replied that there was no doubt of the fraudulent character of the branch, and that it ought to be placed in charge of a receiver, but as counsel for the Comptroller, he said he must advise him that he had no authority to appoint a receiver, except under the conditions stated. The Deputy Comptroller said that he would assume responsi- bility for appointing a receiver, and leave it to the parent bank to question or dispute the legality of his action, and instructed his counsel to go ahead and prepare the commission. A receiver was appointed, and, within an hour afterward, advice was received by wire that the parent bank at Butte had been closed. The Deputy Comptroller immediately wired the national bank examiner who covered that territory to go to Butte and take possession of the parent bank in the name of the Comptroller of the Currency, and that he would appoint him receiver upon receipt of advice that he had taken charge of the bank. The Comptroller's counsel advised him that he had no author- ity to take possession of a State bank. The Deputy Comptroller 284 ROMANCE AND TRAGEDY OF BANKING replied that he would let the State authorities raise that question. Upon receipt of a wire from the national bank examiner that he had arrived at Butte and had taken possession of the bank, the Deputy Comptroller wired him to immediately forward to the Treasurer of the United States, for credit of the Comptroller of the Currency, for account of the creditors of the Aetna Bank- ing and Trust Company, all the cash in the bank, the purpose being to remove these funds from the jurisdiction of the State authorities, in order that in the liquidation of the affairs of the bank, the Washington creditors might be assured that they would receive their share of any dividend that might be paid. Up to this stage of the proceedings neither the bank officials nor any of the State authorities had questioned the right of the Comptroller to take possession of, and appoint a receiver for the Aetna Banking and Trust Company, but several months later, in a suit brought by the receiver against the Bank of Discount of the City of New York, to recover a sum of money due his trust, the question was raised by the defendant as to the authority of a receiver appointed by the Comptroller of the Currency, for a State banking corporation, having an office or branch in the District of Columbia, to sue in the Circuit Court of the United States, for moneys due or property belonging to such banking corporation, when such debt is due from or the property is in the possession of persons outside of the District of Columbia. It was contended by the counsel for the receiver, that if such a doctrine should be allowed to prevail, all that was necessary for a banking corporation doing business in the District of Columbia to do, to render the Act of Congress ineffective, was to remove its assets over the line into Maryland or Virginia, and the receiver would then be powerless to recover. In such an event the cred- itors of the bank residing in the District would be compelled to institute suit in the State in which the bank was incorporated, and follow the assets as best they could. The court very properly held that if a banking corporation organized under the laws of a State, saw fit to go into the Dis- trict of Columbia, and there to do business, it must conform to the laws of the District, and in case it did not, and became insol- vent, the Comptroller could so declare and appoint a receiver ROMANCE AND TRAGEDY OF BANKING 285 of all its assets, no matter where located, and apply such assets according to the provisions of the laws of the United States to the satisfaction of the claims of all the corporation's creditors. The court declared that Congress intended that the Comptroller should have the right to appoint a receiver for the corporation, and not only for the branch doing business in the District of Columbia, and that under such authority, the receiver had the right to take possession of the assets of the corporation wherever situated. This decision of the court, therefore, sustained the position taken by the Deputy Comptroller in the beginning, contrary to the advice of his counsel. Returning to the panic of 1907, from which this discussion .somewhat digressed, the results of this crisis demonstrated that the national banks in New York City were in a very much stronger condition than the trust companies or State banks. There were no other failures of national banks in New York than those mentioned. The First National Bank of Brooklyn was forced to close its doors on October 25, 1907, on account of the failure of the Williamsburg Trust Company and the Jenkins Trust Company, of which latter company, the First National was the Clearing House agent. The suspension of the First National Bank of Brooklyn was made necessary in order to avoid the liabilities which would have accrued from checks of the Trust Company being presented for payment to the national bank through the Clearing House. These two trust companies were largely indebted to the First National Bank, but the bank reorganized shortly after its suspension and resumed business February 4, 1908, and became a flourishing institution. The weak point in the situation in New York City during this crisis was the vulnerability of the trust companies which had been receiving commercial deposits and not carrying against them commercial bank reserves. This question of reserves had been a matter of controversy between the banks and the trust companies for years, and this panic demonstrated absolutely the correctness of the contention of the Clearing House banks that trust compa- nies should carry a cash reserve against commercial deposits the 286 ROMANCE AND TRAGEDY OF BANKING same as commercial banks are required to carry, and led to the enactment of the law of 1908, requiring trust companies in New York City to maintain a reserve of fifteen per cent, on demand deposits. The reports of the Comptroller of the Currency do not con- tain complete information as to the number of failures of bank- ing institutions other than national, as a result of this panic, but approximately practically thirty-one trust companies and State banks closed their doors in New York City and vicinity, while only two national banks were closed in the city and one in Brooklyn. The same conditions existed throughout the country in respect to national associations. Cash payments were suspended largely in some places and entirely in others, and the banks gen- erally resorted to the use of Clearing House certificates in the settlement of transactions between themselves, and all forms of scrip were used as substitutes for money in dealing with their customers. Cash reserves accumulated in the banks, reaching in some instances as high as fifty per cent, of the deposit liabilities. The effect of this money hoarding, which was more prevalent among the banks than with individuals, was a money famine everywhere and a general paralysis of business. A peculiar feature of this panic was that while it started in New York City, through the lack of confidence of the public in certain banks, it spread over the country through a lack of con- fidence of the banks in each other, or rather a knowledge of their inability to obtain from their city correspondents the balances that were due them. This latter phase of the situation was attributable to our defective reserve laws, which permitted country, or what were known as fifteen per cent, reserve banks, to count as lawful money reserve nine per cent, in balances due them from approved reserve agents in reserve and central reserve cities, and twenty-five per cent, reserve banks to count as reserve twelve and one-half per cent, in balances due them from approved reserve agents in cen- tral reserve cities. The panic of 1907 clearly demonstrated both to the banks and the public that this so-called reserve was not reserve at all, ROMANCE AND TRAGEDY OF BANKING 287 as it was not available on demand, and the accumulation of this large amount of money in New York City banks, which at the time of the panic aggregated $242,236,850, was the means of spreading over the entire country a currency disturbance which might otherwise have been confined to New York City alone, or at least to that vicinity. Notwithstanding the severity of this panic from October 1, 1907, to January 31, 1908, only twelve national banks failed throughout the entire country, and more than half of these fail- ures were due to causes having no direct connection with the panic. Defective as our national banking laws were in respect to reserve privileges and requirements, and difficult as it was for the Comptroller of the Currency to compel the banks under the most favorable circumstances to maintain at all times the reserve required, this difficulty was made more perplexing during Mr. Ridgely's administration by the action of the then Secretary of the Treasury, Leslie M. Shaw, who, without warrant of law, excepted United States deposits from reserve requirements, when the statute plainly required a reserve to be carried "on deposits in every respect." While Congress subsequently legalized the action of the Sec- retary of the Treasury by amending the law to except Govern- ment deposits from reserve computations, this fact did not make the Secretary's action any the less unlawful at the time. It is true that there never was any real necessity for carrying a reserve on Government deposits, such deposits being specially secured by United States bonds held by the Treasury Depart- ment. At the time the Secretary made this exception, however, the law made no distinction between Government and any other deposits, but required reserve to be carried against all deposits of every kind and class. Therefore, the Secretary of the Treas- ury had no authority to assume legislative powers and relieve the banks from the statutory requirement of maintaining a reserve on such deposits. But contrary to law as the Secretary's action was in this respect, his subsequent attitude, as disclosed by his public utter- L'SS ROMANCE AND TRAGEDY OF BANKING anccs and private conferences with bankers on the reserve ques- tion, was much more so. In an address before the bankers of the District of Columbia and Maryland he advised them to use their reserves whenever they had a pressing demand for loans. This, he said, in sub- stance, was what a bank's reserve was for, and not to be locked up in the bank's vaults when the business needs of their respective communities demanded money. This was a most peculiar statement for the Secretary of the Treasury to make, especially in the face of the provision of law which prohibited a national bank from making any loan when the lawful money reserve was below the legal requirement, and also prohibited the declaration of any dividends while the reserve was deficient. The Secretary of the Treasury had no direct supervision of the national banks. That power was vested in the Comptroller of the Currency. If a bank neglected or refused to make good a shortage in reserve after due notice from the Comptroller to make such deficiency good, the association was subject to a receiver- ship, but such receiver could be appointed only with the approval of the Secretary of the Treasury. This was the only exception in the banking laws which required the concurrence of the Secre- tary of the Treasury in the appointment of a receiver for a national bank. In all other cases the sole power of appointment was vested in the Comptroller of the Currency. If, therefore, the Secretary of the Treasury who excepted public deposits from reserve requirements, before the law author- ized such exception, had instructed the Comptroller of the Cur- rency not to require the banks to carry reserve on such deposits, and the Comptroller, in recognition of the requirements of law, and in the exercise of his authority under the statute, declined to make the exception, what would have been the result? The Comptroller would have had no power to enforce the penalty for non-observance of the statute, as the Secretary would have said to him, "If you require the banks to carry reserve against Gov- ernment deposits and they neglect or refuse to do so, I will not concur in the appointment of a receiver for such banks," and there the matter would have ended. But the spectacle was pre- KOMANCE AND TRAGEDY OF BANKING 289 sented of the Comptroller of the Currency endeavoring to compel the banks to observe the law, and the Secretary of the Treasury advising them not to do so. A few days before the Secretary of the Treasury made the press announcement relieving public deposits from reserve re- quirements, the Comptroller had made a call upon the national banks for a report of condition, and the reports were coming in and being examined and abstracted. The Comptroller had given no instructions in regard to changing the rule in respect to com- putation of reserve, and public deposits were being included in the computation as usual. A correspondent of a New York City newspaper called at the office and inquired of the Deputy Comp- troller what was being done in regard to relieving the banks from carrying reserve on public deposits. The deputy informed him that there had been no change in the law or the rule of the office in that respect. On this information the correspondent wired his paper a sensational despatch to the effect that there was friction between the Comptroller and the Secretary in regard to reserve requirements and that the former had overruled the latter. As a result of this telegram Wall Street passed through a severe panic for about twenty minutes in the last hours of trading on October 3, 1902. According to the account of one of the New York newspapers, the news from Washington was so disturbing and so plausibly authentic that for a time the market, which had been firm almost to buoyancy, was suddenly checked, and room traders and specu- lators were taken completely by surprise. Brokers on the floor of the Stock Exchange, observing the sudden check in orders from their offices, started to make inquiry as to the cause, but before they could do so were overwhelmed with orders to sell. Stocks dropped from one to five points, irrespective of value, but St. Paul suffered the most. The Secretary of the Treasury was ap- pealed to for a confirmation or denial of the report, and, after conference with the Comptroller, issued the following statement: A wholly unfounded report appears to have been sent from Washington yesterday, calculated to mislead with reference to the action taken by the Secretary of the 290 ROMANCE AND TRAGEDY OF BANKING Treasury relative to the maintenance of reserve against government deposits secured by government bonds. That there may be no misunderstanding either as to the law or the action taken by the department, the banks are advised that the National Bank Act lays down the rule that all associations shall maintain certain reserve against all deposits, failing to do which, the Comptroller of the Currency may, with the concurrence of the Secretary of the Treasury, appoint a receiver. The law, therefore, lays down the rule that the reserve shall be maintained, but lodges a discretion with the Comp- troller and with the Secretary as to the enforcement of the rule. You are therefore notified that the rule will not be enforced so far as it relates to government deposits secured by government bonds. It must be borne in mind in this connection that it is not the intention of the department to encourage increased credit. On the contrary, very great conservatism should be exercised. But it is the desire of the department that no worthy business interest shall suffer simply because a bank has invested its money in government bonds to secure government deposits, and to that extent has relieved the Treasury Department from a growing surplus and thus restricted its capacity to extend accommodations. While the law vested in the Secretary of the Treasury and the Comptroller of the Currency discretionary powers in regard to the appointment of a receiver for a bank which neglects or refuses to maintain the legal reserve, there was no authority or discre- tion vested in either of these officers at that time to except de- posits, secured or unsecured, from the reserve requirements, and if the Secretary had the power to except Government deposits from reserve, simply because they were secured by Government bonds, he also had the power to except any other deposits that were satisfactorily secured. The most creditable phase of this remarkable disregard of the requirements of the law was the fact that the New York City banks declined to recognize the Secretary's authority to make such exception, and the following day the Clearing House Asso- ROMANCE AND TRAGEDY OF BANKING 291 elation announced that twenty-five per cent, reserve would be carried upon total deposits, the same as usual, without exception. When the correspondent who was responsible for sending the sensational message which caused the flurry in Wall Street, called at the Comptroller's office the next day, he was asked to explain why he sent such a despatch. He replied that he did so upon the authority of the Deputy Comptroller, who informed him that no change had been made in the rule for computing reserve, and that he assumed that as the Secretary had announced that reserve would no longer be required to be held against Government de- posits and as the Comptroller was still including such deposits in reserve calculations, there must necessarily be some friction between the Comptroller and the Secretary on the subject, and he so wired his paper. Up to the time the Secretary issued the statement above quoted, there had been no conference between him and the Comp- troller on this subject. The Secretary was in New York City at the time he made the first announcement, and nothing was known in the Comptroller's office of his contemplated action ex- cept what was contained in the newspapers. Life of Receiverships The average life of receiverships of national banks is about four years. The shortest receivership in the history of the national system was that of the Metropolitan National Bank of Cincinnati, Ohio. This bank had a capital of $1,000,000. The association was placed in the hands of a receiver February 10, 1888. The creditors were paid in full within thirty-five days from the date of closing, and the bank was turned over by the receiver to an agent elected by the stockholders, with remaining assets of the nominal value of $1,164,063. This bank was not insolvent at the time it was closed, as the speedy liquidation demonstrated, but it was in a very weak con- dition, due to an inefficient management. The officers and direc- tors were heavy borrowers and resorted to irregular methods to conceal large loans. False reports of condition and other crimi- nal violations of law were discovered. The growing distrust of 292 ROMANCE AND TRAGEDY OF BANKING the depositors in the management of the institution led to the adoption of a resolution by the board of directors to close its doors, with the results above described. The most prolonged receivership of a national bank was that of the Third National Bank of Chicago, 111. A receiver was appointed for this bank November 24, 1877, but its affairs were not finally closed until December 31, 1907, thirty years after- ward, during the closing months of Mr. Ridgely's administration. Within five years after the bank failed, however, the receiver had paid the creditors in full, with interest from the date of closing. The reasons for the prolongation of this receivership, and the unusual results attained in the liquidation of the trust, were that the real estate in and around Chicago which came into the pos- session of the receiver, enhanced very materially in value with the growth of the city. The Act of June 30, 1876, required the Comptroller to call a meeting of the stockholders of a failed bank after the creditors had been paid in full, for the purpose of elect- ing an agent to whom the receiver should turn over the remaining assets for liquidation for their benefit and thus terminate the receivership. A meeting was promptly called in this case, but the stockholders were unable to agree upon the selection of an agent and the bank was continued in the hands of the receiver. To meet this situation and any similar contingency, the Act of June 30, 1876, was amended by the Act of August 3, 1892, authorizing the shareholders of an insolvent bank to determine by ballot at a meeting called by the Comptroller for that pur- pose, whether to elect an agent or to continue the receivership until the affairs of the association were finally wound up. On January 11, 1893, another meeting of the shareholders of this bank was held, at which they elected to continue the receivership until final liquidation. Ridgely's Annual Reports During Mr. Ridgely's term of six and one-half years, he sub- mitted seven annual reports to Congress, his first report covering eleven months of the term of his predecessor, Charles G. Dawes. In concluding this report Mr. Ridgely gave credit to his prede- ROMANCE AND TRAGEDY OF BANKING 293 cessor for many of the suggestions and much of the statistical information which the report contains, and commended him for the high state of efficiency in which he found the Currency Bureau when he took charge, and the thoroughness of its organization. This worthy tribute to his immediate predecessor was char- acteristic of Mr. Ridgely's appreciation of merit and justice, and is in striking contrast with the attitude of his successor in office, as will appear later on. In addition to the usual statistical information, Mr. Ridgely's reports contain many practical suggestions and recommendations for improvements in our banking and currency laws, and con- tribute a valuable addition to the literature of the Comptroller's office on these subjects, particularly in respect to the currency laws and their bearing upon bank panics. Mr. Ridgely, like all of his predecessors, recognized the neces- sity for some important changes in the banking and currency laws, which, in his judgment, would have corrected some of the defects in the statutes and otherwise have improved the service. Following the direction of the statute, he submitted in his annual reports to Congress a number of recommendations for amendments to the laws, many of which were not new, but were similar in thought and purpose to changes suggested from time to time by former Comptrollers, who were of the same opinion as to the necessity for such legislation and therefore his views on these subjects were entitled to additional weight. But the history of the Bureau shows that while the law required the Comp- troller to recommend to Congress such amendments to the laws as experience in their practical operation and administration had shown to be necessary, very little attention was given such recom- mendations by the legislative branch of the Government. This fact is particularly exemplified by the recommendations made for an amendment to Section 5200 of the Revised Statutes, in regard to the limit of loans that the banks might make. For more than thirty years Comptroller after Comptroller recom- mended, not only once but repeatedly, an amendment of this pro- vision of law, but without effect, until the passage of the Act of June 22, 1906, during Mr. Ridgely's administration, which in- creased the limit of loans to ten per cent, of the capital and sur- 294 ROMANCE AND TRAGEDY OP BANKING plus of the bank. It required over thirty years to secure this amendment, and then the statute was not amended as it should have been. The most important of the amendments to the law recom- mended by Mr. Ridgely, were the following: A repeal of the provision of the Act of March 14, 1900, re- stricting the amount of national bank notes of the denomination of five dollars to one-third of the outstanding circulation of the issuing bank. This limitation had not worked satisfactorily to the banks or to the Comptroller's office, and was opposed by the Comptroller before it became a law. After the bill passed the House of Rep- resentatives, containing this restriction, and while it was still pending in the Senate, the attention of Mr. Brosius, of Pennsyl- vania, who was then chairman of the Committee on Banking and Currency of the House of Representatives, was called to the provision and the objections thereto set forth. Mr. Brosius stated that this limitation was incorporated in the bill through inadvertence; that the intention was to restrict the issue of na- tional bank notes of the denomination of five dollars to one-third of the total circulation outstanding of all the banks, and not to one-third of the outstanding circulation of each bank. As a matter of fact the proportion of five-dollar national bank notes to the total national bank circulation outstanding had not exceeded thirty-one per cent, since 1874, so that there was no necessity for this restriction in the Act of March 14, 1900. Mr. Brosius and a representative of the Comptroller's office had a conference with Senator Aldrich, chairman of the Finance Committee of the Senate, in regard to this provision, while the bill was still pending in the Senate, and the latter agreed to correct the objectionable feature in conference, but the provision remained in the bill as it passed the Senate and so became a law. At the hearing before the National Monetary Commission on December 2, 1908, attention was again called to this feature of the law and to the fact that it was understood to have crept into the Act through inadvertence. But Senator Aldrich, chairman of the commission, stated that for twenty-four years preceding that time the legislation of Congress had been framed with a view ROMANCE AND TRAGEDY OF BANKING 295 to giving to the silver certificates, to the greatest extent possible, the field for notes of the denomination of one, two and five dollars, and he expressed the opinion that this policy should be adhered to. In the event of an insufficiency of silver certificates of the denominations stated, provision had been made for the issue of United States notes of the same denominations. The purpose, then, of the restriction on national bank notes of the five-dollar denomination, according to Senator Aldrich, was to force silver certificates of the smaller denominations into circulation, notwithstanding his acquiescence in the statement of Mr. Brosius that this restriction crept into the Act of March 14, 1900, through inadvertence. But whether the provision was placed in the bill purposely or otherwise, the restriction should not have been made. The banks should have been free to issue circulation of any denomination they desired, and any restriction upon their right or privilege to do this simply added to the in- elasticity of the bond-secured circulation so much complained of. As a further means of increasing the elasticity of bank cir- culation, Mr. Ridgely recommended the repeal of the three mil- lion limitation upon the amount of bond-secured circulation allowed to be retired during any one month. This feature of the law was amended during his administration by increasing the limit on bond-secured circulation to nine millions per month and per- mitting so-called emergency circulation to be retired without limit. But even this limitation upon the bond-secured circulation should not have been imposed. The banks should have been per- mitted to increase or reduce their circulation at their discretion. The few instances of abuse which might have resulted from this unrestricted privilege would have been more than counterbalanced by the advantages that would have been derived from the added elasticity to the circulation. Provision for the consolidation of banks is another amend- ment which had been repeatedly recommended without results until November 7, 1918. When it was desired to consolidate two banks, the only means of effecting the consolidation was to place one bank in liquidation and for the continuing association to absorb the assets and assume the liabilities of the liquidating 296 ROMANCE AND TRAGEDY OF BANKING bank. This method was exceedingly inconvenient and cumber- some, both to the banks and to the Comptroller's office. As a means of facilitating and extending the trade of our merchants and manufacturers with foreign countries, especially with South America and the Orient, Mr. Ridgely recommended that national banks located in reserve or central reserve cities, having a capital of $1,000,000 or more, be authorized to buy and sell foreign exchange, to accept bills drawn on themselves, pay- able not to exceed four months after sight, to issue letters of credit, and to open and maintain such offices, agencies or branches as might be deemed necessary to conduct this business in foreign countries and in Porto Rico, the Philippines, Hawaiian Islands, and the Panama Canal Zone. This recommendation was incor- porated in the Federal Reserve Act of December 23, 1913, which authorized national banks with a capital stock of $1,000,000 or more, with the approval of the Federal Reserve Board, to estab- lish branches in foreign countries or dependencies of the United States. In each of Mr. Ridgely's seven annual reports a good deal of thought was devoted to a discussion of the defects in the national currency system and to suggested remedies therefor. In his earlier reports he favored an emergency currency based upon the assets of the banks, which, he thought, could be made absolutely safe and immediately available in times of stringency or panic, with a guarantee fund in reserve raised by a tax on cir- culation. Such circulation, he thought, would be an element of strength and not of weakness to the banks issuing it, and be preferable to any form of Clearing House certificates or emer- gency circulation issued by Clearing Houses or similar associa- tions, such as were resorted to during panics, as each bank could act independently and quickly meet the conditions and necessities in its own community, and would go far toward preventing emer- gencies from arising or at least diminishing their seriousness. Mr. Ridgely thought this plan would be the most simple and practical method of introducing an element of elasticity into our banknote circulation and make it readily responsive to the needs of the respective communities in times of stress or financial dis- turbances of any kind. He therefore recommended that all ROMANCE AND TRAGEDY OF BANKING 297 national banks which had been in operation for not less than two years, and which had a surplus fund of not less than twenty per cent, of their capital stock, be permitted to issue notes un- secured by bond deposits in amount not to exceed fifty per cent, of their bond-secured notes. To protect such notes he proposed that such banks should be required to carry the same reserves as against deposits, in gold or its equivalent, and be further protected by a guaranty fund of five per cent., to be deposited by the issuing bank with the Treasurer of the United States before any notes were issued. From this guaranty fund all such gold reserve notes were to be redeemed on demand. This guaranty fund was to be maintained by a graduated tax on the gold reserve notes, beginning at a rate of not over two and one-half per centum per annum, and every bank issuing gold reserve notes should be required to provide means for the redemption of such notes in every reserve city, and at such other points as might be designated, sufficiently numerous and convenient to put every national bank within twenty-four hours of a redemption center. Mr. Ridgely's plan did not contemplate any change in our present system of bond-secured circulation, but simply provided for an additional issue of emergency notes based upon a per- centage of the bond-secured circulation, with a guaranty fund created and maintained in the manner hereinbefore explained. In answer to the objections raised that an authorized issue of uncovered notes would lead to inflation of the currency and encourage promotion schemes and stock speculations, Mr. Ridgely contended that such would not be the case, as specula- tion is not carried on through the use of actual money. There is seldom any cash used in such transactions, he said. Opera- tions in the stock market are generally conducted through loans and checks drawn against deposit credits. These proposed changes in the law, Mr. Ridgely said, would not add to the loans of the banks, nor make any additions to their credits, because the reserve requirements would be the same for notes as for de- posits or credits, and thus afford no facilities for stock exchange or other speculative transactions. 298 ROMANCE AND TRAGEDY OF BANKING In his last annual report, Mr. Ridgely enlarged upon his plan for a currency reform by favoring the establishment of a central bank of issue and reserve, combining in a measure his uncovered note and the Clearing House certificate plans, as affording the best means of imparting to our currency system an element of elasticity that would enable the banks to quickly furnish circula- tion in times of sudden demand without depleting the supply of reserve money. He regarded the central bank idea as the most effective and satisfactory way of supplying a currency that would meet all the needs of the situation and make our system of currency issues and redemptions more in unison with the most approved and reliable banking systems of the world. He outlined his plan with considerable detail as to the forma- tion and operation of the central bank idea, and his views in this respect make this report a valuable addition to the literature on this subject. Amendments to the Banking Laws During the seven years that Mr. Ridgely was Comptroller there were ten Acts passed by Congress amendatory of the na- tional banking laws, as follows : The Act of April 12, 1902, authorizing a further extension of the charters of national banks for a period of twenty years from the date of expiration of the first period of extension. When this Act was passed there was some question as to whether the Act of July 12, 1882, authorized a second extension of charter, and the Act of April 12, 1902, was regarded as neces- sary to remove any doubt on this subject. The Act of April 28, 1902, requiring the Comptroller of the Currency to annually furnish to the Secretary of the Interior, for publication in the Official Register, a list of all employees of the Currency Bureau, including the names of national bank exam- iners and their clerks, receivers of insolvent banks and their attorneys and clerks, and all other persons connected with the Comptroller's office in Washington or elsewhere, whose salary or compensation is paid from the Treasury of the United States, or from the funds of failed associations. ROMANCE AND TRAGEDY OF BANKING 299 The Act of March 3, 1903, providing for additional reserve cities, by extending the privilege to banks in cities with a popu- lation of twenty-five thousand people, instead of cities with a population of fifty thousand, as provided by the Act of March 3, 1887. The Act of February 28, 1905, providing that directors of banks with a capital stock of twenty-five thousand dollars, need own only five shares of the stock of the association to become eligible as directors, instead of ten shares, as provided by the Act of June 3, 1864. The Act of December 21, 1905, providing that the Panama Canal bonds should have all the rights and privileges accorded to other two per cent, bonds of the United States in regard to the tax on circulation secured thereby. The Act of June 22, 1906, increasing the limit of loans that the banks may make to an amount equal to ten per centum of the capital and surplus of the association, not exceeding, how- ever, thirty per centum of the capital in any case. The Act of January 26, 1907, prohibiting any national bank officer under penalty of a fine of not exceeding one thousand dollars, and not less than two hundred and fifty dollars, or by imprisonment for a term of not more than one year, or both such fine and imprisonment, from making any money contribution in connection with any election at which presidential and vice- presidential electors, or a Representative in Congress, is to be voted for, or any election by any State Legislature of a United States Senator. The Act of March 4, 1907, simply authorized three thousand additional copies of the annual report of the Comptroller to be printed, thereby increasing the number from ten thousand, as fixed by the Act of January 12, 1905, to thirteen thousand copies. The Act of March 4, 1907, amended the Acts of June 3, 1864, and March 3, 1901, by requiring the Secretary of the Treasury, on or before January 1 of each year, to publish a list of the securities required during that year for public deposits, and required such deposits to be distributed equitably between the different States and sections. LAWRENCE O. MURRAY Comptroller of the Currency, 1908-1913 CHAPTER XIV Lawrence O. Murray LAWRENCE O. MURRAY, the twelfth Comptroller of the Currency, was appointed April 28, 1908. He was born in Steuben County, New York, in 1864. He was educated at Addison College, Niagara University, and the Metropolis Law School of New York, and was admitted to the bar in New York City in 1893. He first entered the service of the Federal Government as private secretary to Assistant Secretary of the Treasury Curtis, under President Cleveland's second administration, and later was appointed chief of the organization division in the office of the Comptroller of the Currency. In September, 1898, he was appointed Deputy Comptroller of the Currency. He retained this place ten months and resigned on June 27, 1899, to accept the position of trust officer in the Trust Company of America, of New York City, a new organiza- tion. He remained with this company three years and then became secretary and trust officer of the Central Trust Company of Illi- nois at Chicago, organized by Charles G. Dawes, former Comp- troller of the Currency, who was president of the company. He resigned this position to accept appointment as Assistant Secre- tary of the Department of Commerce and Labor in January, 1904, and continued in that position until appointed Comptroller of the Currency. His only banking experience was that of trust officer in two trust companies, the principal duties of which were to pass upon the legal form of papers. His appointment as Comptroller was purely a personal one on the part of President Roosevelt. Mr. Murray qualified as Comptroller April 28, 1908, but on account of the condition of his health he did not assume active charge of the Bureau until September 2 following. Mr. Murray was the most peculiar character who ever occu- pied the office of Comptroller of the Currency. His moods and 301 302 ROMANCE AND TRAGEDY OF BANKING tenses were so changeable and inconsistent that the subordinate officers and employees of the Bureau who came in daily contact with him were at first inclined to believe that his mental eccen- tricities were due to the condition of his health. But later they were obliged to abandon this charitable diagnosis, because of the fact that as his health improved his peculiarities became more pronounced. His administration of the Bureau always will be known by those who were officially connected with it at that time, as "the period of the reformation," because of the numerous innovations introduced and his utter disregard of law and prece- dent in the practice of the office and in the enforcement of what he termed modern methods of supervision of the banks. The first official act of Mr. Murray after assuming active charge of the Bureau, was to call a meeting of the national bank examiners, to be held in Washington on September 21, 1908. About forty-five examiners assembled on that occasion from the Eastern and Atlantic Coast States, among whom were some of the brightest men in the service, who ranked as high in ability and were as capable of rendering, and had rendered, as good and as reliable service as any set of men engaged in any similar line of work anywhere in the country, in the Government service or outside of the Government service. These men came to Washington in obedience to the Comp- troller's call, at their own expense, expecting, as they had a right to expect, gentlemanly and courteous treatment at the hands of their official superior. They supposed that the Comptroller's purpose in calling them together was to make their acquaintance and to advise them as to his policies in regard to examinations. But their astonishment and indignation may well be imagined when, in his opening address, Mr. Murray bluntly informed them that his purpose in calling them together was to tell them that their work in the past had not been satisfactory and must be improved. He accused them of failing to discover embezzle- ments, defalcations and dishonesty of various kinds, or to esti- mate correctly, or even approximately, the value of the paper and securities held by the banks. Shortages, he stated, had passed detection through several successive examinations, and other criminal wrong-doing had failed of discovery. He told them that ROMANCE AND TRAGEDY OF BANKING 303 their work was hurried and superficial and that they appeared to be more concerned in making fees than in getting information in regard to the condition of the banks, and warned them that the time for such carelessness and defective methods in the Govern- ment service had gone by and should have ceased long before that time. Mr. Murray concluded his remarks by telling the examiners that the standard of their work must be raised and that if they were unable to reach the standard which he required of them, or if they were unable to discover the true condition of the banks they examined, to send in their resignations and their commis- sions at once for cancellation. In calling this meeting of the examiners, there is no doubt that Mr. Murray was actuated by proper motives ; that he desired to raise the standard of examinations and thus increase the effi- ciency of the service and the effectiveness of official supervision of the banks. But there was no foundation or justification for his unqualified denunciation of the work of the examiners as a whole, because of the faulty work of a few of the less efficient or careless men on the force. Nor were the statements made by Mr. Murray based upon any personal knowledge of the work of the examiners then in the service. At the time he made this address he had been in charge of the Bureau only twenty days. He had not personally examined a single report of an examiner, not- withstanding his statements to the contrary, and knew absolutely nothing personally of the relative merits or the efficiency of any examiner's work. Whatever information he possessed on the sub- ject was derived from outside sources before he assumed charge of the office, which was as unreliable and as faulty as his own impressions and assertions on that occasion. In his address to the examiners he told them that when he was connected with the Comptroller's office ten years before that time he had had opportunities for knowing the quality of their work and declared that it was equally as faulty at the time of his remarks as it was then. But it is a positive fact that Mr. Mur- ray knew very little more about the work of the bank examiners at the time of his former connection with the Bureau than he did 304 ROMANCE AND TRAGEDY OF BANKING when he made his denunciatory remarks on the occasion re- ferred to. As chief of the organization division of the Comptroller's office he had nothing whatever to do with the reports of national bank examiners or their work. His duties pertained solely to the organization of banks and the increase or reduction of the capi- tal stock and the liquidation of existing associations. He was Deputy Comptroller for a period of only ten months, during which time he had very little opportunity to inform himself as to the relative merits of the examiners or the thoroughness or laxity of their work. At that time all the correspondence with the banks growing out of the reports of examiners was signed by the Comp- troller and such correspondence did not come under the observa- tion of the Deputy Comptroller, except during the temporary absence of the Comptroller. Therefore Mr. Murray's sweeping arraignment of the examiners and his aspersions upon their work were not based upon personal knowledge acquired during the few days intervening between September 2, when he assumed active charge of the Bureau, and September 21, when he made the ad- dress referred to. Nor were they based upon any knowledge derived during his brief connection with the office ten years previ- ously. His impressions of the work of the examiners were predi- cated solely upon the popular but erroneous belief that it is incumbent upon an examiner to absolutely know and insure the accuracy of every figure entered in the books of the bank exam- ined and to guarantee the genuineness of the signatures to every note and the financial responsibility of the maker and endorser. If a teller receives a deposit and enters only half of it on the books of the bank, putting the other half in his pocket, the ex- aminer under the popular idea of thoroughness must discover that false entry without ever seeing the pass-book in which alone the correct amount is shown, and which is not accessible to him at the time of his examination. In a word, he must insure the absolute honesty of every employee of the bank, the good judg- ment of its officers and directors, and the ability of the associa- tion to pay in full, on demand, every dollar that it owes, which, of course, carried with it the guaranty that every dollar that has been loaned or invested was collectible in full. ROMANCE AND TRAGEDY OF BANKING 305 This is the general conception that the public has of what constitutes an efficient examiner, and this is the impossible stand- ard by which Mr. Murray measured the work and worth of the examiners whom he addressed, and the efficiency which, he admon- ished them, he would expect them to attain and maintain in the future. In a large number of employees such as constitute the force of national bank examiners, there must necessarily be different grades of efficiency. This is true of every class of public service employees. But it was decidedly unjust and unfair to measure the efficiency of the entire force by the shortcomings of the ex- ceptional few, or to declare an examiner to be inefficient after several years of good service because in some one instance he failed to discover something which he should have discovered, or possibly was excusable for not discovering. While superficial work on the part of an examiner cannot be excused or defended, in many instances they have been unjustly held accountable for conditions for which they were in nowise responsible and were utterly powerless to discover or correct. Bank Examiners and Bank Examinations A successful administration of the Currency Bureau depends largely upon the efficiency of the force of national bank exam- iners and the thoroughness and reliability of their work in con- nection with the examination of banks. The Comptroller of the Currency has no means of ascertaining the condition of the banks except as reflected in the reports of the examiners. If a report shows a bank to be in a satisfactory condition, he must accept it as correctly representing its true status, if he has any confi- dence in the ability, integrity and judgment of the examiner who made the examination. If a condition exists other than that shown by the examiner's report, the Comptroller has no means of knowing that fact until some unexpected development brings it to his attention. If a defalcation or shortage is disclosed which the examiner failed to discover, the Comptroller could know nothing of it until revealed through some other source by accident or otherwise. If the examiner's estimate of the value 306 ROMANCE AND TRAGEDY OF BANKING of the notes, collaterals and other securities which he finds in a bank is unreliable or faulty, that fact cannot be determined by his report. It follows, therefore, that if a successful administration of the Currency Bureau depends so largely upon the bank exam- iners ascertaining and reporting to a reasonable degree of cer- tainty the true condition of the banks, the official reputation of the Comptroller and the best interests of the service in general require that the greatest care should be exercised in the selection of the men to fill these important places, not only in respect to their entire fitness by training and experience in this line of work, but as to their integrity as well, so that they can be relied upon to discharge the responsible and onerous duties which attach to the position intelligently, thoroughly and conscientiously. No public employment calls for a higher order of ability, a more conscientious performance of duty, and greater thorough- ness in every detail than the position of a bank examiner. Con- scientiousness because of the great interests with which they have to deal, and which are affected thereby, and thoroughness because of the reliance that must be placed in them by their offi- cial superior and the banking public to determine the safety and solvency of every bank which they examine. A man may be fully competent to satisfactorily discharge the important duties of a bank examiner, but unless he possesses the integrity of character that will insure absolute reliance upon a conscientious performance of duty at all times and under every condition, even to the extent of inconvenience and pecuniary loss to himself, he lacks the most essential qualification upon which the Comptroller and the banking public must rely in measuring the trustworthiness of his work. The fee system of compensating examiners was, in a measure, responsible for some of the superficial examinations that have been made in the past, in that the aggregate monthly earnings of the examiner were dependent upon the number of examinations he made. The tendency of this was to increase the number of examinations at the expense of thoroughness. This temptation is now removed under the salary and expense method of compen- sation and an examiner can now be depended upon to devote as ROMANCE AND TRAGEDY OF BANKING 307 much time to each bank as may be necessary to make a thorough examination of its affairs. The time required to make a thorough examination varies with the volume of business of the bank, the completeness of the system employed in keeping its accounts and the manner in which its business is conducted. While the statutory fee under the old system may have amply compensated the examiner in some cases for the time consumed in making thorough examinations, in other banks of the same size, or even smaller, it was wholly inadequate because of the additional time required to reach the same results, owing to the character of the paper carried, the nature of the transactions and the methods employed by the banks in keeping their books and accounts. This fact, however, did not justify an examiner in slighting his work. He was in duty bound to make as thorough an exami- nation of a bank of the latter class as he was of the former, and if the degree of thoroughness of his work was measured by the compensation received, then the sooner such an examiner was removed from the service the better for all concerned, as his superficial work sooner or later exposed itself, not only to his discredit, but to the discredit of the entire system of official supervision, and weakened public confidence in the efficiency of examinations in general. The qualifications necessary to an intelligent and satisfac- tory discharge of the duties of a bank examiner, in addition to integrity of character, are the following: A thorough knowledge of the principles of bookkeeping and accounting, a general knowledge of the laws governing negotiable instruments and commercial transactions, good judgment in regard to credits and values, force of character, tact and discretion. As the books of a bank are the starting point and the founda- tion upon which an examination must rest, it is incumbent upon an examiner to satisfy himself that they correctly show the resources and liabilities of the bank and account for every dollar received, loaned and disbursed. To enable an examiner to deter- mine this intelligently and with certainty, it is absolutely neces- sarv for him to thoroughly understand accounts, so as to be 308 ROMANCE AND TRAGEDY OF BANKING able to trace an item or an entry through the books from its inception to its finish, and to properly check and verify every transaction involving the use of money, so as to be reasonably certain that no shortage exists that is concealed from him by false entries, forced balances, or a manipulation of the accounts in any other manner. Bank examiners, however, are not bank auditors. Unfortu- nately, the distinction between an examination and an audit is seldom recognized in the criticisms of examiners when banks suffer losses through dishonesty or other cause which have re- mained concealed for some time, undiscovered by the examiner through several successive examinations. A bank that may be thoroughly examined in one or two days could not be completely audited in less time than one or two weeks. When an examiner satisfies himself that the books of original entry are correct and the assets found in the bank are equal in value to the amount called for by the books, he is bound to assume that the original individual credits which go to make up the grand total are correct, and he cannot know otherwise except by a com- plete audit of the books, unless errors or false entries are discov- ered by accident or otherwise. There is only one way of determining the absolute accuracy of an individual ledger or a certificate of deposit register, and that is by calling in and balancing or otherwise verifying all of the depositors' pass-books and by verifying each individual cer- tificate of deposit. It would require weeks of time to do this. No examiner could undertake such a task, and is not expected or required to perform such services. An audit of a bank calls for the performance of this work and similar detail. An examination does not. Yet when a defal- cation is disclosed, which has extended over a period of several years undiscovered by the examiner, the latter is invariably charged with incompetency or superficiality in the performance of his duty, and in most cases unjustly so because of the failure of the critics to discriminate between an examination and an audit. Every bank in the system should receive a thorough audit at least once a year by qualified accountants not connected with the 309 management of the bank in any way. Many of the best banks have such audits regularly made. But these are institutions so well managed and systematized as to require them the least. The fact, however, that such audits are made, has a wholesome effect upon the officers and employees of the institution who handle its funds in that the certainty of discovery deters them from wrong- doing. It is opportunity that makes the thief. It is rarely that a bank is forced to close its doors as a result of a sudden loss of a large sum of money through the dishonesty of one of its officers or trusted employees. Failures from this cause, or large losses, are usually the result of accumulated dishonesty extending over periods of varying length and adroitly concealed from the exam- iner for an indefinite time. Failure in most instances to discover shortages of this nature is no reflection upon the skill or efficiency of the examiner, but usually is directly chargeable to the defective methods employed in the management of the bank, which afforded not only the opportunity for embezzlement in the first instance, but the means of successful concealment. No method of bookkeeping, however perfect, will prevent dis- honesty on the part of officers or employees of a bank, but the opportunity to steal and the means of concealing the theft can be minimized by the adoption of such methods in the conduct of the bank's business as experience has demonstrated will go far toward protecting the most vulnerable accounts from manipu- lation by those who are tempted to dishonesty through the oppor- tunity afforded by the faulty systems employed. It is no reflection upon an examiner who fails to discover a shortage which is the result of the pernicious practice which prevails in some of the smaller banks of permitting the individual ledger bookkeeper to receive deposits and make entries in and balance pass-books, or a receiving teller to make entries in the ledgers. A shortage due to the opportunities afforded by this objectionable practice may remain concealed for years unless revealed by accident, and can be discovered only by balancing or verifying the pass-books. It is incumbent upon an examiner, in addition to seeing that the business of the bank is conducted within the provisions and limitations of the banking laws, to satisfy himself that every 310 ROMANCE AND TRAGEDY OF BANKING dollar that has been paid into the institution, as shown by its books, is properly accounted for. But it is the business of an auditor to determine by balancing and verifying each and every account whether the books show correctly every dollar received. If a teller receives a deposit and credits the depositor on the books of the bank with a less sum than the amount received, the examiner has no means of detecting the shortage. The auditor will discover it by calling in and balancing the pass-books or otherwise verifying each individual balance. If a cashier or other officer issues a certificate of deposit and credits the depositor with a less sum than the amount received, the examiner cannot detect the false entry, but the auditor, by verifying the account with the holder of the certificate, will discover the shortage. The only way, therefore, of verifying the absolute correct- ness of the books of a bank, is by a complete and thorough audit of each and every account, and this a bank examiner cannot and should not be expected to do under any system of salaried com- pensation. This is a duty which devolves upon the directors, who are the trustees of the funds placed in their custody for safe- keeping or investment, and it is incumbent upon them to adopt such safeguards in the conduct of the bank's business as will prevent peculations, embezzlements or other wrong-doing by any of the officers or employees, and insure the correct accounting for every dollar that comes into their hands. Defalcations and em- bezzlements can be minimized, if not prevented, by proper sys- tems of checking and handling of the cash and accounts of the bank. It is always the trusted officer or employee in whom the utmost confidence is reposed, who proves to be the culprit. An officer or employee who does not possess the confidence of the directors, is never placed in a position of responsibility or trust. It is false economy to save a small amount in operating expenses at the risk of large losses and consequent discredit to the institu- tion through dishonesty resulting from the employment of loose or defective methods, inefficiency or lack of sufficient clerical force to properly conduct the business of the bank and safely guard its funds. In addition to the periodical examination made by the na- tional bank examiner, every bank should be required by law to ROMANCE AND TRAGEDY OF BANKING 311 have an annual audit made of its affairs by a competent account- ant, in order that the directors may be assured that the books of tne institution correctly represent its liabilities, and not rely upon the bank examiner to determine this for them. It is not the duty of the bank examiner to ascertain the condition of the bank for the directors. It is the business of the directors to determine this for themselves, independent of the examiner. Ex- aminations are made by bank examiners for the information of the Comptroller, who represents the interests of the public in the bank, and not for the officers or directors of the institution, who have no right to rely on the examiner to determine for them the condition of their own association. If the liabilities of a bank are correctly recorded, the examiner can be depended upon to determine with a reasonable degree of accuracy the value of the assets, at least to the extent of satisfying himself whether or not they are sufficient to pay the liabilities to creditors in full. No better or more convincing illustration can be presented of the necessity for and the advantages of an audit of a bank than that afforded by the failure of the National City Bank of Cambridge, Mass., on February 23, 1910, as a result of the defal- cation of the individual ledger bookkeeper, George W. Coleman. Coleman kept a small personal account in the bank, but never had a pass-book, consequently his account never was balanced. He would draw his personal check for three, four or five thousand dollars on the National City Bank of Cambridge, take this check to the office of a curb broker, whose manager would issue the broker's check for a like amount, payable to the order of a friend of Coleman. The broker's checks were cashed by the bank in which he kept his account and the proceeds were turned over to Coleman. Coleman's checks were deposited by the broker in the bank with which he did business, for collection for his account, and were paid the following morning through the Clearing House by the National City Bank. It was Coleman's duty in the National City Bank to check the Clearing House items, and in doing so he would abstract his own checks from the incoming mail. The general ledger and the general cash books were kept by the cashier, and the total checks paid, including those coming through the Clearing House, were 312 ROMANCE AND TRAGEDY OF BANKING entered by him in the cash books. It appears that the cashier never inspected the Clearing House ledgers, but simply posted the totals of these ledgers in the cash book. The general ledger, therefore, always agreed with the general cash book, but the amount actually due individual depositors was more than the amount shown on the individual ledger, owing to the fact that Coleman's checks were continually paid and were not charged to his account. In order to make the total deposits on the indi- vidual ledger agree with the amount shown on the general ledger, Coleman, it appears, resorted to false entries and the reduction of balances when he carried forward accounts. Through this system of "kiting" checks with the broker, Cole- man stole approximately $310,400 of the bank's funds, and in carrying forward balances from day to day he manipulated from forty to fifty accounts. The defalcation was not discovered until an audit of the bank's books was made, although Coleman's pecu- lations extended over a period of several years. The directors of the bank acknowledged that while they had noticed a continuous shrinkage in deposits, they concluded that it was due to the competition of a trust company in the same city which was paying four per cent, interest on deposits, and the fact that the board was not specially active in striving to increase the business of the bank. The audit which uncovered the short- age was not made for the purpose of ascertaining why the de- posits were continually diminishing, but with a view to placing the association in liquidation and selling its business to the com- peting trust company. When this bank was closed by its directors and the facts became public in regard to the defalcation, the examiner, as usual, was severely criticised for permitting the conditions disclosed to have existed so long without detection, not only by the press of the locality, but by the directors of the institution and the Comp- troller of the Currency as well. The directors assumed to hold the examiner blamable for the conditions for which they alone were responsible, and endeavored to exonerate themselves by throwing the blame upon him under the plea that if he was not able to detect the shortage, they certainly could not be expected to discover it. And the Comptroller gave credence to their ridic- ROMANCE AND TRAGEDY OF BANKING 313 ulous claim by publicly suspending the examiner, to his great injury and the discredit of the service which he represented, before he had any knowledge of the facts other than that derived from unfavorable press despatches. It never occurred to the directors or the cashier of this bank to examine the individual ledger to ascertain whose accounts were being withdrawn and to inquire of the depositors the reason for closing their accounts. Had this been done in any one of the fifty accounts that the bookkeeper manipulated it would have led to the discovery of the fact that the books of the bank did not show the correct balance due the depositor whose funds were being embezzled and whose accounts were being falsified. The account of the President of the bank was one of those that was manipulated. They counted the cash and examined all the bills and notes at regular intervals. So did the examiner. But they never undertook to call in and balance pass-books, or verify indi- vidual deposit balances in any other way, nor did they direct the cashier to do so, and this was the defective and vulnerable point in their management which the bookkeeper took advantage of. After Mr. Murray publicly suspended the examiner in this case he detailed another examiner to make an investigation for the purpose of determining whether or not the regular examiner should have discovered the defalcation. After an exhaustive report, which reviewed in detail the manner in which the defalca- tion was effected and concealed, the degree of responsibility of the examiner for not discovering the shortage, and the account- ability of the directors for the conditions which were found to exist, the examiner summarized the situation into the terse state- ment that it was the same old story of directors failing to direct and leaving the affairs of the bank to be managed by a single officer, who allowed the bookkeeper to keep the individual ledger, balance pass-books, and to do everything else that afforded an opportunity to steal and to successfully conceal the embezzle- ment from detection by any other means than a complete audit of the bank, or by accident. He stated further, that if the exam- iner in this case was culpable of negligence or was incompetent, then ninety per cent, of the examiners in the service were equally culpable, negligent or incompetent, as they were making the same 314 ROMANCE AND TRAGEDY OF BANKING kind of examinations and could not reasonably be expected to do what was not only impracticable but impossible under the then fee system of compensation call in and balance, or verify the pass-books of individual depositors, which in this particular case numbered over eight hundred. The foregoing is only one of the many similar cases that could be presented to illustrate the mistaken impressions that are enter- tained as to the scope of an examiner's duties and the responsi- bility resting upon him to discover everything that goes wrong in a bank. There is not a bank examiner in the employ of the Government, no matter how expert or efficient he may be, who is not liable at any time to be confronted with a similar condition as that which existed in this Cambridge bank. And such will be the case until examinations partake of the nature of an audit or the directors of banks have an annual audit made of their institu- tions. A few hundred dollars spent in payment for an audit is a cheap insurance against wrong-doing, and is more economical than a loss of several thousand dollars through the dishonesty of a trusted officer or employee. Realizing the opportunities for embezzlements and the suc- cessful concealment of the shortage through the manipulation of the individual ledger, Comptroller Ridgely at one time instructed examiners to make a limited verification of individual deposits by taking off at random a dozen or more of the balances due depos- itors, as shown by the individual ledgers, and verify each such balance by correspondence with the depositor. But these instruc- tions were almost immediately countermanded because of the in- jurious effects the attempted verification had upon the banks and the trouble it occasioned otherwise. Silent runs were made upon some banks because of the impression conveyed to the mind of the depositor who received a communication from the examiner, that there was something wrong with the bank and that the examiner was endeavoring to locate it. Other depositors became indignant and informed the examiner that it was none of his business how much of an account they carried. In some instances the circular of the examiner fell into the hands of the wife or husband of the depositor and disclosed the amount of his or her balance. Then there was trouble. A circular addressed to the mother-in-law of ROMANCE AND TRAGEDY OF BANKING 315 a banker disclosed to him that she had an account in another bank, which gave him the impression that his mother-in-law was afraid to trust him, or his bank, with her funds because of his connection with it. More trouble. Two sisters had accounts in the same bank ; one received a circular from the examiner and the other did not. The latter assumed that the books did not show any balance due her, and she wrote the Comptroller asking that an examination of her account be made. Numerous instances of a similar nature could be cited to show how extremely sensitive bank depositors are and how very careful an examiner must be in making inquiries in regard to a bank's affairs. Yet, if a bank were to fail, or meet with a heavy loss through the manipulation of the individual deposit accounts, no one would be more severe in criticising the examiner and the Comptroller's office for not verifying the individual deposit accounts than these same depos- itors who objected to having their deposit balance verified. The second qualification necessary to an intelligent and satis- factory discharge of the duties of an examiner is a thorough knowledge of the national banking laws and a good knowledge of the laws and recognized practices governing negotiable instru- ments, contracts, and commercial transactions generally. While it is not necessary that an examiner should be a lawyer, a good knowledge of the law is helpful to a man in whatever occupation he may be engaged. It is essential that an examiner should familiarize himself with all forms of contracts, obligations or agreements in order that he may be able to intelligently pass upon and determine their legal- ity in form and execution. He should know the difference between notes, bills of exchange, commercial paper, certificates of deposit, checks, drafts, negotiable and non-negotiable instruments. He should know the rules governing accommodation paper and legal and illegal considerations, renewals, or extensions and their effect upon the endorser. He should know the degree of responsibility of a bank as a collecting agent and its liability for neglect or failure to protest notes or give notice of dishonor. He should be familiar with the difference in the powers or authority of a public and private corporation to incur liabilities or obligations, the legal capacity of married women, minors, or irresponsible 316 ROMANCE AND TRAGEDY OF BANKING persons to enter into contracts or incur liabilities, the difference between a guaranty and an ordinary suretyship, the forms and varieties of acceptances, and the effect of material or immaterial alterations of negotiable instruments. All of these questions and many others of a like nature an examiner should be familiar with, in order that he may pass in- telligently upon the paper, contracts, agreements, collateral and securities held by a bank. The third and perhaps the most important qualification that an examiner should possess, and the one on which the Comptroller must depend the most in respect to the reliability of his report as determining the true condition of a bank, or its solvency or insolvency, is the accuracy of his judgment as to values. Bankers, as a rule, are very optimistic in regard to the value of the assets of their banks and seldom will admit that any of the loans and discounts or other resources of the institution are questionable or worthless. It is incumbent upon the examiner, therefore, to determine to the best of his ability, and through the most reliable source of information, the actual value of the paper, collateral, securities and other assets which constitute the resources of the bank upon which reliance must be placed to liquidate its liabili- ties to depositors and other creditors in full. Before reaching any conclusion in this respect, the examiner should confer fully and freely with the officers and directors of the bank in regard to any asset which he has reason to believe is not worth its face value, or the amount at which it is being carried on the books of the association. He is expected and required to give full consideration to any representations which the officers and directors may make in regard to such assets, but he should not be influenced against his judgment in reporting any asset otherwise than what he believes to be its actual worth. The examiner may occasionally err in his conclusions, but not so frequently as do the officers or directors. Being a disinterested party, if he has taken the pains to inform himself in regard to any asset of doubtful value, his estimate usually proves to be more reliable than that of the bank's officers, and if he errs at all it is generally on the side of prudence and safety. ROMANCE AND TRAGEDY OF BANKING 317 Good judgment is a quality that can be tested only by results. It cannot be determined otherwise. Men may honestly differ in opinion as to the value of a bank's assets as in respect to any- thing else. The examiner is always honest in his opinion, because he has no reason to be otherwise. Unlike the representatives of the bank, he has no personal interest in the assets which he esti- mates below the value placed upon them by the officers and direc- tors, and his means of determining their worth are equally as good, and frequently better than that of the officers of the insti- tution which owns or holds them. If the officers and directors of a bank were as honest with the examiner as the examiner is with them there would be less difficulty in arriving at the true condi- tion of affairs and the interest of the bank would be better sub- served thereby. Directors, as a rule, are desirous of showing as large a sur- plus and profit account as possible for their institution, and are very reluctant to admit any losses or depreciation in values which would diminish this account. Some are influenced in this respect by a desire to make a good showing in their published statements as being indicative of successful and profitable management. Others are actuated by the less commendable motive of giving the stock of their institution a book value which it does not actually possess, and as those who trade in such stock have no means of determining its actual value other than that shown by the bank's published statements, upon which the market value is usually based, it is incumbent upon the Comptroller and the examiners to require banks to reduce their surplus and profit accounts in amounts equal to the losses that may have been sustained upon loans or discounts, or by depreciation in the value of other secur- ities held. And any officer or director of a bank who, knowing such losses or depreciations to exist, signs a sworn statement representing the surplus and profits greater than they actually are, makes a false report of the condition of his bank, to the injury of anyone who purchases the stock at a valuation based upon such published statement. In the case of Chesbrough et al v. Woodworth (195 Fed. Rep. 875) it was held that- 318 ROMANCE AND TRAGEDY OF BANKING The making and publishing by a national bank of the reports required by statute are not merely for the informa- tion of the comptroller, but are to guide so much of the public as may have occasion to act thereon, and one who buys from another stock in the bank in reliance upon a false report of its condition and suffers damage thereby has a right of action against any officer or director who, knowing its falsity, authorizes such report under Revised Statutes 5239, which makes them individually liable for damages sustained by the association, its stockholders, "or any other person." In the case of Thomas v. Taylor (224 U. S. 73) the United States Supreme Court held that The fact that a statement of the condition of a national bank is not made voluntarily, but under order of the Comp- troller of the Currency, does not relieve the directors from liability for false statements knowingly made therein. It behooves the honest and conscientious banker, therefore, to co-operate with the examiner in his endeavor to correctly esti- mate the value of the bank's assets, instead of disputing with him the existence of losses which he knows as well as the examiner have been sustained, and to charge such losses off when instructed to do so by the Comptroller. The fourth qualification necessary for an examiner to possess to insure an effective discharge of his important duties, is force of character, tact and discretion. In many banks there will be found some one man who domi- nates its policy or dictates its management. Unfortunately, there are too many instances of this kind. He will be found either as one of the bank's executive officers or a member of the board of directors. He is usually a strong and forceful char- acter, pronounced and fixed in his views, accustomed to having his own way, in some instances affable, plausible and diplomatic, in others arrogant and unreasonable, unwilling to accept sug- gestions, or, if seemingly accepting them, with no intention of adopting them; resentful of any interference with his plans or purposes, regardless of law or the Comptroller's regulations. If ROMANCE AND TRAGEDY OF BANKING 319 he does not own a controlling interest in the stock of the bank, which enables him to have his own way in its management, with- out interference by the directors, he is usually possessed of suf- ficient plausibility and persuasiveness to influence other members of the board to adopt his views. This type of man will not infrequently be found in a bank that has failed and has been placed in the hands of a receiver, or one that is in a very unsatisfactory and uncertain condition because of the doubtful character of some of its investments and the imprudent concentration of loans. In other instances the examiner will find an unsatisfactory or dangerous condition due to incompetency, bad judgment, or spec- ulative tendencies, which require the most careful management to save the bank from serious losses, if not insolvency. To be able to cope with situations of the kind described, and others of a like nature, an examiner must be forceful, resource- ful, tacftul and discreet. Forceful in that he should be able to maintain whatever position he believes to be right, after satisfy- ing himself as to the facts, regardless of whom he has to con- front ; resourceful in that he should be competent to suggest to the board of directors the ways and means of extricating the bank from an unsatisfactory condition ; tactful in his intercourse with men and in coping with delicate situations, and discreet in his investigations and inquiries concerning the paper he finds in a bank and the financial responsibility of borrowers, so as not to disclose the business of the institution or injure the credit of the bank or any of its customers. It is difficult to find the combination described fully developed in any one man. The standard is a high one and calls for an order of ability difficult to obtain for a compensation such as is paid the average examiner. A man who possesses all of the quali- fications mentioned can command, and will have no difficulty in obtaining from financial institutions, a much greater compensa- tion than a bank examiner receives. Consequently, when the Government secures the services of such men, it seldom is able to retain them long, because their abilit}' is quickly recognized by the officers of the institutions they examine, who offer them in- ducements to enter their service. 320 ROMANCE AND TRAGEDY OF BANKING In a large force of examiners, such as is necessary for the Government to employ, there naturally will be found different degrees of ability, and while all of the examiners do not measure up to the standard of those of the first class, they are, with very few exceptions, men of as good average efficiency as may be found engaged in any similar occupation in the service of the Govern- ment or elsewhere. The degree of ability varies, of course, with the experience that the examiner has had and his personality. Many of those who at first are rated in the second class, in course of time develop strength and efficiency which places them in the first rank. Others remain in the second class throughout their whole term of service, either because they do not develop any special ability, or do not have an opportunity to display any qualifications above the ordinary, there being nothing in the con- dition of the banks they examine which enables them to exhibit any latent force they might possess. In justice to the force of examiners as a whole it may be truthfully stated that but a very small percentage of the total number have proven to be incompetent or deficient in those quali- ties which are essential to a proper understanding and satisfac- tory discharge of their duties in their respective spheres. While it would be very desirable, of course, to have all of the bank examiners reach and maintain the standard of efficiency attained by those of the first class, it is not really necessary that this should be so, as a great majority of the banks are excellently well managed and are always in such a satisfactory condition, as far as safety and solvency are concerned, as to require no unusual degree of ability to properly examine them. So that the average examiner is fully capable of making a thorough and satisfactory examination of banks of this class. Although a great majority of the banks are well and con- servatively managed, fully one-third of them violate the law in some respects in the conduct of their business. Not the same banks continuously, but that percentage of the total number all the time. These violations of law are not usually such as to endanger the safety or solvency of the institutions in any way, but are in disregard of the statutory restrictions. ROMANCE AND TRAGEDY OF BANKING 321 For instance, before the passage of the Federal Reserve Act, the records showed that over seventeen per cent, of the banks made loans upon real estate security in contravention of law, over twenty-five per cent, were deficient in their lawful money reserve, and over ten per cent, made loans in excess of the legal limit. Some borrowed money in excess of their capital stock. Some invested in the stocks of other corporations, or made loans upon the security of their own stock. Some concealed a portion of their surplus or profits for various reasons, while others de- clared dividends out of profits which they did not possess, having been absorbed by losses, and some engaged in transactions not within the scope of their corporate powers. These and numerous other violations of law are constantly disclosed by the reports of condition of the banks and in the reports of national bank examiners. Notwithstanding these violations of law by one-third of the banks, ninety-five per cent, of the total number of national asso- ciations are always regarded as being in a safe and solvent con- dition during normal times, or under ordinary financial or mone- tary conditions, and are well and conservatively managed. The remaining five per cent, are always in an unsatisfactory condi- tion. Some through excessive loans made in violation of law, some through bad or questionable loans, and some through im- prudent or hazardous concentration of loans in the hands of single or closely affiliated interests. Others through unduly large lines of credit extended to interests of a more or less speculative nature, with which some one or more of the officers or directors of the bank were identified. In this class of banks the capital may be found to be impaired by losses, necessitating an assessment upon the stockholders, or a threatened impairment because of the indeterminate value of their loans or investments. They may not be insolvent, but may become so at any time. They have to be closely watched and frequently examined. This class of banks demands the attention of the most skillful and experienced examiners, such as possess all of the qualifica- tions described for those of the first class, but even the most experienced of these will find their resourcefulness taxed to the 322 ROMANCE AND TRAGEDY OF BANKING limit in endeavoring to extricate a bank of this kind from its perilous condition. In a majority of instances they succeed. In comparatively few they fail. The failures become a matter of public information. The successes the public knows nothing of. Consequently, the examiner and the Comptroller are usually cen- sured for nursing a bank of this kind known to be in a bad condi- tion in an unsuccessful endeavor to avert a failure or to save depositors from loss, and seldom, if ever, receive any credit for the numerous failures averted through the same skillful and dis- creet handling of a bad situation. But, even where the efforts to save banks from failure were unsuccessful, the depositors and stockholders were benefited by the nursing the banks received at the hands of the Comptroller and the examiner, which resulted in strengthening the institution in many respects. So that when it finally did suspend or fail, the losses to depositors were not so great as they would have been had the bank been closed when it was first discovered to be in a bad condition. As an illustration of some of the successful work done by the Comptroller and the examiners in saving banks from failure and the community from the disastrous effects of a financial and busi- ness disturbance, it may be of interest to narrate a case in point. A bank in a city of large industrial activities became badly involved through the imprudence of its president in extending an unreasonable amount of credit to several industrial concerns in the same place which were owned or controlled by practically the same interests, although they were separate corporations. The principal one of these industrial corporations became badly em- barrassed financially for want of additional funds with which to carry on its operations. It was unable to meet its obligations to the bank. Its paper became past due and the interest was in default, bringing the paper within the category of statutory bad debts. The other concerns were also indebted to the bank and were dependent upon the principal corporation to meet their obli- gations. The solvency of the bank depended upon the solvency of two or three of these large debtors. If the bank had pressed for payment, the principal concern would have been forced to suspend, and its suspension would have compelled the others to take like action. Failure of these debtors to meet their obliga- ROMANCE AND TRAGEDY OF BANKING 323 tions to the bank would have rendered the latter insolvent, neces- sitating the closing of the institution and the appointment of a receiver. The business of the community would have been para- lyzed by the suspension of the bank and irreparable injury would have been done to all interests. Some of the directors of the bank were interested in these several industries and their failure would have meant their financial ruin. This was the situation which confronted the Comptroller's office. Its seriousness was fully realized. The bank was believed to be insolvent, and the question to consider was whether the interests of the depositors would be best subserved by the immedi- ate closing of the bank and the appointment of a receiver, or by allowing it to continue and to co-operate with the directors in their efforts to reorganize the industrial concerns, and place them upon a sound basis, thus assuring their obligations to the bank and its solvency. The examiner and the directors of the bank were summoned to Washington for a conference. Some of the directors were men of good business judgment and integrity and were fully alive to the situation. The bank had been allowed to drift into its then dangerous condition through their negligence in not prop- erly supervising its affairs and in leaving its entire management to the president. A plan was agreed upon by which three of these directors were to assume active charge of the bank. No loans were to be made by the officers, except upon the authority and with the written approval of this committee, and no loan for any material amount was to be made until the bank had been placed in a solvent and entirely satisfactory condition. All loans that were admitted to be worthless were to be immediately charged off, and others that were past due and claimed by the directors to be good were to be collected or adequately secured. Among the loans of this class were some to officers of the bank. The embarrassed corporations whose large liabilities to the bank were the cause of its predicament, owned valuable proper- ties. These properties were to be bonded and their past-due paper was to be paid partly in cash from the proceeds of the sale of the bonds, and the balance in bonds. 324 ROMANCE AND TRAGEDY OP BANKING Of course, an agreement of this character could not be con- summated in a day. It required time to perfect and carry out the plan. In the meantime the bank was in a very precarious condition. Any large creditor could have precipitated a failure by withdrawal of his balance, or any rumors as to the strained condition of the bank might have caused a run upon it and have forced the institution to close its doors. At this juncture a correspondent bank in one of the large cities learned in some way of the straits that this bank was in and became uneasy in regard to the safety of a deposit balance which it had in the institution, amounting to over seventy-five thousand dollars. A representative of this bank called at the office of the Comptroller for the purpose of learning something of the bank's condition. He was advised that it was not the prac- tice of the office to discuss the affairs of one bank with the repre- sentative of another bank, but as he declared it to be his purpose to withdraw the amount due unless he could receive some assur- ance as to its safety, it was thought best to take him into the confidence of the office and explain to him the true situation, as the embarrassed bank was in no condition to pay the demand, if made upon it, nor could one creditor be allowed to secure such a large preference over the other creditors by permitting the bank to pay this claim without being able to pay other demands of like tenor. The representative of the creditor bank was, there- fore, advised of the exact situation and the plans that had been arranged to relieve the debtor bank of its embarrassment. He was advised of the confidence of the Comptroller's office in the sincerity and ability of the directors to successfully carry out the plan agreed upon, and was told that if his bank would co- operate to the extent of allowing its deposit to remain for a few months it would materially help the situation, but if demand were made for its withdrawal, the bank would be closed and placed in the hands of a receiver. The deposit was allowed to remain. The plan arranged with the directors was carried out to the letter. Bad debts were charged off, doubtful loans and overdue paper were collected or secured, the corporations were successful in bonding their indebtedness, the bank received fifty per cent, of the amount due it in cash and the remainder in bonds, and grad- ROMANCE AND TRAGEDY OF BANKING 325 ually disposed of the bonds until the amount held was reduced to a safe investment. The bank was finally worked into a safe and sound condition and is in successful operation at this time. This is only one of the many delicate and desperate situations with which the Comptroller and the bank examiners have to deal in connection with the supervision of the banks. For every fail- ure of a national bank that has occurred during the existence of the system a large number of associations have been saved from failure through the excellent work of the bank examiners and the intervention of the Comptroller. The quiet and successful handling of such cases as the one described never becomes a matter of publicity, and this neces- sarily must be so, as publicity would defeat all efforts to straighten out a situation of this kind by creating alarm among the depositors, which would precipitate the very condition sought to be avoided. Consequently, the examiners and the Comptroller's office never receive the credit to which they are justly entitled for the effective work done in nursing banks that are in a critical condition, or on the verge of dissolution, back again into a state of healthy financial existence. On the other hand, if the nursing remedies fail because of the incurable illness of the patient, no credit is given for the efforts made to save the life of the institution. The examiner and the Comptroller are severely criticised and censured for having per- mitted the patient to live so long, and the effectiveness of the system of official supervision as a whole is generally measured by the failure in a few instances to accomplish the results desired and not by the numerous successes achieved in working banks out of desperate situations. There is about as much reason and justice in criticisms of this character as there would be in discrediting a noted surgeon as unskillful who in the course of his practice operated success- fully upon ninety-nine cases and unsuccessfully upon one, or in measuring the professional reputation of a regular practitioner by the occasional case that lie lost in the course of a long prac- tice instead of by the many that he successfully treated through the remedies prescribed. 326 ROMANCE AND TRAGEDY OF BANKING If all the excellent work that bank examiners do could be given the same degree of publicity that their failure to accom- plish impossible results receives, the banking public would have a better understanding and appreciation of the merits of their work and the potency of the service which they represent. A great deal more is expected of bank examiners now than formerly. Originally the supervision of national banks was intended to protect only the revenues of the Government from being defrauded and the general public from suffering loss through the improper use of the note issues of the banks. When the original Act was under consideration in the United States Senate, a Senator in the course of debate made the remark that the Government had no interest whatever in the depositor. It was for the depositor and stockholder to look after their own interests. The only concern of the Government, he said, was to see that the holders of the banknotes were fully protected. Now the examiner is relied upon and is expected to protect not only the interests of depositors against the defalcations of bank offi- cers and employees and the making of false entries in the books, injudicious investments and unsafe loans, but the stockholders also have come to regard him as the guardian of their interests and depend upon him to protect them from the maladministration of the directors of their own choosing. And even the directors in some cases expect the examiner to keep them informed as to whether or not the officers of their selection are properly conduct- ing the bank's affairs. While examiners are required to remain in a bank long enough to satisfy themselves that they know its true condition in every detail, they are not required nor expected to make an audit, and depositors and stockholders should not expect examinations to be so thorough as to relieve the directors of their individual ac- countability for the proper conduct of the trust which they assume in accepting the position of director. If bank directors were rigidly held to a strict accountability for the faithful and honest performance of the duties that devolve upon them in the management of their banks, there would not be so much necessity for dependence upon an examiner to discover during the brief period covered by his semi-annual examinations, ROMANCE AND TRAGEDY OF BANKING 327 the conditions that have been successfully concealed from those whose duty it is to be in the bank every day and to direct the management of its business. Rotation of Examiners The rotation of bank examiners has been frequently suggested as a means of increasing the efficiency of the force and the effec- tiveness of examinations, but this practice never had been fol- lowed to any great extent by the Comptroller's office until Mr. Murray's administration. The merits of the plan had been thor- oughly considered by former Comptrollers, with the conclusion that while rotation may have some advantages over the system of permanent assignments, it has also its disadvantages, and the latter were believed to greatly outweigh the former. The more familiar an examiner becomes with the financial responsibility and business reputation of the makers and endorsers of the paper which he finds in a bank, the more accurately he is able to esti- mate the worth of the bank's loans and to determine the value of its securities. This knowledge cannot be acquired by one or two examinations of a bank, but the examiner who remains for a considerable time in a district, handles the same paper so fre- quently that its worth becomes as well known as the market value of a Government bond, whether the paper be that of an individ- ual, a firm, or a corporation. Probably the strongest, and, in fact, the only argument that can be advanced in favor of rotation, is that when an examiner has been regularly assigned to a district for a long time, he may become too well acquainted and too intimate with the officers of the banks he examines, and becomes too trustful in their repre- sentations to him. He may take too much for granted and rely upon their statements instead of verifying everything and satis- fying himself through other sources of information as to the value of assets. There have been instances of this kind in the past, and there no doubt will be others in the future, but they are the excep- tion and not the rule. To guard against this contingency, it had been the practice of the Comptroller's office for years to divide the country into 328 ROMANCE AND TRAGEDY OF BANKING examination districts. Each district, with a few exceptions, had two examiners, who exchanged their list of banks in the district every six months and alternated in their examinations. While regular rotation of examiners is not believed to be advantageous, there always has been more or less detailing from one district to another. When the work of an examiner falls in arrears in consequence of sickness, absence on leave, or assign- ment to special duty, an examiner from another sub-district whose work is up to date, is usually detailed to make examina- tions in the territory in arrears, and such details have been made frequently. When the regular examiner for a district found a bank in a very unsatisfactory condition, requiring more time to thoroughly examine it than he could afford to devote to the work under the old system of compensation, he usually reported the situation as he understood it to the Comptroller and suggested the advis- ability of a special examination. For a special examination a per diem was provided, chargeable to the special examination fund appropriated by Congress for that purpose. The examiner was expected and required to remain in the bank as long as was necessary for him to determine accurately its condition, and, if possible, to have its affairs placed in a satisfactory shape. Before the advent of the so-called examiner-at-large, under Mr. Murray's administration, the regular examiners were usual- ly authorized to make such special examinations. They did the work fully as well, and at less expense. Being in the vicinity of the bank, they consumed less time in travel in reaching the locality, and were more familiar with the sit- uation. It did not follow, therefore, that because an exam- iner-at-large was detailed to make a special examination in another examiner's district, that the former was superior in abil- ity to the regular examiner for that territory, as the reverse was frequently the case, and there were any number of examiners on the regular force who were the equals in ability of any of those who were designated examiners-at-large, and could have accom- plished as satisfactory results through a regular examination had they been allowed the same rate of compensation. In fact, ROMANCE AND TRAGEDY OF BANKING 329 there were instances where regular examiners were detailed to review the work of examiners-at -large. Bonding of Examiners The law never required a national bank examiner to give a bond, and bonds never were required of them until Mr. Murray's administration. At the hearing before the National Monetary Commission in December, 1908, an amendment to the law in this respect was recommended, for the reason that as examiners are frequently placed in charge of suspended or failed associations, pending reorganization and resumption, or the appointment of a permanent receiver, it was thought desirable to place them under bond. Mr. Murray did not support this recommendation on that occasion, but subsequently, without any authority of law, required all examiners to give a fidelity bond in the penal sum of twenty thousand dollars. The law authorizes the Comptroller to require bonds of re- ceivers of national banks, but not of bank examiners, and it is questionable, in the absence of any statutory authority, whether such bonds are enforcible. Instances of dishonesty on the part of bank examiners are very rare in the history of the service. Their efficiency, individ- ually and collectively, has been frequently questioned, but their honesty has seldom been assailed. Examiners have been known to borrow small sums of money from banks which they examined, in violation of the office regulation, and to neglect to pay it back, but it is rarely, so rare that only one instance can be recalled, that an examiner has been accused of actual embezzlement. The case referred to was that of an examiner who made a practice of abstracting a twenty-dollar bill from the currency of the bank while it was in his possession for the purpose of being counted. On one occasion a package of the bank's own notes was given him to count. These notes had never been put into circulation. They were as fresh and new as when received from the Treasury Department, and were cut and stacked in a package in the order of their numbers. When the package was returned to the teller. 330 ROMANCE AND TRAGEDY OF BANKING he counted the notes before returning them to the vault and found the package short twenty dollars. He informed the cashier of the fact, who advised him not to mention it. Within an hour after the examiner had completed his examination and left the bank, one of the bellboys from a nearby hotel came into the bank with a twenty-dollar bill to have changed. The teller recognized the bill as the missing note from the package referred to and inquired of the boy where he got the note. He stated that the cashier of the hotel gave it to him to get changed. A messenger was sent to the hotel to ascertain from whom the cashier received the note and he was informed that the bank examiner had paid his bill with it a half-hour before. This fact was not reported to the Comptroller's office until long after the examiner had left the service, when it was learned that this examiner had done the same thing in a number of other banks. Nor was it known to the Comptroller that other exam- iners had borrowed money from banks that they examined until after their separation from the service. Bankers, as a rule, will not report such occurrences. They seem to be under the impression that if they incur the displeasure or ill-will of the examiner, he will cause them annoyance or trouble. No banker who is conducting his bank in a lawful and conservative manner should have any fear of an examiner caus- ing him any annoyance or injury for having reported to the Comptroller any occurrences of the nature indicated, or any dere- liction of duty or improper conduct on the part of an examiner. On the contrary, it is a duty which he owes to himself, the service which the examiner represents, and the public, to promptly report all such matters, for the sooner such men are exposed and re- moved from the service, the better for all concerned. Another illustration of the character of men who have occa- sionally crept into the service may be found in the case of an examiner who, at the time of his appointment and for several years prior thereto, was cashier of a national bank, and whose reputation and standing in his community was all that could be desired. It appears that the previous examiner who had made a number of examinations of this cashier's bank prior to the latter's appointment had accepted his statement without verification that ROMANCE AND TRAGEDY OF BANKING 331 a certain old safe in the bank contained securities of the value of about five thousand dollars. The safe, he said, had not been opened for years and the combination had been lost. He described the securities that were alleged to be in the safe, said that he knew they were in it, and as the bank had no immediate use for them he did not want to break open the safe until it was necessary to do so. The examiner accepted this statement, listed the securities as assets of the bank on hand, and so reported them, but he did not report that they were locked up in an old safe to which he had not obtained access. This examiner left the service and the cashier referred to was appointed to the vacancy. He made regular examinations of this bank of which he was formerly cashier, but made no mention of the securities in the old safe, always reporting them as part of the bank's assets. This examiner remained in the service several years, during all of which time he made the regular examinations of this bank. He finally resigned to accept his former position in the same bank. When the examiner who succeeded him made the first examination of this bank he was told the same story of the securities in the old safe, but he informed the cashier that it would be necessary for him to see them, and insisted upon the safe being broken open, otherwise he would report the assets five thousand dollars short. The cashier protested against the de- struction of the safe, but the examiner insisted upon its being opened. A blacksmith was sent for, the safe broken open, and was found to be empty. The cashier was subsequently indicted for embezzlement, but failed of conviction for want of proof. Notwithstanding the few incompetents and derelicts that have been foisted upon the service from time to time, to its discredit, the record as a whole is very gratifying. The long roll of bank examiners employed since the establishment of the Currency Bureau, contains many honorable names of men of a high order of ability and integrity, who were a credit to the service during their connection with it, and who subsequently distinguished themselves in the world of banking and finance and in other fields of activitv and usefulness. 332 ROMANCE AND TRAGEDY OF BANKING The efforts of Mr. Murray to raise the standard of bank examinations were commendable and would have received the hearty support and co-operation of every examiner in the service had he proceeded in a proper and orderly way to inaugurate his improvements. But his unwarranted reflections upon their integ- rity and efficiency, and the publicity given his remarks at the time, were calculated to and did inspire antagonism rather than co-operation. Had Mr. Murray called the examiners together and, behind closed doors, told them in plain and unmistakable terms what he required of them, much good, no doubt, would have been accomplished. But his weakness for sensational publicity, and his disposition to continually play to the galleries through the medium of the public press (a weakness that prevailed throughout his administration), had the effect of not only sub- jecting the examiners to derision by the public and to discredit among the bankers of the country, but severely and unjustly reflected upon the administrations of his predecessors in office and inflicted incalculable injury upon the service as a whole by shaking confidence in the efficacy of bank examinations. The results of the good work that examiners did never became a matter of public information. The superficial work exposed itself. The relative merits of every examiner in the service was a matter of record in the Comptroller's office, and the proper course for Mr. Murray to have pursued, if he earnestly desired to strengthen and improve the service, was to have silently weeded out such of the examiners as were known to fall below the stand- ard of efficiency necessary to insure reliability and thoroughness, and not to publicly discredit the entire force, and belittle the service as he did on the occasion referred to, by creating in the public mind a false standard of measurement of the service as a whole by the exceptional deficiencies of a very small percentage of the total number of examiners employed. In an interview subsequently published in the Journal of Commerce and Commercial Bulletin, Mr. Murray is quoted as stating : We want better bank examiners in place of some now in the service who, after years of experience, do not measure up to the work and never will * * * We want ROMANCE AND TRAGEDY OF BANKING 333 examiners with courage to tell any bank when it is doing wrong and with strength of character enough to force a correction. This interview was brought to the attention of President Taft, who, under date of January 9, 1911, wrote Mr. Murray a note referring to this statement and suggesting that he furnish the Secretary of the Treasury with the names of "those bank exam- iners who are not up to the mark," for removal from the service. No such list was ever furnished the Secretary of the Treas- ury by Mr. Murray, nor was it necessary for him to obtain the Secretary's consent to remove an incompetent examiner, as the Comptroller was vested with authority to do so on his own responsibility. With no disposition to harshly criticise Mr. Murray or his methods, or to excuse or defend inefficiency or superficiality in the work of any examiner, justice to a body of intelligent, com- petent and conscientious public service employees, whose compen- sation, with few exceptions, was not commensurate with their responsibilities or the arduousness of their duties, demands that the public mind be disabused of any false impressions concerning them as a result of Mr. Murray's indiscriminate and indiscreet remarks. This defense of the examiners then employed is not based upon a superficial knowledge of their work, but rests upon the experience of many years and a daily examination of their reports and supervision of the correspondence with the banks growing out of such reports. The National Monetary Commission The Act of May 30, 1908, known as the "Emergency Cur- rency Act," provided for a National Monetary Commission, to be composed of nine members of the Senate, to be appointed by the presiding officer of the Senate, and nine members of the House of Representatives, to be appointed by the Speaker of the House. This Commission was authorized to inquire into and report to Congress what changes were necessary or desirable in the mone- 334 ROMANCE AND TRAGEDY OF BANKING tary system of the United States, or in the laws relating to bank- ing and currency. During the interim between Mr. Murray's qualification as Comptroller and the date he assumed charge of the Currency Bureau, the National Monetary Commission requested the Secre- tary of the Treasury to have prepared for consideration of the Commission such recommendations for amendments to the na- tional banking laws as experience in the administration of the laws had shown to be necessary. In the absence of Mr. Murray, the Deputy Comptroller of the Currency, who was Acting Comp- troller, was requested by the Secretary to prepare these recom- mendations. They were prepared and delivered to the Secretary early in August, 1908, but were not formally submitted to the Commission until December 2, 1908, at its first meeting in Wash- ington. About a week before the meeting, Mr. Murray received notice from the Secretary of the Treasury that the Commission desired him to appear in person before it and explain these recommenda- tions, but as they had been prepared before he assumed active charge of the Bureau, he requested the Deputy Comptroller to present and explain them. Such of these recommendations as contemplated imposing greater restrictions on the banks in some respects, and increasing the supervisory powers of the Comptroller along certain lines, it was assumed would not meet with the approval of all of the members of the Commission, particularly those who were con- nected with national banks, or the bankers who were present by invitation at the hearing. Notwithstanding this fact, however, the request of the Commission was for the submission of such recommendations for amendments to the banking laws as experi- ence in their administration had shown to be necessary, and not for such recommendations as would be acceptable to the Com- mission or the bankers. The more important of those that were submitted were prepared, therefore, wholly from the point of view of the better security of the creditors of the banks and not from the viewpoint of extending to the banks greater privileges. While, as stated, it was expected that some of the suggested amendments to the law would not be received with favor by some ROMANCE AND TRAGEDY OF BANKING 335 of the members of the Commission, opposition on the part of the Comptroller was not anticipated. But Mr. Murray, who was present at the hearing, interposed many objections to the pro- posed amendments. As he had expressed no dissent to any of the recommendations previous to his appearance before the Com- mission on the occasion stated, his attitude on that occasion was a surprise to everyone present, and very embarrassing to the Deputy Comptroller, who was placed in the position of appearing before the distinguished body of men composing the National Monetary Commission and the representative bankers present, and presenting recommendations for amendments to the banking laws which did not meet with the approval of his official superior. If there were any differences of opinion between the Comp- troller and his official subordinates in regard to the amendments to the banking laws that were deemed necessary, the place to have adjusted such differences was in the Treasury Department and not before the National Monetary Commission. Mr. Murray had ample time and opportunity to have done this. For some time before the meeting of the Commission, he had in his possession a copy of the proposed amendments and if they did not meet with his approval it was his privilege to have discarded them in whole or in part and to have prepared others embodying his own views. But he neither prepared recommendations of his own nor con- ferred with his official subordinates in regard to those that had been prepared, and the first and only expression of opinion heard from him on the subject was when he interposed his numerous objections before the Commission. But the recommendations that he dissented to on that occasion he subsequently gave the stamp of his official approval by endeavoring to put them in force by administrative regulation, without authority of law, and publicly claimed credit therefor as part of his administrative reforms. Notwithstanding the objections raised either by Mr. Murray or members of the Commission to the amendments to the banking laws suggested at that time, the more important of such amend- ments as have not since been adopted are still considered proper and necessary, and their enactment into law would enable the Comptroller in a lawful manner to correct or regulate some of the dangerous conditions which are found in banks, and other- 336 ROMANCE AND TRAGEDY OF BANKING wise greatly improve the effectiveness of administrative super- vision. It is unnecessary to reproduce in this volume or to review in detail the amendments to the banking laws that were recommended to the National Monetary Commission at that time, as these will be found in full by anyone who desires to read them in Senate Document No. 404, Sixty-first Congress, Second Session, issued by the Commission. But reference will be made to the most im- portant of the proposed amendments and such as were the sub- ject of discussion and opposition. The first recommendation submitted for consideration was for a change in the method of compensating national bank examiners from a fee basis to an annual salary and expenses, but while the inadequacy of the fee system of compensation was generally ad- mitted, the proposed change did not meet with the approval of the bankers present at the hearing, principally, if not wholly, because of the fear of an increased cost to the banks. This change in the law was made by the Federal Reserve Act of December 23, 1913. When Mr. Murray assumed charge of the Currency Bureau, he was imbued with the idea that the national bank examiners as a body were a bad lot and that their work was faulty in the ex- treme, due, as he thought and publicly expressed, on the one hand to incompetency and on the other to a proneness to acquire fees at the expense of thoroughness in their work rather than to re- main in banks long enough to learn to a reasonable certainty their true condition. Fee System of Compensation The fee system of compensation of national bank examiners was principally, if not wholly, responsible for the impression that prevailed, and which the indiscriminate remarks of Mr. Murray intensified, that examinations were made too hurriedly and that to this fact was due the failure of examiners in the past in some instances to discover the conditions to which Mr. Murray alluded in his excoriating address at the time of the examiners' meeting in Washington. Failure to discover defalcations, embezzlements or other crim- inal wrongdoing through several successive examinations, as al- ROMANCE AND TRAGEDY OF BANKING 337 leged by Mr. Murray, because of the fact that the examiner did not devote sufficient time to the examination of the bank, were very rare. Failure to discover shortages or other criminality was due to other and varied causes. But this does not alter the fact that the fee system of com- pensation was inherently wrong and was conducive to hurried work. A competent and conscientious examiner would render better service for a commensurate compensation than he could afford to give for an inadequate fee. An inefficient examiner should not be retained in the service under any circumstances, and if one should be found, good administration would require that he be instantly removed and not retained to the discredit of the entire force and the service which he represents. It was un- reasonable to expect or to require an examiner to remain in a bank long enough to make a complete audit of its affairs, extending over a period of several days, for a compensation of twenty or twenty-five dollars, in a small institution, and a proportionately larger fee in a larger institution, varying with the amount of the capital of the association, and out of such meagre allowance pay his railroad fare, hotel bills, clerk hire and all other incidental expenses. The surprising feature of this situation was that the examiners whose districts extended over considerable territory, necessitating constant travel, rendered as good and as reliable services as the records of the Comptroller's office show them to have rendered under the fee system of compensation. When it was demonstrated to the Commission how small the net compensation of many of the examiners was, after deducting all expenses, in answer to a question by a member of the Commis- sion as to whether competent examiners could be obtained for such a compensation, Mr. Murray stated that he had on file about one thousand applications for appointments and that every one of the applicants, or, at least, a majority of them would meet the qualifications required for such a compensation. He stated that he could obtain some very good men for two thousand dollars a year, young men who were very good accountants and expert bookkeepers, who would develop into good examiners. In making such a statement, Mr. Murray only displayed his ignorance of the essential qualifications of an examiner. While 338 ROMANCE AND TRAGEDY OF BANKING a knowledge of accounting and bookkeeping is a necessary requi- site in the examinations of banks, there are other qualifications far more important which are difficult to find in a man who is will- ing to accept such employment for the meagre compensation of two thousand dollars a year gross. Mr. Murray admitted this fact further on in his testimony before the commission when he inconsistently stated that he had made it a rule since he became Comptroller to appoint no one an examiner who was not as good a judge of credits and had as fair a knowledge of modern banking as the officers of the banks that he was called upon to examine. Experience in the appointment of bank examiners has demon- strated that some of the very best men in the service never had been employed in a bank, but their general business experience had been such as to broaden their views and make them excellent judges of credits, competent to size up an unsatisfactory situa- tion or dangerous condition and to suggest the remedies therefor. While it is very essential for an examiner to thoroughly under- stand bookkeeping and the general routine work of a bank, the records of the Comptroller's office show that the man whose train- ing has been restricted to the narrow lines of a bank bookkeeper, without other business experience, does not develop into as good and as reliable a judge of credits as quickly, if at all, as the man of broad business experience with no previous bank training. The latter easily learns the details of bookkeeping and the routine work of the bank, while it is difficult for the former to reach the standard of good judgment and discretion which the latter possesses. Adherence to the rule, therefore, to appoint no one a bank examiner who had not had a banking experience, which Mr. Mur- ray declared would be his policy while Comptroller, but which he did not adhere to, would deprive the service of a class of men such as described, who in a number of instances have proven to be first- class examiners and the most efficient men in the service. The principal qualifications an examiner should possess to insure his rising above the average accountant are force of char- acter, resourcefulness and good judgment. If an examiner does not possess these qualities and cannot cultivate them, he may be ROMANCE AND TRAGEDY OF BANKING 339 an expert bookkeeper and an excellent accountant, but he never will rise above the ordinary in this line of work. It was difficult to attract to or retain in the service the type of men who make the best examiners on account of the meagre compensation allowed under the fee system. Men of this class were found to be engaged as auditors or public accountants, re- ceiving a much higher rate of compensation than examiners re- ceived for the same class of service, and neither the Comptroller of the Currency nor anyone else could employ such men at a net compensation of two thousand dollars a year. Mr. Murray made the further statement before the commis- sion, in connection with the suggestion that examiners be placed under the civil service, that while he was a strong believer in the competitive examination system as a test of fitness for public service, he doubted very much whether by any system of examina- tion an applicant's qualifications for employment as a national bank examiner could be reliably determined. He said an exam- iner must have some presence. He must have good judgment. He must have tact, and these cannot be determined by his ability to answer questions. Mr. Cortelyou, who was Secretary of the Treasury at that time, injected some sensible views into the discussion of this sub- ject. He stated that his experience had been that it was not pos- sible to devise an examination that would extend much beyond the mere technical qualifications as determining the fitness of an ap- plicant to satisfactorily discharge the duties of a bank examiner. He said that a high school or college graduate might demonstrate his ability tp pass a satisfactory examination as an expert in figures and otherwise, but by no means could his personal integ- rity, his discretion and his good judgment, characteristics so vitally essential in a national bank examiner, be determined by examination. He stated further, in answer to a question by a member of the Commission, that he would have to part company with Mr. Murray on the proposition that good judgment as to credits could be obtained for a compensation of $2,000 or even $5,000 a year. The recommendation, therefore, that the banking laws be amended so as to place examiners on a salary and expense basis 340 ROMANCE AND TRAGEDY OF BANKING of compensation, instead of a fee allowance, as at that time, in order to correct some of the conditions for which the fee system was admitted by all to be largely responsible, did not receive the favorable consideration of the Commission, and principally be- cause the bankers who were present were unwilling that the banks should bear the increased cost of examinations that a change from a fee to a salary and expense allowance would be likely to entail. The fee system, with all its defects, was therefore continued until the passage of the Federal Reserve Act, which placed the exam- iners on a salary and expense basis. The next recommendation to the Commission, which developed considerable discussion, but apparently little favor, was the pro- posed amendment of Section 5200 of the Revised Statutes, re- lating to the limit of loans that the banks may make. This recommendation is considered of sufficient importance to warrant its reproduction in full, and was as follows: This section excepts from the limit of loans the dis- count of bills of exchange drawn against actually existing values, and commercial paper actually owned by the person negotiating the same. The evident purpose of these exceptions was to facili- tate trade by enabling the owner of such paper to realize on it at once, instead of tying his capital up until the maturity of the paper or the collection of the draft and the remittance of the proceeds. But in facilitating trade by permitting the discount of such paper without restriction as to the aggregate in any one case, and in addition thereto allowing the same person or interest to become liable at the same time for money borrowed to an amount equal to the limit of a loan that a bank may lawfully make, the security of the depositor, whose funds were used in such transactions, is left entirely to the judgment and discretion of the officers of the bank. It is just as essential to the safety of a bank and the security of its creditors that the discount of commercial paper and bills of exchange be kept within prudent limits as it is to restrict the amount of a loan that may be made to any one person or interest. More bank failures have resulted from the excessive concentration of funds in the ROMANCE AND TRAGEDY OF BANKING 341 hands of single or allied interests than from all other causes combined. It matters not, so far as the security of such funds is concerned, whether the liabilities consist of direct loans made in excess of the limit in violation of the statutory restriction or the discount of commercial or busi- ness paper beyond the limits of prudence and safety, but within statutory authority. Realizing the dangers of such a situation, administra- tive regulation has endeavored to supply a protection to the depositor, which the law does not afford him, by in- sisting that the aggregate liabilities of any person, or of any company, corporation, or firm, or allied interests, for discounted commercial paper or bills of exchange shall be kept within the limits of pudence and safety, but as there is no authority of law to support such regulation when disregarded, appeal can be made only to the conservative judgment of the directors of the bank as to the dangers attending such a policy. Unfortunately for the welfare of the bank, such admoni- tions are too frequently unheeded. Disaster finally overtakes the individual or enterprise, and the bank meets with losses which impair its capital or produce a condition of insol- vency and then only was the Comptroller of the Currency vested with power to take decisive action. This section should be amended so as to place a limit- ation upon the aggregate liabilities of any person, company, corporation or firm for money borrowed and for dis- counted commercial paper and bills of exchange. This limitation should be based upon a percentage of the total loans and discounts of the bank. This would cause a wider distribution of the loans and discounts of a bank, and tend to prevent such concentrations of funds as are frequently found, which endanger the solvency of the as- sociation. A specific penalty should also be provided for violation of this section, enforceable against the officers or directors responsible for such violation, in addition to the general penalty of forfeiture of the charter of the association now provided for any violation of the bank act. The individual and not the corporation should be punished in such cases. 342 ROMANCE AND TRAGEDY OF BANKING The original bank act of 1863 provided : That the total liabilities of any person, or of any com- pany or firm (including in the liabilities of the company or firm the liabilities of the several members thereof) to any association, including liabilities as acceptor on bona fide bills of exchange, payable out of the State where the association is located, shall at no time exceed one-third; exclusive of liabilities as acceptor, one-fifth; and exclusive of the liabilities on such bills of exchange, one-tenth part of the amount of the capital stock of such association actually paid in. While this section of the original bank act was very ambigu- ously drawn, it fixed a limitation upon the discount of bills of exchange and in that respect was better than the present law. The Act of June 3, 1864, which repealed the Act of 1863, wiped out this limitation, and the banks since the former date have been allowed to discount business or commercial paper and bills of ex- change without any restriction as to the aggregate amount in any one case, or of any one kind or class. Until there is a restriction placed by law upon the amount of business paper of any one person, firm, company or corporation that may be discounted by a bank, and the law defines specifically what kind of paper shall come within this classification, just so long will some banks exceed the limits of prudence and safety in discounting for single or affiliated interests and endanger the solvency of the association. The unsatisfactory and frequently dangerous conditions that have been found in banks, as a result of this provision of law, which the amendment proposed to the National Monetary Com- mission was intended to correct and regulate, may best be exem- plified by the following illustrations of actual cases in point in one bank of each class with a capital stock varying in amount from $25,000 to $1,000,000. ROMANCE AND TRAGEDY OF BANKING 343 $4,000.00 105,209.96 $109,209.96 $70,000.00 1 . Capital $25,000.00 Surplus 15,000.00 $40,000.00 Deposits $190,000.00 Loans and discounts 200,000.00 Total assets 250,000.00 Legal limit of a loan 4,000.00 Indebtedness of one company, the president of which was president of the bank: Direct loan Commercial paper 2. Capital $50,000.00 Surplus 20,000.00 Deposits $377,000.00 Loans and discounts 325,000.00 Total assets 197,000.00 Legal limit of a loan 7,000.00 Indebtedness of the president: Direct loan Accommodation notes and loans to companies controlled by him 3. Capital $100,000.00 Surplus 50,000.00 Deposits $567,000.00 Loans and discounts 483,000.00 Total assets 827,000.00 Legal limit of a loan 15,000.00 Indebtedness of cashier: Direct loan $9,900.00 Accommodation notes and loans to concerns controlled by him 215,000.00 6,967.00 75,032.00 $81,999.00 $150,000.00 $224,900.00 344 ROMANCE AND TRAGEDY OF BANKING $15,000.00 860,563.00 $375,563.00 $260,000.00 4. Capital $150,000.00 Surplus 100,000.00 $250,000.00 Deposits $858,000.00 Loans and discounts 1,017,000.00 Total assets 1,878,550.00 Legal limit of a loan 25,000.00 Indebtedness of one company, in which the president of the bank was interested: Direct loan Indirect indebtedness, consisting of com- mercial paper and loans to subsidiary companies 5. Capital $200,000.00 Surplus 60,000.00 Deposits $1,545,500.00 Loans and discounts 1,508,000.00 Total assets 2,078,000.00 Legal limit of a loan 26,000.00 Indebtedness of one company: Direct loan Commercial paper and loans to subsidiary companies 6. Capital $400,000.00 Surplus 150,000.00 Deposits $2,150,000.00 Loans and discounts 2,158,000.00 Total assets 3,427,000.00 Legal limit of a loan 55,000.00 Indebtedness of one firm: Direct $40,000.00 Indirect accommodation notes and loans to subsidiary concerns 279,000.00 $10,000.00 345,454.00 $355,454.00 $550,000.00 $319,000.00 ROMANCE AND TRAGEDY OF BANKING 345 7. Capital $1,000,000.00 Surplus 200,000.00 $1,200,000.00 Deposits $13,400,000.00 Loans and discounts 7,100,000.00 Total assets 22,000,000.00 Legal limit of a loan 120,000.00 Indebtedness of president: Direct Indirect accommodation and advance to his companies $7,776,000.00 The foregoing are fair examples of the imprudent concen- tration of loans which may be found in many banks resulting from the excessive discounting of commercial or business paper, so called, for single interests, and in many instances while such paper takes the form of trade paper excepted from the limit of loans it consists of nothing but accommodation notes made for the purpose of indirectly borrowing money. Senator Knox, a member of the National Monetary Commis- sion at the time this matter was under discussion, seemed to think that inasmuch as the banks did not violate the law by discounting commercial or business paper to such an imprudent extent as to jeopardize the safety of the institution, it was not incumbent upon the Comptroller of the Currency to concern himself about such conditions, and that if disaster should overtake the associa- tion he would not be held accountable. This was a very com- placent view to take of the matter. It is the banker's way of looking at it, but certainly should not be the Comptroller's, if the safety of the institution is to be considered in the exercise of his supervisory powers. It was assumed in the preparation of the recommendations for amendment to the laws that the Commis- sion desired to strengthen the weak places in the statutes and thus increase the security of the creditors of the banks, and no provision of the statute was weaker or more responsible for the conditions which result in large losses and frequently insolvency, and needed strengthening more than the provision which permits the discounting of business and commercial paper without limit 346 ROMANCE AND TRAGEDY OF BANKING as to the aggregate of any one class, except the judgment or discretion of the bank's officers. Mr. Padgett, a member of the Commission, stated that in England, France and Germany there is absolutely no Government inspection of the banks, and no regulation whatever in respect to their loans, while in this country the tendency is toward increas- ing inspection and regulation. If all the national banks in this country were as well and as conservatively managed as the banks that were represented by the bankers who were present at the hearing before the Monetary Commission, or were members of that Commission, no additional restrictive legislation or increased supervisory powers would be necessary. It might be perfectly safe to let the banks be man- aged by their directors and officers, without governmental inter- ference, in the confidence that they would be well and conserva- tively managed in the best interests of their stockholders and the safety of their depositors. But, unfortunately, such is not the case, and never will be, and in order to regulate and effectively supervise the banks that most need regulation and supervision, the additional restrictive measures and increased supervisory powers recommended at that hearing were considered necessary, and until there is a statutory limitation placed upon the total liabilities for discounted commercial or business paper and bills of exchange, of any one person, company, firm or corporation, there will be injudicious and imprudent banking and bank failures resulting from too great a concentration of loans and discounts in the hands of affiliated interests. If the English, German or French policy, referred to by Mr. Padgett, of letting the banks alone to be managed by their direc- tors and officers without governmental supervision, were intro- duced in this country, it would also become necessary to adopt the Chinese penalty of decapitation as a punishment for bank wreckers. The experienced and conservative banker does not need legis- lative restrictions to guide him in determining the line of credit to be extended to any borrower. The aggregate liabilities of every customer for direct loans and indirect obligations as endorser or guarantor, are measured by such bankers not by statutory regu- ROMANCE AND TRAGEDY OF BANKING 347 lations but by the borrower's known financial responsibility. Un- fortunately, however, all bankers are not so constituted, consequently as long as some banks are managed and dominated by men of speculative tendencies, or optimistic or defective busi- ness judgment and of uncertain or questionable integrity, just so long will it be necessary to regulate and control their opera- tions by well-defined laws and limitations. That the weak places in the national banking laws were not strengthened from time to time to afford better protection to depositors and stockholders in the banks, and amended to meet new and constantly changing conditions in banking, was because of the fact that the recommendations made by the several Comp- trollers of the Currency since the establishment of the system did not receive at the hands of Congress the consideration they should have received. Of the numerous amendments to the national banking laws that have been adopted since the enactment of the original Act of 1863, practically all have been in the interest of greater lati- tude or privileges to the banks. Whatever safeguards have been adopted in the way of increasing the security of creditors have been of the nature of administrative regulations. Opposition to additional restrictive legislation or increased supervisory powers has almost invariably come from the bankers of the country whose institutions would not be affected in the least by such legislation, except to be benefited to the extent that such legislation would be an additional insurance of the banking interests of their respective communities against disturbance. Penitentiaries are provided and maintained for criminals and those who disregard the civil and property rights of others. Police regulations are necessary for the protection of law-abiding citizens. But it does not follow that because the great majority of citizens of every community are peaceful, law-abiding and con- siderate of the rights of their fellow-man, penitentiaries and police regulations are not necessary. The law-abiding citizen is not affected or interfered with by their existence, except that he is taxed for their maintenance, but the fact that they do exist insures to him freedom from disturbance in the full enjoyment and exercise of his individual rights without interference, so long 348 ROMANCE AND TRAGEDY OF BANKING as he does not encroach upon or jeopardize the rights or property of others. So would it be with the additional restrictions that have been recommended by Comptrollers of the Currency from time to time for the better security of the depositors and other creditors of the national banks. Their adoption would have contributed largely toward the prevention, or at least the amelioration of numerous disturbances to the banking and business interests of a community resulting from the failure of banking institutions managed by men of the class heretofore described, who needed just such restrictions to control the conduct of their business as some of the proposed amendments to the banking laws contem- platedj and which the conservative and successful banker who does not need them, selfishly or short-sightedly opposed. A bank failure, no matter from what cause, is demoralizing to any community, but when such failures result from the exces- sive concentration of loans to one individual or concern, or an affiliation of interests in the form of discounted commercial or business paper, the law is as much responsible for permitting such imprudent and undue extension of credit as the directors of the bank who authorized the loans and discounts to be made. The next most important amendment recommended related to the impairment of capital of the banks and the manner in which the law required such impairment to be made good. The law in this respect is as defective as the statute relating to the limit of loans. The amendment proposed pointed out the defects and suggested the remedies, and was as follows: If a bank's capital becomes impaired wholly or in part by losses, the law requires such impairment to be made good by a stock assessment within three months from the date of receipt by the directors of notice from the Comptroller of the Currency, or the alternative of placing the associa- tion in liquidation. Inability or refusal to do either within the prescribed time subjects the bank to a receivership. There is an inconsistency between this provision of law and section 4 of the Act of June 30, 1876. While the former requires the capital to be made good within three months in order to escape a receivership, the latter re- ROMANCE AND TRAGEDY OF BANKING 349 quires the stock of any shareholder who fails to pay his proportion of the assessment within that time to be ad- vertised for a period of thirty days after the expiration of the three months before it can be sold by the directors to make good the deficiency. The directors can not, there- fore, enforce payment of the assessment on delinquent stock under four months from the date of receipt of the notice of impairment. These provisions of law are also frequently responsible for the unsatisfactory conditions which are found to exist in banks, which the Comptroller is powerless to correct. Pending the collection of an assessment to make good an impairment of capital, the association remains in the hands of the same management responsible, in many cases, for the losses, either through incompetency, speculation, or otherwise. Depositors continue to put their money in the bank to be loaned or invested and perhaps lost or im- periled in a like manner. There have been a number of instances in the past, and there no doubt will be others in the future, when it would have been and will be for the best interests of all concerned to temporarily close the doors of an association whose capital becomes badly impaired, instead of requiring inno- cent stockholders to risk additional capital in the hands of an incompetent or speculative management and further imperil the funds of confiding and unsuspecting depositors. Under existing law the Comptroller has no authority to exercise his judgment and discretion in such cases. Where he has reason to believe that an assessment can not be collected from stockholders to make good an impairment of capital or where he has no confidence in the ability of the board of directors to restore the bank to a satisfac- tory condition, he should have discretionary authority to close an association under such conditions pending the reorganization or rehabilitation of its affairs. While Mr. Murray admitted that the unsatisfactory condi- tions described were frequently found to exist in banks and that the law provided no adequate means for their prompt correction, he did not approve of the remedy proposed, but offered none better. He stated that when n bank's capital becomes impaired 350 ROMANCE AND TRAGEDY OF BANKING it should be made good forthwith, but he dissented to the sug- gestion that the Comptroller be authorized to close the doors of such a bank pending the restoration of capital as an imprac- ticable expedient which would ruin any bank to which it was applied. If Mr. Murray had carefully read and considered the sug- gestion contained in this recommendation, as he should have done before his appearance before the National Monetary Com- mission, or if he had intelligently grasped its purport when he heard it read at the hearing, he should have known that the prop- osition did not contemplate that the Comptroller should close every bank whose capital became impaired until the impairment was made good, but that he should have the discretionary power of temporarily closing a bank when he had reason to believe that an assessment could not be collected from the stockholders to restore the capital, or when he had no confidence in the ability of the directors or the sincerity of their efforts to place the affairs of the bank in a safe and satisfactory condition. In making this objection to the proposed amendment, Mr. Murray laid great stress upon the fact that the temporary clos- ing of a bank under such circumstances would discredit it in the community to an extent beyond recovery. The records of the Comptroller's office disprove this theory beyond question, and show numerous instances of banks that have been temporarily closed and after a readjustment of their affairs and reorganiza- tion of their board of directors have resumed business and become stronger, more conservative and better institutions than they were before their temporary closing, and rank as high in the confidence of the community as any of their local competitors. Mr. Murray was entirely wrong, therefore, in opposing an amendment to the law conferring upon the Comptroller of the Currency the discretionary power of temporarily closing and taking possession of an institution found to be in the condition described. It does not follow, nor did the recommendation that was sub- mitted to the National Monetary Commission assume, that because a bank's capital became impaired there must necessarily have been incompetency, speculation or dishonesty in its man- ROMANCE AND TRAGEDY OF BANKING 351 agement. Losses may result to an extent sufficient to impair a bank's capital from a variety of causes, and under the very best and most conservative management, but the class of banks that the amendment proposed was intended to reach, by vesting cer- tain discretionary powers in the Comptroller, were those whose management had been shown to be either incompetent, speculative or dishonest. The Comptroller should have the power to take possession of an association of this class when he finds it to be in an unsafe or dangerous condition, instead of permitting it to drift along until a condition of insolvency is developed before intervening. Senator Knox also interposed an objection to the granting of such discretionary powers to an administrative officer, and suggested that the banking laws of Pennsylvania provided a remedy for what he termed "that sort of nonsense." Mr. Knox stated that the Pennsylvania law made the directors of a bank personally responsible for any deposits received by its officers after the bank's capital became impaired, which had the effect of making them very careful, and Mr. Murray declared such a law to be a very good one. The Pennsylvania law contained no such provision as Mr. Knox alleged or as Mr. Murray endorsed. The law of Pennsyl- vania at that time prohibited the receipt of deposits by the offi- cers of a bank when the bank was known to be insolvent, but not when its capital was impaired. Insolvency is an entirely different condition, and the Comptroller is vested by law with ample powers when such a situation is reached. A bank's capital and surplus may be entirely wiped out by losses and the association may still be solvent. A bank is not insolvent until its capital, surplus and undivided profits are entirely absorbed and its remaining assets are insufficient to pay its liabilities to depositors and other cred- itors exclusive of stock. The views of Senator Knox, as expressed on that occasion, and as endorsed by Mr. Murray, as to the effectiveness or suf- ficiency of the remedy proposed by the former in its application to a case of impairment of capital would not meet the situation that the proposed amendment was intended to reach. The national banking laws already provided that if the directors of 352 ROMANCE AND TRAGEDY OF BANKING any association knowingly violate, or knowingly permit to be violated, any of the provisions of the banking laws, they shall be held liable in their personal and individual capacity for all damages which the association, its shareholders or any other person shall have sustained in consequence of such violations. In the class of banks which the increased supervisory powers recommended were intended to reach and regulate, the records of the Comptroller's office show that the losses incurred which impaired their capital were the result of deliberate violations of law for which the directors of the association were responsible and consequently were individually liable. But if this individual liability did not deter them from violating the law, would an individual liability for receiving deposits knowing the capital to be impaired stop them from receiving deposits, as suggested by Senator Knox? No, and if they should refuse to receive deposits under such conditions and under such a law, would not such refusal advertise at once the fact that the institution was in an unsatisfactory condition and bring about the very result, but in a worse form, that Senator Knox and Mr. Murray objected to. It would become necessary under such circumstances to close an institution because of the run that would undoubtedly be made upon it by reason of the action of its officers in refusing to receive deposits. It would not be possible for the directors of a bank to comply with such a provision of law and at the same time keep the doors of the bank open for business. The Comptroller had the power under the law to institute a suit to forfeit the charter of a bank whose directors had violated the law, but he had no power to bring such suit for violations of law which injured the bank committed by an officer of the association who was not a director, when such violations of the statute were not knowingly permitted by a director. Neither is an officer of a bank who is not a director individually liable under the provision of the statute referred to for any losses sustained by his association in consequence of violations of law committed by him. He may be criminally liable, if his acts partake of a criminal nature, but he is not civilly liable. The civil liability under this statute applies only to directors. ROMANCE AND TRAGEDY OF BANKING 353 The recommendation, therefore, to empower the Comptroller to temporarily close and take possession of an institution, such as has been described, when its capital became impaired, was a very proper and reasonable suggestion for the lawmakers to have considered as the best means of quickly correcting the unsatis- factory conditions in such an association, and in the meantime protecting the interests of the depositors and stockholders from being further jeopardized by incompetent, speculative or fraudu- lent management. In quite a number of instances in the past the exercise of such a power by the Comptroller would have resulted in saving depos- itors and stockholders from considerable additional losses in a hopeless effort on the part of the bank's officers to recover losses already incurred by risking additional funds in the same specu- lative ventures. The amendment proposed, however, would furnish an inter- mediate power, which, when applied with discretion in exceptional cases, would result in saving a bank and the depositors and stock- holders from irreparable losses. There are precedents to be found for such authority in the banking laws of some of the States. Directors' Liabilities The next amendment suggested to which Mr. Murray dis- sented was the proposition to make each bank show in its pub- lished statements of condition the aggregate liabilities to the association, direct and indirect, of its officers and directors. While the law conferred upon the Comptroller of the Cur- rency the power to prescribe the form in which reports of condi- tion should be made, and required the publication of such reports in the same form, no Comptroller ever required liabilities of the nature indicated to be shown separately in the published state- ments of the banks. They always were included with the loans and discounts, although several of the Comptrollers have admitted the advisability of showing such liabilities separately. 354 ROMANCE AND TRAGEDY OF BANKING This proposition did not contemplate the publication of the individual liabilities of the officers and directors, but that they should be shown in the aggregate. When Mr. Murray found that this proposed amendment to the law did not meet with the approval of the Commission, he interposed an objection to its adoption, stating that such a pointed discrimination against the management of the bank would be unwise. Why discriminate, he said, against the officers and directors of a bank whose loans may be perfectly good, and let other large loans to the people not connected with the manage- ment go unquestioned? There is a vast difference between the loans to officers and directors of a bank and those to other borrowers not connected with the association. The two classes of borrowers are by no means in the same category. The officers and directors occupy the dual relation of lender and borrower. They are the trustees of the funds which they lend to themselves and the depositors and stockholders have a right to know to what extent they are using the funds entrusted to their care for their individual pur- poses, or for concerns or interests with which they are identified. No amendment to the law would be more effective in keeping such liabilities within proportionate and prudent limits than a requirement for their publication. The Comptroller had the power under the then existing law to require this to be done, by prescribing the use of a form to that effect, but, as a rule, Comp- trollers at that time were averse to doing anything unpopular, especially when the unpopularity was on the side of the banks. Therefore the law should be amended to make the publication of such liabilities mandatory and not discretionary with the admin- istrative official. There was one national bank in New York City, now out of existence, which made a practice for years of publishing its complete report of condition, inside and outside, in the same form that it was made to the Comptroller, which showed such liabilities. The next amendment suggested to which objection was made by Mr. Murray was in relation to the failure of national banks to maintain their five per cent, redemption fund with the Treas- urer of the United States. It was recommended that the Comp- ROMANCE AND TRAGEDY OF BANKING 355 troller be authorized to appoint a receiver for any bank which neglected or refused to make good a deficiency in this fund after due notice. The Treasurer's office has experienced a great deal of diffi- culty in the past in getting banks to comply with the law in this respect, and after writing the delinquent banks a number of times, without effect, to make good such deficiency, has had to appeal to the Comptroller in many cases for assistance. The aggregate deficiency due the Treasurer from this source has at times amounted to over forty millions of dollars and has been the cause of a good deal of annoyance. Mr. Murray was of the opinion that the recommendation that the Comptroller be authorized to appoint a receiver for a bank which persisted in ignoring his demand to make good the de- ficiency in this fund was too drastic a measure, and suggested a fine of five hundred dollars instead. He apparently did not know or overlooked the fact that the law already authorized the ap- pointment of a receiver under such conditions, but the circum- locution necessary before such action could legally be taken was deemed so detrimental to the interests of the Government that the amendment was suggested as a more direct means of reaching the same result. It was a simple matter to impose a fine on a bank, but not so easy to collect it. A suit and judgment would probably be necessary in some cases, and a receivership to enforce the judgment. Any bank is subject to a receivership on the claim of a creditor reduced to judgment which has remained unsatisfied for a period of thirty days, but the amendment recommended simply contemplated dispensing with the delay and annoyance incident to a process of that nature. But Mr. Murray had had no experience during his former connection with the Comptroller's office, in handling a situation of this kind, as such questions did not come before him as chief of the organization division, and he did not inform himself, as he should have done, as to the necessity for or the purpose of the amendment proposed before interposing his objections at the hearing before the Monetary Commission. The suggestion that Section 5223 of the Revised Statutes, relating to the consolidation of national banks, be amended so 356 ROMANCE AND TRAGEDY OF BANKING as to meet the growing difficulties which the Comptroller's office experienced, was also inadvisedly objected to by Mr. Murray, who stated that the old section of the law had always worked satisfactorily so far as he had ever noticed. Banks had been consolidated, he said, for forty years without any friction at all, one liquidating and the other increasing its capital stock. He said he thought the section had worked very well. There never had been a consolidation of a national bank in the history of the system. There was no provision in the Bank Act for consolidation until the enactment of November 7, 1918, providing for consolidations. Section 5223 of the Revised Stat- utes, the only section of the law relating to the subject, provided that when an association closed its affairs for the purpose of consolidating with another national bank, it should not be re- quired to deposit lawful money for its outstanding circulation, but its assets and liabilities were required to be reported by the absorbing association. While this section of the law appears to have contemplated the merging of two institutions, it provided no means for their consolidation. The only way consolidation could be effected under the old law was for one bank to go into voluntary liquida- tion and transfer its assets to the other association. The absorb- ing association usually entered into an agreement to assume certain liabilities of the liquidating bank. If shareholders' inter- ests were to be continued, it was necessary for the absorbing bank to increase its capital stock in an amount equal to the capital of the liquidating association, and to sell the additional stock to the shareholders of the latter. As the shareholders of a bank increasing its capital had the common law right of participating pro rata in an increase of the capital of their association, it became necessary to secure from them waivers of their right in order to dispose of the stock to the stockholders of the associa- tion which was to be absorbed. This method of procedure was attended with a great deal of difficulty and delay and in some instances the purpose sought to be accomplished was prevented by the refusal of shareholders to waive their rights. Under such circumstances it became necessary to deprive certain shareholders in the liquidating association of ROMANCE AND TRAGEDY OF BANKING 357 stock in the absorbing bank, or to induce the holders of stock in the latter to surrender a portion of their original holdings to be sold to shareholders in the liquidating bank. The amendment proposed was in line with the law of the State of New York, which conserves the rights of all shareholders, either to become stockholders in the absorbing bank, or to be paid the liquidating value of their stock, which arrangement permits the surrendered stock to be sold to other interests. In objecting to this proposed amendment to the law Mr. Mur- ray simply did not understand the necessity for it and made no effort to inform himself on the subject previous to appearing before the Commission. Consolidations or mergers of banks were by no means as frequent during the brief period of his former connection with the Comptroller's office as they were subsequent to that time. Mergers overnight were not thought of in those days. Statutes that worked very well in years gone by had become wholly inadequate to meet the changed conditions in bank- ing methods in later years. This was true of many of the pro- visions of the national banking laws which had not been amended between the date Mr. Murray left the Comptroller's office in 1899 and the date of his appointment as Comptroller in 1908. But these provisions of law, while generally admitted to be defective and inadequate during his former connection with the office, were allowed to stand as they were because of the apparent impossi- bility of impressing upon the legislative branch of the Govern- ment the necessity for their amendment. The faultiness of Mr. Murray's objections to the amendments proposed, however, was his lack of familiarity with the banking laws and their practical operation. This ignorance was further displayed by his dissent to the proposition to amend Section 5220 of the Revised Statutes in regard to the voluntary liquidation of banks. A bank under existing law may be placed in voluntary liqui- dation by the stockholders owning two-thirds of the stock, with- out the consent or approval of the Comptroller. When such a bank has deposited lawful money with the Treasurer of the United States to provide for the redemption of its outstanding circula- tion, as it is required by law to do within six months after being 358 ROMANCE AND TRAGEDY OF BANKING voted into liquidation, it passes from under the supervision of the Comptroller of the Currency into the hands of its shareholders and the Comptroller does not again exercise supervision over it, except in event of default in the payment of a creditor. When a creditor obtains judgment against a liquidating bank in any court of record and makes application to the Comptroller, accompanied by a certificate from the clerk of the court that such judgment has been rendered and has remained unsatisfied for a period of thirty days, the Comptroller may appoint a receiver for the bank and proceed to enforce the individual liability of its share- holders for any unpaid debts to creditors. It was a very common thing for the Comptroller's office to receive complaints from creditors of banks in process of liquida- tion that the affairs of the bank were not being properly man- aged. The suggested amendment to the law proposed that the Comptroller should be given authority to require reports from banks in voluntary liquidation, and to make such examinations of their affairs as might be deemed necessary in the interest of creditors and stockholders, to the end that settlements might be effected as expeditiously as possible and that all the creditors and shareholders might receive the full amount to which they were entitled. Because of the opposition of Mr. Murray, or failure to sup- port almost every essential suggestion that was made on that occasion for amendments to the laws, and the apparent unfavor- able attitude of the bankers who were present at the hearing toward any legislation in the nature of increasing the super- visory powers of the Comptroller, or imposing any additional restrictions upon the banks, the recommendations then submitted and the prolonged discussion that followed, amounted to naught. While Mr. Murray objected to almost every recommendation made to the Commission, he suggested nothing in substitution, except to allow the law to remain as it was. He said: I think the law is all right as it is. If the Comptroller has the power to make the officers stay within it it is all right as it is today (December 2, 1908) with the exception of a little smoothing out here and there. ROMANCE AND TRAGEDY OF BANKING 359 In consequence of the attitude of Mr. Murray, the amend- ments then proposed were discarded entirely by the Commission, and the Secretary of the Treasury was requested to have pre- pared and to submit at a later date such recommendations as he and the Comptroller should agree upon. Subsequently other rec- ommendations were submitted to the Commission, but they had no bearing upon the important provisions of the law which needed amending in the interests of the better security of the depositors in the banks and the correction of the incongruities and ambigui- ties in the statutes at that time. This fact Mr. Murray learned in the course of time and was forced to realize the necessity for and the potency of the amend- ments suggested in the practical supervision of the banks. Five years later, on January 8, 1913, he declared before the "Money Trust" Committee of the House of Representatives that the whole system of bank examination was illogical and unscientific, and suggested a number of amendments to the law, some of which were unnecessary and others impracticable and inadvisable. Mr. Murray's Famous Twenty-nine Questions One of the most effective regulations that Mr. Ridgely made when Comptroller of the Currency, and one that accomplished the most beneficial results, was the requirement that the board of directors of a bank should make reply over their individual signa- tures to letters of criticism based upon the reports of national bank examiners, in which the attention of the board was called to all violations of the law and unsatisfactory conditions dis- closed by the examination. In almost every board of directors of a bank there will be found some men not identified with the active management of the institution who will not countenance any violations of law or loose or dangerous practices, and whenever the attention of such men is called to any matter subject to criticism it is usually corrected. If the subject of criticism was a matter of serious importance, it was Mr. Ridgely's practice to send a circular letter to each member of the board calling his attention to the fact that an important letter had been written to the bank and 360 ROMANCE AND TRAGEDY OF BANKING requesting him to see it and to unite with the other directors in making reply thereto. This practice had the effect of bringing to the attention of every member of the board any unsatisfactory condition in the bank and reaching the men on the board who could be depended upon to correct the matters complained of. When Mr. Murray assumed charge of the office, he discon- tinued this practice which had proven so effective, and substi- tuted therefor a list of questions which he sent to each bank examiner with instructions to convene the board of directors at the time of his examination of a bank and submit them to each director for answer. This list contained twenty-nine questions, and was the most amateurish document that ever emanated from the Comptroller's office. They always will be known as the twenty- nine varieties. The directors were required to state how many of them knew of the condition of the bank in all its details. How many had but a general knowledge of its condition. How many knew nothing at all of its condition. Whether they had a full knowledge of the habits and moral standing of the bank's em- ployees. Whether they could certify to the genuineness of the signatures to the notes discounted by the bank. How often they examined and listed all the stocks, securities and real estate mortgages owned by the bank. Whether they called in and bal- anced the pass-books and satisfied themselves as to their correct- ness. Whether they verified outstanding certificates and checks, examined into the condition of the lawful money reserve, and counted the cash periodically, checked up the stock ledgers and examined the profit and loss and expense accounts of the bank, read the National Bank Act, etc., etc. Imagine a director of one of our large city banks, a busy man of affairs and extensive interests, being requested to state whether he ever counted the cash in his bank or balanced the depositors' pass-books. Whether he could certify to the genu- ineness of the signatures to the notes held by the bank, and simi- lar questions ; or the director of a country bank, engaged in farming or some business of a non-professional character, being asked whether he ever studied the National Bank Act. The ROMANCE AND TRAGEDY OF BANKING 361 assertion may be ventured that a large majority of the directors of some of the very best managed banks in the country never have read the national banking laws and have only a general knowledge of their provisions. Nor is it necessary to the success- ful conduct of a bank that a director should have more than a general knowledge of the main features of the Bank Act, and these he may and usually does learn in the practical operation of his bank, and not by reading the Bank Act. When Mr. Murray was before the National Monetary Com- mission, Senator Knox asked him the following question in con- nection with this list of interrogatories which he instructed the examiners to submit to directors: "Do you believe that you could get anyone who was respons- ible to act as a director of a national bank if the law required every director to know that every name signed to every obligation that the bank held was the genuine signature of the person it purported to be?" To which question Mr. Murray replied : "I do not think you could find that kind of a man in the United States, or in the world, Senator, and it was to establish that fact officially that I asked the question in my list of ques- tions." Has anyone ever heard of a more absurd proposition emanat- ing from a Government official? To issue a series of questions, ridiculous in their nature, for the avowed purpose of confirming officially the fact that the directors of banks did not know what he admitted he knew they did not know, and what the law or the proper conduct of a bank did not require them to know, simply for the purpose of establishing that fact officially. Is it to be wondered, therefore, that a director of one of our larger banks, to whom the questions were propounded, should have exclaimed when he read the questions, "Angels and ministers of grace defend us from such administration." And that another should have lapsed into poetry on the subject and under the inspiration of the muse delivered himself in rhyme, through the columns of a Boston journal, as follows: 362 ROMANCE AND TRAGEDY OF BANKING TO A BANK DIRECTOR Have you counted the quarters and pennies and dimes ; E'er let counterfeits by you and how many times? Just how many pens, pencils and stamps in a year, How much mucilage, paper and ink use you here? Got the birthplace and lineage pat of each clerk, And the moment they start and get through with their work? On their outside diversion made Sherlock Holmes search Which they take to the most, saloon, theatre or church? Note the gowns and the hats that your tellers' wives wear, Lest your bank in the payment for same have a share? Do you walk round at midnight to test lock and bar, Lest some window be loose or some safe door ajar? And do you as an expert in handwriting rank, Daily scan every word that is writ in the bank? How's the janitor doing? Are corners swept clean? Does the watchman take catnaps, his box rings between? On the dames who do scrubbing your eye keep, let's hope, Lest extravagant they in consumption of soap? If in any of these little stunts you don't shine, You've just one thing to do, sir, this moment resign. No general rule of conduct applicable to all alike can be pro- scribed for bank management. The element of personal equation enters as largely into this line of business as it does into all occupations of a fiduciary character. What may be considered good management in one bank might be regarded as very defective management in another bank. So far as the degree of personal supervision exercised by boards of directors over their respective institutions is concerned, the banks of the entire country may be divided into three classes. The banks in the larger cities, as a rule, have better systems of management and more complete organization than those in the smaller cities and towns. And this must necessarily be so, because of the larger volume of busi- ness handled and the nature and extent of their transactions. The business of such banks is separated into departments, and each department has its special line. Discount, finance, auditing and other committees are provided, and each committee has cer- tain specific duties to perform. Loans and discounts are passed ROMANCE AND TRAGEDY OF BANKING 363 upon and approved by a discount committee before they are made, and in some banks the directors alternate in serving on such committees. The full board has regular days for meeting, and tri-weekly or semi-weekly meetings are held and the directors keep in close touch with the important business of the institution. But even in such well-managed and regulated banks the directors do not look after the details of the work, such as was covered by Mr. Murray's list of questions. Such matters of detail are left to the supervision of the executive officers of the bank, where they properly belong. In another class of banks, such as are found in the smaller cities or towns, it will be found that the directors as a board give very little attention to the details of management. They place competent men in charge of the bank and leave the management almost wholly to them. They hold board meetings at stated intervals, at which the loans and discounts made are usually examined and approved and the acts of the officers concurred in. In such banks all the details of management are left to the officers, and probably could not be improved upon if daily meet- ings of the board were held and each transaction given their personal attention. In most of the banks of this class the man- agement is competent, conservative, and all that could be desired. The third class of banks, and fortunately they are largely in the minority, are those whose boards of directors give the business of the bank very little, if any, attention, but leave the management entirely to one or more of the officers. The directors seldom meet as a board and know very little of the bank's affairs. Such banks are, as a rule, dominated by one man, or one or two of the directors, who, usually, are free borrowers. In this class of banks loose and dangerous practices will be found, injudicious loaning, speculative tendencies, and very often absolute incom- petency. It was this class of banks that Mr. Murray had in mind when he issued his famous twenty-nine questions. He made the same mistake in this respect in regard to directors that he did in meas- uring the standard of efficiency of the examiners as a whole by the shortcomings of a few. Such of his questions as were rational were very appropriate in their application to the directors of 364 ROMANCE AND TRAGEDY OF BANKING banks of this class. Had the questions been well considered and directed toward the essential features of what constitutes good and proper management, they would have accomplished their pur- pose in stirring up the directors of such institutions to a sense of their responsibilities and duties to their respective associations and their depositors and stockholders, instead of inspiring ridi- cule, as they did, by being submitted to the boards of directors of banks whose management was all that any reasonable-minded man familiar with proper and efficient bank management could expect. While Mr. Murray was no doubt actuated by proper motives in endeavoring to raise the standard of bank management, as he was in endeavoring to raise the standard of bank examinations, his failure to discriminate in each instance between good and bad management and examinations, and the publicity he gave to the percentage of directors who did not know the things they were not required to know and which it was not necessary they should know, and the things they did not do and which it was unnecessary for them to do, had the effect of weakening confidence in the banks by creating in the public mind the false impression that the directors of all banks were neglectful alike of their duties and permitted their institutions to be run in a loose and dangerous manner. A public official who is actuated by sincere and sensible mo- tives in quietly inaugurating administrative reforms which he honestly believes to be for the best good of the service of which he is in charge is a valuable public servant and is deserving of the commendation and hearty support and encouragement of every right-minded citizen. But the official who attempts to make radical changes in long-established usages, which affect vast interests, without regard to the merit of such changes or their effect upon such interests, but simply for the purpose of exploit- ing himself in the public eye as a reformer, and to secure the approbation of the public through misrepresentation of actual conditions and facts, is a dangerous character in any position of trust and responsibility, and the sooner his real essence is dis- closed and his methods and motives exposed, the better for the ROMANCE AND TRAGEDY OF BANKING 365 public service and the interests affected by his ill-considered acts. Murray's Internal Management of the Currency Bureau Mr. Murray's policies and his methods of putting them into force were as pronounced and peculiar in the internal manage- ment of the Currency Bureau as they were in his outward deal- ings with the banks and the bank examiners. When he assumed charge of the Bureau he manifested a disposition to pursue a very radical course. This was during the last year of President Roosevelt's administration. After the change of administration from President Roosevelt to President Taft, and the severe criti- cisms to which Mr. Murray was subjected by some of the news- papers and bankers of the country for some of his administrative acts, what promised to be at the outset a very radical policy, unlike that of any of his predecessors, was suddenly changed to the opposite extreme in his attitude toward the banks. He not only abandoned his dictatorial style of correspondence, but dis- continued writing any letters to the banks based upon the condi- tions shown by examiners' reports, except in a very few instances. Prior to the passage of the Act of June 22, 1906, which increased the limit of loans that the banks could lawfully make, fifty per cent, of the banks violated the law by making loans in excess of the legal limit not always the same banks, but always about the same proportion. When the law was amended, Mr. Ridgely, who was then Comptroller, determined to put an end to such violations of the statute, even to the extent of instituting suit to forfeit the charter of any bank which persisted after due warning in disregarding the limitations, and he so advised all the banks in a circular letter calling their attention to the amended law and explaining its provisions. This action on the part of Mr. Ridgely had the effect of greatly reducing violations of law of this nature. An examination of the reports of condition of the banks made under the last call immediately preceding the change in the law showed that nearly sixty per cent, of the banks reporting under that call had excessive loans. The reports under the first call 366 ROMANCE AND TRAGEDY OF BANKING made several weeks after the law had been amended, and after the banks had been notified that it was the purpose to strictly enforce an observance of the limitation, violations of law of this nature had been reduced to about twenty-five per cent, of the banks reporting, and many of these loans were made before the law was amended and could not be reduced until maturity. Each succeeding call showed a further reduction, and the reports made under the last call immediately preceding the date that Mr. Murray assumed active charge of the Bureau showed the exces- sive loans had been reduced to about thirteen per cent, of the banks reporting, and in this number were included as excessive loans balances with banks other than national which were then treated as loans subject to the limit, but subsequently were not so considered. Eliminating this class of loans from the calcula- tion would reduce the number to about ten per cent. Before Mr. Murray took charge of the Currency Bureau, it had been the uniform practice of the office from the beginning of the national system to write letters to the banks based upon examiners' reports, and upon reports of condition made by the banks, calling their attention to every violation of law shown and requiring them to be corrected. The banks were also required to make reply to such letters, stating what had been or would be done toward complying with the office instructions. These letters were very effective in securing results, and in the event of the subsequent failure of a bank, were relied upon largely by United States Attorneys to aid them in securing convictions for criminal violations of law. They were also effective in establish- ing the individual liability of officers or directors for losses sus- tained by a bank on loans and transactions involving violations of law. At that time probably seventy-five per cent, of the examiners' reports, and about the same percentage of reports of condition made by the banks, disclosed violations of law of one kind or another, making it necessary to write letters to that number of banks. This practice was all changed by Mr. Murray. Instead of the Comptroller's office writing to the directors of banks, calling their attention to violations of law and other unsatisfactory ROMANCE AND TRAGEDY OF BANKING 367 conditions, and requiring their correction, the examiners were instructed to convene the board at the time of examinations, take such matters up with them in person and secure their correction before leaving the bank. Or, if this could not be accomplished, to forward with their reports a statement signed by the directors as to what would be done toward complying with the examiner's directions. This policy was all right where definite and satisfactory results could be obtained, and as far as these instructions related to directing examiners to have matters adjusted as fully as pos- sible before leaving the bank, this practice had been in force for years before Mr. Murray assumed charge of the Currency Bureau, and did not originate with him, as the public was given to understand. In many instances under Mr. Murray's administration, as well as under the administrations of his predecessors, examiners succeeded in straightening out unsatisfactory conditions before leaving the bank and reported to the Comptroller the conditions found at the beginning of an examination and what had been done toward their correction. Where a situation could be handled in this manner, much speedier results were obtained than by the slow process of cor- respondence. But in a large percentage of cases it was beyond the power of directors to make an immediate adjustment of un- satisfactory conditions, and therefore the examiner's efforts to secure correction during his stay in the bank were futile. In such cases, in order to avoid the writing of letters to such banks, examiners under Mr. Murray's administration were instructed to procure and forward with their reports a statement signed by the directors, admitting their knowledge of the objectionable features and promising to correct them as early as possible, and when such signed statements accompanied reports they were usually accepted as satisfactory and the reports and letters were filed away without action on the part of the Comptroller. This policy of administration originated with Mr. Murray. He is entitled to all the credit that may be due for any good results and all the blame that attaches to the failure of such a policy. 368 ROMANCE AND TRAGEDY OF BANKING At a dinner given in New York City in 1909, in Mr. Murray's honor, by a prominent banker, at which a number of bankers were present, he made a brief address in which he reviewed the reforms that he had inaugurated in the administration of the Comptroller's office, and others that he contemplated making. Upon his return to Washington, in referring to this dinner, he made the statement that what most pleased the bankers who were present on that occasion was his statement that he did not intend to write them any annoying letters criticising non-essentials in the management of their banks ; and he gave directions to the office force that no letters should be written to the banks which were calculated to annoy them. This original and novel method of Mr. Murray's in handling the reports of national bank examiners had the effect of reducing the number of reports upon which it had been the practice to write letters of criticism from about sixty per cent, to an average of about five per cent, of the total number received each week. In other words, where it formerly was found necessary to write the banks on sixty out of every hundred reports of examination received, under the reform policy of not annoying the banks with letters only five letters were written on every hundred reports received. But the banks were in the same average condition during this period of non-annoyance as they were when the former prac- tice prevailed of writing on every violation of law that was shown by an examiner's report, and the percentage of reports showing violations of law of various kinds was about the same. When the reports of bank examiners disclosed violations of law or other loose and dangerous practices, it was the duty of the Comptroller to require the bank to correct them, regardless of how annoying such communications might be to the banks receiving them, and when he failed to do this through fear of giving annoyance, or because of the unpopularity of such a pol- icy, he was derelict in the performance of his duty and unsuited to hold the office of Comptroller. In the exploitation of this so-called reform the erroneous impression was created in the public mind that the condition of the banks as a whole had been greatly improved in consequence of the improved method of examinations, making it necessary for ROMANCE AND TRAGEDY OF BANKING 369 the Comptroller's office to write letters of admonition to only five out of every hundred banks examined where formerly it was necessary to write such letters to sixty out of every hundred banks examined. Official bulletins were issued to the examiners and given general publicity, declaring that there was not a bank on the entire list that was in an unsatisfactory condition and that bank failures were occurrences of the past. But at the very time those bulletins were issued and this declaration made, the Comptroller was daily writing banks that because of their unsat- isfactory condition they would be thereafter examined every three months, and other banks were being forced into voluntary liqui- dation to avoid receiverships. Of the more than two hundred examiners' reports received weekly, probably fifty per cent, of that number contained viola- tions of law in the nature of excessive loans, deficiency in lawful money reserve, money borrowed in excess of the capital stock, real estate loans, stock investments and other transactions of an unlawful nature, to say nothing of numerous other irregularities of a more or less objectionable nature. The excellent results attained by Mr. Murray's immediate predecessor in vigorously endeavoring to compel the banks to observe the law in regard to the limit of loans were almost wholly destroyed by Mr. Murray's laxity in the enforcement of this pro- vision of the statute. A large percentage of the reports of exam- iners that were passed without action for the purpose of avoiding the writing of letters to the banks that would annoy them, dis- closed violations of this limitation varying in amount from $500 to $75,000 or $80,000 in excess of the legal limit. And the rule of action laid down by Mr. Murray for the guidance of the clerks whose duty it was to examine these reports and prepare the letters of criticism, was that no excessive loan should be criticised unless it was regarded by the examiner as unsafe or insufficiently secured. Yet the law made no distinction between a secured and an unsecured loan in fixing the limit, but required that no loan, no matter how secure, should exceed the limit prescribed by the statute. As a reason for not criticising deficiencies in reserve, Mr. Murray stated that the United States was the only country in 370 ROMANCE AND TRAGEDY OF BANKING the world that had such a foolish law, that the banks complained of its hardship, and that he did not propose to require them to observe it. He stated further in regard to this provision of law that it was not necessary to call the attention of banks to a short- age in reserve, or to require them to make the deficiency good, as they knew the law as well as the Comptroller, and knew when they were violating it. In many cases the deficiencies in reserve were very large and the banks that were short were chronically deficient. Later in his administration he was compelled to change his views in regard to the necessity for maintenance of the legal reserve, and to issue a special letter to the banks that were de- ficient, warning them that they were subject to a receivership for violating the law in this respect and would thereafter be exam- ined every thirty or sixty days until the legal reserve was main- tained. Money borrowed by one bank from another, largely in excess of the legal limit and concealed by subterfuges in one form or another, was not allowed to be written on, for the reason, Mr. Murray stated, that "the business of this country cannot be carried on by any hard and fast laws. The banks must be given some latitude." Real estate loans were passed without notice, and in many cases the aggregate investments of a bank in this class of securi- ties exceeded its capital stock. The law permitted a national bank to own only such real estate as was necessary for its immediate accommodation in the transaction of its banking business, and such as it should acquire in good faith in satisfaction of debts. Realty taken for debt, however, was required to be disposed of within five years from the date it was acquired. As illustrative of the unwarranted construction placed upon this statute by Mr. Murray, the following case in point is cited : The representative of a small country bank near by called in person at the Comptroller's office one day and inquired of the Deputy Comptroller whether there was any legal objection to his bank purchasing a vacant piece of ground around the corner near where the bank was located for the purpose of providing hitch- ing posts for the horses of country customers when they came to ROMANCE AND TRAGEDY OF BANKING 371 town, the street on which the bank was located being so narrow that the authorities would not permit the parking of horses thereon. The Deputy Comptroller advised him that the bank could not lawfully acquire real estate for that purpose, that if the bank had a right to purchase this lot and erect a shed and hitching posts thereon for the purpose of furnishing stable accommodations for customers' horses it would also have the right to build a black- smith shop on the lot and shoe the horses, but as it was no part of the legitimate or incidental business of a bank to furnish livery or horse-shoeing accommodations for its customers the purchase of real estate for that purpose could not lawfully be made. Not satisfied with the opinion of the Deputy Comptroller on the subject the representative of the bank appealed to the Comp- troller, who informed him that the office would interpose no ob- jection to the bank making the purchase. Some time thereafter a story appeared in the press, attrib- uted to Mr. Murray, and went the usual rounds, to the effect that when the John R. Walsh bank of Chicago Avas in an insolvent con- dition and needed the attention of the Comptroller, the Comp- troller's office was frittering away time in carrying on a contro- versy with a little bank in a nearby town over the question of its right to purchase an insignificant piece of real estate. The pur- pose of this innuendo was to unjustly reflect upon the previous administration of the bureau, while the facts were that there was no correspondence with the bank on the subject at all and that the Walsh bank failed five years before the incident related occurred. In his supervision of the banks Mr. Murray seemed to be gov- erned by the rule of action which he was heard frequently to express, that, "It is always best to pursue the course of least re- sistance". This course of action appeared to control his dealings with the banks after the first jolt he received, occasioned by the unfavorable criticism of his famous twenty-nine questions, as the one likely to meet with the least opposition from quarters that might produce the most resistance. Such a policy, of course, would naturally be received with favor by such of the bankers as desired to manage their banks in their own way, unhampered by law or the interference of the 372 ROMANCE AND TRAGEDY OF BANKING Comptroller. And this view of the matter appeared to be enter- tained by some of the members of the National Monetary Commis- sion, as manifested on the occasion of the hearing before that body, where Mr. Murray probably conceived the idea of inter- fering with the banks as little as possible, as it was subsequent to that hearing that he changed from an extremely radical to an ultra conservative policy. If bankers did their banking wholly upon capital furnished by themselves and their stockholders, instead of upon the money of their depositors, they might very properly claim the right to be let alone to manage the affairs of their institutions in their own way. But when they receive and accept a charter from the Government to do a business within well-defined restrictions, and know what those restrictions are when they accept them, it is their duty to conduct that business within the limitations pre- scribed by law and to strictly observe the requirements of the statute. And it is the duty of the administrative official who is charged with the supervision of the banks to enforce an observ- ance of the laws regardless of whether it is annoying to the banks or not, or what his own judgment may be of the statutes. Directors of banks are sworn not to violate the law and the admin- istrative official is bound by a similar oath to execute it. There is an obligation on both which neither can evade without being false to his trust. The banker who trades upon the confidence inspired by the fact that his bank is under governmental super- vision as a means of securing the deposits of the people in his community, and then objects to or resents interference by the Government in the exercise of its supervisory powers, maintains a very inconsistent and untenable position, to say the least. And the public official who accepts and is charged with the duty of enforcing an observance of the banking laws enacted by Congress in its wisdom for the government of the banks in the safe con- duct of their business, and sets his judgment against the will of the law-making power as expressed in such laws, by refusing to enforce their observance because he does not approve of them, has such an improper conception of his duties and responsibilities as to render him temperamentally unfit to hold any administrative or executive position under the Government whose laws he has 373 sworn to obey and execute. And when he fails in his duty to the Government and the people by neglecting or refusing to perform those duties he becomes a law breaker himself, as much so as the banker who violates the laws enacted for the government and control of his bank, and the one should be just as much amenable to punishment as the other. If the laws, or any of them, enacted by Congress for the regulation of the banks are inadequate, too severe, or incompatible with banking or business interests, it is for the Congress to amend or repeal them and not for the administrative official, who is charged with their execution, to refuse to enforce them, or to amend them by administrative regulations. That such laws failed of enforcement or were amended by administrative regula- tions during Mr. Murray's administration, will be demonstrated further on in this volume. President Taft in his public utterances on this subject ex- pressed himself very forcibly as follows : I know that sometimes in the zest and enthusiasm of reform there is an impatience with legal limitations and statutes that seem to be directed against that reform, or to prevent its immediate accomplishment, such as to lead us to disregard it or to ignore it. The first thing that we have to do after arousing the people to the necessity of a change, is to change the law and not rely upon the executive himself to ignore the statutes and follow a law unto himself because it is supposed to he the law of higher morality. If you depart in any way from the law as it is, you are led into a wilderness. And again: There is a tendency among some of our bi;st fellow citizens to hold the executive responsible for not doing a great many things that it is the business of Congress to do, and for the Executive only to follow after they have laid down the rules. That does not rid the executive of the responsibility of recommending changes in the law. But it 374 ROMANCE AND TRAGEDY OF BANKING does prevent him from going ahead and executing those changes without the co-ordinate action of the legislative branch of the Government. If this rule of conduct applies to the Chief Executive, and under the Constitution of the United States it certainly does, how much more forcibly should it apply to subordinate admin- istrative and executive officials in the service of the Government. Numerous reports of examinations of banks, disclosing viola- tions of law that were passed by Mr. Murray without any action, contained also recommendations from the examiners for a strong letter of criticism to be written by the Comptroller, insisting upon the immediate correction of objectionable features to which his attention was called, and which the examiners in their individual efforts had failed to have adjusted by the directors while they were in the banks. But in a majority of such cases no action was taken by the Comptroller, so intent was he in carrying out his policy of pursuing the course of least resistance by not writing the banks letters that were calculated to annoy them in regard to what he termed non-essentials, but which were absolute violations of law. When the trial of John R. Walsh was under way in Chicago, a former Deputy Comptroller of the Currency testified for the defense that in making excessive loans Walsh had done nothing more than was done by a majority of the banks at that time, with the full knowledge of the Comptroller, and that violations of law of this nature were only perfunctorily criticised by the Comp- troller's office, stamped fac-simile signatures being used on circu- lar forms in calling the attention of the banks to violations of the statute. This statement was true as far as it related to the printed forms and fac-simile signatures used in calling attention to violations of law shown by reports of condition of the banks, but it was not true in respect to letters written on examiners' reports. And the reason why forms were used in the first instance was because of the large number of violations of law of various kinds disclosed by reports of condition, which made it a physical impossibility for the limited force of clerks in the Comptroller's office to write an individual letter in each case. But Mr. Murray ROMANCE AND TRAGEDY OF BANKING 375 solved this problem, in pursuance of the course of least resistance, by not writing any letters at all on reports of condition, no mat- ter what violations of law were shown, thus reducing the number of letters that were previously written which he considered of an annoying character. Examiners' Fees National bank examiners were not salaried officers at that time. Their compensation consisted of fees assessed against the banks examined, and the rate of such fees was fixed by statute. All banks located outside of reserve and central reserve cities, except those hereinafter mentioned, were required to pay a fee for each examination based upon the amount of their capital stock. The rate so fixed varied in amount from a minimum of twenty dollars to a maximum of seventy-five dollars, according to the capital of the bank. Banks located in the States of Oregon, California and Nevada, and in the States that were Territories at the time of the enact- ment of this law, were excepted from the operation of this provi- sion, for the reason that they were so widely scattered and the cost of travel between them was so great that the fee based upon the capital of the associations would not compensate the exami- ner for the time employed in making the examinations and the expenses of travel incurred. The fees for examinations of banks in such States and Terri- tories were therefore authorized by law to be fixed by the Secre- tary of the Treasury upon the recommendation of the Comptroller of the Currency, and the rate so fixed was based upon capital stock with an additional allowance of one cent on each thousand dollars of the average gross assets of the respective banks as shown by their five reports of condition during the preceding year. Before the corporate existence of any bank was extended, the law required a special examination of the bank to be made, "at the expense of the association". It was held by the Comptroller's office, and very properly so, that the provisions governing the rate of fees for the regular examination of banks did not apply to examinations for extension of charter. It was the practice, 376 ROMANCE AND TRAGEDY OF BANKING therefore, to allow the examiner the regular fee and actual ex- penses, or a per diem of fifteen dollars and expenses for making such examinations. The full measure of the Comptroller's authority to assess banks for examinations was therefore limited to the three provi- sions of law referred to. When a bank was found to be in such an unsatisfactory condi- tion that a special examination was necessary, and the Comptrol- ler deemed the statutory fee inadequate to compensate the exam- iner for the time employed and the expenses incurred in making such examination, a specific sum appropriated by Congress was at the disposal of the Comptroller to pay for such examinations, and the Comptroller was free to fix the rate of compensation in such cases, chargeable to this fund. A per diem of twenty-five dollars, covering services and expenses, or fifteen dollars a day and expenses, was usually allowed. The sum annually appropriated for this purpose previous to Mr. Murray's assuming charge of the office, was from five to eight thousand dollars. But in the estimate for appropriations for the Comptroller's office he reduced this amount to five thou- sand dollars, and declared that he did not intend to use public funds to pay for the examination of banks. He was advised that the statutory fee was not sufficient to compensate an examiner for making a special examination of a bank in an unsatisfactory condition and that it was necessary to charge the expenses of such examinations to this fund, which would not be sufficient if reduced to five thousand dollars. He replied that he would make the banks pay this expense as a penalty for getting into such a condition as to make a special examination necessary, and he pro- ceeded to carry out this unlawful policy thereafter. Without any authority of law for his action, but in direct disregard of law, and without even the approval of the Secretary of the Treasury, which the statute required him to obtain as his authority to assess a bank for any amount in excess of the fee based upon capital, he arbitrarily established a special rate of fees which he made such banks pay, ranging in amount from fifteen to twenty-five dollars a day and expenses. Where the statute fixed the fee at twenty or twenty-five dollars for one exam- ROMANCE AND TRAGEDY OF BANKING 377 ination these banks were assessed anywhere from forty to over four hundred dollars for one examination. When a bank pro- tested against this exorbitant and unlawful charge, as occasion- ally one did, the fee was paid from the special examination fund provided for such purpose. In every case in which this un- lawful fee was charged the bank was in an unsatisfactory condi- tion, requiring several days to examine it, and most of them sub- mitted to this extortion because they feared the exposure that would result from a protest. It was for the examination of this class of banks that Con- gress provided the special fund which Mr. Murray declared he would not use. He did not use it where he could lawfully have used it, in payment for special examinations, but he did use it where he could not lawfully use it, in payment for investigations made by himself as to the manner in which bank examiners do their work. The provision of the act appropriating this money read as follows : For expenses of special examinations of national banks. and bank plates, of keeping the macerator in the Treasury building in repair, and for other incidental expenses attend- ing the working of the macerator, and for procuring informa- tion relative to banks other than national, five thousand dollars. There is no authority in this provision of law for the use of any part of this fund to pay a bank examiner, or the traveling expenses of the Comptroller, for investigating the manner in which another examiner does his work, and the use of an appro- priation for purposes other than those for which it was specifi- cally authorized was an unlawful diversion or use of such funds. In every case of such investigation the regular examiner made the examination of the bank, received the statutory fee for the examination, and all the Comptroller and the examiner who ac- companied him did was to look on or discuss banking questions with the officers of the bank while the examination was in prog- ress. If this fund could be lawfully used for such purposes, then the appropriation should have been discontinued, as it would 378 ROMANCE AND TRAGEDY OF BANKING eventually become nothing but a junketing fund for the use of the Comptroller and his favored employees. The misapplication of trust funds of insolvent national banks by Mr. Murray was no less pronounced than his misuse of the special examination fund and his unlawful assessment of fees for examinations. The creditors of failed national banks were re- quired to bear the expenses of an examiner for investigating whether another examiner made proper examinations of the failed bank prior to suspension, or neglected to discover and report the conditions which led to the failure, and the funds of the insolvent bank were charged with the expense of such investigation, while the law limited the use of such funds to the legitimate expenses of the receivership and the payment of the depositors and other creditors of the failed bank. There was no warrant in law for the Comptroller to use any part of such funds in payment for investigations of suspected dereliction of duty on the part of an examiner in connection with his examinations of the bank before suspension, and every dollar so used was an unlawful diversion of the funds of the failed institution and diminished the amount re- turned to the depositors and stockholders. Another practice inaugurated during Mr. Murray's adminis- tration was the detailing of favored salaried employees to make examinations of banks and allowing them a per diem and expenses in lieu of their salaries, by assessment upon the banks. As this allowance did not come out of the Treasury of the United States no vouchers were rendered to the Government for such bills, con- sequently they did not have to pass the scrutiny of the accounting officers of the Treasury Department, otherwise the fact that sal- aried officers were receiving extra compensation for services rendered in time which belonged to the Government would have been disclosed. Such a practice was not only demoralizing to the office force because of the jealousies it engendered between the favored few and the employees who were not so favored, but was detrimental to the public service by reason of the absence from their regular duties of those who were employed and paid for attending to the current business of the bureau. It was also an infringement upon the legitimate work of the regular examiners who were commis- ROMANCE AND TRAGEDY OF BANKING 379 sioned for the express purpose of making such examinations, and who, in most instances, could have done the work at less expense to the banks in time and travel. Characteristics of Murray's Administration A marked characteristic of Mr. Murray's exploitations of his so-called reformatory measures was the reflections that he invari- ably cast upon the methods or policies of his predecessors, in making public announcement of his reforms, and the inference that such announcements conveyed that everything that he did was right and everything that they had done was wrong. This applies also to the interpretation of the banking statutes which had been in existence for forty-four years at the time Mr. Murray assumed charge of the Currency bureau, and had been almost uniformly construed by the courts and by such able men as McCulloch and the long line of practical and experienced bankers and financiers who followed him and preceded Mr. Murray, whose decisions had been adopted as the settled interpretation of the law for the guidance of the bureau in its administration. But Mr. Murray changed all this. The function of instructing the banks, which before the ad- vent of Mr. Murray had been exercised only by the Comptroller, was delegated to the examiners, with the result that instead of having a uniform interpretation of the statutes to all banks alike in the application of the law to their varied transactions, each bank examiner of the constantly changing force of about one hundred interpreted the law to the banks on his list for examina- tion according to his individual ideas. So that ultimately there were almost as many different constructions of one section of the statute as there were examiners in the service. And when the examiners in the various examination districts were alternated the natural consequence of such a policy manifested itself in a conflict of interpretations of the law and of the position of the Comptroller. This led to confusion, especially among the newer banks in the system, as to what the settled policy or practice of the office was or whose advice or direction they should follow. It was not infrequent that the office received requests for advice or 380 ROMANCE AND TRAGEDY OF BANKING instructions, either by mail or in person, from bankers who called attention to the conflicting positions of examiners on the same question. Mr. Murray's administration was also distinguished from that of any of his predecessors by his spectacular advertising of every change that he made in old methods and every new ruling or regulation that he put in force. And long before the examiners received any official notification of such rulings or regulations, they were advised of the contemplated action through the press of the country, financial journals or monthly circular letters issued by some of the metropolitan banks. Nor was he at all backward in promulgating as reforms orig- inated by himself administrative practices that had been in force in the bureau long before he became Comptroller and had worked satisfactorily and successfully without any publicity or stage settings. For instance, one of the first reforms announced by Mr. Mur- ray was his purpose to appoint a few examiners-at-large, whose duty it would be to examine banks that were in a dangerous or unsatisfactory condition and to remain at the bank until all ob- jectionable matters were satisfactorily adjusted. The publicity given this plan and the names of the examiners so designated advertised the fact that any bank examined by an examiner-at-large was regarded as being in a bad or unsatis- factory condition, and the presence of such an examiner in the bank was, therefore, a notice to the other banks in that commu- nity that it was so considered. Banks in the same city, town or vicinity usually know of the presence of an examiner in any one of the neighboring banks and of the frequency of his visits. A particularly bad feature of this plan that was called to Mr. Murray's attention at the time he adopted it, but without effect, was the fact that the examiners-at-large were so addressed in the official correspondence they received from the office, and so signed themselves in their communications to other banking institutions in verifying the accounts of the bank under examination, thus further advertising the fact that the latter bank was being exam- ined by an examiner-at-large and must, therefore, be in an unsat- ROMANCE AND TRAGEDY OF BANKING 381 isfactory condition. Such publicity naturally worked to the in- jury of the bank. There was no authority of law for the appointment of an examiner-at-large, nor for the designation of a bank examiner by such a title. There was no such title provided by statute. The title was simply a creation of Mr. Murray's, a high-sounding des- ignation which implied unusual powers which the examiner did not possess over the ordinary examiner. The duties performed by these so-called examiners-at-large did not differ in any respect from the same duties quietly performed under previous Comp- trollers by the regular examiners. Under former Comptrollers it had been the practice for years to assign banks that were in such a condition as to require special attention to one of the most effi- cient men on the force, who had special qualifications for and ex- perience in handling and adjusting difficult situations. These examiners were paid a per diem of twenty-five dollars, which in- cluded expenses, from the special examination fund appropriated by Congress for that purpose, while Mr. Murray allowed his examiners-at-large a per diem of from fifteen to twenty-five dollars, and in one case fifty dollars and expenses in addition, and authorized them to present their bills to the banks for pay- ment, without any authority of law for so doing. These bills amounted to, in some cases, from two to four hundred dollars for an examination. Another reform which was freely advertised as having been originated by Mr. Murray was in securing the co-operation of the State banking authorities with the national bank examiners in making joint or simultaneous examinations of state and national banks occupying the same or communicating quarters, in order to prevent any commingling of the assets of the two institutions, or the use of the assets of one by the other, as was possible when each bank was examined separately on different dates. The practice of making simultaneous examinations whenever they could be arranged between state and national examiners pre- vailed in the Comptroller's office for years before Mr. Murray became Comptroller, and the national examiners were instructed when they could not arrange with the state examiner for a joint examination to endeavor to obtain from the state institution ROMANCE AND TRAGEDY OF BANKING authority to examine it at the same time they examined the national bank. There was nothing new or novel, therefore, in this so-called reform, except the publicity given the reiteration of old instruc- tions and the originality claimed therefor. Another reform that was extensively advertised was the divi- sion of the country at large into eleven examination districts, and the placing of an examiner at the head of each district, who was called a district chairman, as distinguished from an examiner- at-large. The examiners who covered the territory comprising these several districts were at first instructed to hold conventions in January and July of each year in their respective districts and exchange views generally on the subject of bank examinations. These meetings were subsequently reduced to one each year be- cause of the expense they entailed upon the examiners. In 1887 Comptroller Trenholm advocated this same idea in his annual report to Congress for that year, but suggested an annual meeting to be held in Washington, and recommended that an appropriation be made to defray the traveling expenses of the examiners for attendance at such meetings. At one time since then a movement was started among the examiners to organize themselves into an association and to hold a convention each year at the same time and place that the American Bankers' Association assembled. But nothing resulted from this movement as Congress would not provide the funds from which to defray the expenses, and the examiners could not afford to bear the expense themeslves or lose the time from their work in attending such meetings. Mr. Murray, however, overcame all these obstacles by arbi- trarily grouping the examiners into sections and ordering them to attend these district meetings at their own expense under penalty of suspension if they failed to do so. The examiners were not salaried officers at that time. They were paid only for the time actually engaged in the examination of banks and any loss of time meant a corresponding reduction in their earnings. It was a great hardship, therefore, for an exam- iner to be compelled to attend the district meetings at a loss of compensation and the additional expense of travel, and most of ROMANCE AND TRAGEDY OF BANKING 383 them complained very bitterly of Mr. Murray's arbitrary action in compelling their atendance. They also complained that the additional labor imposed upon them in the preparation of essays to be read and discussed at such meetings and other data relative to the banking conditions in their respective districts involved an additional money loss to them in time and interfered with and delayed their regular work. The consensus of opinion of the examiners in regard to these meetings was that while there was some little benefit to be de- rived from an interchange of views, the meetings resolved them- selves into mere social gatherings which, while very enjoyable and expensive, enabled the examiners to become acquainted with each other, but were of no practical benefit. Comptroller Trenholm's plan to have the examiners meet once a year in Washington, and for Congress to authorize their travel- ing expenses to be paid out of public funds, was a more practical proposition, as far as the accomplishment of beneficial results was concerned, as the examiners would then have been brought in close touch with the Comptroller's office and the contact would have been mutually beneficial. The establishment and maintenance of a credit system in the Comptroller's office on an elaborate scale was another reform that was extensively heralded by Mr. Murray. This plan contemplated the keeping of a record of the names and financial responsibility of all borrowers whose paper in excess of five thousand dollars was found in the more than seven thou- sand banks. This scheme was an excellent one in theory, but it was wholly impracticable, as any one on a moment's reflection could readily understand. In the first place, a record of this character to be of any use at all would have to be accurate, and to keep it accurately it would have to show the constantly changing amount and charac- ter of the paper of any one maker on a given date, in order to determine his aggregate liabilities and whether or not they ex- ceeded his financial worth. If all the national banks of the country were examined on the same date, or if the banks were to list the names of all their bor- rowers and the amount of each loan and discount in their reports 384 ROMANCE AND TRAGEDY OF BANKING of condition for a given date, it would be possible for a force of clerks equal in number to the force employed in the Comptroller's office to abstract such reports and to get a line on the aggregate amount of credit extended to each borrower in all the banks. But what material or practical use would a record of that character be by the time it was completed. By the time the returns were tabulated a large percentage of the notes would have been paid and others would have taken their place for different amounts, either of the same or other makers. So that the only way to make such a record reliable and useful would be for the banks to report daily to the Comptroller by wire all payments and renewals of notes and new loans made to enable him to post the changes promptly in his liability record. The magnitude and utter im- practicability of such a scheme is self-evident and needs no fur- ther comment. For years before Mr. Murray became Comptroller it had been the practice of the Comptroller's office to keep a line on borrowers whose paper was found running through a number of banks in the same locality, or in the same section of the country, as shown by the reports of national bank examiners, for the pur- pose of determining the aggregate liabilities of any borrower and to check his borrowings when found to exceed the limit of his financial responsibility. It was the elaboration of this limited scheme that suggested to Mr. Murray the gigantic and impossible undertaking of estab- lishing an extensive credit record for the whole United States, such as the public were given to understand it was the purpose of the Comptroller's office to maintain. In December, 1909, Mr. Murray sent a circular letter to all the bank examiners requesting them to report to him whether or not there were any banks in their respective districts that were believed to be in an unsatisfactory or dangerous condition. In February, 1910, he made the public declaration, purport- ing to be based upon the replies received from the examiners to this inquiry, that at that time there was practically not a na- tional bank in the entire country that was regarded by the exam- iners as being in an unsatisfactory condition. He stated further that for many years before he took charge of the Currency ROMANCE AND TRAGEDY OF BANKING 385 bureau it had been the practice to carry a list of several hundred banks that were regarded as either in an unsound condition or so poorly managed as to require very close watching, and that although efforts were made to improve the condition of these as- sociations they were successful in only a few instances. He then proceeded to claim, through the press and financial journals of the country, that because of the successful working out of the various reformatory measures which had been a feature of his administration a complete rehabilitation of the unsound and poorly managed banks had been effected and that there was then not a bank left on what was termed the "bad bank" list. In making this statement Mr. Murray not only cast an un- just and unwarranted reflection upon the administrations of his immediate predecessors, but misrepresented the actual condition shown by the returns received from the examiners to the circular letter of inquiry sent them. It had been the practice for a number of years for the Comp- troller or the Deputy Comptroller to keep on his desk a list of the banks that were in an unsatisfactory condition and the date of the last examination of each. These banks were scheduled for exami- nation every three months and this list was kept for the purpose of closely watching these banks and guarding against any of them being overlooked. Mr. Murray abandoned this list and sub- stituted therefor what he termed a "bad bank desk", to which was assigned every bank that was in an unsatisfactory condition, and the clerk in charge of that desk was relied upon to look after such banks and see that they were promptly examined at the stated time. The result of this change was that there were so many banks assigned to this desk and so few examiners-at-large to ex- amine them that many of them were not examined as frequently as they would have been had they been examined in their regular order every six months, and some of these banks subsequently failed and at the date of failure had not been examined for twelve months. A compilation of the reports received from the examiners in reply to Mr. Murray's circular letter of inquiry showed that at that time there were just as many banks in the respective districts of the examiners that were in an unsatisfactory condition as there 386 ROMANCE AND TRAGEDY OF BANKING ever were under any previous administration during normal times, and a number of them were so near a condition of insolvency that in order to avoid a receivership they were forced into liquidation. There always has been a certain percentage of the total num- ber of banks in active operation at a given date in a more or less unsatisfactory condition, requiring frequent examination and special watchfulness, the number varying only with the business conditions of the country. This always has been and probably always will be the case under our present banking system. It was so throughout Mr. Murray's administration to as great an extent as during the administrations of any of his predecessors, under similar conditions. Perhaps the most faulty of all of Mr. Murray's many so- called administrative reforms, and the one that involved the great- est disregard of law and the rights of shareholders in the banks, was his method of forcing banks that were in an unsatisfactory or insolvent condition into liquidation to avoid receivership. Section 5220 of the Revised Statutes of the United States confers upon the shareholders of a bank the right to place the bank in voluntary liquidation at any time by a vote of two-thirds of the stock. There is no authority vested in the Comptroller of the Currency to compel a bank to go into liquidation. If the officers or directors of a bank violate the law he has the right to institute a suit to forfeit the charter of the association, but the court must determine whether or not the bank's franchise shall be declared forfeited. The law also provides that whenever the Comptroller shall be- come satisfied of the insolvency of any bank he may, after due examination of its affairs, appoint a receiver, close up its busi- ness and enforce the personal liability of the shareholders for any deficiency in the assets to pay liabilities to depositors and other creditors. Under the general direction of the Comptroller the receiver is required to take possession of the books, records and assets of the bank, collect all debts, dues and claims belonging to it, and, upon the order of a court of record of competent juris- diction, sell or compound all bad or doubtful debts. In short, the receiver is required to reduce the assets of the bank to cash and make a pro rata distribution of the proceeds to the creditors of ROMANCE AND TRAGEDY OF BANKING 387 the association. If anything remains after the debts of the asso- ciation are paid in full with interest, it reverts to the stockholders. Mr. Murray ignored these provisions of law. When the cap- ital of a bank became badly impaired, instead of ordering an as- sessment upon the stockholders and giving them the right to make the capital good or to place the association in liquidation as pro- vided by law, he ordered an examiner-at-large to proceed immedi- ately to the bank and to require the directors to restore the capi- tal without delay or to take immediate steps to place the bank in liqudation. At the hearing before the National Monetary Commission Mr. Murray opposed the recommendation made by the Deputy Comp- troller for an amendment to the law authorizing the Comptroller to close and take temporary possession of a bank when its capital became badly impaired, pending a reorganization and readjust- ment of its affairs. He declared that such a proposition was too drastic. But subsequently, as part of his administrative policy, and without any authority of law, he proceeded to exercise a power over banks with an impaired capital far more drastic than anything that was contemplated by the amendment to the law proposed. After Mr. Murray made his misleading announcement that as a result of his reforms there was not a national bank in the entire country that could be said to be in a bad condition, and that bank failures were a thing of the past, the average number of insolvent banks developed each year, and in order to conceal the fact that these banks were actual failures, instead of appoint- ing a receiver for them as provided by law, they were coerced into liquidation. The articles of association of the banks that have been char- tered in recent years require the directors to give a thirty days' notice of a meeting of the stockholders by publication in a news- paper published in the city, town or county in which the bank is located, or by mailing to each shareholder a notice in writing thirty days before the time fixed for the meeting, in order that all the stockholders may be present either in person or by proxy. The annual meeting of stockholders for the election of directors, which the law requires to be held in the month of January, on the 388 ROMANCE AND TRAGEDY OF BANKING date specified in the articles of association, is the only meeting of stockholders which does not require a thirty days' notice, but if any business other than the annual election of directors is to be transacted at such meeting, thirty days' previous notice is also required. In no other way can a legal meeting of the stockholders of a bank be held, unless this notice is unanimously waived, or all the stock is represented at the meeting. Cook on Corporation Law states that : If the time and place at which a corporate meeting is to be held and the business to be transacted are distinctly fixed in the charter or by a by-law, this is of itself sufficient notice to all the stockholders, and no further call or notice of that meeting is necessary, unless the charter or by-laws require it. But a by-law which fixes the day of meeting without also fixing the hour is insufficient as a notice of the meeting. And it is a general and settled rule of law that notice, in some way or other, must be given to every person entitled to be present at a corporate meeting. When, therefore, no sufficient notice is given by charter or statute or by-law, each stockholder is entitled to an ex- press notice of every corporate meeting. No usage can operate to excuse a failure to give such a notice. These rules are based on the necessity of protecting the rights of stockholders, and especially of the minority. A provision in the articles of association of a bank has all the force of law, and neither the Comptroller of the Currency nor the board of directors of the institution has any more authority to waive or disregard a requirement of the articles than they have to waive or disregard a provision of the statutes. In forcing banks into liquidation, whether solvent or insolvent, without due notice to all of the stockholders of a meeting called for that purpose, Mr. Murray and the directors of the bank ex- ceeded their authority under the law, and the stockholders in every such instance who were not notified and were not present at the meeting in person or by proxy had the right of redress through the courts. In furtherance of the policy of avoiding receiverships and in support of his pronunciamento that bank failures were a thing of 389 the past, in some instances insolvent banks were put in liquidation over night and a new national association was organized in a day in the same place for the purpose of taking over the assets of a failed bank and assuming its liabilities to depositors. In some in- stances banks were forced into liquidation without even the two- thirds vote of the stock required by law, some of the proxies neces- sary to make up the two-thirds not having been received until after the vote to liquidate had been taken. Section 5136 of the Revised Statutes of the United States provided that upon duly making and filing articles of association and an organization certicate in the office of the Comptroller the association should become, as from the date of the execution of the organization certificate, a body corporate, and Section 5140 provided that before a bank should be authorized to commence business at least fifty per cent, of the capital stock should be paid in, and that such payment should be certified to the Comptroller, under oath, by the president or cashier of the bank. In some instances the Comptroller's certificate of authority for a new bank to begin business was issued before a single paper had been filed in the office, not even a formal application for au- thority to organize the bank, action having been taken upon tele- graphic advice from the examiner that all of the necessary papers had been executed and the requisite amount of capital subscribed for and paid in. In such cases several days elapsed before the organization papers were filed and when received were found to be imperfect or incomplete. In the meantime the bank had been opened and was doing business. In other cases where longer time was required to perfect the new organization, or negotiations to that end had failed, the in- solvent bank was allowed to remain open a week or more, with knowledge of its insolvency, and in the meantime some depositors who were aware of its condition were permitted to withdraw their deposits, while others who knew nothing of the situation con- tinued to put money into the institution. In order to bolster up some of the doubtful or worthless assets taken over by the new association, the officers or directors of the failed institution were coerced by the examiner into giving mort- gages or other security on their individual property, or required 390 ROMANCE AND TRAGEDY OF BANKING to pay notes or overdrafts under a threat of criminal prosecution for violations of law if they did not comply with the examiner's demand. The following is a specimen of the communications received from the examiner who did this class of work for Mr. Murray: I called in every doubtful borrower that could be reached and informed him that if he did not satisfactorily arrange for the payment of his indebtedness to the bank I would consider reporting the facts to the District Attorney for such action as he might take. As the people in this State are very much afraid of the Federal Judge, this bluff 'worked so beautifully that I was able to commence to pay my depositors on Thursday morning. When the attention of this examiner was called to his un- lawful and reprehensible methods he declared that he did not care what the law required so long as he accomplished his purpose of not allowing a bank to go into the hands of a receiver, and those officials of the Comptroller's office who dissented to such pro- cedures were regarded as representatives of old methods and not in sympathy with Mr. Murray's policies. This examiner was subsequently indicted and became a fugi- tive from justice, having fled to Europe before the World War. These and other loose and unlawful practices were indulged in by examiners and countenanced by Mr. Murray during his admin- istration in furtherance of his modern methods of supervision, which appeared to recognize no law other than that the end justi- fies the means. One of the worst features of this policy of liquidating insol- vent banks, or banks that were in an otherwise unsatisfactory condition, was the fact that the institution was allowed to remain in the hands of the men who were responsible for its failure or its unsatisfactory condition, thus affording them ample opportunity to cover up any criminal wrongdoing they may have been guilty of, and to escape also their civil liability for any losses or damages the bank may have sustained by reason of their violations of law. When the capital of a national bank became impaired by losses or otherwise the law gave the stockholders the option of ROMANCE AND TRAGEDY OF BANKING 391 making the impairment good by assessment of the stock, or the alternative of placing the association in liquidation by a vote of two-thirds of the stock. If they voted to assess the stock, they had three months under the law in which to pay in the assessment. Mr. Murray insisted upon the immediate restoration of the capital, or the immediate liquidation of the bank, and in a number of instances directors were coerced into taking the latter course because of his insistence upon such action, and the stockholders were thus denied the right to exercise the discretion conferred upon them by law. If a bank became insolvent and could not be immediately re- stored to solvency, the law required the Comptroller to appoint a receiver for the association and directed the course that should be pursued in liquidating its affairs. In a number of cases of insolvency Mr. Murray persistently refused to appoint receivers, in support of his declaration that bank failures were occurrences of the past, and that receivers would be unnecessary during his administration. Such banks were permitted to be liquidated by their stockholders or by an- other banking institution in the same place. If an officer or director of a bank wilfully violated the law, the penalty prescribed by the statutes was forfeiture of the charter of the association, to be determined by suit brought for that pur- pose by the Comptroller in his own name. Mr. Murray demanded and insisted upon the removal of any officer or the resignation of any director who violated the law by making excessive loans or doing any other unlawful act, thus exer- cising a power which Congress had persistently refused to confer upon the Comptroller, notwithstanding the fact that several Comptrollers had recommended legislation granting such author- ity. Directors of banks are elected by the stockholders for a period of one year, and the board is authorized to appoint its officers and remove them. Nowhere in the law was any authoriity conferred upon the Comptroller of the Currency to remove or to demand the removal or resignation of an officer or director. Mr. Murray assumed this power and when such a demand was made it was generally complied with through fear of the injurious effect upon the bank of frequent examinations which were threatened if 392 ROMANCE AND TRAGEDY OF BANKING his demand was not complied with. In one case at least the Comp- troller was required to revoke his demand for the removal of an officer because of threatened civil action by the objectionable of- ficer for damages. Bank examinations in the main were a great deal more effec- tive during Mr. Murray's administration than formerly. That such was the case was due to the fact that he instructed the exam- iner to convene the directors at the time of examination and re- quire them to correct as fully as possible all unsatisfactory con- ditions before he left the bank. In other words, the examiner was required to have done under his personal direction what other Comptrollers undertook to accomplish by the slower process of correspondence based upon the examiner's report. That former Comptrollers did not pursue Mr. Murray's policy, except in special cases, was due to the inadequate fee sys- tem of compensation. They did not feel justified in exacting of an examiner several days' work for one day's compensation, and did not feel authorized to increase that allowance by an arbitrary and unlawful assessment upon the bank. But they recognized the weakness of the system in this respect and recommended to Con- gress time and again a change from a fee to a salary or per diem and expense allowance. They did not assume the right to change the law by administrative regulation. Mr. Murray, however, over- came this obstacle by disregarding the law and unlawfully assess- ing a per diem for the number of days devoted to a special exam- ination where the statute fixed the fee. Where an examiner was restricted to the statutory fee for a regular examination and was required to remain at the bank until all unsatisfactory conditions were corrected, his compensation in many such cases barely exceeded his expenses. As a result of this policy some of the very best examiners in the service, after two or three months' work under the conditions stated, tendered their resignations, giving as a reason therefor that their net income during that time, over and above actual expenses, averaged only two dollars a day. Other examiners had the same experience, and within a period of eighteen or twenty months, thirty examiners voluntarily resigned and left the service, ROMANCE AND TRAGEDY OF BANKING 393 either because of the inadequacy of the compensation or the in- tolerable conditions under which they were required to work. Mr. Murray's policy of requiring examiners to devote as much time to an examination as was necessary to a thorough under- standing of the condition of the bank, and to have all objection- able matters corrected before leaving the institution, was, without doubt, the correct theory of examinations. But such thorough- ness could not be secured under the fee system of compensation. An examiner should be adequately compensated for the time ac- tually and necessarily employed in making an examination, and this could be accomplished only under a salary or per diem and expense allowance. Is it to be wondered, therefore, that examinations were more effective under Mr. Murray's administration than under those of his predecessors? In making the contrast, however, the unlawful methods employed to accomplish results must be taken into con- sideration. In connection with the organization of new banks the law pro- vided that any number of natural persons, not less than five, might form a national banking association, and after they had executed all the necessary papers and complied with the provi- sions of law relating to organization, the Comptroller should issue his certicate of authority to the bank to commence business. But if he had reason to suppose that the shareholders had formed the association for any other purpose than the legitimate objects contemplated by the National Bank Act, he was authorized to withhold his certificate. No Comptroller of the Currency before Mr. Murray ever assumed the right to determine the question of the business needs for a new bank, or an additional association, in any city, town or place. That question was left to the judgment of the organizers and the subscribers for the stock in the proposed institution. If they chose to risk their capital in a doubtful venture of this kind, it was held by the Comptroller that banking was free and that he had no authority to deny them a charter. If the organizers of the bank were ascertained to be men of reputable character and standing in their community, and were organizing the bank for the legitimate purposes contemplated by the banking laws, it was 394 ROMANCE AND TRAGEDY OP BANKING held that they had the same right to engage in the business of banking as those already in the business ; that banking was free to any five reputable citizens who desired to form an association, and that when all the provisions of law had been complied with, the Comptroller was required to issue his certificate of authority. But Mr. Murray assumed the right to determine whether or not there was any business demand for the proposed bank and exercised the discretion of issuing or withholding his certificate of authority accordingly. Nowhere in the national banking laws could authority be found, expressed or implied, vesting the Comptroller with such discretionary power, and in the absence of any provision of this nature, Comptrollers from McCulloch to Ridgely held that they had no discretion in the matter. Banks with a capital stock of fifty thousand dollars and less required the approval of the Secre- tary of the Treasury to their organization. This exception would seem to confer upon the Secretary the discretion of determining whether or not banks of this class should be authorized. While such discretionary power, if judiciously and impartial- ly exercised, would prevent the organization of banks for which there is no legitimate field, at the same time it is a power that is open to serious abuse and therefore a dangerous discretion to vest in any administrative official. In the hands of an unscrupu- lous official it could be wielded in the interests of existing associa- tions ambitious to monopolize the banking business of their re- spective communities. If too many banks were organized in a place, the fittest would survive. In some instances this condition had existed, but the latest organized institution sometimes ab- sorbed the business of the older one, because of the greater confi- dence of the community in the ability and integrity of the manage- ment. Following the example of Mr. Murray his successor in office pursued the same policy. Another regulation made by Mr. Murray in connection with the organization of banks was the requirement that the president and a majority of the directors of a new institution should reside in the place in which the bank was to be located. The National Bank Act required at least three-fourths of the directors of a bank to have resided in the State in which the bank KOMANCE AND TRAGEDY OF BANKING 395 was located for at least one year preceding their election, and to continue such residence in the same proportion during the ex- istence of the association. But there was nothing in the law re- quiring the president or a majority of the board of directors to reside at the place of location of the bank. The purpose of this administrative regulation was to insure the regular attendance of the president and a majority of the directors to the business of the bank, and Mr. Murray thought that this could better be accomplished by having them reside in the same place than to have a non-resident president and non- resident directors. In this same connection Mr. Murray required the shareholders of a new bank to be financially worth double the amount of their stock subscriptions. He contended that as the law held stock- holders liable in their individual capacity to the extent of the amount of their stock investments, the statute contemplated that they should be worth double the amount of their subscriptions, and he prescribed a new form of organization certificate requir- ing the financial worth of each subscriber to the original capital to be stated. There was no authority of law to support such a regulation. Any person had a right to subscribe for stock in a national bank who could pay the price of his subscription, even though he did not have another dollar to his name. The law did not require, nor contemplate, that a subscriber for stock should demonstrate his financial ability to respond to an assessment as a condition precedent to his right to subscribe. The statute provided another means of meeting this contingency. If the capital of a bank be- came impaired by losses or otherwise, and an assessment was ordered to make good the deficiency, the stock of any shareholder who was unable or refused to pay his pro rata share of the as- sessment was required to be sold at public auction, after due notice, for not less than the amount of the assessment due thereon. The foregoing comprises some of the principal measures of reform introduced and enforced by Mr. Murray during his term as Comptroller, by which his administration was distinguished from that of any of his predecessors. Original as they were novel, arbitrary as they were unlawful, resting solely upon the 396 ROMANCE AND TRAGEDY OF BANKING fiat of the Comptroller, these measures were successful in part to the extent only that the existing banks to which they were ap- plied tacitly submitted to his official decree. The banks that submitted without protest were usually such as feared the effect upon the institution of the exposure that might result from resistance to the Comptroller's requirements, and concluded that discretion was the better part of valor. Those that entered a vigorous protest were invariably excepted from the operation of the unlawful regulation, and those that were in nowise affected were indifferent to the requirements. Most of the strenuous and experimental measures adopted by Mr. Murray were put in force early in his administration. Many of them after being tried were materially modified or abandoned altogether, either because of their illegality or impracticability of enforcement. The most satisfactory test of the real merit and success of any administrative reform is the actual results attained from its practical operation, in comparison with the practice or rule of conduct which the reformatory measure displaced. All changes in administrative practices are not necessarily reforms or im- provements on old methods. Unfortunately, however, the same degree of activity is never displayed in giving publicity to the actual results of experimental reforms as is used by the reformer in advertising his measures in the first place. So that the public is never in possession of the facts essential to the formation of intelligent and impartial judgments as to the true merits of changes which administrative officials advertise as reforms, whether such changes relate to methods of management or econ- omy in expenditures of public moneys. The credit side of the account is generally freely displayed or advertised, but the debit side is never disclosed, especially if it does not make a favorable showing. Such was the case with many of Mr. Murray's experiments. His administration of the Currency Bureau was distinguished from that of any of his predecessors from McCullough to Ridgely in one marked respect, and that was his assumption of supervis- ory powers over the banks not conferred upon the Comptroller by law. Other Comptrollers recognized the inadequacies of the ROMANCE AND TRAGEDY OF BANKING 397 statutes in many respects and suggested to Congress the legis- lative remedies, without which they did not feel warranted in adopting methods of administration contrary to law. Mr. Mur- ray proceeded without such authority, and by this rule of meas- urement alone can his administration be justly contrasted or com- pared with those of his predecessors in the results accomplished. If it is to be conceded that an administrative official is justi- fied in ignoring the plain provisions of the statutes enacted for his guidance and for the protection of the interests confided to his supervision, in order to successfully carry out his measures of reform or to gratify an ambition to distinguish his adminis- tration from those of his predecessors in the results accomplished, then Mr. Murray's administration of the Currency Bureau may be ranked with the most successful in its history. But in com- paring it with previous administrations the legality or illegality of the measures and methods employed to secure results must have full consideration. Human nature does not change much as time rolls on. Men are influenced by the same motives in the present day and gen- eration as they were in ages gone by. The world is still deceiv'd with ornament. In law, what plea so tainted and corrupt, But, being season'd with a gracious voice, Obscures the show of evil? In religion, What damned error, but some sober brow Will bless it, and approve it with a text? Thus ornament is but the gilded shore To a most dangerous sea. Failures During Mr. Murray's Term Although only forty-three banks were placed in the hands of receivers during Mr. Murray's administration, the number of actual failures during that period was much greater. Mr. Murray was decidedly averse to appointing receivers for failed banks and he made such appointments only when a bank was so hopelessly insolvent that a receiver was unavoidable, con- sequently a number of banks that were insolvent at the time they 398 ROMANCE AND TRAGEDY OF BANKING were closed were allowed to be liquidated by other methods than a receivership, contrary to law, and appear in the reports of the Comptroller as voluntary liquidations. The largest of the banks that were placed in the hands of receivers by Mr. Murray were the Allegheny National and the Cosmopolitan National Banks of Pittsburgh, Pa., each with a capital stock of five hundred thousand dollars and gross liabili- ties of $3,854,263 and $1,519,585, respectively, and the Union National Bank of Columbus, Ohio, with capital stock of $750,000 and liabilities of $3,489,674. The two former were closed May 18, 1908, and September 5, 1908, respectively, and the latter December 7, 1911. The Allegheny National Bank was wrecked by its cashier, who was tried and sentenced to a term in the penitentiary for criminal violations of law. The Cosmopolitan failed because of losses sus- tained on loans made largely in excess of the legal limit, and the Union because of injudicious banking. The most sensational and disastrous failure that occurred during Mr. Murray's term was the First National Bank of Min- eral Point, Wis., which was placed in the hands of a receiver October 12, 1909. The capital stock of this bank was $100,000, the surplus and undivided profits $31,723, and the total liabilities $668,000. The bank was dominated by Phil Allen, Jr., a promi- nent citizen of Mineral Point. During the progress of a special examination of the bank the examiner's suspicion was aroused by erasures and alterations in the certificate of deposit register, which were plainly evident. Thirteen hundred dollars was made to read $300 by removing the figure one, and $6100 was changed to read $1100, by altering the figure six. Phil Allen, the vice-president of the bank, was questioned by the examiner in regard to these alterations and the consequent discrepancies between the certificate register and the general ledger balance. At first he denied any knowledge of the trans- actions, but finally admitted that he had altered the record, giv- ing as a reason for doing so that he was worried over a loan that he had made in excess of the limit and had temporarily borrowed from the owners of these certificates, without their knowledge, a ROMANCE AND TRAGEDY OF BANKING 399 sum sufficient to enable him to conceal the excessive loan from the examiner. The examiner then took Allen in the back room of the bank for a conference, as he felt certain that the note file had been tampered with, the notes having been handled exclusively by Allen. They went over the loans and discounts together and Allen picked out notes aggregating $90,000 which he admitted were forgeries. The examiner then called the directors together and informed them of the condition of affairs. They appeared to have very little knowledge of the loans, but were personally acquainted with most of the makers of the notes. The examiner procured a typewritten confession from Allen in which he admitted numerous forgeries, falsification of the books and reports, embezzlement, abstraction and the whole category of the crimes covered by the penal statute of the Bank Act. His peculations were carried on and concealed in various ways. In addition to the manipulation of the certificate of de- posit register and forged notes placed in the loans and discounts, he had convenient for use a supply of certificates of deposit, printed in blank, with duplicate numbers. He sold notes to cus- tomers of the bank who had money on deposit to their credit. In a great many instances these notes were fictitious, and in some cases were the property of the bank. In the bank vault there was a special file containing about five hundred envelopes, in which there were notes, securities, life insurance policies and other valu- ables belonging to customers which had been placed there by them for safekeeping. Many of these envelopes had been pilfered of their contents, and in some cases good notes had been taken out and forged notes substituted. How much Allen stole by this method probably never will be known, as the bank was not liable for the property left in these envelopes. The bank was absolutely looted by Allen and some of his associates who had been in control of affairs at Mineral Point financially and politically for years. They used the bank to further their mining schemes and speculations, some of which were financed from the beginning of their development by money borrowed from the bank. The failure of this bank caused a great amount of suffering and hardship throughout the section in which it was located. 400 ROMANCE AND TRAGEDY OF BANKING Allen's peculations began as far back as 1893, through the failure of a local industrial venture in which he was heavily interested, and increased year by year until the collapse of the bank in October, 1909. He was a genius in the art of fraud and decep- tion. He carried on his stealings for many years and successfully concealed them from various bank examiners, the board of direc- tors and those who were associated with him daily in the bank. Although a clever forger, a close inspection of his handwriting readily detected the forgery. The system of bookkeeping em- ployed in the bank was so complicated that it was difficult to trace entries through the books. The system of accounting and the manner in which the business of the bank was conducted were no doubt designed by Allen to enable him to carry on and conceal his peculations and fraud. No deposit slips were used. Many of the depositors did not use checks, being furnished with a pass- book in which deposits and withdrawals were entered, the bank taking no receipt for such withdrawals. It was very difficult for the examiner, after taking possession of the bank, to trace Allen's falsifications and peculations. Allen would volunteer no information and render no assistance. He would admit a forgery, defalcation, or falsification of the books only when confronted with absolute proof, and in the most inno- cent and nonchalant manner say that he was very sorry he had not remembered the transaction and spared the examiner the time and trouble of tracing it out. He had a very ingenious system of numbering his notes whereby he could with certainty determine whether the signature to a note was genuine or forged. He was the administrator for a number of estates and it was understood that he robbed these in the same way that he did the bank. His total stealings from the bank were reported to amount to over $400,000. So great was the confidence in him of many of the old cus- tomers of the bank and his church-going friends, that some of them would not believe he was guilty of the crimes charged against him until he admitted his guilt, and then one of the old lady members of his church and one of his victims remarked, "Well, Phil may be guilty, but my ! he could say a nice prayer." ROMANCE AND TRAGEDY OF BANKING 401 Allen was indicted, and when arraigned pleaded guilty and was sentenced to a term of ten years in the penitentiary. Shortly following the closing of the bank, Frank E. Hans- corn, the cashier, committed suicide, and his mother-in-law died suddenly the same night from shock on learning of his death. Hanscom was related to Allen by marriage. At first it was not thought that he was implicated with Allen in any of his fraudu- lent transactions, as no evidence of collusion could be found. But investigation following the failure of the bank disclosed that all the false entries and alterations in the books were made by him, presumably at Allen's instigation, and when he found that dis- covery was inevitable, he left the bank and killed himself. It was natural that the indignant depositors in this bank who suffered heavily through the rascality of Allen and the negligence of the board of directors, should vent their indignation upon somebody, and, as usual, the bank examiner was held to be prin- cipally responsible. While a bank examiner is required to satisfy himself as to the value of the paper which he finds in a bank, it is neither the prac- tice nor the duty of an examiner to verify the signatures to the notes. He assumes, as he has a right to assume, that the names signed to the paper are the genuine signatures of the purported makers, unless his suspicions to the contrary are aroused at the time of examination. It is the duty of the officers and of the bank directors to know that the notes they accept for loans are genuine and worth their face value, and this responsibility they cannot evade or shift upon the examiner. When the directors are obliged to purchase outside com- mercial paper through correspondent banks in order to find em- ployment for surplus funds, and have to rely upon correspond- ents' representations as to the genuineness and worth of such paper, they may be in a measure excusable if some spurious or worthless notes occasionally find their way into the bank, but they are inexcusably negligent when they accept and permit to be carried as good assets forged, fictitious and worthless local paper when a casual examination or inquiry in regard to such paper would disclose its worthless character. 402 ROMANCE AND TRAGEDY OF BANKING Change of Location of Small Suburban Bank A question was raised during Mr. Murray's administration as to the right, of a national bank, organized with a small capital to do business in a suburb or place adjacent to a large city, to change its location to another point within that city after the corporate limits of the city had been extended to include the suburb, without first increasing the capital of the bank to the amount required by law for a bank in a city with a population of six thousand or more. The law required the organization certificate of a bank to state specifically the place where its business was to be conducted, and the bank was chartered to do business in that place and no- where else. The law authorized a bank to change its location by a vote of its stockholders owning two-thirds of the stock and with the approval of the Comptroller, to any other place within the same State not more than thirty miles distant, after complying with the requirements of law in regard to the minimum amount of capital. While a bank had an unquestioned right to change its domi- cile to any other point within the city or location in which it was organized to do business, it was contended by the Comptroller's office that when the corporate limits of a city were extended to cover an adjacent place or suburb, a bank with a small capital organized to do business in that place had no right to change its location to a point within the city proper where it could not have been authorized to do business in the first place without a larger capital. The First National Bank of Capitol Hill, Oklahoma, was chartered November 17, 1909, with a capital of twenty-five thousand dollars to do business in the village of Capitol Hill, adjacent to Oklahoma City. Shortly afterward the corporate limits of Oklahoma City were extended to cover Capitol Hill, and the bank subsequently removed its location to the business center of the city without first increasing its capital from twenty- five to two hundred thousand dollars, the minimum capital re- quired by law for a bank in a city with a population of fifty thousand or more. ROMANCE AND TRAGEDY OF BANKING 403 The Comptroller referred the case to the Solicitor of the Treasury with a request to instruct the United States Attorney for Oklahoma to commence an action against the bank for for- feiture of charter. After a hearing in the office of the Solicitor at Washington, by agreement with counsel for the bank, a suit was instituted in the name of the Comptroller in the United States District Court for the Second District of Oklahoma for annulment of the bank's charter. The defendant demurred to the petition, but the Court over- ruled the demurrer and held that the petition stated good ground for cause of action for forfeiture of charter. The case was then appealed to the United States Circuit Court of Appeals, which Court held that the alteration of the boundaries of the City of Oklahoma did not entitle the bank to remove its place of business to a point within that city without first increasing its capital as required by the Comptroller, and having so removed without compliance with those conditions the Comptroller was entitled to maintain a suit for the forfeiture of the bank's charter. In the meantime, in anticipation of this decision, the bank, by a vote of its stockholders, was placed in voluntary liquidation on July 22, 1913. A Chicken Bank In a small country town located a short distance from a rail- road there was a State bank in operation which had been reason- ably successful in business and apparently supplied the town with all the banking facilities needed. In the same town there lived a retired professional man of prominence and influence in the community, who also had been successful in business. His next-door neighbor was a young man who had a fondness for raising chickens, of which he had quite a number. The party-line fence which separated their properties was not in very good repair and afforded the chickens an oppor- tunity to trespass upon his neighbor's premises, causing more or less friction and unpleasantness between them. On one occasion the two neighbors met on the street and the one who was annoyed 404 by the chickens complained to the other and admonished him in very emphatic language that he must keep his chickens at home. Some warm words passed between them, with the result that their neighborly relations were thereafter very much estranged. Shortly subsequent to this occurrence the owner of the chickens secured employment in the little bank in the town as a clerk, and one day his elderly neighbor dropped in the bank to transact some business, and, seeing the young man at work there, went immediately to the cashier and demanded his dismissal, say- ing that he would withdraw his account if his employment was continued. The cashier promptly and properly refused to comply with this demand, consequently the account of the unreasonable cus- tomer was withdrawn. There was no other bank in the town, and none nearer than seven miles away, which made it quite incon- venient for him to transact his banking business, so he determined to organize a new bank and operate it in opposition to and in competition with the State bank. When the officers of the State bank learned of his purpose the directors immediately made application to the Comptroller for authority to convert their institution into a national asso- ciation. Both banks applied for the title of First National, but as the application of the new bank was the first received at the Comp- troller's office, under the rule it was entitled to and was allowed the title. Within a year after this bank opened for business the cashier defaulted and the organizer sustained an individual loss in conse- quence, far greater than any he had incurred as a result of the depredations and trespassing of his neighbor's chickens. This bank was always referred to by the employees of the Comptroller's office as the "chicken bank." The law conferred upon the Comptroller of the Currency authority to refuse a charter to a national bank whenever he had reason to suppose that the shareholders had organized the bank for any other than the legitimate objects contemplated by the national banking laws. ROMANCE AND TRAGEDY OF BANKING 405 While the organization of this bank was known to be purely a matter of spite growing out of a disagreement between two neighbors over a few marauding chickens, the Comptroller did not consider that this fact afforded sufficient warrant for his denial of a charter, and, therefore, he issued his certificate of authority. Banks organized under such conditions are not, as a rule, successful or prosperous institutions, and this bank proved to be no exception to the rule, as the town was already amply sup- plied with banking facilities by the successful institution already in operation there, which apparently possessed the confidence and had the support of the community. CHAPTER XV Interim THE term of Lawrence O. Murray expired by statutory limi- tation April 27, 1913, having extended fourteen months into the administration of President Wilson. The office remained vacant from that date until February 2, 1914, when John Skelton Williams qualified as Comptroller and assumed charge of the Bureau. During the vacancy, which covered a period of ten months, the Bureau was in charge of the writer as Acting Comptroller. During this period, in consequence of a change in the political complexion of the Federal administration at Washington, a great deal of constructive work was necessary. Congress had been convened in extra session and bills were under consideration pro- posing material amendments to the banking and currency laws, which required the preparation of a great amount of statistical data for the information of the Secretary of the Treasury and the Banking and Financial Committees of the Senate and House of Representatives. Aside from this consideration and passage of the Federal Reserve Act, the principal events of the period were the failure of the First-Second National Bank of Pittsburgh, Pa., and the suspension of the United States Trust Company, of Washington, D. C. The First National Bank of Pittsburgh was an old institu- tion, having been chartered August 5, 1863, with an authorized capital stock of $400,000. The bank was last examined before merger with the Second National Bank of Pittsburgh in September, 1912. The examiner then reported the capital to be impaired thirty per cent. The board of directors were notified of the impairment and were advised that if the deficiency was not made good without delay they would be required to call a meeting of the shareholders for the purpose of assessing the stock or placing the bank in volun- tary liquidation. The directors were financially unable to restore 407 408 ROMANCE AND TRAGEDY OF BANKING the impaired capital and were fearful that any attempt to make good the deficiency by assessment of the stockholders would pre- cipitate a crisis which would probably close the bank. Negotia- tions were then renewed with the Second National Bank of Pitts- burgh, which had been started sometime previously and aban- doned, for the consolidation of the two banks. These negotia- tions were conducted by Oscar L. Telling, the irresponsible presi- dent of the First National Bank, in conjunction with the Messrs. Kuhn, who were heavily interested in both banks. The scheme to merge the two banks was cunningly devised and successfully forced through, as subsequently disclosed, against the earnest protests of certain substantial stockholders of the Second National Bank, who, however, failed to make their protests known to the Comptroller's office until after the merger. The Second National Bank was also an old institution, hav- ing been organized December 11, 1863, with an authorized capi- tal of $300,000. While negotiations for the merger of the two banks were pending, several conferences were held by the Messrs. Kuhn, Telling and the national bank examiner with Comptroller Murray at the office of the latter in Washington. What understanding was reached at these conferences the records of the Comptroller's office do not show and no official connected with the office was present at the conferences other than the Comptroller and the bank examiner. The First National Bank was voted into voluntary liquidation by its stockholders April 19, 1913. The Second National Bank increased its capital stock to $1,600,000 on April 21, 1913, purchased the assets of the First National, assumed its liabilities and merged its business with the latter bank under the title of First-Second National, with a com- bined capital of $3,400,000. Comptroller Murray's term expired April 27, 1913, and the duties of the Comptroller then devolved upon the Acting Comp- troller. The First-Second National Bank was then past due for exam- ination in regular order, and as the records of the Comptroller's office did not show the condition of the consolidated bank or what ROMANCE AND TRAGEDY OF BANKING 409 had been done toward the elimination of the objectionable assets on which the losses were estimated which impaired the capital of the first National, two of the most experienced examiners in the service were instructed, under date of May 21, 1913, to make a thorough examination of the bank, but owing to the fact that one of them was then engaged upon some special work, the examina- tion was not commenced until the first week in June following. As the examination progressed, a condition was disclosed which the examiners regarded as so serious that a conference with the Acting Comptroller in Washington was requested. John Skelton Williams was then Assistant Secretary of the Treasury and was slated by the Secretary of the Treasury for the vacancy in the office of Comptroller of the Currency. The law provided that the Comptroller of the Currency should be appointed by the President upon the recommendation of the Secretary of the Treasury, and confirmed by the Senate for a term of five years, and should discharge the duties of his office under the general direction of the Secretary of the Treas- ury. He was held, however, to be independent of the Secretary, inasmuch as the Secretary had no power to remove him. The Deputy Comptroller was a Civil Service employee appointed by the Secretary of the Treasury for no definite term, and could be removed by the Secretary at any time. During the absence or inability of the Comptroller, or during a vacancy in that office, all the duties, powers and responsibilities of the Comptroller devolved by law upon the Deputy as Acting Comptroller, but he had not that independence of the Secretary that the Comptroller had. While acting during the absence or inability of the Comptrol- ler he was expected to carry out the Comptroller's policies and be governed by his rulings and interpretations of the law, whether such policies, rulings or interpretations were in accord with his views or not. When acting during a vacancy in the office he was expected to confer with the Secretary of the Treasury in regard to the more important affairs of the Bureau and be guided by his instructions. But whatever he did under such conditions, whether right or wrong, he was expected to assume responsibility therefor. He could not divest himself of such responsibility by claiming 410 ROMANCE AND TRAGEDY OF BANKING that he followed the direction of his official superior, because the law vested in him the right to exercise his own judgment, by con- ferring upon him all the duties and powers of the Comptroller when so acting. On one occasion when Mr. Murray was Comptroller he called the Deputy to task for refusing, during his absence, to follow his ruling in regard to the interpretation of certain provisions of the banking laws which the Deputy did not believe to be right, and, being unwilling to accept responsibility therefor, he ex- plained to him his position with respect to the rule of conduct which governed him in all such matters, not only under his admin- istration but also under those of his predecessors. He informed Mr. Murray that he had not at any time taken, and would not take, either when the Comptroller was present or during his absence, any position on any subject in conflict with what he knew or understood to be the Comptroller's policy or position on the same subject. But at the same time he declared that he had not and would not place his signature to any letter or paper containing views which he did not approve. He informed Mr. Murray that it had been and would continue to be his practice to hold all such matters for the Comptroller's action upon his return, or, if immediate action were necessary, to qualify his posi- tion by stating that "The Comptroller had ruled," or "The Comp- troller holds," or some such qualifying phrase, and thus place responsibility for the policy or ruling upon the Comptroller. The decision of a Deputy or Acting Comptroller was seldom accepted as final on any question. Consequently, appeals were continually being made to the Comptroller, or to the Secretary of the Treasury if the office were vacant, for a reversal of the Deputy's ruling or action in some instances where he had simply followed the Comptroller's position. Such appeals made it neces- sary for the Deputy or Acting Comptroller to be constantly on the defensive, which entailed a great deal of extra work and con- siderable annoyance, especially if the appellant was a person of some political influence or standing. Appeals, however, generally resulted in the Deputy or Acting Comptroller being sustained by his official superior, as his action was invariably based upon law, ROMANCE AND TRAGEDY OF BANKING 411 precedent or approved practice, and the same action, if taken by the Comptroller, would have been accepted without question. Assistant Secretary Williams, by direction of the Secretary of the Treasury, was authorized to keep in close touch with the affairs of the Comptroller's office during the vacancy in that office following the expiration of Mr. Murray's term, and the change which had taken place in the political complexion of the Govern- ment. In accordance with this understanding and at Mr. Wil- liams' request the Acting Comptroller advised him of the serious condition of the First-Second National Bank of Pittsburgh and the desire of the examiners for a conference on the situation. This conference was held on July 2, 1913, in the office of the Secretary of the Treasury, at which the Secretary, Assistant Secretary, Acting Comptroller and one of the examiners were present, and the affairs of the bank were reviewed in detail. The condition of the bank seemed to be critical and hopeless, and at the suggestion of Assistant Secretary Williams, a Pittsburgh banker, the president of a rival bank, one of the smaller institu- tions, was requested to come to Washington for consultation. The condition of the bank was made known to him by the Assist- ant Secretary, who instructed the examiners to go over their report with him in detail, with a view to having his bank come to the relief of the situation. This suggestion was an impracticable proposition to submit to so small a bank when the amount of the liabilities of the First- Second National Bank was considered, and, of course, nothing came of it. The examiners were then instructed to return to Pittsburgh and confer with a committee of the Clearing House Association in regard to the situation. On July 4 the examiners telephoned the Acting Comptroller that they had been in consultation with a committee of the Clear- ing House Association, but without results, and that the commit- tee declined to further consider the matter unless the Acting Comptroller came to Pittsburgh for a conference. The Acting Comptroller went immediately to Pittsburgh, arriving there early on the morning of July 5. In the meantime, one of the Pittsburgh bankers got into communication with 412 ROMANCE AND TRAGEDY OF BANKING Assistant Secretary Williams, who was then at Blue Ridge Sum- mit, Pa., and requested him to come to Pittsburgh. The Acting Comptroller arranged for a conference with the Clearing House Association at ten o'clock on the morning of July 5, and while the conference was in progress Mr. Williams came in. Some of the bankers present were inclined to resent his presence at the conference on the ground that as neither the Secretary of the Treasury nor the Assistant Secretary had any supervision of national banks, that power being conferred by law exclusively upon the Comptroller of the Currency, he had no right to inject himself into the conference. The condition of the bank, however, was thoroughly discussed and various propositions were suggested to the representatives of the Clearing House banks with a view to having them render the directors of the First- Second National Bank the financial assistance necessary to enable them to meet the demands of the depositors and other creditors in the event of a run on the bank, and thus avoid the closing of the institution and the locking up of a large amount of money for an indefinite period. Secretary Williams assured the bankers that if they needed any funds to enable them to meet the situation the Treasury Department would make a deposit of public moneys in the Pitts- burgh banks to the extent of $5,000,000 to be used for that purpose. This conference consumed nearly an entire day without accomplishing anything. The Acting Comptroller then arranged with the president of the First-Second National Bank for a meeting of the board of directors of the bank on Sunday morning, July 6, at ten o'clock, and the conference with the Clearing House Association ad- journed to await the result of the meeting with the directors of the First-Second National Bank. Secretary Williams returned on Saturday night to Blue Ridge Summit. Before leaving he requested the Acting Comptroller to advise him by telephone on Sunday afternoon the result of the conference with the directors of the bank. There was considerable nervousness over the situation, in which the Secretary of the Treasury and Mr. Williams shared. The officers of the bank had ROMANCE AND TRAGEDY OF BANKING 413 pictured to Mr. Williams the disastrous consequences that would result from the closing of the bank. It was claimed that such action on the part of the Government would cause a run on every bank in Pittsburgh and precipitate a panic that would become general throughout the country. That is the usual claim made by officers of tottering banks when all other efforts have failed to dissuade the Comptroller from taking possession of them, the extent of the predicted dis- aster varying with the size of the bank. Mr. Williams was thoroughly imbued with the idea that dire consequences would follow the failure of this bank because of the numerous corporations with which its president and his brother were connected and their diversified interests, and therefore he was strongly opposed to the Government taking possession of the bank. Some of the Clearing House bankers were also of the same opinion. The Acting Comptroller, however, contended that the only banks that would be seriously affected by the failure were those in Pittsburgh and vicinity with which the Kuhn brothers were connected, and he expressed his convictions at the time that the disturbance would not extend beyond such banks. At the conference on Sunday morning the examiners discussed with the directors of the First-Second National Bank the prin- cipal items on which losses were estimated and the transactions of a criminal nature which they had discovered. This conference lasted from ten o'clock in the morning until about three in the afternoon. The Acting Comptroller advised the directors that if the Clearing House Association would guarantee the payment of all deposit liabilities of the bank on demand pending a reorganiza- tion of the board of directors and the restoration of the capital, the bank would be permitted to continue business while this was being done. One member of the board offered to contribute his full share of the amount necessary to make up the deficiency in capital, but suggested that in view of the facts disclosed by the examiners and the rumors on the street that the bank was in a very bad condition, he thought it would be better for the Government to 414 ROMANCE AND TRAGEDY OF BANKING take possession of the bank and liquidate its affairs. He thought this would be for the best interests of all creditors alike. He stated that he believed if the bank's doors were opened on Monday morning some of the depositors who had knowledge of its condi- tion would withdraw their balances and thus secure a preference over other creditors who had no such knowledge. He stated that the interests of the small depositors should be protected and he did not think it would be fair to open the doors and allow the large deposit balances to be withdrawn through the Clearing House and otherwise and leave the small and out-of-town depos- itors to share in what remained. Such of the other directors present as expressed any views on the subject approved the course suggested, and all were of the opinion that to undertake to make up the deficiency in capital stock by assessment of the shareholders and keep the bank in operation at the same time was impossible. A committee of the directors, therefore, was appointed to confer with the Clearing House Committee to determine what, if anything, could be done toward securing from the Clearing House Association a guaranty of the deposit liabilities of the bank pend- ing a reorganization of its affairs and the payment of an assess- ment by the stockholders to make good the impaired capital. A meeting was held with the Clearing House Committee at about five o'clock on the evening of the same day, when the prop- osition above outlined was again submitted, but the Clearing House Committee rejected the proposition because of the fact that the bank held slow and non-liquid assets equal to three times the amount of its capital stock and they were averse to tying up for a long time several millions of dollars in slow and unproduc- tive real estate and other non-liquid securities. The Clearing House Committee and the committee of the directors were then advised by the Acting Comptroller that the bank would not be permitted to open for business in the morning, as two hundred thousand dollars had been transferred the day before to another bank in Pittsburgh and it was rumored that a number of correspondent banks in the vicinity and elsewhere were arranging to withdraw their balances. It was also reported that Telling, the president of the bank, had stated that he felt ROMANCE AND TRAGEDY OF BANKING 415 morally obligated to protect certain accounts which he was in- strumental in bringing into the bank and had advised such depos- itors to withdraw their balances. The final conference with the Clearing House Committee was concluded so late in the day that the Acting Comptroller did not communicate the result to Secretary Williams by telephone as requested, but one of the directors of the First-Second National Bank got into communication with him and informed him that the Acting Comptroller intended taking possession of the bank on Monday morning. Mr. Williams was reported as having instructed the director to say to the Acting Comptroller that under no cir- cumstances should the bank be closed, and to have the Acting Comptroller communicate with him by telephone immediately. The Acting Comptroller got into communication with Mr. Williams and informed him briefly of the situation and that it was his purpose to close and take possession of the bank early Monday morning, as nothing else remained to be done. Mr. Wil- liams suggested delay in taking possession until nine o'clock. He was told that the bank practically opened at eight o'clock, as many of the employees came in at that hour to get ready for the day's business, and that it was necessary for the examiners to take possession of everything and seal up the vaults and safes before their arrival. Mr. Williams then suggested withholding the posting of a notice on the doors of the bank until he reached there, and stated that he would take the early morning train due to arrive in Pitts- burgh at 7.30. The Acting Comptroller and the examiners went to the bank at seven o'clock on Monday morning and the examiners proceeded to place their seals on the vaults, safes, boxes, and everything that was supposed to contain anything of value. At eight o'clock, Mr. Williams not having arrived, it was learned through inquiry by telephone at the depot that the Western Maryland train due to arrive at seven-thirty was over a half-hour late. As the clerks were beginning to assemble in the bank and a number of foreigners had gathered around the door, presumably to purchase steamship tickets, the Acting Comptroller instructed the examiners to take 416 ROMANCE AND TRAGEDY OF BANKING possession and post a notice on the doors that the bank was closed and in the hands of the Comptroller of the Currency. Subsequently it was learned that on Sunday night one of the bankers who was present at the conference with the Clearing House Committee sent a night letter to correspondent banks advising them to transfer their deposit balances to his bank on Monday morning. When Mr. Williams reached the bank about 8.15, he found the doors closed, a policeman on guard, and a number of people standing around reading the notice. He was then informed in detail of the efforts made to save the bank and the failure to obtain any assistance from the Clearing House Association beyond an understanding that they could take care of the situa- tion in Pittsburgh outside of this bank without any aid from the United States Treasury. The bank was declared to be insolvent and was placed in the hands of a receiver on July 7, 1913. It remained in charge of a receiver until April 25, 1914, when, after reorganization of the board of directors, it was allowed to resume business with a fully- paid-in capital stock of $4,000,000. On the date of failure the total liabilities of the bank amounted to $29,656,512.52, and deposits of all kinds aggre- gated nearly $30,0^0,000. In point of total assets and deposit liabilities this was at that time the largest bank failure in the history of the national system. As predicted by the Acting Comptroller, the disturbance caused by the failure was wholly local and was confined to a pro- tracted run on the Pittsburgh Bank for Savings, of which the Kuhn interests were in control, and the temporary closing of the First National Bank of McKeesport, of which one of the Kuhn brothers was president. The following day, after communicating with Mr. Williams, the Secretary of the Treasury gave to the press a statement cover- ing the condition of the bank and the necessity for closing it, and he and Assistant Secretary Williams received numerous congratu- lations upon the failure of the predicted panic to materialize and the excellent manner in which they handled the situation and averted a panic. 417 Nothing succeeds like success. Eighteen months after the failure, Oscar L. Telling, the former president of the First National Bank, and Francis H. Richard, the former cashier, were indicted by the Federal Grand Jury on twenty-three counts charging them with misappropria- tion of the funds of the bank, abstraction, false entries in the books, etc. A bench warrant was immediately issued for the arrest of Richard, who was placed under bond to await trial. Telling, the other defendant, went into hiding immediately following the closing of the bank, and later fled to Europe, where he remained a fugitive from justice until after the trial and fail- ure to convict Richard, the cashier, when he returned to this country. He never was brought to trial, as the ruling of the court in the Richard case made it impossible to secure a con- viction. Telling, a few years before becoming president of the First National Bank, was a clerk in the office of the Comptroller of the Currency. He was transferred from a clerkship in the Mint at Denver in exchange for a stenographer in the Comptroller's office who desired to remove to Denver on account of the health of his child. Telling ingratiated himself into the confidence of Mr. Murray, when the latter became Comptroller, who appointed him a national bank examiner. His record as an examiner was a dis- grace to the service, a discredit to the Comptroller's office, and a reflection upon the Comptroller who appointed him. On July 9, 1913, immediately after the Acting Comptroller returned to Washington, he had a conference with Assistant Secretary Williams in regard to the situation in Pittsburgh when he left there, and Mr. Williams inquired of him whether he knew of any other bank that was in as bad a condition as the First- Second National of Pittsburgh. The Acting Comptroller advised him that there was a bank in Washington, right under the eyes of the Treasury Department the United States Trust Company the capital of which was known to be badly impaired and the condition otherwise very unsatisfactory, and had been for a long time. Mr. Williams then remarked that he did not think it advis- able to stir up any further trouble at that time. 418 ROMANCE AND TRAGEDY OF BANKING The United States Trust Company The United States Trust Company was organized in 1907, under authority of an Act of Congress approved October 1, 1890, authorizing the formation of trust companies in the District of Columbia with a capital stock of not less than one million dollars. This company had a turbulent career from the beginning, owing to internal dissensions which resulted in frequent changes in the personnel of the board of directors and the managing officers of the institution. In January, 1911, control of the company passed into the hands of Eldridge E. Jordan, who became its president. A little later, because of dissatisfaction with him and his methods, he was superseded by N. B. Scott, ex-United States Senator from West Virginia. In a very short time Mr. Scott was succeeded again by Mr. Jordan, under whose domination the company remained until its failure on November 21, 1913, although nominally succeeded by Lawrence O. Murray, former Comptroller of the Currency, in April, 1913. Mr. Jordan made his first appearance in banking in the city of Washington in the Merchants and Mechanics Savings Bank, a small institution located on Seventh Street. Later he became connected with the Traders National Bank, which institution he merged with the Merchants and Mechanics Savings Bank in April, 1908. Subsequently, he merged the last-named bank and the International Banking Corporation with the United States Trust Company. He also became connected with the Commercial National Bank and because of his attempted domination of this bank several of its officers and directors withdrew from the con- cern and organized the Federal National Bank. The records of the Comptroller's office show Mr. Jordan to have been the cause of disturbance and dissensions in every bank in the District of Columbia with which he had been connected, and a source of anxiety to the Comptroller and the banking inter- ests of Washington generally, because of his unlawful, speculative and hazardous methods. The records show that many of the transactions with which Jordan was connected were hazardous in the extreme and that he ROMANCE AND TRAGEDY OF BANKING 419 was regarded as a most daring and reckless speculator. For some time after his retirement from the presidency of the Merchants and Mechanics Savings Bank, the Comptroller objected to his becoming connected with the management of any banking institu- tion in Washington, and Comptroller Murray made the remark that if he had the authority he would prohibit him from walking on the same side of the street on which a bank was located. In January, 1911, however, after Mr. Jordan acquired con- trol of the United States Trust Company, Mr. Murray, for some unknown reason, withdrew his objection to Mr. Jordan in the following signed letter, dated January 9, 1911 : The Comptroller has carefully read this report and I would be justified in making objection to Mr. Jordan again becoming connected with any banking institution under the supervision of the Comptroller of the Currency. It is my wish, however, to take a kindlier view of the situation, and will interpose no objection to Mr. Jordan's entry into the banking business. The last examination of this company, previous to its failure, was made on January 8, 1913, at which time losses were reported by the examiner aggregating $256,150, impairing the capital to the extent of over $177,000. This examination was interrupted and prolonged until the following April, when on April 26 a con- ference was held with some of the officers and directors of the bank in the office of the Deputy Comptroller. As Comptroller Murray's term was about to expire, he requested the Deputy Comptroller to take the matter up with the directors, inasmuch as, he stated, the Deputy would have it to handle after he left the office. The condition of the company's affairs was gone over in detail with the directors by the examiner who made the examination and the Deputy Comptroller, and the directors were required to make up the deficiency in the capital stock without delay by the substi- tution of cash or its equivalent for some of the depreciated assets, and paper and securities on which losses were estimated. The directors would not concede the capital to be impaired and would not agree to put in the cash. They wanted time to 420 ROMANCE AND TRAGEDY OF BANKING work out the unsatisfactory condition without interference by the Comptroller's office. The Deputy Comptroller, however, insisted upon the capital being made good in the way above sug- gested, otherwise he would serve formal notice on the bank declar- ing the capital to be impaired and requiring a meeting of the shareholders to be called for the purpose of voting an assessment of the stock. Appeal was then made to Comptroller Murray, who took the matter out of the Deputy's hands and accepted a bond executed by some of the directors in the sum of sixty thousand dollars to indemnify the depositors in the company against any existing or future loss occasioned by depreciation of a certain asset which was being carried on the books at a valuation of $851,000, and on which the examiner had estimated a loss of $121,000. Most of the directors who executed this bond were then heav- ily indebted to the company, and some of them were unable to pay their individual obligations at that time. The Deputy Comptroller did not regard this bond as of any value and did not approve of that method of making good an impairment of the bank's capital. A few days after this conference Comptroller Murray accepted the presidency of this institution, but did not remain with it long. He resigned in less than six months after his accept- ance of the office, giving as a reason therefor, as stated by the examiner, that he could not tolerate Jordan's banking methods. The Deputy Comptroller was of the opinion that the tender of the position to him in the first place was mainly for the pur- pose of forestalling any attempt on the deputy's part to compel the directors to make good the impaired capital of the bank by the substitution of cash or its equivalent for the bad assets or by an assessment of the stock. The directors also entered into a signed agreement prom- ising to charge off certain listed assets which the examiner de- clared to be worthless and to collect or secure other doubtful or questionable loans aggregating $1,070,000. In November, 1913, the bank was due again for examination in regular order and an examiner other than the one who made the several previous examinations, and one of the most efficient ROMANCE AND TRAGEDY OF BANKING 421 men in the service, was assigned to the work. This examination was commenced on November 15, 1913, and continued until No- vember 20, when a run started which closed the bank and its branches. This examination disclosed that no honest efforts had been made by the management to carry out in good faith the terms of the bond or the agreement to collect, secure or charge off the doubtful paper and losses, and that the bank was in a much worse condition than at the time of the former examination. The asset previously carried at a valuation of $851,000, covered by the bond accepted by Comptroller Murray, had been padded $21,000, and the more than one million of doubtful assets listed in the signed agreement to collect, secure, reduce and charge off had been curtailed only $163,000. As an illustration of the methods of manipulation that were resorted to in this bank the examiner reported that about a year before the absorption of the Merchants and Mechanics Savings Bank by the United States Trust Company in April, 1912, Eldridge E. Jordan, then president of the savings bank, un- loaded a certain office building in the city of Washington on the bank in the following manner : He traded a building owned by him and valued at from $250,- 000 to $300,COO for the office building mentioned, subject to a mortgage of $375,000 on the latter building. He then trans- ferred his equity in the office building to the Merchants and Mechanics Savings Bank for $362,500, taking in payment there- for $62,500, in cash and 2,000 shares of the capital stock of the savings bank. The directors of the savings bank, it was claimed, did not know of this purchase until the sale had been consummated, and Jordan, it was stated, admitted that he made a profit in the transaction of $40,000. This investment of the funds of the savings bank by Jordan resulted in a disruption of the board of directors and the resig- nation of Jordan. It appears further that the Merchants and Mechanics Savings Bank then organized a building company with a capital stock of ten thousand dollars to carry this office building and issued bonds for the remainder of the investment. 422 ROMANCE AND TRAGEDY OF BANKING In April, 1912, the Merchants and Mechanics Savings Bank was absorbed by the United Sttaes Trust Company. At that time the stock of the building company was carried by the savings bank at ten thousand dollars. In order to provide the necessary funds for the purchase of the savings bank the stock of the build- ing company was then inflated $69,192.86. Shortly afterward $3,2-7.14 was charged to this account and the account further inflated by that amount. When the United States Trust Company purchased the Inter- national Banking Corporation the directors of the former com- pany were reported as having placed a note in the assets of the bank for which a certificate of deposit was issued for $30,000. When it became necessary to pay this certificate the directors' note was eliminated from the assets and the value of the stock in the building company was further inflated thirty thousand dollars. This account was also further inflated by the amount of the purchase price of ten parcels of real estate which the United States Trust Company found necessary to acquire in order to protect second deeds of trust which the company held against such properties. In May, 1913, in order to eliminate from the assets of the bank a note of the building company for twenty-one thousand dollars, the stock of the company was again inflated by this amount, making a total inflation of $123,000. While the examination was in progress and for some time previous thereto negotiations were being carried on between Mr. Jordan and the president of a national bank in Washington with a view to merging the bank with the trust company. At this time Jordan was chairman of the board of directors of the trust company, and in reality president of the company, as Mr. Murray had resigned the presidency several months previously. In fur- therance of the negotiations to merge the two institutions Mr. Jordan requested the bank examiner to make a joint examination of the company with the banker with whom he was negotiating. The examiner informed Mr. Jordan that he would submit his re- quest to the Acting Comptroller as he could not make the exami- nation without authority. 423 Knowing the condition of the trust company to be very un- satisfactory, and having in mind the criticisms to which the Comptroller's office was subjected in connection with the joint examination of the assets of the First and Second National Banks of Pittsburgh by the national bank examiner and the appraise- ment committee composed of a representative of each bank prior to their consolidation, the Acting Comptroller did not look with favor on the proposition, and instructed the examiner to advise Mr. Jordan that the banker and his associates must make their own examination and appraisement of the assets, but after doing so there would be no objection to his conferring with them in regard to any of the assets about which there was any difference in valuations. The examiner and the officers of the company dif- fered very materially as to the value of certain of the principal assets and the Acting Comptroller desired to obtain the inde- pendent judgment of the banker and his associates in regard to these disputed items. Following these instructions the examiner conferred with the banker and his associates after they had made their own ap- praisement of these particular assets, and on every item the loss or depreciation estimated by them was greater than that esti- mated by the examiner. They also expressed grave doubts as to the solvency of the company and regarded the condition of its affairs as so alarming and the situation so menacing to the banking commu- nity of Washington as to call for immediate action on the part of the clearing-house banks to strengthen and fortify themselves against any unusual demands. On the morning of November 18, 1913, the examiner again conferred with the Acting Comptroller in regard to the situa- tion, which was considered very verious, and the Acting Comp- troller instructed him to arrange for an immediate meeting of the board of directors of the trust company in the office of the Comptroller. He took the matter up with the treasurer of the company, who informed him that some of the directors were out of town and an immediate meeting could not, therefore, be held. The treasurer suggested that a meeting be called for 4.30 in the afternoon of the following day, November 19. The Act- 424 ROMANCE AND TRAGEDY OP BANKING ing Comptroller then communicated by telephone with the treas- urer of the company and insisted upon an immediate meeting of the officers and directors who were in the city. The treasurer stated that an earlier meeting than the time stated could not be had as some of the directors were absent and those who were in the city had important engagements. The Acting Comptroller informed him that no officer or director of the company could have any engagement of more importance than his attendance at this meeting which must be held at once. He stated he would see what could be done and would advise the Acting Comptroller later. Not hearing from him near the close of business on that day the Acting Comptroller called him again by telephone and he said the earliest hour he could arrange for a meeting was twelve o'clock on the following day. The Acting Comptroller advised him that a meeting must be had that night. He said that was impossible. He was then advised that it must be had not later than nine o'clock the next morning and that he would ex- pect to see the directors at that hour in the Comptroller's office. At the close of business on the same day the examiner and the banker who examined the assets came into the Comptroller's office for the purpose of discussing the situation and determining what should be done. The banker declared that all negotiations were off for a merger of the two institutions and expressed a seri- ous doubt as to the solvency of the trust company. After discussing all phases of the situation it was deemed advisable to call into conference the representatives of the prin- cipal clearing-house banks in order that some arrangement might be made to take care of the situation which had reached a critical stage. Accordingly the presidents of seven or eight of the largest banks in Washington were requested to meet that night in the office of the bank examiner. The condition of the trust' company was then explained to them in a general way. No information was given them in regard to the affairs of the company that the banker and his associates who had examined the assets did not already know and there was not a banker present who did not know and had not known for at least a year that the trust company was and had been in a very ROMANCE AND TRAGEDY OF BANKING 425 unsatisfactory and unsafe condition, and the subject of criticism by the Comptroller of the Currency. Some of the bankers present expressed a willingness to come to the assistance of the trust company and desired to know how badly it was involved and how much money would be required to meet demands in the event of a run upon the institution. They were told that while the company was believed to be solvent, its capital was impaired to the extent of at least seventy-five per cent., and in addition thereto a large proportion of the assets were of a slow, doubtful and non-liquid character. After a general discussion of the situation the conclusion was reached that the trust company's assets were of such a nature as to make it impracticable for the banks upon the security of such assets to furnish the funds necessary to meet the demands that would probably be made upon it. They concluded, therefore, to confine their efforts to taking care of the situation outside of this institution by fortifying their banks to meet any unusual with- drawals and extending assistance to each other. The meeting adjourned with this understanding, after the bankers present were admonished to refrain from any reference to the meeting or the trust company's affairs. While the meeting was in progress two of the directors of the trust company came into the adjoining room. When the Acting Comptroller was advised of their presence he personally invited them to join the conference, but they declined to do so. The Acting Comptroller then explained to them the condi- tion of the trust company as disclosed by the examiner's report, but they did not seem to appreciate or realize the seriousness of the situation. They were told that the capital of the company would have to be made good if the bank was permitted to continue in business, and they were asked what the effect would be if a meeting of the shareholders were called for the purpose of restor- ing the deficiency in capital by an assessment of the stock. They expressed the belief that a call for such a meeting would result in closing the bank, as a large number of the shareholders would be unable to respond to an assessment. They were advised by the Acting Comptroller that such being the condition it would be more creditable for the directors 426 ROMANCE AND TRAGEDY OF BANKING to close the institution and arrange for its liquidation, reorgan- ization or absorption by some other bank than for the Comp- troller of the Currency to close and take possession of it, as he would be compelled to do in the event of a run and the inability of the company to meet its demand liabilities. To this suggestion one of the directors replied that the Comptroller had power to close the bank if he thought it advisable to do so. He was in- formed that the Comptroller had the right to close the bank only in the event of insolvency and that the bank examiner had not reported it to be insolvent, but if a run should start and the bank should not be able to meet all demands according to their tenor the Comptroller would have authority to take possession. The meeting of the board of directors of the company called for nine o'clock on the following morning was never held, but promptly at nine o'clock Assistant Secretary Williams requested the Acting Comptroller to come to his office where he found sev- eral of the officers and directors of the trust company in confer- ence with Mr. Williams, headed by a Richmond (Va.) banker, who was then connected with another bank in Washington, closely affiliated with the trust company in many of its transactions. They had complained to Secretary Williams of the action of the Acting Comptroller and the examiner in calling a meeting of the the bankers of Washington the night before and exposing to them the condition of the trust company. The examiner was called in and they disputed his valuations of certain properties owned by the company and his estimates of losses on certain notes, claim- ing that the properties were worth fully the amount at which they were carried on the bank's books and that the notes were col- lectible at their face value. They ridiculed any suggestion of losses sufficient to impair the capital and maintained that the bank was solvent and able to pay its creditors in full on demand. The examiner had not yet prepared his report and his data were not assembled in a way to enable him to discuss the condition of the bank in an intelligent and orderly manner. It was plainly evident from Mr. Williams' manner at the beginning of the conference that his mind had been prejudiced by the statements made to him by the representatives of the bank and their friends, and that he was inclined to prejudge the case and ROMANCE AND TRAGEDY OF BANKING 427 discredit the examiner before he was informed of the real condi- tion of affairs. As an illustration of this fact a single instance may be stated : When the examiner produced an itemized list of the notes which he regarded as slow, doubtful or worthless, Mr. Williams found among them the name of a Richmond man whom he knew personally, and he expressed surprise that the examiner should have questioned the worth of his paper. He declared the note to be absolutely good and collectible, and then proceeded to dis- credit the examiner before all who were assembled in the room by stating that if his judgment in regard to the other assets of the bank were as faulty as his judgment of the value of this particu- lar note, his report was wholly unreliable. This statement was made before the examiner was given an opportunity to say what he knew about the note or to explain how he arrived at his valuation of this particular piece of paper. Later in the conference Lancaster Williams of Baltimore, a brother of Secretary Williams, was present, and was asked by Mr. Williams what he thought of the note in question. He promptly replied that paper of the same party had gone to pro- test in Baltimore and that it was not considered good. Under such circumstances, confronted with a half dozen or more officers and directors of the trust company and their friends, all antagonistic to the examiner and more or less personally in- volved or interested in the bank, and Mr. Williams apparently biased in their favor, is it surprising that the examiner was dis- couraged and lost heart in defending his position in regard to the condition of the bank? No orderly or intelligent consideration of the bank's condition could be maintained under such circum- stances. This conference lasted the best part of the whole day. In the meantime, the representatives of the bank instead of complying with the Acting Comptroller's request for a conference with the board of directors in his office, at which it was intended to dis- cuss the condition of affairs in detail and determine what was best to be done, fearing, it was presumed, that the Acting Comp- troller contemplated closing and taking possession of the trust company, hurried off to the capitol and other places to bring 428 ROMANCE AND TRAGEDY OF BANKING influence to bear to forestall such action. In this way it became rumored around the streets of Washington that the United States Trust Company was in trouble. These rumors spread. Christ- mas was approaching. The company held a large amount of Christmas savings funds. The rumors reached the ears of this class of depositors and a run quickly followed. The company operated five branches. The run started on the Pennsylvania Avenue branch and soon extended to all the others and the principal office. It was equivalent, therefore, to a run upon six banks in different sections of the city. The legal right of this or any other trust company organized under authority of the Act of Congress approved October 1, 1890, to operate branches was always questioned by the Comptroller's office. This act did not specifically, nor by implication, confer such authority, and the rule laid down by the courts in such cases is that powers not specifically granted or necessarily incidental to those that are conferred are prohibited. The attention of the Department of Justice was called to this matter at one time and an opinion requested, but the Attorney General declined to express an opinion, stating that the question was one for the Attorney for the District of Columbia to deter- mine as coming within his jurisdiction. Notwithstanding the apparently antagonistic attitude of Mr. Williams toward the examiner at the beginning of the irregular conference in regard to the condition of the trust company, a careful analysis of the slow, doubtful and worthless assets listed by the examiner, demonstrated beyond question that the capital of the company was badly impaired and that it was otherwise in a very precarious condition. As the directors were unable to make good the deficiency or to make any immediate arrangement to meet the pressing demands of the depositors that were then being made it became necessary for the Comptroller either to close and take possession of the company or for another financial institution to take over its assets and assume its deposit liabilities. Accordingly with the latter object in view negotiations were com- menced with the Munsey Trust Company, of which Lancaster Williams was a director, and the Continental Trust Company, of which ex-Senator Scott was president. ROMANCE AND TRAGEDY OF BANKING 429 At a special meeting of the board of directors of the United States Trust Company, held on the night of November 21, a reso- lution was unanimously adopted requesting the Munsey Trust Company to advance to the United States Trust Company suffi- cient cash to meet the emergency growing out of the run upon the latter company by its depositors and to guarantee the pay- ment of the deposit liabilities of the company in full. In consideration of compliance with this request by the Mun- sey Trust Company the United States Trust Company agreed to forthwith assign and transfer to the Munsey Trust Company all of its assets, including cash, securities, real estate and prop- erty of every kind and nature as security for such advances and guarantee, with full authority to hold and to realize upon the same until reimbursed in full, including cost and expenses, for moneys advanced and satisfactorily indemnified for its guarantee of the company's deposit liabilities. It was further agreed by resolution of the directors of the United States Trust Compan}' that an effort would be made to obtain the approval of the stockholders of the company to a resolution authorizing the Munsey Trust Company to take over and liquidate all of the assets of the United States Trust Com- pany of every kind and description. All moneys realized from the assets over and above the liabilities of the company, plus the ex- penses of liquidation and administration, exclusive of the services of the Munsey Trust Company, to be paid to the stockholders of the United States Trust Company in stock of the Munsey Trust Company at its then book value, plus interest, or in cash at the stockholder's option. During the early morning hours of November 22 the officers of the national banks of Washington were hurriedly called together and informed by a representative of the Secretary of the Treas- ury that the Treasury Department would advance $1,000,000 to the national banks for use in meeting the demands of the depositors in the United States Trust Company if each national bank would assume liability for its proportionate share of the deposit. This money could not lawfully be deposited in the Munsey Trust Company as the law permitted such deposits to be made in 430 national banks only. But upon the written guaranty of the Munsey Trust Company to indemnify them against loss and a deposit by the company of collateral with the Treasurer of the United States, consisting of selected assets of the United States Trust Company, the national banks assumed their proportionate share of the liability to the Treasury Department for this loan, and the money was deposited directly with the Munsey Trust Company. All deposits in the United States Trust Company were paid in full on demand by the Munsey Trust Company, except such as were voluntarily transferred to and continued with the latter company. After reimbursing the company from the assets of the United States Trust Company for the amount of the claims paid and retaining sufficient assets to cover the remaining liabilities as- sumed, the Munsey Trust Company turned over to the receiver of the United States Trust Company, appointed by the court, the remainder of the assets. In the meantime the stockholders of the United States Trust Company adopted a resolution placing the company in volun- tary liquidation and named the Commercial National Bank of Washington as liquidating agent. The legality of this action was not recognized by the Munsey Trust Company and was questioned by the Comptroller of the Currency. The Act of Congress under which the United States Trust Company was organized contained no provision for liquida- tion, consequently the company had to be liquidated under the laws of the District of Columbia covering such cases, which re- quired a receiver to be appointed by the court. A receiver was then applied for and appointed by the court, to whom these assets were turned over to be liquidated for the benefit of the stockholders of the United States Trust Company. While the face value of these assets amounted to about $800,000, their actual value was problematical, as they con- sisted largely of slow, doubtful and worthless paper, the ultimate liquidation of which would no doubt sustain the exam- iner's original estimate of losses thereon sufficient to have im- paired the capital of the company at least seventy-five per cent. 431 The whole transaction in connection with the deposit in the Munsev Trust Company of a million dollars of public moneys taken from the Treasury of the United States may be briefly summed up as follows: There was no authority of law whatever for the deposit of this money in the Munsey Trust Company. The money was not deposited in the banks and by the banks loaned to the trust company, but the banks guaranteed ths liabil- ity of the trust company to the Treasury Department by assum- ing responsibility for the loan and in doing so committed an ultra vires act, as the courts had held time and again that it was beyond the power of a national bank to guarantee the obligations of an- other party. The money was deposited in the Munsey Trust Company on the security of the assets of the United States Trust Company and not upon security owned and deposited by the banks, but the liability was assumed by the banks and was taken upon their books constructively as crop-moving funds. The Munsey Trust Company paid the loan to the Treasury Department in full by installments as the assets of the United States Trust Company were liquidated. Immediately following the subsidence of the excitement over the failure of the United States Trust Company Assistant Secre- tary Williams wrote a letter to the Acting Comptroller of the Currency, stating that there was still quite a little comment in Washington on the action of the Acting Comptroller in calling a meeting of the presidents of some of the national banks and trust companies and discussing with them the condition of the United States Trust Company before the matter was taken up with the directors or executive committee of the trust company, and re- questing to be advised of the exact sequence of occurrences which led up to the failure of the company. The Acting Comptroller replied to this communication in writing under date of December 12, 1913, relating in detail the history and condition of the trust company from the date of its organization to the date of its failure and many interesting fea- tures in the career of some of the managing officers of the com- pany who were responsible for wrecking the institution. 432 ROMANCE AND TRAGEDY OF BANKING In concluding this communication the Acting Comptroller said: When a bank in the hands of a management known or believed to be honest and competent becomes temporarily embarrassed, the best interests of all concerned require that every proper assistance should be extended to the management in their efforts to extricate the institution from its unsatisfactory or dangerous condition, and restore it to a state of solvency and safety. This always has been the policy of the Comptroller's office. But when a bank is in the control of a management believed or known to be hazardously speculative, whose honesty of purpose, sincerity or ability is questioned, whose free use of the funds and credits of the bank in furtherance of their individual reckless ventures has brought the institution to a condition bordering on insolvency, such a management is entitled to no consideration or forbearance and the sooner the doors of their institution are closed the better for its depositors, stockholders and the community in general. To temporize with a management of this kind is simply to invite disaster and jeopardize the interests of depositors and minority stockholders in a way that cannot be justified. Such was the reputation of the controlling management of the United States Trust Company as shown by the reports of the bank examiners on file in the Comptroller's office. There was nothing new or novel in the manner in which the affairs of this company were handled by the Acting Comptroller when the true condition of the concern became known. There are a number of similar situations in the records of the Comptroller's office, the most notable and recent being that of the First-Second National Bank of Pittsburgh. Before the completion of the examination of that bank the examiners came to Washington for a confer- ence as to its condition. The president of another national bank in Pittsburgh was sent for at the suggestion of Assistant Secretary Williams and was permitted by him to go over the assets in detail with the examiners. The examiners then returned to Pittsburgh with instructions to confer with the clearing house committee. Several con- ferences followed, at some of which you and the Acting Comptroller were present, but the condition of the bank ROMANCE AND TRAGEDY OF BANKING 433 was not taken up with the board of directors until Sun- day morning, the day before its doors were closed. The two cases were exactly similar. Each had a serious impairment of capital, which the directors were unable to restore, and any attempt to collect an assessment from the stockholders would have resulted in the closing of the bank. No complications arose in the Pittsburgh case, as the bank was promptly closed. No complications would have arisen in the case of the United States Trust Company if similar action had been taken. Whenever a bank of any size fails the examiner and the Comptroller's office are invariably severely criticised for not doing what the critics think should have been done, or for doing what they did do. The case of the United States Trust Company is no exception to the rule. Such criticisms as were made of the Comptroller and the Examiner in this matter came from or were instigated by, as is usually the case, the men responsible for wrecking the institution. If any criticism of the Department in connection with this matter is justified, it is for permitting this company to continue doing business so long after its real condition became known. It was the intention of the Acting Comptroller to close and take possession of the United States Trust Company on the morn- ing following the day on which the run on the institution began. It was evident that the run would continue the next day with increasing severity. The assets of the company were not suf- ficiently liquid to enable the management to raise the funds neces- sary to meet the urgent demands of the depositors, and the finan- cial strength and credit of the directors were not such as to afford any assurance of their ability to meet the situation otherwise. They would not entertain a suggestion to close the bank pending its reorganization or absorption by another institution, so the only alternative was for the Comptroller to take possession. As in the case of the Pittsburgh bank, the bugaboo of a threatened panic was again called into service. It was claimed that the closing of the institution by the Comptroller would pre- cipitate a crisis that would involve every bank in Washington. 434 The Acting Comptroller did not share in this apprehension. He contended that the only banks that would probably be affected by the failure would be one national bank and a savings bank which were known to be somewhat involved with the trust com- pany. All the other banks and trust companies in Washington had made preparations to promptly meet any demands of their depositors. This was one of the good effects of the conference with the bankers before the failure, as it enabled the banks to prepare for the emergency. The unwarranted and extraordinary proceeding of lending to a trust company a million dollars from the Treasury of the United States for the purpose of paying the deposit liabilities of another trust company did not occur to the Acting Comp- troller as a possible means of saving the latter institution, as such a proceeding had no precedent in the annals of the Comptroller's office or the Treasury Department. If the Acting Comptroller had placed the United States Trust Company in the hands of a receiver on the morning of November 22, 1913, as he would have done had it not been for the interfer- ence of his official superiors, the depositors would have been tem- porarily inconvenienced, but the Treasury Department would not have been subjected to the severe arraignment that was heaped upon it because of Assistant Secretary Williams' course, the inter- est of the minority stockholders would have been better subserved, and those who were responsible for wrecking the institution would have been brought to justice. Many of the stockholders in this bank bought their stock at a valuation based on an unimpaired capital of $1,250,000 and un- divided profits of over $98,000. At the date of failure and for some months previous thereto the profit account was entirely wiped out and the capital was impaired at least seventy-five per cent., according to the examiner's report. The disappearance of this large sum of money never has been satisfactorily accounted for to the stockholders. When the Munsey Trust Company paid the depositors in full and satisfied its own claims against the United States Trust Com- pany the books of the company and the remaining assets were turned over to Mr. Tucker K. Sands, the receiver of the company ROMANCE AND TRAGEDY OF BANKING 435 appointed by the court. Mr. Sands was vice-president of the Commercial National Bank of Washington, D. C., at the time of his appointment. Eight of the ten directors of the Commercial National Bank were directors of the United States Trust Com- pany at the date of its failure. The propriety of this appoint- ment was, therefore, very properly questioned as it placed the final liquidation of the company in the hands or under the influ- ence of its former management. The books of the trust company showed many transactions and manipulations which it is not believed would have stood the test of a judicial investigation. An illustrative case was submitted by the Comptroller of the Currency to the Department of Justice for investigation before the books of the company were surren- dered by the Munsey Trust Company, but the matter was disposed of by that department referring it to the United States Attorney for the District of Columbia with a notification to the Comptroller that the question was one coming under the supervision of the United States Attorney, and there the matter ended. The Miss Lotta Taylor Episode In April, 1913, immediately following a change of adminis- tration in the Treasury Department an anonymous communica- tion was received by the Secretary of the Treasury in which it was charged, among other things, that a representative of the National City Bank of New York at that time and for a number of years prior thereto was furnished with a desk in the office of the Comptroller of the Currency and after each call made upon the banks for a report of their condition was allowed access to such reports and granted the special privilege of compiling con- fidential information therefrom for the use of the National City Bank. The Acting Comptroller was called upon for a report as to the truth or falsity of these charges and submitted to the Secre- tary a statement in detail relative thereto. The sensational press despatches and newspaper reports sent out from Washington at the time in regard to this matter were wholly unwarranted and misleading. They unjustly reflected 436 ROMANCE AND TRAGEDY OF BANKING upon the administration of the Comptroller's office and subjected a very estimable young lady to undeserved notoriety. The facts in regard to this matter are as follows: Mr. Charles McL. Taylor, who had been employed in the Comptroller's office for a good many years, died on November 10, 1903. He was one of the principal clerks in the bureau and a very valuable employee. After his death his daughter, Miss Lotta M. Taylor, applied to the Deputy Comptroller for assist- ance in securing employment. She was given temporary employ- ment in the Comptroller's office from time to time for periods not exceeding thirty days. When these employments were discontinued the Deputy Comptroller recommended her for employment to the vice-presi- dent of the Riggs National Bank of Washington in connect-on with the redemption of circulation of correspondent banks for which the Riggs National Bank was the authorized agent. She was then given employment of this nature. For a number of years, as far back as 1884, the United States Investor of Boston, Dun & Company of New York and one or two other concerns employed, with the approval of the Comptroller of the Currency, one of the clerks in the Comptrol- ler's office to compile for them, five times a year, from the reports of condition of national banks a statement showing the principal items of resources and liabilities, such as capital, surplus, undi- vided profits, loans and discounts, deposits, etc. A representative of these concerns could not be allowed access to these reports, so the Comptroller authorized an employee of the office to compile this information with the understanding that the work should be done entirely outside of office hours. The clerk was compensated for his services by the parties furnished with the information. This work was carried on for a number of years in this man- ner until the administration of Comptroller Ridgely, when another employee called his attention to the fact that one particular clerk had had a monopoly of this special privilege for several years and requested to be allowed to do part of the work. This request led to a discontinuance of the work entirely by direction of Comptroller Ridgely, who objected to any employee ROMANCE AND TRAGEDY OF BANKING 437 receiving compensation for information obtained from the official records of the bureau. Mr. Ridgely did not object to the particu- lar information being furnished, but did not think it was proper for an employee of the office to receive compensation therefor. Later in Comptroller Ridgely's administration the vice- president of the Riggs National Bank applied to the Deputy Comptroller for authority to permit Miss Lotta M. Taylor to compile for the National City Bank of New York the informa- tion above referred to from the reports of condition of national banks after each call. This request was submitted to Mr. Ridgely, who authorized the work to be done, with the understanding that Miss Taylor was not under any circumstances to handle or to have access to the reports of the banks. The figures she obtained were to be taken from the abstract sheets after the clerks were through with them. The charges made in the anonymous communication to the Secretary and the press despatches sent out from Washington that Miss Taylor was allowed access to the reports of condition of the banks and copied confidential information therefrom for the special benefit of the National City Bank of New York were wholly unwarranted and unfounded. This lady did not have access to or handle the reports of the banks. She did not do her work in the same room where the re- ports were handled and filed. She had no regular desk assign- ment, but moved about from place to place wherever she could find a vacant desk. The information she obtained was in no sense of a confidential nature. It was information such as the law re- quired every national bank to publish in a newspaper published in the city or town of its location, and it was so published in every case for at least a week or ten days before this lady had access to the figures in Washington. There was no disposition on the part of the Comptroller or any officer of the bureau to extend to the National City Bank any special privilege or facilities, as the public were given to under- stand, or to furnish that bank any information that would not have been given to any other bank applying therefor. The same information could have been obtained, but not so readily, from 438 ROMANCE AND TRAGEDY OF BANKING the published statements of the banks and for one call each year from the annual report of the Comptroller to Congress. Writers of anonymous letters are invariably either moral cowards or malicious libelers, and the proper receptacle for such communications is the official waste basket, to which they should be consigned. It had been the practice of the department to ignore such letters altogether, but the case in point, for some reason, was made an exception to this rule. The Federal Reserve Act On August 29, 1913, a bill was introduced in the House of Representatives by Hon. Carter Glass of Virginia, Chairman of the Banking and Currency Committee, to provide for the estab- lishment of Federal reserve banks, to furnish an elastic currency, to afford means for rediscounting commercial paper, to more effectively supervise banking in the United States, and for other purposes. The title of this proposed measure was The Federal Reserve Act. It created a Federal Reserve Board composed of five mem- bers to be appointed by the President of the United States and confirmed by the Senate, and two ex-officio members the Secre- tary of the Treasury and the Comptroller of the Currency. A Reserve Bank Organization Committee was provided for, to be composed of the Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency, which was authorized to designate not more than twelve nor less than eight cities in the United States to be known as Federal Reserve cities, and to divide the continental United States into districts, each district to embrace one of the Federal Reserve cities. These dis- tricts were required to be apportioned with due regard to the convenience and customary course of business. The bill required every national banking association to signify in writing to the Reserve Bank Organization Committee, within sixty days after the passage of this act, its acceptance of the pro- visions and terms of the act, and any national bank failing to do so should cease to act as reserve agent for other banks upon ROMANCE AND TRAGEDY OF BANKING 439 thirty days' notice to be given by the Organization Committee or the Federal Reserve Board. Any national bank failing to become a member of this system within one year after the passage of the act forfeited all rights, privileges and franchises under the national banking laws. The privilege of becoming a member was also extended to State banks and trust companies. The long recommended change in the method of compen- sating bank examiners from a fee to a salary and expense basis was provided for by this bill. A Federal Advisory Council was authorized to consist of as many members as there were Federal Reserve Districts, each Federal Reserve Bank by its board of directors to select annual- ly a representative to serve on the council. Important changes were made in the laws governing reserve requirements and the method of maintaining reserve. Loans by member banks on farm lands within well-defined limi- tations were authorized, as well as the establishment of foreign branches by banks having a capital and surplus of $1,000,000. The bill was favorably reported to the House of Representa- tives by the Banking and Currency Committee on September 9, 1913, and passed the House September 18, 1913, by a vote of 287 ayes to 85 nays. The bill was reported to the Senate on the same day that it passed the House of Representatives and was immediately re- ferred to the Committee on Banking and Currency, of which Senator Robert L. Owen was chairman, where it remained until December 19, 1913. On this date it was reported favorably to the Senate, passed by that body on the same date, and was re- ferred to a Conference Committee of the two Houses on the dis- agreeing amendments. It was again reported to the respective Houses by the Conference Committee on December 22, 1913, and finally passed the House of Representatives on that date by a vote of 298 ayes to 60 nays. It was approved by the President on the same date in the presence of a number of Senators, Representa- tives, department officials, newspaper correspondents and others. This bill as it originally passed the House of Representatives was by no means a well considered measure. It contained manv 440 ROMANCE AND TRAGEDY OF BANKING glaring defects and numerous objectionable features. It was hurried through the House under restricted debate without suf- ficient time for the consideration and digestion of its important provisions, and bore every evidence of hasty legislation. It was under consideration in committee less than ten days and passed the House in nine days after being reported from the committee. The opposition to many of the provisions in the bill as it passed the House was so strong that the Senate committee very wisely accorded public hearings on the measure to a number of prominent bankers and practically redrafted the entire bill. The bill was intended, as the report of the Committee stated, "to bring about necessary changes in the banking and currency system of the United States and to correct long-standing evils that had a slow and deep-rooted growth". It aimed to rectify defects complained of in the national bank- ing system, although, the report stated, "it did not seek to make all the innovations that might, from an ideal standpoint, be deemed desirable". In comparing this measure with the bill reported and recom- mended by the National Monetary Commission on January 8, 1912, known as the Aldrich bill, the committee stated that the Aldrich bill was often referred to "as a poisonous theoretical nov- elty," and at other times as an "ingenious scheme to create a central bank which would absorb all banking functions to itself". It was claimed for the Federal Reserve Act that such panics and commercial crises as have occurred in the past would be made mathematically impossible in the future by supplying a method for the banks to readily obtain a circulation medium sufficiently elastic to meet all the demands of industrial or commercial activ- ities, by providing for the mobilization of reserves in the several reserve districts and their .availability not only for the business needs of the respective districts but for the legitimate demands of any other district, and by furnishing a discount system which would enable every well-managed bank to quickly convert its assets into cash to meet unexpected contingencies or runs. The framers of this act while condemning the central bank plan apparently recognized the principle of a central authority 441 with limited branches as the correct theory of a banking system, but objected to a central bank because of the power and influence it was feared such an institution would wield in the political and financial affairs of this country. This act, however, created a central authority in the Federal Reserve Board with far more power than was ever contemplated conferring upon a central bank by any of the plans proposed for such an institution. The ultimate success or failure of the Fed- eral Reserve Bank System will depend upon the conservatism, judiciousness and absolute impartiality with which this power is exercised by the central authority. JOHN SKELTON WILLIAMS Comptroller of the Currency, 1914-1921 CHAPTER XVI Biography of John Skelton Williams JOHN SKELTON WILLIAMS, the thirteenth Comptroller of the Currency, was born in Powhatan County, Virginia, July 6, 1865. His father, John Langbourne Williams, was a well- known banker of Richmond. After receiving a private school edu- cation in Richmond, he attended the University of Virginia. He began the active work of his life in his father's office at the age of eighteen years. While so employed he attracted attention by the publication of a pamphlet entitled "A Manual of Investments," which became so popular that it was issued yearly for some time. He became a partner with his father in the banking and brokerage business and later engaged actively in the material development of the South. He organized and consolidated the Seaboard Air Line and was elected the first president of this company in 1900. He also served as president of other railroad companies of less mileage and was president of the Bank of Richmond and of the Southern Investment Company. He was director of several other trust companies, banks and other corporations, and was recog- nized as one of the leading financiers of the South. Mr. Williams was appointed Assistant Secretary of the Treas- ury on March 24, 1913, and was placed in charge of the fiscal bureaus of the Treasury Department. He remained in this posi- tion until his appointment and qualification as Comptroller of the Currency. The statutory period of Mr. Williams' appointment expired February 2, 1919, but he continued to discharge the duties of the office until March 2, 1921, under authority of the Act of Congress approved March 2, 1895 (28 Stat., 808, 844), which authorized the continuance in office of all officers under the Treasury Department after the date of the expiration of their statutory terms pending the appointment and qualification of their successors, and also waived the requirement for a new bond during the continuing period in the discretion of the Secretary of the Treasury. 444 ROMANCE AND TRAGEDY OF BANKING Considerable opposition was made to Mr. Williams' confirma- tion as Comptroller, and charges were filed against him with the Committee on Banking and Currency of the United States Senate in connection with the absorption of the United States Trust Company by the Munsey Trust Company and the deposit in the latter company of one million dollars of public moneys taken from the Treasury of the United States, as explained in the fore- going chapter. These charges were investigated by the commit- tee. Testimony was taken and reported stenographically. The report may be found in a pamphlet entitled "Confidential Hear- ings before the Committee on Banking and Currency, United States Senate," sixty-third Congress, Second Session, January 14, 1914. As a member of the Federal Reserve Board Organization Com- mittee, Mr. Williams took an active part in the formation of the Federal Reserve Districts and other work incidental to the inaugu- ration of the new banking system. The administration of Mr. Williams was distinguished at the outset by a rigid enforcement of the banking laws, and much good was accomplished by him in compelling the banks to observe the law and to respect the requirements of the Comptroller's office. His official career in the Treasury Department was more or less turbulent from the beginning, and his administration of the Currency Bureau was considered by many of the banks the most radical and exacting of any in its history. Before his ap- pointment to official position in the Treasury he had the reputa- tion of being a man of strong impulses and prejudices, courageous, blunt and outspoken, unwilling to accept advice or suggestion, lacking in suavity, but entirely devoid of subtlety, and relentless toward those with whom he had business or personal differences. These characteristics were strongly manifested in his official intercourse and dealings with some of the banks and throughout his administration of the Comptroller's office. Unlike his immediate predecessor whose oft declared policy was to "always pursue the course of least resistance," Mr. Wil- liams never hesitated to pursue the course of most resistance when he deemed it necessary to accomplish what he believed to be right or to secure the correction of what he believed to be wrong. He ROMANCE AND TRAGEDY OF BANKING 445 never compromised with what he considered to be wrong to avoid contention or resistance, no matter how formidable, or criticism, however severe. It was not so much what Mr. Williams did when he was Comp- troller that subjected him to so much criticism and made his administration so unpopular as it was the manner in which he did it. Another Comptroller might have done the very same things or followed the same line of policy without arousing the antag- onism that he did by pursuing a more tactful course. But tact- fulness was not one of Mr. Williams' cardinal virtues. Mr. Williams was a man of very warm friendships and of many excellent qualities of head and heart, generous, of recog- nized ability, and of unimpeachable integrity and honesty. Apart from his controversial characteristics it must be conceded, even by his critics, that he was one of the ablest officials, and without doubt the most forceful Comptroller of the Currency who ever occupied the office. Aldrich-V re eland Emergency Currency Law On January 1, 1914, twenty-one national currency associa- tions had been formed in different sections of the country under authority of the Act of May 33, 1908, known as the Aldrich- Vreeland emergency currency law, but no application for the addi- tional currency provided for by this act had been received from or currency issued to any of these associations, although periods of money stringency had existed in sections of the country which would seem to have made an issue of this currency desirable. The high rate of interest charged on this currency probably deterred banks from taking it out. An occasional application was re- ceived from individual banks for additional circulation authorized by Section t3 of this act, but none was issued, and no so-called emergency currency was issued to any association or bank until after the outbreak of the war in Europe, which created a condi- tion of affairs in this country threatening a serious business and financial crisis. Immediately preceding the declaration of war the resources of the banks in New York City had been heavily drawn upon to 446 ROMANCE AND TRAGEDY OP BANKING meet the demands incident to large expectations of gold to Europe and sales on the New York Stock Exchange of enormous amounts of American securities for foreign account. Further shipments of gold and sales of securities were anticipated. To prevent a general demoralization of the market the stock ex- change was closed on the morning of July 31, 1914, and remained closed until December 12 following, when trading in stocks was resumed under certain restrictions prescribed by the special com- mittee of the stock exchange. The New York Clearing House statement for August 1, 1914, showed that the reserves of the New York banks had been reduced $43,599,500 below the amount held the preceding week and that the deficiency in reserves amounted to $17,425,750. In May, June and July nearly $100,000,000 of gold had been exported to Europe. To meet further maturing obligations in Europe, for which payment in gold was demanded, J. P. Morgan & Company organized a million-dollar syndicate, and later another syndicate was organized, called the Gold Fund Pool, to take care of the foreign exchange market. At this juncture the Aldrich-Vreeland emergency currency measure proved of great aid to the financiers and bankers. Al- though this law had been in existence since immediately following the panic of 1907, it had never been utilized and probably never would have been had it not been for the grave emergency created by the European war. The Secretary of the Treasury realized the gravity of the situation, and on August 3 announced through the press that the Treasury Department was prepared to immediately issue to na- tional banks in New York City $100,000,000 of additional cur- rency authorized by this act. To facilitate the issuance of emergency currency, Congress, under date of August 4, 1914, amended the Act of May 30, 1908, authorizing the Secretary of the Treasury, in his discretion, to waive the provision in the original act, restricting the issuance of additional currency to national banks which had outstanding bond secured circulation equal to forty per cent, of their capital stock. The act was further amended to increase the amount of currency which a bank was authorized to issue from one hundred ROMANCE AND TRAGEDY OF BANKING 447 per cent, of capital and surplus to one hundred and twenty-five per cent, of capital and surplus, and repealed the provision limit- ing the total issue of such currency to $500,000,000. Immediately following these amendments to the law additional currency associations were rapidly formed in different sections of the country. On October 1, 1914, forty-four of these associa- tions had been organized, covering nearly every State. The num- ber of national banks composing these associations aggregated 2102 and their capital stock and surplus amounted to $1,197,- 771,000. The total amount of emergency currency issued ag- gregated $382,502,645. The situation was further relieved by the New York Clearing House Association which, on August 3, 1914, commenced the issuance of clearing-house loan certificates. Between August 3 and October 15 following, $124,695,000 of these certificates were issued. The last of these certificates were cancelled on November 28, 1914, and on July 8, 1915, the entire Emergency Cur- rency issues had been retired, except $171,703.11 issued to the First National Bank of Uniontown, Pa., which had failed and had been placed in the hands of a receiver January 18, 1915. After that date this emergency currency was provided for by the de- posit of lawful money. The Clearing House Associations in Chicago, St. Louis and other large cities also issued clearing-house certificates, but by December 1, 1914, all such certificates had been paid or were called in for redemption. The Kiggs National Bank Controversy At the time of the investigation by the Senate Committee on Banking and Currency of the charges preferred against Mr. Williams in opposition to his confirmation as Comptroller of the Currency, Milton E. Ailes, vice-president of the Riggs National Bank of Washington, testified before the committee that Mr. Williams was particularly hostile and vindictive towards him be- cause of his connections with the National City Bank of New York and the Seaboard Air Line, he having succeeded Mr. Wil- liams on the board of directors of the railroad company. 448 ROMANCE AND TRAGEDY OF BANKING Mr. Ailes charged that Mr. Williams, while Assistant Secre- tary of the Treasury, resorted to extraordinary methods to obtain information with which to attack the National City Bank of New York, and that in furtherance of this purpose had in- structed national bank examiners to search the confidential files of certain banks in Richmond, Va., and Chattanooga, Tenn., to see if he could find any evidence of an incriminating nature against the National City Bank and the Riggs National Bank or any of their officers, and that these examiners abstracted from the files of these banks original confidential papers and brought them to Washington. He charged further that the national bank examiners for New York City in examining some of the banks singled out Seaboard Air Line loans and instructed the banks to dispose of them, inti- mating that this action on the part of the examiner was taken by direction of Mr. Williams. Mr. Ailes also reverted to the Miss Taylor incident, herein- before referred to, and charged that the manner in which Mr, Williams conducted the investigation of that matter was another evidence of his hostility to him and the National City Bank. As is usual in investigations by a Congressional Committee, the rules of evidence were not strictly adhered to in taking testi- mony, consequently a good deal of extraneous and irrelevant testimony, hearsay and innuendo were introduced. The effect of the whole proceeding was simply to consume time, delay the confirmation of Mr. Williams and intensify the strained relations existing between him and some of the managing officers of the Riggs National Bank, as subsequent events fully verified. In his first annual report to Congress in 1914, Mr. Williams referred to an article published in the New York Tribune on December 10, 1913, in which an attack was made upon him and the Treasury Department in connection with the use of Treasury funds to avoid the failure of the United States Trust Company. He charged the newspaper with being hostile to the administra- tion and that the article in question was "instigated and pro- moted by individuals connected with a local national bank which was affiliated with a banking interest in New York City, also ROMANCE AND TRAGEDY OF BANKING 449 hostile to the administration, and which under the previous admin- istration had enjoyed special favors and privileges from the Gov- ernment, particularly in connection with the Treasury Depart- ment". While the names of the particular banks to which he had ref- erence were not mentioned, it was clearly understood that they were the National City Bank of New York and the Riggs National Bank of Washington. He stated that the charges embraced in this newspaper attack were investigated by the Banking and Currency Committee of the United States Senate and were found to be false, unprovoked and without the slightest justification or excuse, and that while he had been the special object of attack by the newspaper and banking interests referred to, his nomination to be Comptroller of the Cur- rency was confirmed by the United States Senate on January 19, 1914, with but one dissenting vote, and that this dissenting vote was from a member of the opposite political party, who stated that his objection was entirely impersonal and was based upon economical issues. Almost immediately following the assumption by Mr. Williams of the duties of Comptroller the Riggs National Bank became the object of his special attention. An examination of this bank was commenced by national bank examiners and continued without interruption for the period of almost one year. Every trans- action of the bank in connection with loans and investments from the date of its organization in 1896 to the date of the examination was exhaustively investigated and expensive legal counsel was employed to assist the examiner in interrogating the officers of the bank under oath. Numerous special statements and sworn re- ports were called for by Mr. Williams, and finally he called for a sworn statement showing all loans made to officers of the bank since the date of its organization in 1896, and the interest paid on such loans, and all loans made to any member of an officer's family. This information was required to be furnished within one week. Section 5213 U. S. R. S. provides that every national bank which fails to make and transmit within the time specified any report required by the Comptroller of the Currency under 450 ROMANCE AND TRAGEDY OF BANKING authority of Sections 5211 and 5212 of the Revised Statutes shall be subject to a fine of one hundred dollars a day, and if any bank delays or refuses to pay the penalty imposed after it has been assessed by the Comptroller, the amount of the penalty may be retained by the Treasurer of the United States, upon the order of the Comptroller, out of the interest, as it may become due to the bank on its bonds deposited with the Treasurer to secure circula- tion, and that all such sums so collected shall be covered into the Treasury of the United States. Under date of March 9, 1915, the Riggs National Bank ad- dressed a communication to the Comptroller, acknowledging re- ceipt of one of his letters, and stating that during the previous nine months the bank had received more than forty letters from the Comptroller, every one of which contained insulting imputa- tions or insinuations against the integrity or veracity of some of its officers. Much of the information requested, it was stated, the Comptroller had no right under the law to call for and the bank could very properly have refused to comply with his demands. But his communications were answered in the expectation that when he was fully advised in regard to the affairs of the bank and the conduct of its officers, his sense of official obligations would prevail over his personal feelings and restrain him from abusing the power of his great office to gratify his personal resentment. His last letter, however, it was stated, had made it manifest that the forbearance of the bank's officers had only invited more per- sistent attack, and, therefore, they were convinced that the Comp- troller was actuated in his course only by personal hostility toward some of the bank's officers. On March 30, 1915, the Comptroller notified the bank that for failure to make and transmit the special reports called for within the time prescribed, or within five days thereafter, an assessment of one hundred dollars a day was imposed for each day from February 8 to March 30, 1915, amounting to five thou- sand dollars, which the bank was directed to pay. At the same time the Treasurer of the United States was instructed to with- hold any interest due or to become due on the bonds belonging to the bank on deposit as security for circulation. ROMANCE AND TRAGEDY OF BANKING 451 In a letter addressed to the Treasurer of the United States, dated April 1, 1915, the bank denied the legal right or authority of the Comptroller to assess the penalty imposed and demanded payment to the bank of the interest due on bonds deposited as of April 1, 1915. But if the Treasurer, under the circumstances, did not feel that he could comply with this demand, he was re- quested to hold the matter in abeyance until the bank had an opportunity to be heard or to take such legal action as was necessary to protect its rights. On April 12, 1915, the bank filed a bill of complaint in the Supreme Court of the District of Columbia asking for protection from persecution and oppression by officials of the Treasury De- partment, and on this petition the Court granted a temporary order restraining the Secretary of the Treasury, the Comptroller of the Currency and the Treasurer of the United States from pay- ing into the United States Treasury the whole or any part of the retained interest money due or to become due and payable April 1 and assessed as a penalty against the bank. This order also restrained the Comptroller from revoking the bank's designation as a depository of other national banks or from refusing to approve applications for such designations. The court also issued a rule directing the officials mentioned to show cause on or before the sixteenth day of April following why they should not be permanently enjoined from interfering with the bank in any manner whatever. In the bill of complaint filed by the bank it was averred that at the time the nomination of Mr. Williams was under considera- tion by the Senate Committee Mr. Williams was interrogated as to whether if appointed Comptroller of the Currency he would discharge the duties of his office fairly and impartially notwith- standing his apparent hostility toward certain officers of the Riggs bank, and that it was only after an affirmative answer to such interrogatories that the Committee consented to report favorably upon his nomination. The bank further averred that Mr. Williams caused the with- drawal of $1,158,479.51 of Panama funds from the bank and that he and the Secretary of the Treasury conspired to take away and did effect the withdrawal of nearly $2,500,000 at a time when the 452 ROMANCE AND TRAGEDY OF BANKING banks in the United States were making strenuous efforts to hus- band their resources, and at a time when the Riggs National Bank could not dispose of the bonds it had pledged as security for this money because of the European war. The complaint charged further that Mr. Williams had ma- liciously used his high office as a cover to impertinently, arrogant- ly and insolently pry into matters with which he had no official concern whatever, for the purpose and with the intent to injure the bank and wreak his vengeance on certain of its officers against whom he entertained a personal hatred. To supply the information called for as to loans to officers and their families and the interest paid on such loans, which the Comptroller required to be furnished within one week, the petition averred, would require an examination of the bank's records cov- ering a period of eighteen years, and would cause such a serious loss of time and interference with its current business that the officers felt justified in refusing to comply with this demand upon the ground that it was unreasonable. It was further averred that under date of March 19, 1915, Mr. Williams wrote the bank a long, rambling, insulting and argu- mentative letter concerning certain loans made during the previ- ous five years, and demanded a report in response within one week. The language of this letter, it was stated, was intemperate, arrogant, insolent and libelous in the extreme and indicated a mind utterly blind to the duties and dignities of the office of Comp- troller of the Currency, and a recklessness and impatience of all legal restraints, arising either from uncontrollable hatred, temper or from a graver cause. Five days were consumed by counsel in argument, during which personalities were freely indulged in. The court then announced that the motion made by the Government to dis- miss the case would be taken under advisement, at the same time denying the prayer of the bank for continuance of the injunction pending litigation. Without considering, the court said, what evidence might here- after be presented, there was nothing in the record as made up which showed that the officials of the Government had exercised ROMANCE AND TRAGEDY OF BANKING 453 arbitrary powers in refusing to approve the Riggs National Bank as a reserve agent for other national banks. The court expressed the opinion that the officials of the Gov- ernment would have been remiss in their duty had they done otherwise, as the evidence presented showed persistent violations of law on the part of the Riggs bank, which began before Mr. Williams came into office and continued for some time thereafter. The court was correct in the opinion thus expressed, both as to the duty of the officials and as to the disregard of the law by the bank. But if this policy had been impartially and rigorously applied to all national banks shown by examiners' reports to have persistently violated the law "before Mr. Williams came into office and for some time thereafter," as in the case of the Riggs National Bank, there would have been very few banks approved as reserve agents for other banks, or continued as reserve agents after approval, as a large number of such banks were as persistent violators of the law as the Riggs National Bank, if not more so. The court expressed the further opinion that the policy of not designating as reserve agents stock exchange banks as com- pared with commercial banks, was sound and commendable, and was recognized by Congress in framing the Federal Reserve Act. The court denied all of the prayers of the plaintiffs in their bill of complaint, except the one asking that the Treasurer of the United States be enjoined from converting into the Treasury the five thousand dollars interest due on the bonds of the bank on de- posit as security for circulation, which had been retained upon the order of the Comptroller of the Currency to pay the penalty im- posed by him upon the bank for neglect or refusal to make and transmit the special reports called for. In regard to this the court said a temporary restraining order had been granted because the contention had been raised that if this money was unlawfully covered into the Treasury it might require an Act of Congress to get it out, which would occasion considerable delay. The court declared that the only question at issue in this case was as to the power of the Comptroller of the Currency to assess the penalty imposed, and this question would be taken under ad- visement and a decision rendered by the first of July following. 454 ROMANCE AND TRAGEDY OF BANKING Although this case was taken under advisement by the court May 21, 1915, a decision was not rendered until May 31, 1916, a year and ten days thereafter. It was then ordered that the tem- porary injunction restraining the payment into the Treasury of the United States of the $5,000 due the bank as interest on its bonds on deposit as security for circulation, be permanently continued. The decision concludes as follows : Except for the purpose of compelling payment of the interest due the bank and retained, and of enjoying the assessment of penalties because of the failure to comply with the demands for the reports the bill will be dismissed as to all the defendants. It was contended by counsel for the plaintiff in the argument of this case that the Comptroller of the Currency had no author- ity to impose upon the bank the penalty of one hundred dollars a day prescribed by Section 5213 of the Revised Statutes for fail- ure to make and transmit within five days the special reports called for. It was held by counsel that this penalty was appli- cable only as against failure to make and transmit what are known as reports of condition, containing a statement of the resources and liabilities of the bank, sworn to by the president or cashier and attested by at least three of the directors, which the banks are required by law to make not less than five times a year on call of the Comptroller. In defining the Comptroller's powers in regard to requiring reports from the banks the court expressed the opinion that with the exception of Section 5240 of the Revised Statutes the most suggestive provisions of the national banking laws to aid in the interpretation of Section 5211, under authority of which the Comptroller claimed the right to call for the special reports in connection with which the five-thousand-dollar penalty was im- posed, were to be found in Section 5169 of the Revised Statutes, which the court stated practically defines the word "condition" to mean every fact relating to a bank including those showing an intention to use the association for any other than the legitimate objects contemplated by the national bank act. KOMANCE AND TRAGEDY OF BANKING 455 The court then referred to Section 3 of Chapter 290, Act of July 12, 1882, relating to the extension of the corporate existence of national banks and expressed the opinion that the exam nation authorized by this section contemplated the same kind and scope of an examination as that provided for in Section 5169 relating to the organization of banks. It is significant that the court should have deemed it neces- sary in determining this case to have referred to the section of the law governing the extension of the corporate existence of a bank and interpret its meaning at the very time the application of the Riggs National Bank for extension of its corporate exist- ence was under consideration by the Comptroller of the Currency and Mr. Williams was seeking legal advice as to whether he could lawfully refuse to extend the bank's charter because of his pro- nounced and uncompromising objection to the management. Section 3 of the Act of July 12, 1882, relating to the exten- sion of charters of national banks reads as follows: That upon the receipt of the application and certificate of the association provided for in the preceding section, the Comptroller of the Currency shall cause a special examination to be made, at the expense of the association, to determine its condition; and if after such examination or otherwise it appears to him that said association is in a satisfactory condition he shall grant his certificate of approval provided for in the preceding section, or if it appears that the condition of said association is not satis- factory, he should withhold such certificate of approval. The court held that the examination required by this section is the same kind of an examination and for the same purpose as that provided for in Section 5169 of the Revised Statutes relating to the inquiry to be made by the Comptroller before granting per- mission to begin business. Congress, the court held, used the word "condition" to indi- cate an inquiry of the broadest scope. It is not believed that the Supreme Court of the United States would sustain the opinion rendered by Justice McCoy in his inter- pretation of the law relating to the discretionary powers of the 456 ROMANCE AND TRAGEDY OF BANKING Comptroller of the Currency with respect to extensions of char- ters of national banks. No such interpretation as that placed upon the language of the statute by the court ever was enter- tained bv any Comptroller since its enactment, except Mr. Williams. John Jay Knox was Comptroller at the time the Act of July 12, 1882, was passed, providing for extensions of charters. He recommended this legislation to Congress in his annual report for 1881, and drafted the original enactment. On page X of the text of his report for 1881, Mr. Knox said : It is recommended that an act be passed during the present session, authorizing any national bank, with the approval of the Comptroller, at any time within two years prior to the date of the expiration of its corporate ex- istence, to extend its period of succession for twenty years, by amending its articles of association. The bill may provide that such amendments must be authorized by the votes of shareholders owning not less than two-thirds of the capital of the association, the amendment to be certified to the Comptroller of the Currency, by the presi- dent or cashier, verified by the seal of the association, and not to be valid until the Comptroller's approval thereof shall have been obtained, and he shall have given to the association a certificate authorizing it to continue its business under such extension. Responsibility for the extension of the corporate existence of the banks will thus, in a measure, rest with the Comptroller; and he can require such an examination of its affairs to be made, prior to granting the extension, as may seem to him proper, in order to ascertain if the capital stock is intact, and all the assets of the bank in a satisfactory condition. Section 3 of the Act of July 12, 1882, above quoted, requires a special examination of a national bank before extension of its charter, and if such examination shows the bank to be in a "satis- factory condition" the Comptroller is required to issue his cer- tificate of extension. The words "satisfactory condition" always were held by the Comptroller's office, and by its legal advisers, to mean that the ROMANCE AND TEAGEDY OF BANKING 457 bank was in a solvent condition at the time of the special examina- tion, that its capital was unimpaired and that its business was being conducted within the provisions and limitations of the na- tional banking laws. If the special examination showed an unsatisfactory condi- tion the practice was to notify the board of directors and require the matters complained of to be corrected as a condition prece- dent to the approval of an extension of the bank's charter. It was not the practice to investigate the condition of the bank run- ning back a number of years into periods covered by former ad- ministrations of the Comptroller's office, as was done in the case of the Riggs National Bank, and there was no precedent to be found in the records of the bureau for such a procedure. The duty and powers of the Comptroller in passing upon applications for extension of charters were believed to be limited to ascertaining "if the capital stock is intact, and all of the assets of the bank in a satisfactory condition". This was believed to be the intent of the Act of July 12, 1882, and was so understood by John Jay Knox, who recommended the amendment to the law and drafted this enactment, the opinion of Mr. Justice McCoy of the Supreme Court of the District of Columbia to the contrary notwithstanding. On May 23, 1916, a committee representing the stockholders and board of directors of the Riggs National Bank called in per- son upon the Comptroller and filed with him a formal application for extension of the bank's charter. The spokesman of the com- mittee, after briefly stating the object of their visit, tendered the application to Mr. Williams, who declined to receive it from his hands and motioned to him to lay it on the desk. The paper was laid on the desk and the committee withdrew. Under date of June 21, 1916, Mr. Williams addressed a com- munication to the Riggs National Bank, covering thirteen type- written pages, in which he called attention to an error in the application, which requested an extension of the charter for the period of twenty years and one day, and required an amended application for twenty years' extension in conformity with law. The amended application was filed on June 26, 1916, in compli- ance with the Comptroller's request. 458 ROMANCE AND TRAGEDY OF BANKING In the communication above referred to Comptroller Williams called the bank's attention to Section 3 of the Act of July 12, 1882, providing for extension of charters, and to the construc- tion placed upon the word "condition" by Justice McCoy of the Supreme Court of the District of Columbia in the decision ren- dered by him under date of May 31, 1916, in the suit of the Riggs National Bank vs. the Comptroller of the Currency et al., in which the court held that the word "condition" comprehended not only the solvency of the bank but the character of the business done. The communication then referred to the numerous violations of law committed by the bank's officers during the existence of the institution, mentioning the officers by name and the specific nature of some of their unlawful transactions, and concluded with a ref- erence to their refusal to furnish certain special reports called for by the Comptroller and denial of his authority under the law to call for such reports. It was a serious question, the Comptroller stated, whether the corporate existence of a bank should be extended whose officers had defied his authority and challenged his right to call for in- formation which, in his judgment, was deemed necessary to a proper understanding of the condition of the bank, if the same officers were to be continued in charge of the bank's affairs. If the practices and methods of these officers, the Comptroller stated, which had been the subject of criticism for years had continued to the date of the application for extension of charter then pending, the extension could not lawfully have been ap- proved, but the records of the Comptroller's office showed that during the preceding eighteen months the unlawful practices complained of had been discontinued and that the condition of the bank had been generally satisfactory, with the exception of the refusal to furnish the special reports called for. The decision of the court, however, the Comptroller stated, afforded a solution of this phase of the situation, and as the officers of the bank accepted the court's decision as to the Comp- troller's authority to call for special reports and the board of directors solemnly pledged themselves to see that the affairs of the bank would in future be conducted strictly in compliance with ROMANCE AND TRAGEDY OF BANKING 459 the national banking laws and in conformity with the lawful rules, regulations and requirements of the office of the Comptroller of the Currency, the Comptroller advised the directors that he had concluded to extend the bank's charter. The Certificate of Extension was signed at nine o'clock on the morning of June 24, 1916, by Deputy Comptroller Thomas P. Kane as Acting Comptroller. Some inquiries and comments were made as to why Mr. Wil- liams did not sign this certificate as Comptroller, and it was stated in explanation that it was signed by the Deputy Comptroller as Acting Comptroller as a matter of expediency. It appears that a meeting of the board of directors of the bank had been called for ten o'clock on the morning of that date and a representative of the bank had requested the Comptroller to issue his certificate as early in the day as possible in order that it might be presented to the directors at the board meeting, and Mr. Williams authorized the Deputy Comptroller to sign the certicate if he should be delayed in reaching the office on the morning of the twenty-fourth. As Mr. Williams was late in arriving at the office on that date the Deputy Comptroller s ; gned the certificate as Acting Comp- troller and it was delivered to Mr. Darlington, a director of the bank, before ten o'clock, who called in person for it. The last chapter of this unprecedented controversy was writ- ten on Saturday, July 1, 1916, when the attorney for the bank, in behalf of himself and his former associates in the case, ordered a discontinuance of the equity suit brought by the bank against the Comptroller of the Currency, the Secretary of the Treasury and the Treasurer of the United States. This step followed the agreement reached by the parties to the suit when the Comptroller declared his purpose to extend the charter of the bank. While the signed acceptance by the directors of the bank of the decision of Mr. Justice McCoy as to the scope of the Comp- troller's powers in calling for special reports, and the Comp- troller's determination to extend the bank's charter in view of this recognition, afforded a very happy solution and settlement of this bitter controversy, it is to be regretted that the important ques- tion involved in the case could not have been passed upon by the 460 ROMANCE AND TRAGEDY OF BANKING court of last resort, and a decision reached as to the extent of the Comptroller's authority to pry into the past affairs of a bank and the individual transactions of its officers in connection with an application for extension of charter. Indictment of Bank's Officers for Perjury In the affidavit made by Mr. Williams and filed in the action brought by the officers of the Riggs National Bank against the Comptroller, it was alleged, among other things, that from the date of its organization as a national bank until the practice was stopped by his investigations, the Riggs National Bank con- ducted an extensive stock brokerage business through Lewis John- son & Company, buying and selling stocks on commission in vio- lation of law. Lewis Johnson & Company was an unincorporated banking and brokerage concern doing business in Washington, through which the Riggs National Bank was supposed to have conducted its alleged unlawful stock operations. This company had failed a short time previously and went into bankruptcy. These allegations were denied by the bank's officers in a joint affidavit made by the president, vice-president and cashier, dated May 19, 1915, and filed in the case. In this affidavit it was declared that the Riggs National Bank never at any time bought or sold any stocks whatever from or through Lewis Johnson & Company. Following the filing of this affidavit, the court at the instance of the United States Attorney made an order on the trustees in bankruptcy of the estate of Lewis Johnson & Company, requir- ing them to surrender to the custody of the United States Attor- ney the accounts standing in the name of the Riggs National Bank appearing on the books of the brokerage firm. National bank examiners were then put to work upon these accounts, which numbered about six thousand, and after a lengthy and exhaustive investigation, involving the tracing of every item through the books, reported their findings to the United States District At- torney, who submitted the facts presented to the grand jury. On October 1, 1915, four indictments were returned, one against ROMANCE AND TRAGEDY OF BANKING 461 Charles G. Glover, president of the bank; William J. Flather, vice-president, and Henry H. Flather, cashier, jointly, and one against three of these officials individually, charging them with perjury in having sworn falsely that the bank never at any time oought or sold any stock through the firm of Lewis Johnson & Company, when the books of this defunct concern showed numer- ous accounts of stock purchases and sales carried in the name of the Riggs National Bank. In anticipation of some such action on the part of the Gov- ernment the board of directors of the bank appointed a special committee of three directors, with authority to employ expert accountants and special counsel, to make an investigation of all matters involved in the affidavit made by Messrs. Glover and Flathers, the truth of which was questioned by the indictment. This committee employed the American Audit Company of New York to make a thorough and complete examination of the records of the bank and of all transactions of the bank or any of its officers with Lewis Johnson & Compnay. This audit company pursued its investigations daily for a period of about four months. Item by item in the affidavit filed by the Government was traced through the books and identified, and all but a relatively small number were identified as being for the account of particular individuals, and it was claimed by the bank, in a published statement, that no one of the transactions was made for or in any way on account of the Riggs National Bank, and that each and every so-called short sale was traced and iden- tified as being that of an individual and in no single instance as that of the bank. The bank in a statement issued for the information of its stockholders, depositors and customers said that the indictments grew out of a controversy regarding a purely technical construc- tion of the phraseology of an affidavit filed in the course of the argument in the pending suit of the Riggs National Bank against officers of the Government, by which neither the court nor anyone else was deceived, and without any charge involving loss or injury to the property or business of the bank. In explanation of the stock transactions with Lewis Johnson Company the bank in its published statement said that in order 462 ROMANCE AND TRAGEDY OF BANKING to facilitate the making of investments by its depositors and cus- tomers it was the practice of the bank to execute orders when received through one of its officers acting in his individual capac- ity as a member of the Washington Stock Exchange or otherwise. Such orders, it was stated, were always on a cash basis and not upon margin. While the transaction was conducted upon the order and for the account of a particular depositor, customer or other individ- ual, in the course of business the execution of such orders was reported by the brokers directly to the bank, but no order or transaction was ever made by the bank for its own behalf or profit, but invariably in behalf of others. The fact that the bank cleared orders of the nature indicated for depositors and customers, it was stated, was open and well known to the investing community, and to every Comptroller of the Currency, and to every bank examiner who examined the bank. Since the passage of the Federal Reserve Act, however, it was stated, this practice had been discontinued, for the reason pre- sumably that it might be held to be in violation of Section 22 of the Federal Reserve Act. The bank's counsel denounced in a public statement as ma- licious persecution the action of the Government in procuring this indictment while the civil suit of the bank against two government officials was pending, and stated that such action looked danger- ously like an attempt to invoke the operation of the criminal court to punish the officers of the bank for their temerity in ap- pealing to the courts for protection against persecution. Counsel stated that the action of the Secretary of the Treasury and the Comptroller of the Currency in inducing the Department of Jus- tice to obtain the indictments proved that they were actuated by malice against which the bank sought protection in the court. The criminal case was called for trial May 8, 1915. The Government was represented by the United States District Attor- ney, assisted by special counsel from the Department of Justice. The defendants were represented by eminent attorneys of the dis- trict bar, assisted by ex-Governor John B. Stanchfield of New York. Great interest was manifested in the case and many dis- tinguished members of the district bar, bankers and Congressmen ROMANCE AND TRAGEDY OF BANKING 463 were present in court as the trial progressed. Two ex-Presidents of the United States, William Howard Taft and Theodore Roose- velt, were character witnesses for the defendants and testified to their unimpeachable integrity and high social and business stand- ing in the community. Intense feeling was displayed between counsel throughout the trial and arguments and one of the attorneys for the bank offi- cials took the witness stand and testified that he personally drew the affidavit on which the indictments were based, denying that the Riggs National Bank had dealt in stocks. He explained in detail the circumstances under which the document was drawn, signed and sworn to. He stated that he carefully explained to the signers of the affidavit what he meant by the language used, that the Riggs National Bank, as a bank, had never purchased, sold, or dealt short in stocks, and that if there were any accounts car- ried on the books of Lewis Johnson & Company purporting to show such purchases, sales or dealings by the bank, such accounts were false. He stated that he explained to the defendants before they signed the affidavit that the affidavit did not relate to the brokerage transactions in which the officers of the bank in their individual capacity bought and sold stocks for customers. He declared that he alone was responsible for the wording of the affidavit and that the language used meant precisely what he in- tended it should mean. The explanation of this witness was so clear and convincing that the defense could have safely rested their case on his testi- mony alone as totally destroying all evidence of any intent on their part to wilfully make a false statement in the affidavit. The trial lasted twenty days. The case was given to the jury on the morning of May 27, 1916, and a verdict of "not guilty" was returned within nine minutes from the time they left the jury box. Only one ballot was taken which was unanimously in favor of acquittal. Origin of the Riggs National Bank . In 1837, W. W. Corcoran established a private bank and brokerage office on Pennsylvania avenue near Fifteenth street, directly opposite the north front of the United States Treasury 464 ROMANCE AND TRAGEDY OF BANKING Department. In 1839 this office was removed to the old Bank of Metropolis Building on the corner of Fifteenth and F streets. In 1810 George W. Riggs became a partner of W. W. Corcoran and the business was conducted under the firm name of Corcoran & Riggs. This firm purchased the building of the old Bank of the United States on the northwest corner of Fifteenth street and Pennsylvania avenue. After the death of Mr. Corcoran, Charles C. Glover and Thomas Hyde entered the firm and continued the business under the name of Riggs & Company. On June 27, 1896, the partners of Riggs & Company organ- ized the Riggs National Bank to succeed the private bank and brokerage firm and commenced business as a national institution on June 30, 1896, with an authorized capital stock of $500,000. On April 11, 1903, the capital was increased to $1,000,000. It will thus be seen that the Riggs National Bank was an old and honorable institution. Its founder and his successors were substantial and leading citizens of Washington, prominent in the financial and business activities of the city. The bank from its early organization had an unquestioned reputation for conserva- tism and good management. It always was considered one of Washington's largest, strongest and best financial institutions, and enjoyed the full confidence of its patrons and of the com- munity. Like seventy-five per cent, of the national banks throughout the country, the Riggs National Bank violated at times some of the provisions of the national banking laws, such as making loans in excess of the legal limit or upon the security of real estate mortgages, failure to maintain the required reserve, investments in stocks, buying and selling bonds and stocks on commission, and engaging in other transactions either expressly prohibited by law or beyond the powers of a national bank. None of these transactions, however, affected or endangered the solvency of the institution in the least degree, but on the con- trary were more or less profitable to the bank. Following each examination for years previous to the incum- bency of Mr. Williams as Comptroller the attention of the officers and directors of this bank was called in writing to the violations of law reported by the examiners and a correction demanded. It ROMANCE AND TRAGEDY OF BANKING 465 was also insisted upon that the unlawful practices or transactions be discontinued. Correspondence with the bank and personal conferences with its officers on these subjects were generally con- ducted by the Deputy Comptroller, but because of the intimate personal acquaintance and relationship which usually existed between the principal officers of this bank and some of the higher officials of the Treasury Department, very little, if any, attention was paid to the Deputy Comptroller's demands and admonitions, and the bank continued for years to be the subject of criticism by the Comptroller's office on account of the unlawful transac- tions and practices complained of. On one occasion the Deputy Comptroller met one of the prin- cipal officers of this bank at a gathering of the bankers of the District of Columbia. On entering the room where he and some other bankers were assembled, this officer remarked in rather a sneering manner: "Here comes the man who writes those letters to the banks telling them how they should conduct their business." The Deputy Comptroller replied that there was no intention or disposition on the part of the Comptroller's office to run the banks or to interfere with their business, except to require that they be conducted within the provisions and limitations of the national banking laws and the regulations of the Comptroller based upon such laws. He was told that he might belittle the letters of criticism received from the Comptroller's office and dis- regard their requirements and admonitions, but his bank was being placed on the official records by such letters as a violator of the law, and the time might come when that record would confront him and his fellow officers and call for an explanation of their course of action, as other bankers had been called upon to do under similar circumstances, to their sorrow. In view of subse- quent events this warning seemed prophetic. Whether or not Mr. Williams was actuated by animosity in his dealings with the Riggs National Bank, growing out of former personal differences with some of its officers and their open oppo- sition to his confirmation as Comptroller, as was freely charged, the instance above referred to is only one of many that could be recited to illustrate the insolent and arrogant manner in which some of the officials of that bank received and disregarded the 466 ROMANCE AND TRAGEDY OF BANKING admonitions of the Comptroller's office when their attention was called to violations of law and other irregularities, and the spirit which prevailed in the bank when Mr. Williams became Comptrol- ler of the Currency, and with which he had to contend. In the meantime many of the unlawful practices formerly engaged in had been discontinued. The law had been amended increasing the limit of loans from ten per cent, of capital to ten per cent, of capital and surplus, thereby legalizing the large un- lawful loans which this bank had been in the habit of making. The decisions of the courts and the rulings of successive Comptrollers modified the position of the office with respect to real estate loans and enabled the banks to make loans indirectly secured by real estate which before had been held to be unlawful, and the bank changed its method of handling bond and stock transactions. So that at the time Mr. Williams assumed charge of the Comp- troller's office the reports of the bank examiners disclosed very little, if anything, in this bank calling for criticism, and the bank apparently was in a sound and satisfactory condition. Had this bank been handled as firmly by former Comptrollers, when it was violating the law with impunity, as it was by Comp- troller Williams, the effect would have been very beneficial. But the officers of the bank could not understand why long after their unlawful practices above mentioned had been discontinued, Mr. Williams should deem it incumbent upon himself to make the bank the object of his special regard so soon after he became Comp- troller, and subject it to almost continuous examination for near- ly an entire year, investigating and requiring special reports covering transactions running back to the date the bank opened for business, and therefore they attributed his action to personal animosity, especially because of the fact, it was claimed, that at the time the Riggs National Bank was receiving the continuous and undivided attention of Comptroller Williams and the exam- iners, there were thirteen national banks, six trust companies and nineteen savings banks in the city of Washington, nearly all of which, they stated, were long past due for examination, and sev- eral of them had not been examined for eight or ten months. One of these banks, it was alleged, had succeeded the Riggs National Bank in the financial affections and patronage of the then officials ROMANCE AND TRAGEDY OF BANKING 467 of the Treasury Department, and was reputed to be in a very unsatisfactory condition at the time of its last examination. Activities of Comptroller Williams The law requires every national bank to make not less than five reports of condition each year, according to the form pre- scribed by the Comptroller, verified by the oath or affirmation of the president or cashier, and attested by the signatures of at least three of the directors. From the establishment of the Currency Bureau by McCul- loch, in 1863, to the time Mr. Williams assumed charge of the office, in 1914, there was a great deal of uniformity in the form of reports of condition and no Comptroller ever called for more than five reports during any one report year, which covered the period from November 1 to October 31. Comptroller Williams,, however, made frequent and radical changes in the form and called for six reports during the year 1914 and following. He also enlarged the report blank very materially by adding many new items and schedules, making the report much more diffi- cult to prepare, and more expensive to the banks to publish. It also required so much more time and labor on the part of the em- ployees of the Comptroller's office to examine and abstract that it was impossible with the limited clerical force to complete the work between calls and much of it had to go undone. Many special reports were called for and the banks were re- quired to furnish a vast amount of statistical and detail informa- tion. In January, 1915, a circular letter was sent to all national banks requiring the discontinuance of overdrafts. The directors were required to adopt a resolution prohibiting any officer or employee of the bank from paying or charging to the account of any depositor any check in excess of the amount to the credit of the drawer on the books of the bank. Theretofore it had been the practice of the Comptroller's office to discourage overdrafts as much as possible, and whenever the reports of examiners showed overdrafts for any material amount and that the practice of granting them had become habitual on 468 ROMANCE AND TRAGEDY OF BANKING the part of the bank, the board of directors was required to col- lect the loans and to discontinue the practice. Overdrafts always were regarded by the Comptroller's office as the most objectionable form of making loans, and the practice was discouraged and condemned wherever found to be habitual, but at the same time the impracticability or impossibility of eliminating overdrafts entirely was appreciated, as it was recog- nized that small overdrafts occasionally were unavoidable. For this reason no Comptroller before Mr. Williams ever undertook to require the banks to prohibit overdrawing entirely. Comptroller Williams' requirement, therefore, in this respect was regarded by the banks as extremely radical and impracticable, as it admitted of no exceptions, but while it caused a great deal of dissatisfaction it accomplished some good results, as it had the effect of reducing overdrafts from $15,798,224.76, as shown by the reports of the banks under the call of December 31, 1914, made immediately before the issuance of the circular, to $7,046,- 524.16, as shown by the reports furnished under the call of March 4, 1915, immediately following. On October 27, 1915, Comptroller Williams issued another circular to the banks calling the attention of boards of directors to their oaths of office, declaring that they would not knowingly violate or willingly permit to be violated any of the provisions of the statutes of the United States under which their bank was or- ganized, and also to Section 5197 of the Revised Statutes of the United States, which prohibited a national bank from taking, receiving, reserving and charging on any loan or discount made, or upon any note, bill of exchange or other evidence of debt, interest in excess of the rate allowed by the laws of the State in which the bank was located, or when no rate was fixed by the State laws a rate not exceeding seven per centum per annum. This circular letter then called attention to the fact that the sworn reports of condition of a great many banks showed that the section of the law above referred to was being grossly violated by many banks, and admonished the banks that the law must be strictly observed. Letters were received from a large number of banks in reply to this circular, stating that it had been their practice to make a 469 minimum charge of from twenty-five cents to one dollar on small loans varying in amount from ten dollars and upwards, running for periods of from thirty to sixty or ninety days. This mini- mum charge, it was claimed, was necessary to cover the expenses of the bank for postage, stationery and bookkeeping incidental to the loans, and if this expense was to be considered interest charged, the bank could not make the loans without violating the usury laws, as the legal rate of interest on loans of this character would not compensate the bank for the time and clerical labor of passing them through the books. It was therefore claimed that this minimum charge should be considered an expense and not interest. In response to these protests the banks were advised that the Comptroller had no power to authorize any bank to charge on any loan a rate of interest in excess of the rate permitted by the laws of the State in which the bank was situated, and the report of condition blank sent out with the call of December 31, 1915, required the banks to state the number of loans upon which inter- est, discount or commission was charged or collected at rates which would amount to more than the equivalent of six per cent, per annum. The banks were cautioned by the Comptroller to prepare their statements with care and accuracy as the bank examiners would be required to verify the correctness of all reports if any were found to be inaccurate. The banks were also requested to state whether it was their practice to require borrowers to carry a deposit when loans were granted them, and to furnish complete information as to the connections of officers and directors with other banks or trust companies, their salaries, liability as payers, etc. In his annual report for the year ended October 31, 1915, Comptroller Williams stated that in the autumn of 1914, after the stock exchanges of the principal cities of the country had been closed as the result of the European war, a number of the banks in these cities arbitrarily raised the rates of interest on their loans secured by stocks and bonds from the ante-war rates of two or three per cent, to eight, nine or ten per cent., and in a few cases as high as twelve per cent, per annum. 470 ROMANCE AND TRAGEDY OF BANKING On November 1, 1914, the Comptroller sent telegrams to all national banks in New York City and certain other large cities, requiring them to report the maximum rates of interest which they were at that time charging on loans, and when a reduction to a six per cent, rate might be expected if they were charging in excess of that amount. In consequence of these telegrams, the Comptroller stated, nearly all the banks which were charging a rate in excess of six per cent, promptly reduced the rate to that figure. In New York City three of the larger banks took exception to the Comptroller's attitude and referred to it as an attempt to force upon the banks a policy which they might not consider cor- rect, claiming that there was a class of debtors not of prime standing and not having prime collateral who were not entitled to acommodation on the same terms as others more desirable. The effect of the Comptroller's action, however, was the re- duction in the high rate of interest by a number of banks to a uniform rate of six per cent. After securing a reduction of the rates of interest charged by the large city banks, the Comptroller directed his attention to the rates being charged by the smaller banks throughout the country, and all banks were required to furnish the information called for in the reports of condition as hereinbefore indicated. An analysis of the reports received from the banks in response to the call for this information showed, the Comptroller stated, that some national banks in nearly every section of the country were charging rates of interest on some of their loans not only illegal and usurious, but injurious to the community, unfair and burdensome. The Comptroller stated that these excessive and usurious rates were being charged mostly by the small banks in rural sec- tions of the South, Southwest, West and Northwest. Perhaps no administrative action on the part of Comptroller Williams aroused as much opposition and criticism among the bankers as his requirement in regard to interest charges to be shown in reports of condition called for December 31, 1915, in furtherance of his anti-usury campaign. The bankers complained that every form of condition report sent out by Comptroller ROMANCE AND TRAGEDY OF BANKING 471 Williams contained a number of new questions and requirements, entailing additional clerical work, research and expense to the bank and delving into details to such an extent as to seriously handicap and interfere with the conduct of the bank's current business. Some bank officers, under advice of their board of directors, flatly refused to furnish the information in the detail required, stating that it was physically and practically impossible for the work to be done within the five days allowed by law. Many banks protested that it was impossible to carry on the current business and at the same time do the work involved in the preparation of the information called for by the Comptroller, as it would require a separate interest calculation on every note, varying in amounts and dates of maturity, some on a discount and some on an inter- est basis, some with a recording fee and taxes added or deducted, depending upon whether paid by the bank or by the borrower, often changing the rate one per cent, or more, and many of the notes being for small loans of five or ten dollars for one week to one month. In short, the requirements of the Comptroller, it was contended, necessitated an acute examination of all the loans of the bank for an entire year, which was practically impossible without additional clerical help and serious interference with the bank's current business. The annual report of the Comptroller for 1915 contained a long list of loans made by national banks for the period from August 1, 1914, to November 27, 1914, on which a greater rate of interest than eight per cent, was charged. This list gives the date and amount of each loan, the date of maturity and the rate of interest charged or collected, but omits the names of the banks. The names of the States in which the banks were located were given. The annual report of the Comptroller contained a communi- cation six and a half pages in length from an ex-judge of the County Court of Sequoyah County, Oklahoma, on the subject of 'The Crimes of the Usurer in Oklahoma". It was charged in this communication that almost every bank in Oklahoma, without ex- ception, state and national, was engaged in the business of exact- ing usurious rates of interest. 472 ROMANCE AND TRAGEDY OF BANKING The writer stated that when he first went to Oklahoma he made a study of the subject of usury "not for profit but because it preyed on his mind," to such an extent that he delivered lectures and wrote essays on the subject. By way of illustration he proceeded to weave a very pathetic story around some poor unfortunate farmer who, it was alleged, had become entangled in the meshes of one of those excessive interest-charging banks and was fleeced of all his worldly pos- sessions. This farmer's whole stock in trade, it appears, consisted of four mules, a horse or mare, five oxen, six yearlings, one or two wagons, etc., all of which were pledged as security for a loan and were eventually sold by the bank under foreclosure to satisfy the farmer's debts, leaving him penniless and a pauper. Another instance was narrated of a man who also "went the road," as this correspondent expressed it. This man was old, with a family of six children. He was noted for his hard-working qualities "up to the time the bank began to pinch him". He had a good reputation which "went down as he went down," but his creditors never made inquiry, it was stated, "as to how he went to the bottom and became a beat." He took sick and died and the county had to bury him. The failure of both of these men and their subsequent poverty and misfortune were all charged to their dealings with an un- scrupulous bank which mercilessly exacted of them usurious inter- est on small loans and sold their chattels to satisfy their debts when they were unable to pay otherwise. This letter and many others of a like tenor were received by Comptroler Williams in commendation of his efforts to compel the banks to observe the law in respect to interest charges. The publicity given the activities of Comptroller Williams in connection with his efforts to break up usurious interest prac- tices on the part of the banks seemed to strike a responsive chord in the mind of every individual in the country who ever had any difference with a bank or was denied an accommodation or forced to pay a loan, and many letters were received at the Comptroller's office of a nature similar to that of the Oklahoma judge. ROMANCE AND TRAGEDY OF BANKING 473 The unusual and remarkable feature in connection with the letter from the judge was its publication in the annual report of the Comptroller and the implied authenticity which such publica- tion gave the allegations of the writer without verification by in- vestigation of the details recited, or his standing and reputation in the community. Complaints against banks, of a varying nature, were fre- quently received at the Comptroller's office, and while many of them related to transactions which did not come under the Comp- troller's supervision, as a rule, all were investigated, either by cor- respondence with the banks or by an examiner at the time of his regular examination. With very few exceptions such complaints were found to be without justification, the transactions complained of coming clearly within the rule of recognized banking practices or of legal procedure. Rarely were any complaints received against banks of the nature of usurious interest charges. The practice was almost universal in some sections of the country for banks to make a minimum charge of from twenty- five cents to one dollar on small loans for short periods. It was claimed by the banks that such loans were more of an accommoda- tion to the borrower than of profit to the banks, and no complaints were made to the Comptroller by borrowers of this class that the banks had charged them excessive or unreasonable rates for the loans. To restrict the banks to the legal rate of interest on such loans, it was claimed, would have required them to make the loans at a loss or to refuse the borrower the accommodation. In recognition of this fact the Comptroller subsequently mod- ified his requirements by advising the banks that no loans need be reported on which a minimum rate of not more than fifty cents was charged. The determination of Comptroller Williams to put an end to usurious interest charges by national banks was commendable and met with the approval of the best elements in banking. But the aspersions which were cast upon the banks as a whole by the publication of the letter of Judge McNabb in his annual report and other statements of similar import which appeared in the public prints were calculated, to create the impression that 474 ROMANCE AND TRAGEDY OF BANKING the isolated cases cited were fair illustrations of many of a like nature and that the national banks of the country generally were engaged in a nefarious loan shark business, when this condition was far from being the case. If Mr. Williams had quietly instructed the national bank ex- aminers to investigate at the time of their regular examinations and report to him any and all banks that were engaged in the practice of charging usurious and exorbitant interest on loans and then required these particular banks to discontinue their un- lawful and reprehensible practices under the penalty of exposure and prosecution if they did not comply, instead of creating the impression in the public mind that nearly all the banks were en- gaged in this practice, it was believed much more beneficial results would have been accomplished and the evil consequences of unwar- ranted and unjust reflections upon the banks as a whole would have been avoided. Theft of Postage and Currency In August, 1915, the Treasury Department contract with the express company, under which national bank circulation for many years had been shipped to the banks, was discontinued and all shipments thereafter were required to be made by registered mail insured. This change necessitated the use of postage stamps on all money packages shipped by the Comptroller to the banks. The postage was furnished the Comptroller by the Treasury Department upon requisition, and the Treasury was reimbursed by the banks receiving the currency. This method of affixing postage on currency shipments proved to be unsafe and unsatisfactory, as it involved the use of large amounts of postage stamps and accounting therefor, and was soon superseded by an arrangement made with the city postmaster to have the postage placed on the money packages by the postmaster at the branch post office in the Treasury Department. A postage account was opened with the postmaster and settlement made by check at the end of each month through the regular disbursing officer of the Treasury Department, thus avoiding the handling of any cash or postage by the employees of the Comptroller's office. ROMANCE AND TRAGEDY OF BANKING 475 Some time after this change became effective the attention of the Secret Service Division of the Treasury Department was called to the fact that an employee of the department had recent- ly made several purchases of goods from a mail-order house in Chicago, paying for the goods in postage stamps of the larger denominations. Investigation of this complaint led to the discovery that this clerk was an employee of the Comptroller's office and had charge of the postage accounts at the time these purchases were made. When called upon to explain the payment for his purchases in postage stamps he admitted having appropriated the stamps at the time he had charge of the postage and had stolen from time to time about $60 worth. He explained that his method of pro- cedure was to place short postage on a number of packages each day and appropriate to his own use the amount of the shortage. This man had been a trusted employee of the department for a number of years and was one of the clerks who had access to the money vaults of the bureau in which a half billion of dollars were stored. Although a count of the vaults had been made only a short time previously it was feared that he might have stolen some na- tional bank notes after completion of the count. The Comptrol- ler therefore deemed it advisable to have a recount made and at his request the Secretary of the Treasury appointed a committee of three to make the count, composed of one each from the offices of the Secretary, the United States Treasurer and the Comptroller of the Currency, with the necessary counters and other clerical assistance. With the exception of a few minor discrepancies between the vault balances and the books, which were readily reconciled, no shortage was discovered. A few days subsequent to the completion of this count and before the committee had made up and submitted its report, it became necessary to reissue circulation to a certain bank on account of the redemption of some of its notes. When the vault package containing the circulation of this bank was counted it was found to be short ten sheets of fifty dollars each. This same package had been counted by the committee a few days previously 476 ROMANCE AND TRAGEDY OF BANKING and found to be correct and no shipment had been made therefrom. It was evident, therefore, that the missing sheets had been taken between the date of the count and the time the shortage was dis- covered, a period of about two or three days, and that some one connected with the count had taken them. The Secret Service Division of the Treasury Department was immediately notified of the missing sheets and furnished with a description of the notes, and the Redemption Division of the Treasurer's office was advised of the theft and requested to look out for any of the notes that might come in for redemption. In the course of a few days some of these notes were received by the United States Treasurer for redemption, having been signed with fictitious names and placed in circulation in Washington, but as they were mingled with a miscellaneous lot of notes received from different banks it was impossible to obtain any clue to the source from which they came. In the meantime the secret service agents of the department had been at work on the case and several employees who had assisted in the count were under investigation and surveillance. I inally by the process of elimination suspicion was narrowed down to one man who was shadowed and caught in the act of passing one of the notes in a department store. He was immediately placed under arrest and charged with theft of the notes, some of which were found on his person. He admitted his guilt and in- formed the secret service agent where the remainder of the notes could be found concealed at his home. This man was detailed from another bureau of the Treasury Department to assist the committee in making the count. He had been in the employ of the department for a number of years and was considered honest and trustworthy, having been previous- ly assigned to similar work several times. He was quick to ob- serve the defective system employed in making the count and to take advantage of its weakness. Fortunately, however, very shortly after the package containing the missing sheets was counted it became necessary to ship some currency to this par- ticular bank in reissue of circulation redeemed, which disclosed the shortage. Had no shipment been made that bank for some time after completion of the vault count it would have been impossible ROMANCE AND TRAGEDY OF BANKING 477 to account for the missing notes or the manner of their disappear- ance and suspicion would have fallen upon all of the regular vault clerks of the division, as it would have been assumed that the sheets were taken or in some unaccountable way disappeared after the committee had verified the vault balance and completed its work. No one was quicker to realize this fact than the thief who stole the money. He gambled on the possibility of escape from sus- picion or detection, took the chance and lost. He was indicted and admitted his guilt, but escaped the penalty of his wrongdoing by being paroled by the court instead of being sentenced to a term in the penitentiary. Almost immediately following the disposition of this case an- other very suspicious circumstance was accidentally brought to light which upon investigation disclosed a further shortage through an entirely different source. In the rearrangement of the contents of the shelves in the office file room in the sub-basement of the Treasury to make space for additional stock, nineteen sheets of incomplete national bank circulation, amounting to $950, were found concealed under some old record books. How long these notes had been hidden there or what the original sum amounted to never was definitely ascer- tained. But these particular notes were part of the last package of eight hundred sheets of new circulation in the vaults of the Comptroller for a bank whose charter had been extended several months previously. When the charter of a national bank is extended a new series of notes was then required by law to be issued, of a design readily distinguishable from the notes issued to the bank before extension, and the cancellation and destruction of all the old notes. The office record of the amount of old circulation in the vaults to the credit of this particular bank had been changed so as not to show the receipt from the Bureau of Engraving and Printing of the stolen sheets. The notes on hand for this bank, of the old series, were care- fully checked against the record as previously changed and found to agree, but subsequently it was ascertained that a number of the notes of this same series had been placed in circulation with 478 ROMANCE AND TRAGEDY OP BANKING forged signatures of the president and cashier of the bank and apparently with no attempt whatever to disguise the handwriting of the forgers or to imitate the signatures of the officers. A year or more before these occurrences the chief of the issue division of the Comptroller's office was stricken with paralysis and was incapacitated for duty for several months. While he never fully recovered from this attack, in the course of time he got sufficiently well to return to the office and supervise the work of his division. During the progress of investigation of this matter this chief had a second stroke of paralysis and while confined to his home from this attack committed suicide by shooting himself. This man had been employed in the Comptroller's office for nearly a half century. He was a veteran of the Civil War and a member of the famous "Iron Brigade" of Michigan. During the greater part of his service in the bureau he held positions of trust and responsibility. At one time he was chief clerk of the office. For many years and up to the time of his death the money vaults of the bureau were in his charge, containing at times as much as a half billion dollars. Every Comptroller under whom he served had absolute confidence in his integrity and honesty. He was a man of excellent habits and of good moral character. Of the entire force of his division he was probably the last person upon whom the slightest suspicion of dishonesty or wrongdoing would rest, and when information of his suicide reached the office, al- though the investigation of the forgery and circulation of these notes was then in progress, he was not even then suspected of being concerned. Subsequent disclosures, however, furnished such conclusive evidence that he not only committed the forgeries and put the notes in circulation, but had manipulated and falsi- fied the records in an endeavor to conceal his crime. The evidence was so convincing that his family unhesitatingly made good the loss to the Government to the extent of their financial ability. With the memory of his long and previously good record in the service of the department it was the charitable belief of those who knew him and were familiar with these facts, that he was mentally irresponsible at the time he committed this crime as a result of paralysis, from the effects of which he suffered two or ROMANCE AND TRAGEDY OF BANKING 479 three years before his death, and that his knowledge of the fact that the matter was under investigation with the certainty of de- tection, led him to self-destruction. Suit to Enjoin Comptroller On May 1, 1919, the First National Bank of Canton, Penn- sylvania, brought suit in equity for an injunction against John Skelton Williams, individually, not as Comptroller of the Cur- rency, in the District Court of the United States for the Middle District of Pennsylvania. On the day the suit was instituted the court issued a temporary injunction and also a rule against the defendant to appear on May 9, 1919, and show cause why a pre- liminary injunction should not issue. On the return day of the rule, which had in the meantime been continued to May 19th, a motion to dismiss for want of process was urged by the Depart- ment of Justice, appearing for the Comptroller, who declined to enter a general appearance until this question had been passed upon by the court. Complainants were permitted to amend their bill so as to name the Comptroller of the Currency in his official capacity as defendant, the original complaint describing him as "claiming to be and exercising the powers of the Comptroller of the Currency". On May 20th the court announced that it would overrule defendant's motion, but might reinstate it upon further consideration. With proper reservations affidavits were filed by return to the rule and a motion was made to dismiss the bill for want of jurisdiction, for lack of equity and for other causes. The case was fully argued by both sides and submitted on May 20, 1919. The court reserved its decision and continued the injunc- tion in effect. On October 12, 1919, an order was entered dismissing the bill on motion made by defendant, appearing specially, on the ground that process had not been legally served, and from this action of the court complainants appealed to the Supreme Court of the United States. The Supreme Court, on April 19, 1920, re- versed the District Court on the question of process and the case was remanded to the District Court. 480 ROMANCE AND TRAGEDY OF BANKING On a special trial of the case additional affidavits and briefs were filed and the matter finally placed on the court calendar for argument October 6, 1920. It was subsequently continued until December 16, 1920, when it was fully argued and resubmitted. During the course of the argument the court's attention was called to the fact that in the near future the defendant would retire from the office of Comptroller of the Currency, and that it was very important, because of the questions involved, that a decision be rendered before that time. The court again took the case under consideration. On March 2, 1921, the defendant resigned as Comptroller of the Currency, and on March 31st a decree dismissing the bill for want of a proper defendant to stand in judgment was entered, and the injunction, of course, ceased therewith to be in effect. Mr. Louis T. McFadden, a Representative in Congress from Pennsylvania, and chairman of the Banking and Currency Com- mittee of the House of Representatives, was president of this bank. For a year or more before the institution of the suit by the First National Bank, the bank had been in a very unsatisfactory condition, so much so that it was necessary to place it on the special list for frequent examination. This fact seemed to exas- perate the president, Mr. McFadden, to such an extent as to impel him to make a personal attack upon Mr. Williams on the floor of the House of Representatives, in the course of which he impugned the Comptroller's motives for placing his bank on the special list and subjecting it to the annoyance of frequent exami- nations. He also introduced a bill for the abolition of the office of Comptroller of the Currency, and the merger of the Currency Bureau with the Federal Reserve Board. To a man of Mr. Williams' controversial tendencies, the action of Mr. McFadden was equivalent to a challenge to combat, which he very readily accepted, with the result that a long and bitter personal controversy followed, and was given broad publicity. It was alleged in the bill of particulars filed by the bank in the suit to enjoin the Comptroller that, in order to injure the complainant's president, toward whom he entertained personal ill will, the Comptroller determined to destroy the bank's business, and to that end he had maliciously persecuted and oppressed it ROMANCE AND TRAGEDY OF BANKING 481 for three years, in the following ways among others: By often demanding special reports and information beyond the powers conferred upon him by law; by disclosing confidential and official information concerning it to banks, members of Congress, repre- sentatives of the press, and the public generally, by inciting litiga- tion against the bank and its officers ; by publishing and dissemi- nating false statements, charging the bank with unlawful acts and improper conduct and reflecting upon its solvency; and by distributing among its depositors, stockholders and others alarm- ing statements intending to affect its credit, etc. And further, that unless restrained, he would continue these and similar ma- licious and oppressive practices. It will be noted from the foregoing that the complainant in this bill charged Comptroller Williams with being actuated by personal ill will towards the bank, whose business he had sought to destroy and had maliciously persecuted and oppressed the bank for three years, immediately previous to the institution of the suit to enjoin him. But as a matter of fact, and in justice to Mr. Williams, it should be stated that he had nothing whatever to do with the criticisms of this bank by the Comptroller's office, or with directing the frequent examinations into its condition by national bank examiners, until long after the bank had been placed on what was known as the "special list," because of its unsatisfactory condition, as will be seen by the following affidavit made by Thomas P. Kane, the Deputy Comptroller of the Cur- rency, filed in the case : I, Thomas P. Kane, Deputy Comptroller of the Cur- rency, being duly sworn, depose as follows: I have been connected with the office of the Comptroller of the Cur- rency in Washington for over thirty-two years, to wit, since June, 1886. In June, 1899, I was appointed Deputy Comp- troller of the Currency, and have held that position con- tinuously since that date, during which time there have been four Comptrollers of the Currency, namely, Charles G. Dawes, William B. Ridgely, Lawrence O. Murray and John Skelton Williams. Pending a vacancy in the office from April 23, 1913, to February 2. 1914. I held the position of Acting Comptroller. During this entire period 482 ROMANCE AND TRAGEDY OF BANKING I have had immediate supervision of all correspondence with national banks based upon the reports of examinations made by national bank examiners. The records of the Comptroller's office show that the First National Bank of Canton, Pa., has been criticised for violations of law, irregularities, and unsatisfactory conditions by every one of the Comptrollers above named and by myself as Acting Comptroller, said criticisms being based on the reports of at least four different ex- aminers. The subject matter of these criticisms varied and consisted of excessive loans, real estate unlawfully held, improper cash items, defective bookkeeping methods, un- lawful investment in or purchase of stock, statutory bad debts, concentration of loans to allied interests of the president, and excessive liabilities of directors and other interests. I first called the attention of John Skelton Williams, Comptroller of the Currency, to the condition of the First National Bank of Canton, Pa., in December, 1918. Prior to that time all the office correspondence with that bank in regard to its condition was conducted by me without con- sultation in any respect with the Comptroller. After the examination of the bank made by National Bank Examiner Kinzie B. Cecil on June 28, 1917, by my direction it was placed on what is known as the special list for frequent examination, and I advised the directors of this fact, and that it would be continued on the special list until all un- lawful practices were discontinued and unsatisfactory con- ditions corrected. This same course was pursued in the case of every other national bank which was reported by the national bank examiner to be violating the law or in an unsatisfactory condition, and no exception was made in the case of the First National Bank of Canton, Pa. This bank was not placed on the special list by direction of the Comptroller, as alleged by complainant, and I never con- ferred with him in regard to this bank until December, 1918, when National Bank Examiner John K. Woods, in his report of examination of the First National Bank of Canton, Pa., made on November 20, 1918, suggested that Mr. Louis T. McFadden, president of the bank, and Charles A. Innes, cashier, be requested to come to Wash- ington for a conference with the Comptroller. I then con- ROMANCE AND TRAGEDY OF BANKING 483 ferred with the Comptroller in regard to the condition of the bank, and told him how long it had been on the special list and arranged with him for a conference with Mr. McFadden and Mr. Innes at his office. I also informed him at that time that Mr. McFadden, the president of the bank, was a Representative in Congress and a member of the Banking and Currency Committee of the House of Representatives. I did not discuss with the chief examiner or with the Comptroller the selection of any examiner or examiners to make the examinations of this bank nor did I receive any instructions from the Comp- troller as to the selection of such examiner. The examina- tions were made by examiners who were on duty in Pennsylvania at that time. This bank had been subject to criticism for a number of years and was placed on the special list on account of its generally unsatisfactory condition, due to excessive loans, shortage in reserve, unlawful real estate holdings, slow and unsatisfactory loans, irregular cash items, un- satisfactory methods in reconciling bank balances, and persistent disregard of the law and admonitions of the Comptroller's office, and not because of "one small ex- cessive loan" as alleged by the complainant in the bill filed in the case of First National Bank of Canton v. John Skelton Williams. The suggestion in office letter of May 24, 1918, ad- dressed to the board of directors of the First National Bank of Canton, and signed by the Deputy Comptroller, to the effect that "if president McFadden is not in- clined to observe the instructions of this office and the law he should be required to resign and the board should elect some one else as president who will," was not "made with the view to prejudicing the officers of the complainant against its president, McFadden, and for the purpose of forcing his removal as the complainant's president and visit upon him the disgrace thereto," as alleged in complainant's bill, but was a suggestion such as is frequently made to boards of directors of banks whose officers persist in disregarding the instructions of the Comptroller's office to discontinue violations of law and to correct irregularities. This suggestion is also made for the purpose of placing the responsibility upon boards 4S4 of directors for continuance in office of any officer of the bank who is shown to have deliberately and persistently violated the law and is responsible for the bank's unsatis- factory condition. The Comptroller had nothing whatever to do with the writing of the letter of May 24, 1918, either by way of dictation, suggestion, or otherwise, and never saw the letter or had any knowledge of its having been written until after the conference with Mr. McFadden in Wash- ington on January 7, 1919. It should be apparent from the foregoing that the frequent examinations of this bank and the special reports and informa- tion called for by the Comptroller of the Currency from time to time were not made because of the personal ill will entertained by Mr. Williams toward the president of the bank, as alleged in the complainant's bill, but were made necessary by reason of the continued unsatisfactory condition of the bank and the attitude of the dominant management who, because of the fact that he was a member of Congress, seemed to be under the impression that he was superior to law and the regulations of the Comptroller of the Currency. It is greatly to be regretted that the hearing of this complaint was not pushed to a conclusion and a decision rendered by the court because of the importance of the question involved in the administration of the Comptroller's office and his supervisory powers over the national banks, but the resignation of Mr. Wil- liams on March 2, 1921, brought the case to an abrupt termina- tion without decision. Last Official Act of Comptroller Williams One of the last official acts of Comptroller Williams on the eve of his retirement from office was to make a call upon the national banks for a report of their condition at the close of busi- ness February 21, 1921, fifty-four days after the last previous report of December 29, 1920, the sixth report for that year. The call for February 21 required the banks to show the ag- gregate amount of salaries or compensation paid the officers of ROMANCE AND TRAGEDY OF BANKING 485 the banks for the month of January, 1921, the annual pay of all the officers and the number of officers on the date of the report. As the law required reports of condition to be published in the same form in which they were made to the Comptroller it followed that the information in regard to salaries paid must necessarily be shown in the published statements of the banks. Many of the banks objected most strenuously by letter and by wire to this requirement and requested its modification to the ex- tent at least of relieving them of the necessity of publishing these items, claiming that no public good would be accomplished by their publication. Banks in the smaller communities, whose officers were limited to a president and a cashier only, objected to making known to everybody in the town the amount of compensation paid to their officers. Clearing house associations in some of the larger cities met and after considering the question were reported as having advised their member banks not to furnish the information, or, if fur- nished, not to include it in their published statements. The general counsel for the American Bankers' Association was appealed to for an opinion as to whether the compensation paid to officers and employees was a resource or liability within the meaning of Section 5211 of the Revised Statutes of the United States, such as the Comptroller of the Currency was empowered to call for under authority of said section and as the banks were required to furnish and publish in their statements of condition. In reply to this request counsel of the association rendered a written opinion as follows : Section 5211 requires five reports each year to the Comptroller "according to the form which may be pre- scribed by him" and "each such report shall exhibit, in detail and under appropriate heads, the resources and liabilities of the Association," etc. The report must be published "in the same form in which it is made to the Comptroller." The Supreme Court of the United States in Cochran v. U. S. 15 Supreme Court Reporter 628 says that the object of Section 5211 is "to apprise the Comptroller of the 486 ROMANCE AND TRAGEDY OF BANKING Currency and the public of the condition of each national bank at stated periods." In my opinion a statement of salaries paid, does not come within the spirit and meaning of Section 5211; it is not the character of information which the law requires shall be reported upon call of the Comptroller and pub- lished. It is not a statement of what the bank owns or what it owes its resources and liabilities and a report and publication of such salaries would in no way fulfill the object of Section 5211 which as declared by the Supreme Court is, as already said, to apprise the Comp- troller and the public of the bank's condition at stated periods. The Comptroller's authority is measured by law he cannot go beyond the law and this is simply an authority to call for a report of resources and liabilities so that he and the public may know the condition of the bank. When he goes beyond this and demands the publication of addi- tional information of a confidential character, he is, in my opinion proceeding without authority of law. True, Section 5211 also provides for special reports to enable the Comptroller to acquire "a full and complete knowledge of its (the bank's) condition." But, assum- ing the authority to require these special reports would cover a wider latitude of information, there is no re- quirement for publication in such case. I am, therefore, inclined to the opinion that a report of the compensation paid to officers and employees is not a report of the resources and liabilities and that the Comp- troller of the Currency has no power to force the reporting banks to publish this confidential information. Concerning the penalty for failure to make reports, Section 5213 Revised Statutes imposes a penalty of $100 a day for failure to make and transmit the required report; but this Section contains no penalty for failure to comply with the provision of the Act that the report must be published in the same form in which it is made to the Comptroller. Even assuming there was authority to require publication of this information, which I very much doubt, the only penalty for non-publication would be the general penalty provided by Revised Statutes Section 5239 of forfeiture of the franchise but a prerequisite to such forfeiture is ROMANCE AND TRAGEDY OF BANKING 487 judgment of a court in a suit brought for the purpose by the Comptroller of the Currency. Most of the protests that were filed against furnishing this information or requests for a modification of the requirements were received at the Currency Bureau after Mr. Williams had re- tired from office, and during the period of fifteen days intervening between his retirement and the appointment and qualification of his successor the office was in charge of the Deputy Comptroller as Acting Comptroller and the consideration and disposition of these protests therefore devolved upon him. A new administra- tion had taken charge of the affairs of Government and a new Secretary of the Treasury had just been inducted into office. It was believed that neither the President nor the Secretary of the Treasury was in sympathy with the requirement of the retired Comptroller and there was some doubt as to his authority to require the banks to make and publish in a report of condition the compensation paid their officers, which it was contended was not a resource or liability. The Acting Comptroller therefore sub- mitted the opinion of the general counsel of the American Bankers' Association to the Comptroller's counsel, with a request for his views and interpretation of the law on the subject, who rendered an opinion as follows : At the recent call made by the Comptroller of the Cur- rency on national banking associations for a report of con- dition, the associations were asked to report on the form prescribed the aggregate amount of salaries paid to of- ficers and employees. You request my opinion as to whether the Comptroller can compel the reporting banks to publish this information. This call was made under the provisions of Section 5211 Revised Statutes of the United States, which required not less than five reports to be made each year by national banking associations to the Comptroller of the Currency according to the form which may be prescribed by him. "Each such report shall exhibit, in detail and under ap- propriate heads, the resources and liabilities of the associa- tion at the close of business on any past day by him specified; and shall be transmitted to the Comptroller 488 within five days after the receipt of a request or requisition therefor from him, and in the same form in which it is made to the Comptroller shall be published in a newspaper * * * at the expense of the association ; * * * Section 5213 imposes a penalty on the association for failure to make and transmit such reports to the office of the Comptroller within the time prescribed but no penalty is provided in said section for failure to publish the report. It is contended that the aggregate sum paid officers and employees of a bank for salaries is not a part of the bank's resources or liabilities and therefore the Comptroller has no authority in law to call for this information in a report of condition which requires publication and that if such in- formation can be at all required it must be obtained by special reports which are also provided for by Section 5211 and which reports are not required to be published. I am not satisfied that this is a correct interpretation of Section 5211. It might very reasonably be contended that salaries paid or contracted for which are excessive or out of proportion to the business of the bank or to its earning capacity would essentially affect its resources, but in the absence of a judicial determination I regard the question involved in doubt and do not consider it necessary to be determined to comply with your request. If % the banks are satisfied that such information cannot legally be required of them in their reports of condition when called for by the Comptroller they may decline to give the information and have the question determined by the courts should the penal provisions of the statute be attempted to be enforced against them. If, however, the banks give the information as requested on the form prescribed and transmit the reports to the Comptroller I am of opinion that the reports must be published as made and transmitted. The language of the statute is explicit requiring the report to be "transmitted to the Comptroller within five days after the receipt of a request or requisition therefor from him and in the form in which it is made to the Comptroller shall be published in a newspaper * * *" Section 5213 provides no penalty for failure on the part of the bank to publish the report as made, nor does the ROMANCE AND TRAGEDY OF BANKING 489 statute in terms require the bank to cause its publication. It only provides that it shall be published "at the expense of the association" and while it has been the practice for the banks to make the publication there appears no reason why the publication cannot be made by the Comptroller at the expense of the association. While it is true that the statute does not in terms require the banks to cause the publication of their statements to be made, it is unreasonable to suppose that it intended otherwise, as it would be wholly impracticable for the Comptroller to undertake to pub- lish the statement of each bank at the expense of the bank in the local newspaper published in the city or town of the location of the bank as required by law. One important fact in the requirement of the Comptroller seems to have been overlooked by those who contended that the compensation of officers of the banks was not a resource or liabil- ity, and therefore the Comptroller was without authority under Section 5211 of the Revised Statutes to require this item to be shown in a report of condition. The report blank prescribed by the Comptroller for this par- ticular call did not include the compensation of officers with the items to be shown as a resource or liability, but made a special item of this matter below the total footings, so that the banks could have furnished the information in their reports and pub- lished their resources and liabilities in the same form in which they were made to the Comptroller without showing this item. There really was no necessity, however, for the Comptroller to have called for this information for the use of the office, as the salaries of officers and employees of the banks are shown in the reports of national bank examiners at the time of each examina- tion of a bank. It would seem, therefore, that as this information was already in the possession of the Comptroller's office the only purpose in calling for it in the reports of condition must have been to secure its publication. While there was some doubt in the mind of the Acting Comp- troller as to the authority of the Comptroller to require the banks to show in their reports of condition the amount of salaries paid 490 ROMANCE AND TRAGEDY OF BANKING their officers he did not deem it advisable to formally rescind the order, especially in view of the fact that at this stage of the sit- uation the nomination of a successor to Comptroller Williams had been sent to the United States Senate, which it was expected would be confirmed in a day or two. In the meantime before the new Comptroller's confirmation and qualification nearly all of the reports of condition of the banks and certificates of publication had been received at the Comptroller's office and the disturbing effect of the Comptroller's requirement had subsided. It was therefore concluded to let the matter rest and accept the reports and published statements as rendered. DANIEL R. CRISSINGER Comptroller of the Currency, appointed 1921 CHAPTER XVII Daniel Richard Crissinger DANIEL RICHARD CRISSINGER, the fourteenth Comp- troller of the Currency, was nominated by President Harding to succeed John Skelton Williams, March 10, 1921, and assumed charge of the bureau March 17 following. He was a fellow townsman and a life-long friend and neighbor of the President. Mr. Crissinger was born December 10, 1860, in a log cabin in Tully township, Marion County, Ohio. He was educated in the common schools of Caledonia, Ohio, and was graduated from the Caledonia High School in 1880. He taught one year in the grade schools of Caledonia, and one year as assistant in the high school of that town, while finishing his high school studies. He entered Buchtel College at Akron, Ohio, in September, 1881, and was graduated from that college with the degree of B. S. in June, 1885. He took up the study of law in the office of Judge William Z. Davis at Marion, Ohio, in July, 1885, as a student and read law with Judge Davis until October, 1885, when he entered the law school at the University of Cincinnati, and was graduated with a class of one hundred and fifteen in June, 1886, when he returned to Marion and entered a partner- ship with Judge Davis, his preceptor, in 1886. He was elected prosecuting attorney in 1888 and was re- elected in 1891. In 1893, while still prosecuting attorney, he was elected city solicitor of Marion, Ohio, and was re-elected in 1895 and again in 1897. He was nominated for Congress in 1904 and in 1906 on the Democratic ticket. He entered into a part- nership with John A. Wolford in the practice of law in 1896, which partnership continued until Mr. Wolford's death in 1898. Two years later he entered a partnership with Fred E. Guthery, which partnership was still maintained at the time of his appoint- ment as Comptroller of the Currency. 491 492 ROMANCE AND TRAGEDY OF BANKING He assisted in the organization of the City National Bank of Marion, Ohio, in 1880, and was its vice-president about ten years. He succeeded to the presidency of the bank in April, 1911, after the death of I. S. Merchant, its first president. At the expiration of the bank's charter on September 5, 1920, he assisted in the organization of the National City Bank & Trust Company, which company absorbed the City National Bank. He became president of the new bank, which opened with a capital of $300,000 and $30,000 surplus. He was a director of the Marion Steam Shovel Company, and for twenty-two years was the general counsel of the company. He was a director and vice-president of the Marion Union Stock Yards Company, a director and treasurer of the Marion Packing Company, and a director of the Marion County Tele- phone Company. He was president of the Marion Cemetery Asso- ciation, and was also connected with many other enterprises about Marion. He was actively engaged in the practise of law, representing clients doing business in all the States of the Union, and in Can- ada, Alaska, South America, Africa and Continental Europe. His professional practise has been largely the handling of the busi- ness interests of his clients. He was extensively interested in farming and stock feeding, and owned several large farms in Marion County, Ohio, annually buying and feeding several hundred heads of cattle and hogs, and was deeply interested in the successful advancement of all agricultural work. Malcontents While it was usual whenever a change occurred in the execu- tive head of the Currency Bureau for bankers who were dissatis- fied with the policies of the former Comptroller to appeal to his successor to revoke or modify his rulings or regulations, the num- ber of appeals of this nature made to the successor of Mr. Wil- liams was much more numerous than those made under a change in any previous administration. But these complaints were not confined strictly to the rulings and regulations made by Mr. Williams in the exercise of the dis- ROMANCE AND TRAGEDY OF BANKING 493 cretionary powers that were vested in the Comptroller by law. Many of them related to provisions of the banking laws enacted long before he came into office, and which he was without author- ity in the discharge of his official duties to have waived or modified if he had been disposed to have done so. A good many bankers did not take kindly to restraints of any kind, or to supervisory regulations of their banking business, but wanted a free license to operate their banks without inter- ference from Washington. As a rule, such bankers were not sufficiently familiar with the banking laws to have always been able to distinguish between an office regulation and a provision of law, consequently Comptroller Williams was frequently blamed for making arbitrary rulings or regulations when he had simply endeavored to enforce an observance of a statutory requirement. The extreme laxity in this respect, or negligence which dis- tinguished the administration of the Currency Bureau that im- mediately preceded that of Comptroller Williams, was far more censurable for failing to require the banks to observe the plain provisions of law governing their operations, than any act of Mr. Williams in endeavoring to rigidly enforce the law, and this fact made it more difficult for him to secure compliance with his requirements. The comparison of Comptroller Williams' administration of the Currency Bureau, with that of his immediate predecessor, would be like comparing two distinctly opposite extremes. Periodical changes in the executive head of the Currency Bureau seemed also to have been regarded as an opportune time for that atom of humanity, the "anonymous correspondent," to secretly inject his insidious and poisonous fangs into some sub- ordinate officer of the Bureau who had incurred his displeasure in the discharge of his official duties and whose loyalty or repu- tation he sought to injure or destroy. These mischief-making varmints were usually to be found shielding themselves behind such signatures as "An Old Line Dem- ocrat," if the previous administration had been Republican, or "A Lifelong Republican," if the previous administration had been Democratic. 494 ROMANCE AND TRAGEDY OF BANKING To one who had been in the service of the Bureau for a long period of years, and had witnessed these periodical occurrences, it was amusing in many instances to note the ingenuity displayed by these pests, in the presentation of their pleas, and the plausi- bility of the stories they told, in an endeavor to arouse the sym- pathy of the new administrative officer, or to create in his mind a prejudice against the object of their displeasure. They seemed to think that the only record of the things of which they com- plained, was in the memory of the new Comptroller's predecessor, and they felt secure in the thought that he had carried that rec- ord away with him. They did not seem to realize that in the permanent files and letter books of the Bureau there was a com- plete record of the matters complained of, and an explanation of the motives actuating the complaint. While no officer of the Bureau was immune from such ma- licious attacks, anonymously made or otherwise, the Deputy Comptroller seemed to be the special object of devotion of these malcontents, and the alleged source of all their troubles. Their fire, therefore, was generally concentrated upon him. But the source of these attacks was not confined altogether to the anonymous correspondent. It embraced bankers whose speculative schemes the Deputy had been largely instrumental in thwarting and exposing; ex-convict bankers who had served terms in the penitentiary and were pardoned by a too lenient President before the completion of their sentences; dismissed bank examiners separated from the service for incompetency and insubordination, and employees of the Currency Bureau, male and female, who had been discharged for cause. Some members of Congress also were not above giving vent to their petty spites against the Deputy, in an underhanded way, on the floor of the House of Representatives or behind the closed doors of the committee room in retaliation for his having incurred their displeasure by refusing to furnish confidential information for improper use. A notable instance of this fact may be stated by way of illus- tration of how very small some of these gentlemen are who make our laws, and this statement can be verified by reference to the Congressional Record covering the date of these occurrences. ROMANCE AND TRAGEDY OF BANKING 495 A congressman from one of the Southern States called at the office of the Deputy Comptroller one day and requested a list of the national banks that had increased and reduced their circula- tion during the six months immediately preceding his call and the amount and date of each increase and reduction. The Deputy informed the congressman that he would give him a statement showing the aggregate amount of the increases and reductions in circulation during the period stated and the number of banks involved, but that it was contrary to the rule of the office to disclose the names of the banks. The congressman replied that that would not answer his pur- pose and insisted upon having the names of the banks. The Deputy courteously informed him that he was sorry, but he could not give him the names of the banks. He insisted that as a member of Congress he had a right to the information. The Deputy replied, "I beg your pardon, Mr. Congressman, as an individual member of Congress you have no more right to the information than any other citizen." He stated that he could obtain it by securing the adoption of a resolution by the House calling for the information. The Deputy replied that the House of Representatives had rights in the matter which he as an individual member of Con- gress had not, and if the House called for the information that he had asked for it would be furnished, but that it could not be given to him. At that time there was some question under consideration by the House which had precipitated a debate involving the prac- tice of some national banks of speculating in Government bonds by reducing their circulation and withdrawing their bonds when the market value of the bonds was high and selling them to get the benefit of the high price, and subsequently re-depositing bonds and increasing their circulation when the market was low. This congressman wanted the information he had asked for to use in a speech he intended to make in the House, and expected to show that a certain large city bank had been engaged in spec- ulation in Government bonds in the manner stated. 496 ROMANCE AND TRAGEDY OF BANKING The congressman secured the passage of the resolution by the House calling for the information he had requested, and it was promptly furnished the House, but it did not show that the particular bank which the congressman proposed to attack had increased or decreased its circulation during the period men- tioned, and therefore the speech was not made. For a number of years the salary of the Deputy Comptroller had remained fixed by statute at $3,000 per annum. Shortly after the occurrence related, the salary was increased in the ap- propriation bill to $3,500. When the bill came before the House for consideration and passage this congressman took no part in the debate on the bill until the item increasing the Deputy Comp- troller's salary was reached, although a number of similar in- creases were provided for in the bill ahead of this item, when he had the item stricken out on a point of order. It was restored to the bill in the Senate but was again stricken out when reported to the House on a point of order raised by this same congress- man, and it remained out when the bill became a law. The reader may draw his own conclusion as to the motive of this statesman in giving this matter his special and persistent attention. On another occasion a prominent congressman from the West called upon the Deputy Comptroller, with two of his constituents, for the purpose of having him reconsider his action in refusing to approve the title of First National for a bank which these constituents proposed to organize in their home town in the dis- trict represented by this congressman. They were advised of the rule of the Comptroller's office governing the approval of the title of First National and the reasons for its adoption, and were informed that this title could not be given them without waiving this rule, which the Deputy stated he could not consist- ently do. The congressman was most insistent upon securing the title for his constituents, and contested every objection made by the Deputy to granting it, but the Deputy was firm in his position that he could not consistently let them have the title. The Congressman then declared his intention to appeal from the decision of the Deputy to the Comptroller when the latter ROMANCE AND TRAGEDY OF BANKING 497 returned to Washington, he being temporarily out of the City, and requested his constituents to remain over for a day or two. When the Comptroller returned they called upon him and laid their appeal before him. The Deputy was not present at the interview, but when it was over the congressman came into his room, which adjoined that of the Comptroller, and told him that the Comptroller had promised to review the case during the day and had requested him to call later, when he would let him know his decision. He then said to the Deputy, "Now I have been in Congress and around Washington long enough to know that a man who has been in the service of the Bureau as long as you have, and who occupies the position that you occupy, has a great deal to say in the determination of these questions, and," he said, "you can get me this title if you will." He said further, "I can- not tell you how much it means to me to secure this title for these gentlemen," and "If you will help me to get it for them I shall appreciate it very much and / will not forget you" The Deputy stated in reply that if the Comptroller in the exercise of his discretion was disposed to let the congressman's constituents have the title of First National that he would inter- pose no objection, but if he asked him for his opinion or recom- mendation in the matter he would be obliged to advise against it. Returning later in the day the congressman and his constit- uents called upon the Comptroller, and when the interview was ended they came through the Deputy's room in passing out and the Deputy inquired whether the Comptroller had decided their matter. One of them replied, "Yes, but not to our satisfaction." The congressman, standing in the doorway between the Dep- uty's room and the corridor, with his arm outstretched at full length and his finger pointing at the Deputy, said, "And I blame you for it," and he and his constituents then departed very much disappointed. The Comptroller had sustained the action of the Deputy in denying the title of First National. Now for the sequence. At the time of this occurrence the estimates for appropriations for the Currency Bureau for the following fiscal year had been submitted to the Appropriations Committee, of which this congressman was a prominent member. 498 ROMANCE AND TRAGEDY OF BANKING These estimates contained a recommendation from the Secretary of the Treasury and the Comptroller of the Currency for an increase in the salary of the Deputy Comptroller of $500 per annum. The Deputy Comptroller realized that in denying to this congressman the request he had so persistently made of him that he had jeopardized his chances for securing the increase of salary that had been recommended, but nevertheless he conscientiously discharged his duty without regard to its effect upon himself. The increase in salary was not allowed that year, nor for the two or three following years, although it had been recommended each succeeding year, and it was not until after the congressman left the Appropriations Committee that the increase was granted. Now, my dear reader, if you were placed in a similar official and responsible position and a congressman were to call upon you and ask you to do something for him which you could not consistently do, and say to you, "If you will do this for me I will not forget you," and at that very time there was a recommenda- tion pending before a committee of which the congressman was a member for an increase in your salary, what inference would you draw from his remark, "If you will do this for me I will not forget you," and the fact that the increase in salary recom- mended was not granted until three or four years later, when that congressman was no longer a member of the Appropriations Committee ? I leave that to you for determination. But There are more things in heaven and earth, Horatio, Than are dreamt of in your philosophy. The foregoing incidents are only two of many similar occur- rences that could be related as showing the temptations thrown in the way of an official of the executive departments in Wash- ington in the discharge of his duties and the injustice that is frequently done him by our lawmakers on Capitol Hill. Title of First National Bank The name First National Bank is the only bank title that ever had a commercial value, consequently this title was very ROMANCE AND TRAGEDY OF BANKING 499 much in demand by the organizers of new banks and by the officers of existing banks desiring to change the names of their associa- tions. Originally it was the purpose of the Comptroller to restrict all national bank titles to serial numbers so as to indicate the order in which two or more banks in the same city or town were organized, but this plan was so strongly opposed by the organ- izers of banks in large cities and by State banks contemplating conversion into national associations, that the plan was aban- doned when the serial numbers began to run high. In New York City the serial numbers ran as high as the Tenth National Bank and the State banks preferred retaining their old names rather than convert into a national bank and take a high serial number. The title First National, if it means anything, indicates that the bank of that name was the first bank to be established in the place of its location. Acting on this assumption, therefore, other banks having items for collection and no regular correspondent at that place, sent their business to the First National Bank. Previous to the passage of the Federal Reserve Act the title of First National was much more valuable than it has been since the Federal Reserve Banks established the practice of collecting at par all checks and drafts for member banks in their respective districts and crediting them with the proceeds on their books. But even without these collection items there is a great deal of business that goes to banks with the title of First National which they probably would not receive otherwise, so that the title still retains considerable commercial value. There have been many bitter contests between rival appli- cants for this title and many keen disappointments over its refusal. As far back as 1886, when William L. Trenholm was Comp- troller of the Currency, there was quite a spirited contest for this title between two applicants in which a United States Sen- ator took an active interest. In pleading for the title he indis- creetly made the statement to the Comptroller that the title was worth $50,000 to his constituents. Being uncertain of the motive which prompted the Senator to make that statement, Colonel Trenholm, with a flushed face, replied in a very emphatic man- ner, "Well, senator, if the title 'First National' has such a com- 500 ROMANCE AND TRAGEDY OF BANKING mercial value as you say it has, I will establish a code of rules for the government of this office in approving that title which will determine the matter beyond question," and thereupon he issued the following order: The title of "First National Bank" will not be ap- proved unless : 1st. The application therefor is really the first ap- plication to establish a national bank in the place named in the title, or unless all such applications previously made have lapsed or been abandoned. 2nd. Unless no national bank is located at the time in the place named in the title. 3rd. Unless the title asked for, though once in use, is at the time vacant by reason of the entire extinction of the bank that had it. 4th. Unless every national bank at the time located in the place .named in the title assents to the application. The term "place" means any ward of a city, county, State or geographical area. When Mr. Lacey became Comptroller in 1889, he modified this rule so as to permit any existing bank in the place to have the title "First National," provided it procured the written ap- proval of all other national banks in the same place. In July, 1919, Mr. Williams, then Comptroller, laid down the rule that an application for the title "First National" would receive favorable consideration under the following conditions : 1st. When no national bank existed at the locality at the time of receipt of the application. 2nd. When the bank applying was the only existing national bank in the place. 3rd. When the bank applying was the oldest existing national bank in the locality and none of the other national banks was a successor of the original first national bank. Comptroller Williams later modified this rule by authorizing the conversion of the Illinois State Trust Company in East St, Louis, 111., into a national bank under the title "First National," KOMANCE AND TRAGEDY OF BANKING 501 on the ground that its shareholders had been interested in the old First National Bank of that city, which went into voluntary liquidation March 3, 1907, and was absorbed by the Illinois State Trust Company, but at the time the conversion was authorized, there were two other national banks existing in East St. Louis. Further modifications of the rule governing the approval of this title have been made by succeeding Comptrollers, until now precedent may be found for almost any position that the Comp- troller may think proper to adopt. Theodore Roosevelt's Methods When Theodore Roosevelt was President of the United States there was a national bank failure in one of the large cities of the West. The Deputy Comptroller was Acting Comptroller at the time, as he always appeared to be when any disturbance occurred, and one of the United States Senators representing the State in which the failed bank was located called to see him in regard to the appointment of a receiver. The Senator was advised of the rule of the office governing the selection of receivers and he was told that the privilege of naming a receiver for this bank would be given him if he would recommend a man possessing the neces- sary qualifications. The following day the Washington correspondent of a news- paper published in the city where the failed bank was located called upon the Deputy Comptroller at the request of the owner of the newspaper and recommended the appointment of a friend of his as receiver. After inquiring as to the business experience of the party recommended, the Deputy Comptroller informed the correspondent that he could not appoint his employer's friend, as he did not appear to have had the experience necessary to qualify him for receivership work. It developed later that the newspaper owner was a long-time personal friend of President Roosevelt, and without mentioning that fact to the Deputy Comptroller the correspondent went immediately to Oyster Bay, N. Y., to see the President, who at that time was at that place, and laid the matter before him. The President wrote a note to the Deputy Comptroller in the pres- 502 ROMANCE AND TRAGEDY OF BANKING ence of the correspondent and mailed it to Washington, in which he stated that the newspaper owner was a long-time personal friend of his, that he regarded him very highly and had the utmost confidence in any recommendation he might make, and that it would be very gratifying to him if the Deputy could appoint him receiver of the bank. The newspaper correspondent called the day following and without intimating that he had been to Oyster Bay to see the President inquired of the Deputy Comptroller whether he had selected a receiver for the bank. He was advised that he had not. He then inquired whether he had not received a letter from Presi- dent Roosevelt instructing him to appoint the man he had recom- mended two or three days before. He was informed that he had not. The correspondent seemed very much nonplused, as he had seen the President write a letter the day before, but had not read it, and therefore did not know that the President had not in- structed the appointment of his friend, but had only stated that it would be gratifying to him if he could be appointed, which expression under ordinary circumstances would have been equiva- lent to a command, but the circumstances of the case were not usual, and therefore the Deputy Comptroller was not disposed to act on the President's suggestion until after he had acquainted him with the facts. The newspaper correspondent then inquired of the Deputy Comptroller what steps he had taken toward the selection of a receiver, and was informed that several days previously he had had a conference with one of the senators from that State and had requested him to recommend a man possessing the qualifica- tions necessary to the proper filling of the position. The news- paper correspondent then left, apparently very much puzzled over the situation. The Deputy Comptroller then wrote a letter to President Roosevelt, acknowledging the receipt of his letter and stating that before its receipt he had had a conference with the United States senator in regard to the appointment of a receiver and had told him the office rule governing such appointments and had promised him that if he could find a man who would meet these requirements he would appoint him. The Deputy then explained ROMANCE AND TRAGEDY OF BANKING 503 to the President that the sole purpose of the Comptroller's office in the selection of receivers for failed banks was to select men who by their experience could realize the most money from the assets of the bank for the depositors and other creditors, and that it was not believed that the man whom he had suggested for the place had had the experience necessary to enable him to accomplish what the Comptroller's office desired. The Deputy concluded his letter by saying to the President, "Now, Mr. President, with all the facts before you, I will await a further expression of your pleasure before taking definite action." The next day's mail brought a letter from the President say- ing that in view of the statements made by the Deputy Comp- troller and the action he had already taken towards securing a competent receiver for the bank, he had no further suggestion to offer. The man finally selected and recommended by the senator was therefore appointed receiver, and his administration of the affairs of the trust proved to be very satisfactory, but the newspaper correspondent never understood why the President's instructions to appoint his man had not been carried out. There was another bank failure during President Roosevelt's administration, in one of our large cities. This institution had the reputation of being a political bank, and like all banks of that character, proved to be no exception to the rule, in regard to criminality and rascality of management. This bank was known to have been in a precarious condition for several months before it was closed, and when the examiner advised the Deputy Comptroller, who at that time was again in charge of the office, that the bank was hopelessly insolvent, he immediately directed him to close its doors, and at the same time instructed one of the officials of the office, who was an expert in receivership work, to go immediately to the bank and take pos- session of it as receiver, and, when he had done so, to advise the Deputy Comptroller by wire, and he would make public announce- ment of his appointment in order to forestall any attempt on the part of the political friends of the management of the failed con- 504 ROMANCE AND TRAGEDY OF BANKING cern to secure the appointment of a receiver of their selection, as it was anticipated they would make a strenuous effort to do. A few hours after the bank was closed and announcement had been made of the appointment of a receiver, the Deputy Comp- troller received a telegram from a United States senator from that section of the country recommending a local man for ap- pointment as receiver. This man was known to have been a bosom friend of the bank officer who was principally responsible for the wrecking of the bank, and was one of his political associates. The senator was advised by wire that a receiver had been appointed before the receipt of his recommendation. The following day this senator and a representative in Con- gress, from the city of the bank's location, called upon the Dep- uty Comptroller and renewed the recommendation for appoint- ment as receiver of the man the senator had recommended by wire the day before. They urged in the strongest terms the superior qualifications and business experience of their candidate, and his especial fitness for the position of receiver because of his knowledge of local conditions and his acquaintance with the people with whom the receiver would have to deal. The Deputy Comptroller stated to the senator and the rep- resentative in reply, that conceding all they said of their candi- date's fitness for the position, a better or more experienced man than the one he had appointed receiver he did not believe could be found, and that he intended the appointment to be permanent, and was not disposed to make any change. "Very well, then," said the senator, "we will go higher." "Very well, gentlemen," said the Deputy, "that is your privi- lege." The distinguished senator had not been accustomed to having his recommendations disregarded by one so far down, in his esti- mation, in the official scale of importance as a Deputy Comp- troller of the Currency, so he declared it to be his purpose to appeal to the Secretary of the Treasury. Later, on the same day, the Secretary of the Treasury sent for the Deputy Comptroller in regard to the matter, and the Dep- uty explained the situation in detail to him, and the qualifications ROMANCE AND TRAGEDY OF BANKING 505 and special fitness for this particular trust, of the man whom he had appointed receiver. The Secretary replied, saying, "Well, you know that Senator (calling him by name) is a pretty big man. He has done a great deal for the administration and we have to rely upon him to do a good deal more, so that it may be necessary to meet his wishes in this matter." The Deputy Comptroller was not pleased with the apparent attitude of the Secretary as indicated by his remarks, as it gave him the impression that he did not intend to support him in this appointment as against the senator ; but later he was very much gratified to learn that his impression was wrong. When the Deputy returned to his room he wired the receiver to advise him promptly by mail whether there were any good reasons why the party recommended by the senator should not be appointed receiver of the bank. The next morning's mail brought a letter from the receiver in which he stated that it would be a great mistake to appoint this man receiver, and that his appointment would subject the Comptroller to severe public criticism, as he was generally known to have been an intimate social and political friend of the man who was responsible for wrecking the bank, who was one of his bondsmen as a city official, and was himself a debtor of the bank for a considerable sum. The letter also contained copies of several very strong pro- tests against his appointment, or the appointment of any other resident of the city in which the bank was located. Upon receipt of this communication and its inclosures, the Deputy Comptroller immediately wrote a letter to the Secretary of the Treasury in part as follows: I enclose herewith copies of several communications re- ceived this morning protesting against the appointment of Mr. or any other resident of - as Re- ceiver of the - - National Bank. Mr. - , whom I appointed Receiver of the bank, is thoroughly competent in every respect. He has been connected with this Bureau in receivership work for ten or twelve years. I selected him because of his special 506 ROMANCE AND TRAGEDY OF BANKING qualifications for the position and his long experience in this particular line of service, his knowledge of the banking laws, decisions of the courts in insolvent bank cases, and his familiarity with the methods of this Bureau in the administration of insolvent banks, insuring a speedy, judicious, economical and impartial liquidation of the affairs of this trust. Politics played a large part in the wrecking of this in- stitution. There is no politics in Mr. - 's appoint- ment. There should be none in any appointment of this kind. To appoint Mr. as receiver of this bank would be against the established policy of this Bureau and con- trary to all precedent within my recollection, and would undoubtedly subject the Comptroller to severe criticism. The law, as you are well aware, Mr. Secretary, vests in the Comptroller of the Currency the power to appoint receivers of failed banks, and holds him accountable for the proper administration of the trusts. The responsibility for the appointment should carry with it the untrammelled right of selection. If the President directs, or if you, Mr. Secretary, direct the appointment of Mr. as receiver of this bank, I shall make the appointment, but with very great reluctance and against my judgment as to what is for the best interests of all concerned and the service in general. The receiver of this bank should be an entirely inde- pendent and disinterested party who can be depended upon to impartially administer the affairs of the trust and to aid to the fullest extent in bringing to justice all who were concerned in the wrecking of this institution. On the same day that the Deputy Comptroller addressed this communication to the Secretary he received a letter from him in reply in part as follows: Your policy in appointing receivers for failed banks is precisely in line with my instructions given on a number of occasions since I have been Secretary of the Treasury, and particularly during the last few weeks when several ques- tions relating to the appointment of receivers have been brought to my attention. ROMANCE AND TRAGEDY OF BANKING 507 So that there may be no misunderstanding whatever as to my attitude in this regard, I want to repeat that politics should play no part whatever in the administration of the office of the Comptroller of the Currency. Appointment of bank examiners, receivers, and others under that office should be made on merit, in the effort to secure efficient and impartial execution of the law. Your action in regard to the appointment of a receiver is approved. Not satisfied with the action of the Secretary of the Treasury in sustaining the Deputy Comptroller in declining to appoint his man as receiver, the senator appealed to President Roosevelt and the President, after informing himself as to the facts in the case, wrote the senator as follows: I think this is peculiarly a case where the Government should clear up the whole situation in its own way, with its own officers, and without any regard whatever to any- thing connected with politics. The failure of the two banks named and the incidents related in the preceding pages following the biography of Mr. Crissinger have no connection with his administration of the Comptroller's office, but they were introduced in the belief that they might be of interest to the reader as showing some of the annoyances and difficulties encountered by an administrative official in an honest endeavor to discharge his duties in the best interests of the public and the service which he represents, and also to enable him to contrast the attitude of President Roosevelt with that of the two representatives in Congress and the United States senator here- inbefore mentioned when he was advised by the same subordinate official that the man he expressed a desire to have appointed receiver was not qualified under departmental regulations for the position and that it was not considered for the best interests of the service that he should be appointed. President Roosevelt simply suggested the appointment of the man of his choice when he had the power to have directed the appointment to be made, but when he was advised of the reasons 508 ROMANCE AND TRAGEDY OF BANKING why the appointment was considered inadvisable he readily accepted the views of his subordinate and acquiesced in his deci- sion because he believed the Deputy Comptroller was actuated by what he considered to be for the best good of the service, and President Roosevelt invariably sustained the official whom he believed to be governed by such considerations. The occurrences related were by no means rare or isolated cases. Many incidents of a similar nature could be recited in the career of President Roosevelt as showing that in all matters of this kind he placed the good of the service above every other consideration. First Official Act of Comptroller Crissinger The first official act of importance of Mr. Crissinger after assuming charge of the office was the revision and simplification of the forms on which national banks make and publish the reports of condition required by law in response to the calls of the Comptroller, not less than five times each year. When Comptroller Williams assumed charge of the office on February 2, 1914, the form of report used on the last call immedi- ately preceding that date contained forty-three items of resources and liabilities on the face of the report and eleven schedules on the reverse side. At that time and for many years previously it had been the practice of the office to make very few changes in the form of the report, as it was held that frequent changes in the form were calculated to destroy its usefulness for comparative purposes, therefore uniformity was considered very desirable and necessary. The forms used by Mr. Williams for the first and nine suc- ceeding calls after he became Comptroller contained no material changes or increase in the number of items, but the tenth call made by him contained an aggregate of fifty-one items on the face of the report, an increase of eleven, and thirty schedules on the reverse side, an increase of nineteen. Each succeeding report called for by Mr. Williams was ma- terially changed by the elimination of old items and the substi- tution of new ones, and the number was increased until the last ROMANCE AND TRAGEDY OF BANKING 509 call made by him immediately before his retirement from office contained one hundred and five items on the face of the report, including those below the total figures and twenty-nine schedules on the reverse side, each containing from three to thirteen items. The constant changing of the form of the report and the addi- tion of new items with each change was the cause of a great deal of dissatisfaction and complaint on the part of the banks, as their books did not contain the information called for in a way to enable them to readily make up the report, therefore they claimed that its preparation became more and more difficult with each call, and consequently more burdensome, annoying and expensive, so that when Mr. Crissinger assumed charge of the office he had received so many requests from the banks for a sim- plification of the form, that the first official act to which he directed his attention was a revision of the form by the elimina- tion of all items which he regarded as non-essential and declaring it to be his purpose to return to the practice of the office before Mr. Williams became Comptroller, of maintaining a uniform report blank for each succeeding call. He thereupon reduced the number of items on the face of the form used in his first call for a report from one hundred and five items on the face of the report, including those below the total figures, and twenty-nine schedules on the reverse side, to fifty-eight items on the face of the report including those below the total figures, and seventeen schedules on the reverse side, and rescinded also the regulation made by Mr. Williams that the copy of the report retained by the bank for its files and the copy furnished the newspaper for publication should be a duplicate original, signed, attested and sworn to the same as that furnished the Comptroller's office, instead of a copy as formerly required. This action of Mr. Crissinger was received with general satis- faction by the banks, and for which he was warmly commended. With no intention to detract in the least from the credit and commendation so generally given Mr. Crissinger for his prompt modification of the form for reports of condition, at the same time, inasmuch as the Deputy Comptroller was regarded by many bankers as being largely responsible for these objectionable forms, it is deemed proper to state that when Mr. Williams retired 510 ROMANCE AND TRAGEDY OF BANKING from office it was assumed from past experiences by the Deputy Comptroller, who became Acting Comptroller immediately when the vacancy occurred, that some weeks would probably elapse before a successor to Mr. Williams would be nominated by the President and confirmed by the Senate, and that the duty of making the next call on the banks would, therefore, devolve upon him as Acting Comptroller. He therefore immediately instructed the Chief of the Statistical Division of the Comptroller's office to carefully revise the report of condition form and to eliminate therefrom all items which were regarded as unnecessary and non- essential, and when Mr. Crissinger assumed charge of the office fifteen days later he approved and accepted this revised form with practically no change and used it in his first call upon the banks for a report. Suit to Forfeit the Charter of the First National Bank, Hagerstown, Md. On September 28, 1921, a suit was entered in the United States District Court for the District of Maryland at Baltimore, by the United States Attorney, in the name of the Comptroller of the Currency, to annul the charter of the First National Bank of Hagerstown, Md., for violations of the national banking laws. The court being of the opinion that the mere filing of a com- plaint of such a character would precipitate a run on the bank and cause irreparable injury and damage to the institution and many of its creditors, appointed National Bank Examiner Robert D. Garrett temporary receiver, until a hearing could be had on the bill of complaint and an answer thereto filed by the defendant. Upon filing a bond with the Clerk of the Court in the penal sum of fifty thousand dollars the receiver was directed to take immediate charge of the bank and all of its assets of every char- acter and description and to hold the same subject to the further orders of the Court, to suspend all payments, and to collect all maturing notes and obligations of every character owned by the bank. The receiver was also authorized by the Court to do and perform any and all things that were necessary or proper for him to do as receiver. ROMANCE AND TRAGEDY OF BANKING 511 The authority of the court to appoint a receiver to take charge of a national bank pending the hearing of a complaint of the Comptroller of the Currency in a suit to forfeit the charter of the association for violations of law was seriously questioned. There was no precedent for such action. The law specifically stated the conditions under which a receiver might be appointed for a national bank, but was silent as to the method of procedure in the case of forfeiture proceedings. In discussing with representatives of the Department of Jus- tice, previous to the institution of the suit, the method to be fol- lowed in the Hagerstown case, the Deputy Comptroller advised them that he would arrange to have a national bank examiner in readiness to take charge of the bank in the name of the Comp- troller of the Currency in the event that a run on the institution should develop when it became known that a suit had been filed to forfeit the charter of the bank. The Comptroller being fully satisfied that the bank was not in a condition to meet all demands that would be made upon it by depositors and other creditors, would have been well within his authority to appoint a receiver under such circumstances and take possession of the institution to prevent preference of creditors. It always has been contended by the Comptroller's office that when a court of competent jurisdiction declared the charter of a national bank forfeited, the Comptroller of the Currency, under authority of such decree, could appoint a receiver for the bank to liquidate its affairs. On the other hand, it has been contended that the directors of the bank would have authority to liquidate the bank the same as if the association had been voted into volun- tary liquidation by its stockholders, but no precedent or author- ity was known for the Court to appoint a receiver pending a hearing of a suit brought by the Comptroller to forfeit a charter. Between the date of filing of the complaint and the time fixed for a trial of the case, the United States Attorney telephoned the Comptroller's office that the president of the defendant bank was in his office and had indicated a willingness to make such changes in the management of the bank and in its personnel as would satisfy the Comptroller of the Currency, if further proceedings 512 ROMANCE AND TRAGEDY OF BANKING would be discontinued, and requested an expression of the Comp- troller's views on the subject. The Deputy Comptroller, in the absence of the Comptroller, advised the United States Attorney that the Comptroller's office had no confidence whatever in the management of the bank and was satisfied that no permanent improvement in its condition could be effected or correction be made of the abuses which had prevailed so long while the association remained in the control of the then management, and that it was his desire that the suit to forfeit the charter be vigorously pressed to a conclusion. Later the United States Attorney telephoned that the presi- dent or his counsel now proposed to reorganize the board of directors and transfer the control of the bank to some of the best and most reputable bankers in the State of Maryland, and stated that he would submit the plan to the Court if the proposition met with the approval of the Comptroller's office. The United States Attorney was advised in reply that the Comptroller's office would be satisfied with any plan which con- templated the entire elimination of the Wingerts from the bank, who owned or controlled a majority of the stock, the disposal of their stockholdings and the election or appointment of an entire new board of directors, cashier and minor officers, but before sub- mitting any proposition to the Court for a withdrawal of the suit the directors should be required to execute a binding and enforceable contract specifically covering the agreement, to insure its being carried out in good faith. Later the United States Attorney and Mr. Alexander Armstrong, Attorney General for Maryland, called in person at the Comptroller's office and sub- mitted a copy of the contract entered into by the president and directors of the bank with the parties who were to succeed them in control, by which the entire stockholdings of the Wingerts and their interests, consisting of 5,500 shares, would be disposed of and a new board of directors appointed, composed of W. B. Lowndes, first vice-president of the Fidelity Trust Company of Baltimore; Emory L. Coblentz, president of the Central Trust Company of Frederick, Md., and president of the Hagerstown and Frederick Railway, Hambleton and Company, brokers, of Baltimore; Cyrus F. Flook of Myersville, Md., connected with ROMANCE AND TRAGEDY OF BANKING 513 the Central Trust Company of Frederick, Md. ; Robert H. Mc- Cauley, a prominent lawyer of Hagerstown, Md. ; John P. Baer, of Baltimore, and Alexander Armstrong, Attorney General for the State of Maryland, and vice-president of a Hagerstown bank. Upon receipt by the United States Attorney of a copy of the agreement signed by the retiring members of the board of direc- tors, to transfer control of the bank to the parties above men- tioned, the Court, on motion of the United States Attorney, ordered the temporary receiver withdrawn, and the bank was then turned over to Directors Armstrong and Baer, of the new man- agement, who reopened it for business on the morning of October 8, 1921. On October 17, 1921, one of the defendant directors served notice on the clerk of the Court that he intended to take an appeal from the Court's order placing the bank in the hands of a tem- porary receiver, pending a hearing of the suit to forfeit its char- ter, but no further proceedings were had in this connection. The former directors having resigned to make place for the new board and having sold their stockholdings, were no longer in a position to make an appeal in the name of the bank. The vital question raised by the appellant in this case was whether or not, in the absence of any allegation of insolvency, the Court had a right under the circumstances to appoint a temporary receiver pending a hearing of the suit to forfeit the charter of the bank. The Court of Appeals, on motion of the United States Attorney, dismissed the appeal, and in doing so took occasion to express itself as follows: The disposition of the case upon the motion to dismiss, makes it unnecessary to pass upon the merits of the original appointment. Without meaning so to do, we may say, in passing, that it appears to the Court that the action taken in the circumstances of this case, was not only in the discretion of the chancellor, but that the exercise thereof was wise and prudent. Pomeroy's Eq. Jur. 2nd Ed. (1919), Vol. 4, Sees. 1537, 1541, 1542. No loss was sustained by the appointment of the receiver, and it cer- tainly resulted in averting serious consequences. The con- trary course might have proven most disastrous from a financial viewpoint, to the bank and all parties in interest. 514 ROMANCE AND TRAGEDY OF BANKING The First National Bank of Hagerstown was organized on May 2, 1865, by conversion of the Hagerstown Savings Bank, a State institution, and was successfully and conservatively con- ducted until the Wingert interests secured control in January, 1918. For several years following this change and preceding the institution of the suit to forfeit the charter of the bank, the rec- ords of the Comptroller's office show that the bank under the Wingert management was a most persistent violator of the law, and not only deliberately ignored the instructions of the national bank examiners at each examination, but openly and continuously defied the admonitions and repeated warnings of the Comptroller of the Currency, until the Comptroller was forced to apply to the Court for revocation of the bank's charter. Charters of other national banks have been revoked by order of the Courts from time to time for various reasons, but the suit brought in the name of the Comptroller of the Currency to annul the charter of the First National Bank of Hagerstown was the first and only suit instituted up to that time in the history of the national banking system to revoke the charter of an active national banking association for violations of the banking laws in the conduct of its business, and the reason why no such suit was ever brought before is that Comptrollers of the Currency had regarded the penalty of revocation too severe and drastic a meas- ure to be resorted to, in the case of a solvent bank, if there was any hope of saving the institution from compulsory liquidation because of the unlawful acts of its management. Therefore the Comptroller was very willing to accept the offer of compromise in the case of the First National Bank of Hagerstown of a com- plete change of management and personnel, and thus preserve an old and previously reputable and successful institution to its patrons and the community of Hagerstown. Stock Dividends When the Supreme Court of the United States, in an opinion rendered March 8, 1920, in the case of Eisner vs. Masumer, decided that stock dividends, when declared by corporations, were not taxable as income, the question was raised by bankers ROMANCE AND TRAGEDY OF BANKING 515 whether it was permissible for national banks to declare stock dividends. Prior to the administration of Comptroller Crissinger it had been the uniform holding of the Comptroller's office that there was no authority in law for the declaration of stock dividends by national banks, that dividends could be lawfully declared and paid out of net profits only after deducting all losses and bad debts, and that surplus earnings could be converted into capital stock only by the declaration of a dividend from net profits in the regu- lar way, payable by checks, which, when properly indorsed, could be accepted in payment for new stock. Following the decision of the Supreme Court above referred to, on account of the numerous inquiries received at the Comp- troller's office on this subject, Comptroller Williams referred the question to the Solicitor of the Treasury for an opinion, and the Solicitor rendered an opinion sustaining the long-maintained position of the Comptroller's office, that stock dividends were not permissible by national banks. Not being fully satisfied with the Solicitor's opinion, Comptroller Williams referred the question to the Department of Justice, and the Acting Attorney General, in an opinion rendered in October, 1920, ruled that national banks cannot lawfully declare stock dividends. He said : Section 5199 of the Revised Statutes authorizes directors, subject to certain restrictions, to "declare a dividend of so much of the net profits of the as- sociation as they shall judge expedient." Since, how- ever, a stock dividend cannot be declared without in- creasing the capital stock, and since the Acts of Congress contain explicit provisions as to the manner in which the capital stock may be increased, a stock dividend cannot be lawfully declared unless the stock so issued may be pro- vided for through an increase of the capital, in accordance with the terms of this Section. The question then is, whether an increase of capital for the purpose of converting accumulated earnings into capital stock is permitted by the national banking laws. Congress has seen fit to prescribe, with considerable de- tail, the manner in which the capital stock of a national bank may be increased. 516 ROMANCE AND TRAGEDY OF BANKING Section 5142 of the Revised Statutes provides that: "Any association formed under this title may, by its articles of association, provide for an increase of its capital from time to time, as may be deemed expedient, subject to the limitations of this title. But the maximum of such an increase to be provided in the articles of associa- tion shall be determined by the Comptroller of the Cur- rency; and no increase of capital shall be valid until the whole amount of such increase is paid in, and notice thereof has been transmitted to the Comptroller of the Currency, and his certificate obtained, specifying the amount of such increase of capital stock, with his approval thereof, and that it has been duly paid in as part of the capital of such association." It will be observed that this Section authorizes a bank, at the time of its organization, to provide in its articles of association for an increase in the future of its capital, fixing a limit to the amount of such increase, subject to the approval of the Comptroller of the Currency. It is then expressly provided that, in exercising the authority so provided for, no increase of capital shall be valid until the whole amount of such increase "is paid in," and that it must be certified to the Comptroller of the Currency that this amount "has been duly paid in as part of capital of such association." Apparently, it was thought that this Section did not authorize an increase of capital in any case in which such increase was not provided for in the articles of association, and to make provision for an in- crease in cases not provided for by the articles of associa- tion, the amendatory Act of May 1, 1866, was passed providing "That any national banking association may, with the approval of the Comptroller of the Currency, by the vote of shareholders owning two-thirds of the stock of such association, increase its capital stock, in accordance with existing laws, to any sum approved by the said Comptroller, notwithstanding the limit fixed in its original articles of association and determined by said Comptroller; and no increase of the capital stock of any national banking as- sociation either within or beyond the limit fixed in its original articles of association shall be made except in the manner herein provided." ROMANCE AND TRAGEDY OF BANKING 517 It is thus enacted that no increase of capital stock shall be valid unless the amount "has been duly paid in as part of the capital of such association." And this is coupled with an expressed prohibition against the increase of capital in any other manner. The issuance of a stock dividend, it has been held, does not make the stockholder richer or the corporation poorer. It simply changes the evidence of the stockholders' title of what he already owned. * * It would seem, therefore, that the mere conversion, by a corporation of earnings which it already owns, into capital stock, and thus keeping in its business permanently what it previously was at liberty to distribute among stock- holders, is not equivalent to paying in an equal amount of money as a part of the capital of the corporation. No part of it has been paid in to the corporation. It has been earned by the corporation as a profit, and I cannot think that the conversion of it into capital stock will be an increase of capital in the manner provided by the Acts of Congress. It may be said, of course, that so far as the corpora- tion is concerned the result of declaring a stock dividend is not different from what is accomplished by declaring a cash dividend which is used by the stockholders to pay for additional stock, but I think Congress has expressed an intention that it shall be done in the one way and not in the other. A very good reason I think, which may have moved Congress, is that a stockholder in a national bank incurs a liability for the debts of the bank to the extent of the amount of his stock, and it may very well have been considered unwise to permit two-thirds of the stockholders to increase this liability of the minority by increasing the capital stock through the issuance of stock dividends. While the Solicitor of the Treasury is the Statutory Counsel of the Comptroller of the Currency, his opinion and the opinion of the Attorney General concerning questions of this character are not binding on the Comptroller. The Comptroller of the Cur- rency is free to follow his own judgment in such matters until overruled by a court of competent jurisdiction. 518 ROMANCE AND TRAGEDY OF BANKING Exercising this prerogative, Mr. Crissinger, in disposing of this question on December 20, 1921, ruled as follows: It has been my view that the National Bank Act should be liberally construed in all matters in which there is not a direct inhibition in the charter or in the law as enacted by Congress. Having that view, I find myself unable to agree with the distinguished solicitors in the con- clusion they arrive at. If any question of public policy could be involved in the authorization of stock dividends out of undivided profits, it would seem to me to be all in favor of granting such permission, for the reason that the stock does incur a double liability and to that extent offers further assurance of security and protection to creditors and people doing busi- ness with the bank. The right is inherent in the board of directors to declare a dividend to absorb all of the earnings of the bank outside of that which is required to be set aside for surplus purposes, and they also have the in- herent right of carrying such earnings to surplus, and I am of the opinion that in the case of the profits being insuf- ficient to pay dividends, that they have the inherent right to transfer the surplus back to undivided profits for the purpose of paying dividends. If I am correct in these conclusions, then the surplus or such portion of it as may be authorized by the board of directors may be returned to the undivided profits for the purpose of paying an an- nual dividend or for the purpose of distribution, either in cash or by a stock dividend. Before a stock dividend can be ordered it is necessary to have the articles of in- corporation so amended as to increase the capitalization of the bank for that purpose. When that is done pursuant to law, the directors certainly could either sell the new stock, giving the stockholders their right as provided by statute of taking the stock, or the directors could pro rate it to the stockholders in proportion to their holdings before the increase and issue to the stockholders of a stock divi- dend from the surplus transferred to the undivided profits. It is my opinion that nobody has the right to complain of such transaction when the increased capitalization is legally authorized except a stockholder, and I have my very serious doubts whether such stockholder can object, but ROMANCE AND TRAGEDY OF BANKING 519 in the event of such objection it is purely a matter for the stockholders and the dissenting stockholder, and not one for this Bureau to control. Having these views of the law I made the order which became necessary originally in order to protect certain banks that were in difficulty and in exercising my discretion to protect the banks so in difficulty, I found it necessary to give a liberal construction to those provisions of the National Bank Act in the matter of dividends instead of the strict and rigid construction heretofore given to statutes, which certainly in administrative matters should be liberally construed; especially so when the public interest is best conserved by so doing and when the interests of stock- holders are not in any way put in jeopardy. It will be understood, therefore, that the decision to authorize stock dividends when complying with the requirements of the office in issuing them is of my own initiative and I take entire responsibility for the same. Whether all the Comptrollers of the Currency from the estab- lishment of the National Banking System to the date of this rul- ing were wrong in their position, and Comptroller Crissinger was right in reversing them, can be determined finally only by a court of competent jurisdiction. The Fort Dearborn National Bank of Chicago During an examination of the Fort Dearborn National Bank of Chicago by the clearing house examiners, commencing Novem- ber 15, 1921, a condition was disclosed which, but for the prompt and co-operative action of the clearing house banks, undoubtedly would have developed into the most serious financial situation that had threatened the city of Chicago and the surrounding ter- ritory for a number of years, and would have resulted also in the failure of the Fort Dearborn National Bank and the Fort Dear- born Trust and Savings Bank, an affiliated institution, with all the disturbing and disastrous consequences that usually follow the failure of financial institutions of the size and importance of these two banks. 520 The collapse of the Fort Dearborn National Bank was the result of a series of events. About fifty per cent, of the stock of this bank was owned by the Tilden interest and the management of the bank was practi- cally, if not wholly, in the hands of the Tildens. The Edward Tilden estate under the management of Averill Tilden, a director of the Fort Dearborn National Bank, had hypothecated about 21,000 shares of the stock of the bank as collateral for loans from various banks, totalling around $4,000,- 000. In addition to the borrowings on the security of this stock the Tilden interest became interested in other enterprises, under- writings and financing of heavy mercantile, manufacturing and realty ventures, some of which were more or less speculative. The general business depression affected many of these loans. The companies financed were those in which the Tildens and their associates were largely interested, and it appears that cor- respondent banks of the Fort Dearborn National Bank, and their connections, were very freely used in placing these loans, both on collateral and on open lines of credit. For a year or more previous to the closing of the banks the various industries in which the Fort Dearborn bank, through the Tilden connections, was incidentally interested had been very extensively advertising, the publicity end of the business having been conducted by John Fletcher, who, it appears, was also inter- ested in the enterprises advertised and was liberally compensated as their financial agent. He was connected with the various con- cerns officially and at the same time was an active vice-president of the Fort Dearborn banks, national and state. Through the financing of these many industries and interests the Tildens became heavily over-extended and embarrassed. On December 28, 1921, Mr. William A. Tilden, president of the Fort Dearborn National Bank, approached the officers of the First National Bank of Chicago with a proposition for that bank to purchase the assets of the Fort Dearborn National and assume its liabilities, and an arrangement was made for an immediate ex- amination of the assets of the latter bank. After the entire credit department and auditing force of the First National had devoted all day Saturday, December 31, and the following Sun- ROMANCE AND TRAGEDY OF BANKING 521 day and Sunday night to an examination of the assets of the Fort Dearborn National, the First National Bank declined to favorably entertain the proposition on the ground that the amount of the liquid assets of the bank was insufficient to war- rant the First National in assuming its liabilities. The immediate and precipitating cause, therefore, of the col- lapse of the Fort Dearborn National Bank and its affiliated insti- tution, the Fort Dearborn Trust and Savings Bank, may be attributed to the failure of the negotiations with the First Na- tional by the president of the Fort Dearborn National to take over the assets of the latter and assume its liabilities, which ap- peal was necessitated by the embarrassment of the Edward Tilden Company because of the inability of the company to finance any further the corporations with which it was connected, or to meet the maturing demands upon its own and affiliated companies. The affairs of the Edward Tilden Company, Merrill, Cox & Com- pany, the Earl Motors Company, Inc., and various other enter- prises in which the Tildens and their associates were interested or were assisting in financing, were placed in the hands of a committee of their creditors for adjustment, which fact increased the diffi- culty of accurately appraising the assets of the bank, as the finan- cial worth of the individual and corporate borrowers from the bank depended largely upon the favorable outcome of their inter- woven interests. When the First National Bank declined to entertain favorably the proposition of Mr. Tilden, a meeting of the clearing house was called for Monday morning, January 2, 1922, for the purpose of considering the best means of liquidating the Fort Dearborn National Bank through one of the clearing house banks and thereby averting what threatened to become a most disas- trous failure, not only of the national bank but also of the Fort Dearborn Trust and Savings Bank, its affiliated institution. At this conference it was finally agreed that the Continental and Commercial National Bank should take over the assets of the Fort Dearborn National, and that the Continental and Commer- cial Trust and Savings Bank should take over the assets of the Fort Dearborn Trust and Savings Bank, and that each should assume the liabilities of the bank taken over. 522 ROMANCE AND TRAGEDY OP BANKING The agreement also provided that in order to induce the Con- tinental and Commercial National Bank to enter into the agree- ment to take over the business of the Fort Dearborn National Bank, the clearing-house banks would, on January 3, 1922, make deposits in the Fort Dearborn National Bank aggregating $1,000,00^0, and would accept from the Fort Dearborn National Bank for such deposits, deferred certificates of deposit, payable January 3, 1924, bearing interest at the rate of five per cent. per annum, from date. This one million dollars was to consti- tute and be a part of the assets taken over by the Continental and Commercial National Bank, and no part of the one million dollars thus contributed was to be repaid to the contributing banks until all liabilities of the Fort Dearborn National Bank assumed by the Continental National Bank, together with interest on said liabili- ties assumed, at the rate of five per cent, per annum, had been re- paid to the Continental National Bank and liquidated in full. It is understood that a similar agreement was entered into between the Fort Dearborn Trust and Savings Bank and the Continental and Commercial Trust and Savings Bank. The real elements of danger in and the primary cause of the enforced merger of these institutions were their domination by the Tilden interests and the too free use of the funds of the bank by such interests for their self-serving purposes. The banks were managed largely, if not altogether, by directors who were either active officers, or were heavily and continuously indebted to the institutions and connected with the borrowing concerns, thereby making it necessary for the banks to borrow large sums of money to enable them to carry these lines of credit. At the time of the examination of the Fort Dearborn National Bank in November, 1921, by the national bank examiner, the liabilities of the bank to the Federal Reserve Bank for rediscounts were reported to be over $12,876,000, paper classed as slow amounted to over $5,000,000, doubtful paper to over $6,800,000 and undesirable assets to over $8,700,003. At the time of the examination by the clearing house examiner the early part of the same month, he required the bank to charge off as a loss over $800,000. ROMANCE AND TRAGEDY OF BANKING 523 The total deposits of the two national banks and the two trust companies after the merger aggregated over $400,000,000 and their total resources over $525,000,000. The merger of these two national banks, therefore, made the Continental and Commercial National Bank the second largest national bank in the United States. Extension of Charters of National Banks for the Period of Ninety-Nine Years National banks, the charters of which were extended by the Acts of July 12, 1882, and April 12, 1902, began to expire in July, 1922, making it necessary that some steps should be taken to provide for a further extension of the charters of such banks. Comptroller Crissinger, therefore, submitted to Congress two bills designed to accomplish this purpose ; one providing for a fur- ther extension for a period of twenty years in the same manner as had been provided for in the first and second extensions by the previous acts ; and the second bill granting perpetual extensions of charters of all existing banks, and providing that future banks should have perpetual charters. This latter bill was taken up by the House of Representatives and passed, but was amended by the Senate so as to fix the period of the corporate existence of all national banks at ninety-nine years. The bill was passed practically in this form and approved by the President, July 1, 1922. By this latter act the charters of all national banks in exist- ence July 1, 1922, were automatically extended for the period of ninety-nine years from that date, and the charters of all banks subsequently organized are to be for a like period from the date of their organization. The granting of a perpetual charter, however, was consid- ered more desirable from the standpoint of banks that were au- thorized to exercise fiduciary powers. Branch Banks or Branch Offices In a previous chapter of this book Comptroller Lacey was quoted as saying in one of his annual reports, that : 524 ROMANCE AND TRAGEDY OF BANKING Banks are indispensable to the successful conduct of the various business enterprises which form a prominent fea- ture in modern civilization. These agencies must keep pace with the progress made in manufactures, in commerce, and in all forms of industrial activities, or serious embar- rassments will surely follow. The national system must occupy the field or give way to another. Mr. Crissinger practically exemplified this suggestion of Mr. Lacey on the question of the right of national banks to establish and operate branch offices in competition with State institutions which have that authority under State statutes. This privilege or advantage which State banks have over national associations has induced many national banks in recent years to leave the national banking system and reorganize under State authority. The opening of a branch bank by the First National Bank of St. Louis, Missouri, in June, 1922, and similar action taken by a number of the larger national banks in other sections of the country and threatened by others, brought this issue to such an acute stage that Mr. Crissinger found it necessary to look care- fully into the law on the subject to determine whether there was any way through administrative regulation of solving this ques- tion and affording national banks the relief they sought. After a careful and thorough consideration of the whole subject and consultation with recognized legal authorities the conclusion was reached that while national banks had no authority under existing law to establish and operate branches, it was considered per- missible under the law for them to establish and operate additional offices or agencies in the same place where they are authorized to do business. As the law has not been amended in this respect since 1864, except as to foreign branches authorized by the Federal Reserve Act, it is inconceivable that the National Bank Act should have been in existence nearly sixty years without someone having dis- covered that the act permitted the exercise of the very power that many of the banks have been clamoring for since the date of its original enactment in 1863. ROMANCE AND TRAGEDY OF BANKING 525 Although Mr. Crissinger up to August 30, 1922, had issued no official ruling on the subject in his correspondence with individ- ual bankers and others, he expressed the opinion that : While a national bank was chartered to do business in a certain place, it was not restricted to a particular loca- tion in that place, and that there is no limitation upon the number of offices or banking houses it may have in which to do business in the place of its location as long as these additional offices are controlled and operated by the same board of directors and the same officers. Mr. Crissinger also stated that he was of the opinion that: This view was and had been sustained by the national banking laws ever since their enactment in 1863. The National Bank Act authorizes the doing of busi- ness in a certain place, and there is a clear dis- tinction between a branch bank and an additional place of business in the city where the bank is authorized to do business. He contended that the law does not mean that the bank's business must be done in one banking office or in one banking house in that place, but that the national bank act clearly authorizes the bank to do business in as many banking houses or offices in that place, as may be necessary to carry on the business for which it was incorporated, and that the corporate authorization empowers the bank to do all the business that may be entrusted to it. The implied and incidental powers secured to the bank by its charter clearly clothe the directors with the power to furnish enough offices and banking house facilities in which to properly conduct the proffered business in the place of its domicile fixed by the bank's charter. This opinion of Mr. Crissinger, however, is contrary to the position of the Comptroller's office on this subject since the estab- lishment of the bureau. Section 11 of the original National Bank Act, approved Feb- ruary 25, 1863, reads : 526 ROMANCE AND TRAGEDY OP BANKING and their usual business shall be transacted in banking offices located in the places specified respectively in its certificate of association and not elsewhere. This provision bears out Mr. Crissinger's contention and would seem to comtemplatc that the intent of this act was to permit the banks to maintain more than one banking house or office, but the Act of 1863, it will be remembered, was repealed in its entirety by the Act of June 3, 1864, and Section 8 of the latter act provides : and its usual business shall be transacted at an office or banking house located in the place specified in its or- ganization certificate. It will be noted, therefore, that the words "banking offices" in the Act of 1863 were changed in the amendment to read "office or banking house," and the word "places" was changed to read "place," thus implying that Congress intended by the amendment that a bank should be permitted to have but one office or banking house. This has been the interpretation of the law by every Comp- troller of the Currency from Mr. McCulloch to Mr. Williams, in- clusive, the immediate predecessor of the present Comptroller, Mr. Crissinger, and this construction of the law has been sus- tained by every Solicitor of the Treasury during that entire period and by Attorney General Wickersham in an opinion writ- ten by Assistant Attorney General J. A. Fowler under date of May 11, 1911, in the case of the Lowry National Bank of Atlanta, Georgia. Banks applying to Comptroller Crissinger for permission to open additional offices were required to file a resolution adopted by the board of directors authorizing the proper officers to make application to the Comptroller of the Currency for permission to establish an additional office or offices. Under the Comptrol- ler's regulation the application was required to show the particu- lar locality at which it was desired to open such office, the neces- sity for the establishment of the office, the population to be served therefrom, the distance of the nearest bank from the point of location of the proposed office, the amount of capital and sur- ROMANCE AND TRAGEDY OF BANKING 527 plus of the applying bank, and the ability of the bank to meet the demands of the business community in the section which it was proposed to supply, etc., etc. Up to the time of this writing (August 30, 1922), twenty- five banks, located in different sections of the country, had been granted permission to open additional offices. Proposed Abolition of the Comptroller's Office During the last year or two of the administration of Mr. Williams a strong movement developed in favor of the abolition of the office of Comptroller of the Currency by merging the bureau with the Federal Reserve Board and transferring the functions, powers and duties of the Comptroller to that board. Bills were introduced in both houses of Congress designed to effect this consolidation. These bills, however, might have been more appropriately designated as "Bills to abolish John Skelton Williams," as the demand for such legislation seemed to come mainly, if not wholly, from bankers to whom Mr. Williams was personally obnoxious, from some of the members of the Federal Reserve Board who, unfortunately, had had disagreements or differences with him in regard to the policies of the board, or to his policies of administration of the Comptroller's office, and from the twelve Federal Reserve Banks whose officers were exceedingly desirous of supplanting the Comptroller of the Currency in the supervision of all the national banks and of absorbing his duties. Demands for the consolidation of the two offices, however, appar- ently subsided immediately following the retirement of Mr. Wil- liams from office on March 2, and the hearings on the bills before Congress, which had been deferred from time to time by the re- spective committees of the two houses which had them under consideration, were indefinitely postponed, thus indicating that the movement for consolidation of the two bureaus was due more to dissatisfaction with Mr. Williams personally and his policies of administration of the Comptroller's office than to a sincere de- sire for the abolition of the office and the transfer of its manifold duties and responsibilities to the Federal Reserve Board. This conclusion was further exemplified by the fact that many bankers 528 ROMANCE AND TRAGEDY OF BANKING throughout the country and in Congress who had at first strongly favored the movement during Mr. Williams' incumbency of the office of Comptroller subsequently became either indifferent or strongly opposed to it after his retirement from office. It was contended by those who favored a merger, and the same impression seemed to prevail among Congressmen generally, that there was more or less duplication of work in the operation of the two offices independently or separately, which could be avoided and the business more economically and efficiently con- ducted if they were consolidated in one bureau under one control. But in this they were in error. There is not now and never has been any duplication of the work of the Federal Reserve Board by the office of the Comptroller of the Currency, nor of the Comp- troller's office by the Federal Reserve Board. The business of each bureau is wholly distinct and separate from the other, but the Comptroller's office is and has been from the beginning much more economically administered than the office of the Federal Reserve Board, as may be clearly demonstrated by comparison of expenses and volume of work performed. The Comptroller of the Currency in the supervision of the na- tional banks makes not less than five calls each year upon the banks for a report of their condition. These reports of condition are carefully examined and abstracted by experienced clerks of the Comptroller's office and these reports and abstracts are as available at all times to the proper officials of the Federal Reserve Board as if the board itself called on the banks for the reports and its own clerks abstracted them. The national bank examiners employed by the Comptroller of the Currency are required to make not less than two examina- tions of every national bank each year. These reports are on file in the Comptroller's office and are accessible to the proper officers of the Federal Reserve Board at any time. It will, therefore, readily be seen that there is and has been no duplication of this work and no necessity for any duplication. All the correspondence with national banks and with national bank examiners growing out of the conditions shown by these reports is conducted by the Comptroller's office force and such ROMANCE AND TRAGEDY OF BANKING 529 correspondence is also as readily accessible to the officials of the Federal Reserve Board as if conducted by that office. The Comptroller of the Currency is charged by law with the duty of issuing Federal Reserve notes and Federal Reserve Bank notes and the Federal Reserve Issue Division is a part of the Comptroller's office and is located in that bureau. There is, therefore, no duplication of this work. The Federal Reserve Board is required to call upon the State banks and trust companies which are members of the Federal Reserve System for reports of condition not less than three times each year. The Comptroller of the Currency notifies the Federal Reserve Board in advance when he contemplates making a call upon the national banks for a report of their condition, and the Federal Reserve Board makes a call on the State member banks for a report for the same date, but not more than three times a year. The Federal Reserve Board makes its calls through the Federal Reserve Banks and the State member banks make their reports in duplicate direct to the Federal Reserve Bank of their respective districts. The Federal Reserve Banks retain one copy of the report and forward the other to the Federal Reserve Board at Washington. These reports are abstracted by the statistical division of the Federal Reserve Board the same as the reports of national banks are abstracted by the statistical division of the Comptroller's office. There is, therefore, no duplication of this work. The Federal Reserve Banks make weekly or daily reports to the Federal Reserve Board as may be required by the board. There is absolutely no more duplication of work in any branch of the business of the two bureaus than there is between the divisions of the respective offices. The work of each bureau is wholly separate and distinct from the other and no good rea- son exists, from the standpoint of efficiency, expedition or econ- omy, for the consolidation of the two bureaus. The Federal Reserve Banks from the very beginning of their existence have strongly favored and persistently urged the ab- sorption of the Comptroller's functions by the Federal Reserve Board and the abolition of the office of Comptroller of the Cur- rency. These banks have been principally instrumental and 530 ROMANCE AND TRAGEDY OF BANKING active in keeping alive the agitation of this question and are ap- parently influenced wholly by a desire or ambition to enlarge their own authority or powers by having the national banks in their respective Federal Reserve districts placed under their exclusive supervision and control. They contend that the na- tional banks have now increased in number to such an extent as to render effective and satisfactory supervision by a centralized authority at Washington practically and physically impossible, and, therefore, they recommend and urge that this supervisory authority be divided among the twelve Federal Reserve Banks, each to have supervision and control of the member banks com- prising its Federal Reserve district. In other words, instead of having, as now, a Comptroller of the Currency at Washington performing his duties under the general direction of the Secretary of the Treasury, and a uniform interpretation of the national banking laws and regulations for the guidance of all banks and bank examiners alike, it is proposed to decentralize this authority, when the tendency of the age is toward centralization, and scatter it to the four winds of the country by creating twelve little Comp- troller's offices and placing the banks in their respective territo- ries under their exclusive supervision and control. Under such a system it must be conceded that confusion can- not but be the ultimate result of having as many interpreters of the statutes governing banking and as many conflicting rules and regulations for the guidance of the banks and bank examiners as there were units in the division of the banks. That which would be held lawful in one reserve district would be ruled to be unlawful in another district. Under the present system of supervision there is absolute uniformity in the interpretation of the banking laws and the rulings and regulations of the Comptroller of the Cur- rency. When the position of a bank or a bank examiner is ascer- tained to be in conflict with that of the Comptroller's office it is promptly corrected by correspondence. It is confidently believed, and this belief is based upon the light of years of experience, that a division such as is proposed in the supervisor}' control of the banks would prove to be im- practicable and unsatisfactory. Enforced observance of the law in some districts would likely prove too severe and arbitrary, ROMANCE AND TRAGEDY OF BANKING 531 and in others inexcusably lenient and faulty, unduly lenient or arbitrarily severe according to the temperament or disposition of the governing control, influenced by favoritism or actuated by selfish interests or prejudices. Many banks in the West and in the South have already experienced some of the objectionable and selfish motives which have actuated or influenced the Federal Re- serve Banks in those sections of the country in their dealings with member banks when their own interests were concerned. There is no advantage whatever to be gained by the country banks from such a change as is proposed and advocated by the Federal Reserve Banks, and no improvement in the supervisory system will result from such a change. The Federal Reserve Banks are now furnished with a copy of the report of every exam- ination made of the banks in their respective districts by the national bank examiners immediately upon completion of the re- port in each case, so that they have at all times as full and com- plete knowledge of the condition of the banks, as shown by such reports, as the Comptroller of the Currency has. The reports are made in duplicate, one copy for the Comptroller of the Cur- rency, and the other for the Federal Reserve Bank. There is no duplication of examinations, therefore, and no necessity for any, as the copies of the reports furnished the Federal Reserve Banks by the national bank examiners contain all the information they could possibly obtain in regard to the condition of the banks, and probably more, if their own examiners were to make the examina- tions. State banks and trust companies that are members of the Federal Reserve System are, as a rule, examined by the State Bank examiners, who furnish the Federal Reserve Banks with a copy of their reports which are accepted by the Federal Reserve Banks, unless the condition shown by the reports is not satisfac- tory, in which case they have an examination made by their own examiners, who report direct to the Federal Reserve Bank in- stead of to the Federal Reserve Board, as national bank exam- iners do to the Comptroller of the Currency. This practice the Federal Reserve Banks are exceedingly anxious to have extended to national bank examiners so that reports of their examinations of all national banks shall be made direct to them instead of to the 532 ROMANCE AND TRAGEDY OF BANKING Comptroller of the Currency, and that these examiners shall be directly under their supervision and control. It is believed that it would be a serious mistake to transfer the supervision and control of the national banks and national bank examiners to the Federal Reserve Banks even though the Federal Reserve Board and the Comptroller's office should be consolidated at some time in the future. Some of the reasons why this should not be done will be more clearly understood by a study of the banking and business situa- tion in Iowa during the period commencing about the year 1918, and the principal factors responsible for these conditions. Iowa, it will be remembered, is entirely an agricultural State, and may be said to be, in fact, one great big farm. Statistics show that about nintey-six per cent, of the industrial activity of the State arises from farm products, consisting of canneries, meat packing plants, grain mills, etc. The actual wealth that has accrued in Iowa has heretofore come largely from increases in the value of farm lands and not from profits derived from the production of crops. This fact had a tendency to encourage speculation in land to an enormous extent. In many instances there were first and second mortgages on farm property, followed by unsecured notes, nearly all of which found their way into the banks. These obligations arose from inflated values of the farm property. In some cases the price was as high as $600 per acre. It was estimated that the State and national banks in Iowa held paper of farmers amounting in the aggregate to about $40,000,000, given by them for the purchase of highly speculative stocks, which had little, if any, intrinsic value. The promoters of "sky blue" corporations sold this stock to farmers, taking their notes in payment therefor, which they discounted with the banks, accepting certificates of deposit for the proceeds. They then sold the certificates to brokers in Chicago and elsewhere and when the certificates matured the banks naturally were called upon to pay them. In the meantime the corporations for whose shares of stock the notes were given had probably gone into the hands of receivers and the farmers refused or contested payment. These conditions prevailed to such an enormous extent that in a very large number of instances the loans to borrowers were of ROMANCE AND TRAGEDY OF BANKING 533 such proportions as to greatly exceed the legal limit of the loan- ing banks, and there was considerable swapping of paper between the banks for the purpose of circumventing the limitations of law. This occurred to such an extent and in such magnitude that it was not unusual to find banks with a capital of $25,000 swap- ping paper with other banks of about the same size in amounts ranging up to $100,000 and in some cases in greater amounts. In a number of instances banks sold this paper to city corre- spondent banks under guarantees of their officers and directors, which transactions, in fact, were nothing but rediscounts. Conditions of this kind existed in many banks which were difficult for the examiners to discover and more difficult to correct. Apparently no curb was placed upon the borrowing banks by the Federal Reserve Bank of that district and the deplorable and critical situation which existed in Iowa was, in a great measure, due to the unreasonably large lines of credit extended to the member banks by the Federal Reserve Bank of Chicago, ap- parntly without regard as to whether the funds loaned were to be used in legitimate business transactions or for speculative pur- poses or hazardous ventures. In a number of cases the lines extended to these banks were largely in excess of justifiable and prudent limits. In addition to the amount of eligible paper discounted for Iowa banks by the Federal Reserve Bank the volume of ineligible paper held by that bank as collateral to the eligible paper ran to very large totals. The proper exercise of even ordinary judgment by the Federal Reserve Bank at Chicago in extending credit to the member banks in Iowa undoubtedly would have prevented the situation in that State from becoming so acute. The enormous deflation in commodity values would have caused a most unsatisfactory condition under the most favorable circumstances, but the critical situation that developed could have been avoided, or, at least, greatly ameliorated, if the Fed- eral Reserve Bank at Chicago had not permitted the Iowa banks to become so desperately extended. After about four years of this extreme liberality, the Federal Reserve Bank suddenly reversed its policy, and about January 534 ROMANCE AND TRAGEDY OF BANKING 1, 1921, commenced to advise the banks that they could have no more credit, but must arrange to liquidate their indebtedness. An active and vigorous campaign was then inaugurated through the Federal Reserve examiners to coerce the banks into liquidating their obligations to the Federal Reserve Bank. Due to the shrinkage in the value of farm products the tenants were unable to pay the landlords the cash rents contracted for on the basis of high values. Consequently nearly all business in that State was at a standstill. Practically nothing was being moved to the markets. A considerable portion of the previous year's corn crop remained to be moved, but this could not be done until the roads were in a better condition. Most of the hogs were not ready for market. It was no time for liquidation at the then market prices. For the Federal Reserve Bank to insist that any great pro- portion of the borrowings of the banks be liquidated at that time was a thing impossible to be accomplished. The result of such a policy on the part of the Federal Reserve Bank was obvious. Numerous complaints from different banks and from other sources were made to the Comptroller of the Currency of the attitude of the Federal Reserve Bank and the Federal Reserve examiners, which were brought to the attention of the Federal Reserve Board by the Comptroller. The Governor of the bank and some of its officers were summoned to Washington for a con- ference over the situation, with the result that a change of policy was immediately put into effect and the injudicious and destruc- tive methods that had been pursued were abandoned, and more constructive measures adopted in the nature of assisting the banks that were deserving of assistance. The Comptroller of the Cur- rency transferred a number of his most experienced examiners into the State to study the situation and aid the banks in every possible and proper way and encourage them to remain open by having them understand that they were there to help them out of their difficulties and not to force them into liquidation. This constructive policy was also pursued by the Federal Reserve Bank after the conference in Washington, and thus what threatened to develop from a bad to a very serious banking situation was great- ly alleviated. ROMANCE AND TRAGEDY OF BANKING 535 What has been said in regard to the conditions in Iowa and the policies of the Federal Reserve Bank and its examiners may also be said of other Federal Reserve districts where similar con- ditions existed and like methods were resorted to. In some cases banks were forced to suspend business and close their doors, either by the voluntary action of the board of di- rectors, because of their inability to meet the exactions of the Federal Reserve examiners, or by the examiner's direction, an assumption of authority which he did not possess. In a number of cases banks were urged to the point of insistency to dispose of their Liberty Bond holdings at a considerable loss, for which they had paid par at the time of their issue, when each Federal Reserve Bank was alloted by the Government a certain amount of the total issue and each member bank was urgently solicited to take its proportionate share of such allotment. It was alleged by the president and cashier of a national bank in Montana that the bank was closed by the Helena branch of the Minneapolis Federal Reserve Bank for political reasons, and that the Helena branch withheld from the bank further rediscount privileges at a critical time in order to force the bank into insol- vency. They charged that this was due to the influence of the chairman of the board of the Helena branch bank, who owned a controlling interest in a Montana State bank, a competing bank of the national association which was closed. It was asserted further that without authority or approval the examiner of the Helena branch called at the national bank on July 26, 1921, and under threats and duress compelled the cashier of the bank to accept a receipt for certain notes that he took from the bank's portfolio, as excess collateral amounting to $17,472.45. The cashier further asserted that this paper was the very best security in the bank for rediscount purposes and without it the bank was left in a very precarious financial condition. He attrib- uted the failure of the bank to the loss of this paper, and stated that after complaining to the Helena branch of the action of the examiner and making several demands for the return of this paper, some of it was returned to the bank on October 5. It was stated that the cashier of this bank was a young man of but limited experience and was easily swayed by the predom- 536 inating influence of the Federal Reserve examiner, and after mak- ing futile efforts to secure help elsewhere than from the Federal Reserve branch and without the backing of the directors of his bank, he telephoned the manager of the Helena branch that he was through and would close the bank and post a notice on the window that it was closed. He stated further that after closing the bank and before the arrival of the national bank examiner to take charge, the manager of the Helena branch of the Federal Reserve Bank telephoned him a request to send to the Helena branch certain notes held by the bank in trust for the reserve bank, which, he stated, he re- fused to do as he had no right to dispose of any of the property or assets of the closed bank prior to the arrival of the national bank examiner. Another occurrence was reported to the Comptroller's office of a small State member bank in the eleventh Federal Reserve dis- trict, which had been hard pressed for funds and was badly in need of assistance owing to the business depression in that section of the country. It was stated that a representative of the Federal Reserve Bank called at this bank and demanded of the cashier that he turn over to him all the available cash the bank then had on hand, to protect the Federal Reserve Bank from loss on advances that had been made to the bank, and that, after making a futile pro- test, he complied with this demand and the representative of the Federal Reserve Bank took away with him every dollar of cash the bank had, even to the nickels and cents, so that there was nothing else for the cashier to do but to suspend business and close the doors of the bank. It is not believed by anyone familiar with the operations of the office of the Comptroller of the Currency that the affairs of that bureau can be satisfactorily, promptly and efficiently adminis- tered by a board requiring unanimity of its members as it has been or can be by a single responsible head with authority to act upon his own responsibility. Many of the affairs of the bureau require such prompt decision and quick action during the busi- ness hours of the day and after business hours as would be impos- sible to obtain from a board. Instructions to bank examiners and ROMANCE AND TRAGEDY OF BANKING 537 receivers of failed banks as to critical banking situations and im- portant business transactions are frequently required to be given by telegraph or telephone during all hours of the day and night. With very few exceptions the supervision of State banks is conferred by law upon one official, and even in States where super- vision is conferred upon boards there appears to be the delega- tion of executive power to a single head. Within the past few years California and Connecticut changed their laws to provide for a Superintendent or Commissioner of Banking in lieu of a board. In the State of Nevada the banking board is composed of the Governor and a State bank examiner, but the duties of the board appear to be conferred upon the examiner, who is practi- cally the single executive head of the board. As independent bureaus the duties of the Federal Reserve Board and those of the Comptroller of the Currency are distinctly sep- arate and well defined. To unite the bureaus would create con- fusion and to a certain degree inefficiency. It would also be neces- sary to amend the national banking laws in many respects to avoid complications, as the simple transfer of the powers and duties of the Comptroller to the Federal Reserve Board would not be ample to cover the situations which would ensue. The national banks are now under the supervision of the Comptroller of the Currency, who is a member of the Federal Reserve Board. He participates in the deliberations of that body and has a voice in their conclusions. The proposed change would not in any way alter results. If the two bureaus were merged it would be necessary for the board to designate some one of its members as the executive head of what is now the Comptroller's office, with full power to act upon his own responsibility in regard to all matters which could not be delayed for board action. This would be practically the same condition as exists at the present time. The Comptroller is the executive head of the bureau and is a member of the board. The only effect of the proposed change, therefore, would be to delay action on all matters which required consideration by the full board. While it would be difficult for the board to act promptly as a whole on all matters, it is very questionable whether they would have the power to delegate to one of their members full authority 538 ROMANCE AND TRAGEDY OF BANKING over the bureau with power to act on such questions as the issu- ance and extension of charters, appointment of receivers of insol- vent banks and liquidation of their affairs. If the board should have authority to designate one of its members to act with full power in all such matters there would be practically no difference between the officer so designated and the present Comptroller. If he were not so designated and empowered it would be impossible on all occasions to give the prompt action that is necessary when a bank is in a critical condition. On numerous occasions the Deputy Comptroller, when Acting Comptroller, has had to give directions by telephone in the middle of the night to national bank examiners or answer inquiries in like manner in regard to matters that were necessary to determine before the opening of the bank for business on the following morning. There is another phase of this question which calls for very careful consideration and is, without doubt, the most important, from the standpoint of the depositors' interests in the banks, of any of the objections that can be raised to the amalgamation of the office of the Comptroller of the Currency with the Federal Reserve Board. The United States Government, as is well known, does not in any sense guarantee the deposits in national banks, or assume any liability for their payment, but the Comptroller of the Currency always has been regarded by depositors as the special guardian, as it were, of their interests. They always have relied on him for the protection which he has endeavored to insure to the fullest extent of his power by requiring the banks to observe the law and conduct their business not only within legal limitations but also within the bounds of prudence and safety. It is the prime duty of the Comptroller, and always has been, to know, through the in- strumentality of his examiners, that a bank is at all times in a solvent condition, that the liquidating value of its assets is, at least, equal to its liabilities to depositors and other creditors, and that it can arrange to pay them promptly on demand. To this end all banks are examined twice each year and many of them more frequently as their condition seems to require. If the exam- iner's report discloses that a bank is in an unsatisfactory condi- ROMANCE AND TRAGEDY OF BANKING 539 tion proper corrective measures are promptly adopted, always with a view to protecting the interests of the depositors. Of course, it has been beyond the power of the Comptroller to prevent a bank failure in every instance, but as has been herein- before stated for every failure that has occurred many failures have been prevented through the timely and effective supervision of the Comptroller, and where failures have occurred the first duty of the Comptroller has been to take prompt steps to protect the interests of the depositors by at once placing the bank tempo- rarily in the hands of an examiner until it could be determined whether reorganization and resumption of business could be effected or whether it would be necessary to finally liquidate the bank's affairs through a receivership. In the liquidation of a bank through a receivership the interests of the depositors take precedence over every other claim except that of the Government for the redemption of circulation, if there should be any circula- tion outstanding, and this liability is always satisfied by a sale of the Government bonds held by the United States Treasurer as security therefor. If the assets of the bank are insufficient to pay the liabilities to the depositors in full, then the stockholders be- come liable to the extent of one hundred per cent, of their stock holdings for the amount of the deficiency, and the receiver pro- ceeds, under authority of the Comptroller, to enforce payment of the assessment. As the assets of the bank are reduced to cash dividends are declared from time to time and the proceeds distributed pro rata to the depositors. No money or assets are returned to the stock- holders until the claims of depositors are paid in full with inter- est from the date of closing of the bank if the assets should yield a sufficient amount for such payment. It follows, therefore, that the interests of depositors in na- tional banks are protected to the fullest extent possible by the Comptroller of the Currency from the moment a bank opens its doors for business until it is finally liquidated through a receiver- ship, should the bank be so unfortunate as to be placed in the hands of a receiver. The Comptroller or the receiver has no personal or selfish interests in the outcome of the liquidation to satisfy or to gratify. 540 ROMANCE AND TRAGEDY OF BANKING His only concern in the liquidation of a failed bank is to endeavor to obtain every dollar that it is possible to realize from the assets of the bank by collection, compromise or sale and to make a fair, impartial and pro rata distribution of the proceeds to the depos- itors in the failed institution. It is now proposed to change all this by merging the Comp- troller's office with the Federal Reserve Board and transferring the supervision of the banks and bank examiners to the Federal Reserve Banks. The relationship between the Federal Reserve Banks and the depositors in national banks is quite different from that of the Comptroller of the Currency towards these institutions. The Comptroller is entirely independent of these banks and free from any personal interest in their affairs. The Federal Reserve Banks are generally interested as a creditor and invariably so in the banks that are in an over-extended and otherwise unsatisfactory condition, or verging on insolvency. Therefore, when one of these banks becomes insolvent the Federal Reserve Bank is usually its largest creditor, and a preferred creditor at that, as it always holds as security for rediscounts or for loans made the institution its choicest paper. Self-preservation is the first law of nature. The first move of the Federal Reserve Bank after failure of the debtor bank, therefore, would be to take care of its own interests. The doors of the failed institution would be closed and its affairs would have passed into the hands of a preferred creditor the Federal Reserve Bank which would immediately proceed to sat- isfy its own claims, even to the extent of sacrificing the security which it holds, if necessary, regardless of the interests of the helpless and unfortunate depositors. Would it be reasonable, therefore, to assume that it would do otherwise or have the same solicitude for the welfare of the gen- eral depositor that the Comptroller of the Currency would have? The first duty of the Federal Reserve Bank would naturally be to itself. That bank would have no concern for the general depos- itor until after its own claim upon the insolvent institution should have been fully satisfied. What would have been the effect upon the interests of depos- itors if a national bank had failed under such conditions as those ROMANCE AND TRAGEDY OF BANKING 541 described as having prevailed in Iowa, Montana, Texas and in other sections of the country, and the bank had been liquidated under the supervision of the Federal Reserve Bank? What would have remained for the depositors after the Federal Reserve Bank, in satisfying its claim, had disposed of not only the eligible paper which it held as security, but as much, if not all, of the in- eligible paper and securities which it also held as collateral to the eligible paper? It is not difficult to imagine. A preferred creditor of an insolvent national bank, holding security for his claim, is entitled to prove the claim against the bank for the full amount of the debt and, at the same time, to receive thereon any dividends that may be declared until the amount of the dividends and the collections from the collateral held are sufficient to discharge the debt in full. There is no question in connection with the liquidation of in- solvent banks that arises more frequently and is contested more warmly than that of preferential claims of creditors. There is no general or definite rule for determining the right of a creditor to a preference. The question always has been determined in each case by the Comptroller of the Currency himself, upon a full and clear statement of the facts submitted to him by the receiver or by the courts on appeal. Comptrollers have been so careful to prevent favoritism of any kind in allowing preferences that even the receivers of insolvent banks never have been permitted to decide these questions upon their own judgment. The procedure of placing a preferred creditor in charge of an insolvent national bank who holds as security for his loan the very best paper of the bank, or any creditor or debtor of the institution, for that matter, is without precedent in the history of the office of the Comptroller of the Currency. The liquidation of an insolvent bank should be under the im- mediate supervision of a wholly disinterested Government official, such as the Comptroller of the Currency. Neither the Federal Reserve Bank nor the Federal Reserve Board should have any voice in the settlement of the affairs of such banks. The national banking system has been in operation for nearly fifty-nine years. Its principal defects and weaknesses, which existed and were fully recognized for so long a time, were prac- 542 ROMANCE AND TRAGEDY OP BANKING tically cured by the enactment of the Federal Reserve Act, which materially enlarged the scope of powers of the banks, and afforded them the means of obtaining additional credits to meet the needs of their respective communities. Under the leadership of the Comptroller of the Currency the national banking system has successfully stood the tests of time and safely weathered the finan- cial storms and business depressions of every character and sever- ity which it has encountered during the more than half century of its existence. The experience of the past is always a safe guide in determin- ing the course of the future. The best interests of the national banking system and of the banks would not be benefited by such a convulsive and experimental change as the abolition of the office of the Comptroller of the Currency and the transfer of the Comp- troller's duties to the Federal Reserve Board or to the Federal Reserve Banks, as is proposed. The duties of the Comptroller and the business of the Comptroller's office can be more efficiently, economically and advantageously administered separately than by uniting the two bureaus, and more satisfactory results will accrue to the banks and the banking public by their continued operation apart, as they have been. The stability and continued success of the national banking system depends wholly upon the confidence of the depositors in the security of their deposits and an impartial and conservative execution of the banking laws. Any change that will have a ten- dency to jeopardize the safety of deposits or impair confidence in the supervisory authority will have an injurious effect upon the system as a whole. Any supervisory authority which the Federal Reserve Board may possess should be limited to the regulation of the Federal Reserve Banks and the restriction of the activities of these banks to the discharge of the duties for which they were expressly cre- ated, namely : to supply the member banks in times of urgent need with funds, by means of rediscounting their eligible paper in amounts sufficient to enable them to meet the demands of creditors and of legitimate business in their respective communities. Closer supervision of the Federal Reserve Banks by the Fed- eral Reserve Board and more uniformity of regulations in regard ROMANCE AND TRAGEDY OF BANKING 543 to the management and methods of these banks would appear to be very necessary in the light of developments and disclosures hereinbefore referred to. The frequent encroachments of some of the Federal Reserve Banks upon the jurisdiction of the Comp- troller of the Currency and their unauthorized and unwarranted interference with the Comptroller's functions have been produc- tive of more or less confusion of understanding and conflict of instructions, difficult to reconcile or correct. This has been nota- bly the case in connection with matters involving the interpreta- tion of provisions of the banking laws by giving information or advice in conflict with the rules of practice established and fol- lowed by the Comptroller's office. Instead of referring the banks, as they should have done, to the Comptroller of the Currency for information or instructions on all such subjects, some of the Federal Reserve Banks in numerous instances have undertaken to interpret the law, instruct the banks, or answer the inquiries ac- cording to the judgment of the particular individual to whom the inquiries were submitted, and almost invariably the instructions or information given was in conflict with the position of the Comp- troller's office on the same subject and with that of the national bank examiners. To avoid conflicts of this nature, therefore, and resulting con- fusion the Federal Reserve Board should assume active super- vision of the Federal Reserve Banks, restrict the activities of these banks to the discharge of the duties for which they were created, as hereinbefore explained, and leave the supervision of the na- tional banks exclusively to the Comptroller of the Currency. The duties and powers of each branch of the system are well defined by law, and if each branch will attend strictly to its own business and not encroach upon or interfere with the duties of the other there is no good reason why the three branches of the Federal Re- serve System should not function harmoniously, effectively and successfully, and the system, as a whole, be a worthy successor, as it was intended it should be, of the national banking system. Unless this is done, more or less confusion, conflict and dissatis- faction will be the inevitable consequence. The knowledge that the system as a whole is working harmo- niously, that the principal imperfections of the national banking 544 ROMANCE AND TRAGEDY OF BANKING laws have been corrected or removed and its deficiencies supplied should, and no doubt, will, so increase public confidence in the stability and safety of the improved system, as a whole, as to insure its satisfactory and successful perpetuity through the years to come. Status of the Federal Reserve Board The Federal Reserve Board is not a bureau of the Treasury Department like the office of the Comptroller of the Currency. It is a part of the banking system of the country and not of the Government. If it were a bureau of the Treasury Department the Government then would be in the banking business. It is not the function of Government to engage in such business, and, there- fore, inasmuch as the board is not a Government bureau it should be located in a building of its own outside of the Treasury Depart- ment. The principal functions of the Federal Reserve Board were intended to be to provide, through the Federal Reserve Banks, a circulating medium sufficiently elastic to meet readily the periodi- cal demands for additional currency incident to the movement of the crops and increased industrial and commercial activities by making it possible for the banks to convert quickly their assets into cash to meet unexpected contingencies or extraordinary de- mands upon them, and to automatically retire such currency when no longer neded. The principal defect in the national bank currency was its in- elasticity. It was unresponsive to the demands of trade and com- merce, and the Comptroller of the Currency was powerless to make it otherwise. In addition to providing an elastic currency, the duty was im- posed upon the Federal Reserve Board of prescribing regulations for the Federal Reserve Banks, governing the rates of discount, and, incidentally, to conserve the country's stock of gold as a material basis for Federal Reserve issues of currency. The Federal Reserve Board is the head of the Federal Reserve Banking System. The members of the board, with the exception of the Secretary of the Treasury and the Comptroller of the ROMANCE AND TRAGEDY OF BANKING 545 Currency, who are ex-officio members, are not officers of the Gov- ernment, like the heads of bureaus, although appointed by the President and confirmed by the United States Senate. They are a part of the Federal Reserve Banking System. The Comptroller of the Currency is an official of the United States Government. He is the representative of the Government and not of the banks. He is charged with the duty of administer- ing the banking laws and the supervision of the banks. He repre- sents no part of the banking system and his relations with the banks are entirely independent and disinterested, except so far as seeing that the laws are faithfully administered and properly ob- served by the banks in the conduct of their business. To abolish the office of Comptroller would remove the only safety link be- tween the Government and the depositors upon which the latter have relied confidently for more than a half century, as to the solvency of the banks and the security of their deposits. And the banks have exploited the Comptroller's supervision by advertise- ment and otherwise, as their strongest recommendation for the confidence of the banking community in soliciting and retaining their business. The right to advertise the institution as being under the supervision of the Government of the United States always has been regarded bv national banks as one of their most valuable assets, and this fact has been prominently displayed and extensively advertised from the day the banks first opened their doors for business in competition with other banking institutions in their respective communities. Supervision of the member banks by the Federal Reserve Banks would be equivalent to supervision by the system of which the member banks are a part, and not by an independent, impar- tial and disinterested officer of the United States Government, like the Comptroller of the Currency. The officers in charge of the Federal Reserve Banks would not have the same solicitude for the interests of the depositors that the Comptroller has. Nor would the depositors have the same degree of confidence in this character of supervision as they have in supervision by an im- partial and wholly disinterested official of the United States Gov- ernment, especially in the liquidation of banks in which the super- vising authorities would have a substantial and secured interest. 546 ROMANCE AND TRAGEDY OF BANKING which they would proceed to satisfy first, as has been done in every instance of a suspended bank owing the Federal Reserve Bank money. The Federal Reserve Act was a most excellent piece of con- structive banking legislation, and it was enacted at a very oppor- tune time, although it did not begin to function until November 16, 1914, over four and a half months after the outbreak of the great World War. Fortunately, however, it contained the pro- vision extending the life of the Aldrich-Vreeland emergency cur- rency act for the period of one year. This enabled the Comp- troller of the Currency, under authority of the Secretary of the Treasury, to make use immediately of the several hundred mil- lions of emergency currency which had been accumulated in the vaults of the Treasury Department for just such a contingency. The prompt issue of this circulation to currency associations that had been hastily formed under authority of the Aldrich- Vreeland Act supplied the banks in all parts of the country with all the money they required and enabled them to continue cur- rency payments without interruption, thus relieving a very men- acing situation and inspiring confidence in the soundness of busi- ness and of our financial institutions and averted a threatened panic such as the country never had experienced. Notwithstanding all that may be said in favor of the Federal Reserve Act, it was not and is not a perfect banking measure. It had and still contains many imperfections. Fundamentally it is sound, but many of its provisions can be improved upon, some by legislative amendments and others by judicious administration more in harmony with the spirit and intent of the act than has been displayed in many instances. Some of its provisions should be entirely repealed and some of its weak features strengthened and safeguarded so as to prevent extravagances, wastefulness in expenditures and oppressive abuses through the enforcement of policies of administration not contemplated by the act, but arbi- trarily assumed and exercised by administrative officers of the Federal Reserve Banks. Politics, the arbitrary exercise of power and the improper and extravagant use of money were some of the principal charges made against the United States Bank which finally led to its ROMANCE AND TRAGEDY OF BANKING 547 downfall. The Federal Reserve Banks should profit by the his- tory of that institution. If misfortune or failure ever overtakes the Federal Reserve System, it will arise through opposition to objectionable and op- pressive policies and methods of administration of the Federal Reserve Banks as affecting disastrously the interests and business of the member banks. Therefore, it would be an exceedingly dan- gerous experiment to abolish the office of Comptroller of the' Currency and to transfer to the Federal Reserve Banks the power to examine and supervise the member banks, as time would very soon prove, if this fact has not been sufficiently demonstrated already by the experiences which a number of the member banks have had in the sections covered by the incidents heretofore related. It will be noted that throughout this entire volume the pronoun "I" has not been used in a single instance, except on the intro- ductory pages, when it could not well be avoided. I hope I may be excused, therefore, if in these concluding paragraphs I make some allusions to myself in the first person. It may be the impression of some of the readers of this volume that my views in regard to the inadvisability of transferring to the Federal Reserve Board and the Federal Reserve Banks any of the supervisory powers heretofore exercised by the Comptroller of the Currency are influenced by personal or selfish interests as affecting the position which I have continuously occupied for more than twenty-three years. To remove any thought of this nature from the mind of any- one who might entertain such an impression, it may be stated that the position of Deputy Comptroller of the Currency is a classified civil service place and the occupant is subject to the provisions of the retirement act. I passed the maximum retire- ment age some time ago and am now holding the position under a second extension of time for the limited period of two years. I was willing and anxious to retire from office at the end of the first period of extension, but I concluded to remain for a while longer at the urgent request of Comptroller Crissinger, in the 548 ROMANCE AND TRAGEDY OF BANKING following letter addressed by him to the Secretary of the Treas- ury under date of May 27, 1922: The purpose of this letter is to advise you that this office has requested the retention in the service for a period of two years from August 20, 1922, of Mr. Thomas P. Kane, Deputy Comptroller of the Currency. Mr. Kane is one of the most indispensable men con- nected with the Bureau of the Comptroller of the Cur- rency. He is willing to continue in the Government service and I recommend that by all means his services should be retained. Mr. Kane is senior Deputy Comptroller and during my absence from the office, acts in my stead, performing all the duties appertaining to the Comptroller. Mr. Kane's knowledge of the National and Federal reserve banking laws and the rules, regulations, and prec- edents of the office peculiarly fit him for the position he now holds and which he has held for many years, the duties of which he has discharged with the highest dili- gence, intelligence and fidelity. He has attained a pro- ficiency in his work which makes him of exceptional value to the Treasury Department. Mr. Kane's long experience in the office makes his service peculiarly valuable at the present time, and if he were to retire from the service at this time, it is doubtful whether another man of his experience and ability in handling these difficult problems could readily be secured. His services are such as I should very much regret to dispense with now. While he is a man seventy-two years of age, he has accurate and keen possession of all his faculties and is capable of rendering a greater amount of service in the position in which he is serving the Government than many younger men. Therefore I request that the time of his services be extended for such period as is permitted by law. In my opinion the mental and physical condition of Deputy Comptroller Kane at this time is excellent, and his services would warrant the payment to him by the Gov- ernment of a much larger salary than he now receives. It should be understood, therefore, that my views as declared in the foregoing paragraphs are not influenced in the slightest ROMANCE AND TRAGEDY OF BANKING 549 degree by selfish or personal reasons, but express ray honest con- victions, based upon long experience, of what I believe to be for the best interests of the public service and of the national banks of the country which I have had the honor to assist in supervising for more than a quarter of a century. But it matters not whether I am in the Government service or out of the service, my earnest prayer shall ever be that the Fed- eral Reserve System may continue to grow in strength and wisdom and steadily improve with age, and that when the history of the system is finally written it shall be a realization of the fondest hopes and expectations of those who framed the measure, and not become, through faulty, incompetent or oppressive administra- tion, another "Romance and Tragedy of Banking". UCLA-GSM Library HG 2555 K13r 1922 L 005 028 091 6