UNIVERSITY OF CALSFO- AT LOS ANGELES IX ^ The Romance and Tragedy of Banking Problems and Incidents of Governmental Supervision of National Banks By THOMAS P. KANE Deputy Comptroller of the Currency VOLUME 1 NEW YORK THE BANKERS PUBLISHING CO. 1922 a 9 1» 3 Copyright, 1922, by The Bankers Publishing Co. WARREN PUBLICATIONS PniSS tAManiOGt. MASS.. U. 8 A • • • I \^ iL \ '^ 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 nR^923 CONTENTS Page INTRODUCTION -------- i CHAPTER I.— THE NATIONAL BANK ACT AND ITS ORIGIN - 6 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 xMcCULLOCH - - - - 28 Biography of Hugh McCulloch, the first Comptroller of the Cur- rency — McCuUoch's annual reports — McCuUoch's circular letter to^ — • the banks — McCuUoch's appointment as Secretary of the Treasury — Selection of McCulloch to organize the bureau — First national bank organized. CHAPTER IV.— FREEMAN CLARKE - - - . 35 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 — ,^_^ Instances of theft in connection with currency shipments— Great Chicago fire of 1871 and its effect upon the banks — Bank failures during Hulburd's administration — Amendments to the laws enacted. V CONTENTS Page CHAPTER VX.— JOHN J. KNOX - - - 71 Biography of John Jay Knox — Knox's annual reports — Panic of 1873 and its causes — R^umption 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 — Fauure 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. z^**..— — CHAPTER VIII.— WILLIAM L. TRENHOLM - - - 181 Biography of William L. Trenholra — Unprecedented reduction in circulation — Trenholm's circular letter to the banks — Plan for National Currenc^_^eform — 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 - - - "v^Sl Biography of Edward S. Lacey — Monetary stringency of 1890-^ Failures during Lacey's administration — Failure of the Keystone National Bank — Failure of the Spring Garden National Bank — Failure of the Maverick National Bank — Necessity for some lim- itation on the discount of cflu wicrfeiaL J* ap e r — Suggested amend- ments to the law. > CHAPTER X.— A. BARTON HEPBURN - - - - 173 Biography of A. Barton Hepburn — National bank failures dur- ing Hepburn's administration — P'ailure of the National Bank of Guthrie, Oklahoma — Annual report of Hepburn — Amendments to theTaw recommended. VI CONTENTS I Page CHAPTER XI.— JAMES H. ECKELS - - f - - - 187 Biography of James H. Eckels — Panic ^f 189 3 — ITie 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 ;^imri 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 Globe National Bank — Defalcation in the First National Bank of New York City — The Currency__i,aws — Prefcnnent 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 - - - 243 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 ~*s4 fires — Failure of the Chicago National Bank — Legality of the > action of the Clcarin£_Jifliise .Banks — Indictment, trial and con- viction of John R. Walsh — The Bigelow defalcation — Culpability 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 ofJ[,9p,2:r-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 panicia_AVall Street — Life of receiverships — Ridgely's annual reports — Amendments to the banking laws. Vll ILLUSTRATIONS Pag* Thomas P. Kane - - - ----- - 1 Hugh McCulloch - - ----- 28 Freeman Clarke - - - - - - - -85 HiLAND R. HULBURD ------47 John Jay Knox - - - - - - - - -71 Henry W. Cannon - - - - - - - -115 William L. Trenholm - - - - - - - -181 Edward S. Lacey - - - - - - - - -151 A. Barton Hepburn -------- 173 James H. Eckels -------- 187 Charles G. Dawes -------- 215 William B. Ridgely - - - - - - - 243 Cassie Chadwick ----- - 263 Assignment of the $500,000 Note 264 Bogus Trust Agreement ------- 264 Assignment of the $250,000 Note - - - - 264 Forged Carnegie Note for $250,000 - - - 266 Forged Carnegie Note for $500,000 - 266 Vlll 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. 1 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 ray 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. Trenliolm, 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 ment 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 ROIVLANCE 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 Avhich 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. They lack that essential element of any currency. They can only be used during the war. The very moment that peace comes, all tliis 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 has 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^. 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 conunercial 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 Currency Bureau 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 McCuUoch as Comptroller, and the selection bj^ 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 framers 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- 13 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 hy 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 hy 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 wliat 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 TRAGEDY OF BANKING 15 pointing this oflScer 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 susp>end 16 ROIVLA-NCE AND TRAGEDY OF 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 he 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 ROMANCE AND TRAGEDY OF BANKING 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 they 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 July 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 countr}^ 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 w^as 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 ROMANCE AND TRAGEDY OF BANKING 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 2& 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 reoi-ganization, 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 ROMANCE AND TRAGEDY OF BANKING 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 board, 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 imdcr bond. Presidents being annually elected or appointed will, of course, be required to give annual bonds, and whenever an official is reappointed a bond should be 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 Ixitween 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 always 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 sturd}^ 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 OF 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. 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 haA'e been conducted entirely ROHklANCE 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 oC: 'i;,o 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 Ba\'ne, a brother of L. P. Bayne, of the firm of Bayne & 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 ROMANCE AND TRAGEDY OF BANKING 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 Sz 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 lai-ge 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 lie 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 which 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 the}' 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 faix'ly 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 befoi'e its failure. ROIVIANCE AND TRAGEDY 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 necessar}^ to i-ecover 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 was $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 Bank 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 KOMANCE 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, Fenn & 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 OP 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 Avould 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 mone}^, 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 cesser, 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 AprH 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 strongl}' 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 actuallv 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 KOMANCE 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 reserv^e 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 ovm 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 dej>osit, 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. Anv 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 cit}^ 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 city bank 90,000 Total $180,000 $180,000 52 ROMANCE AND TRAGEDY OF BANKING 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 $:t65,000,000 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 Jind 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 countr3^ 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 11th 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. KOMANCE 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 $3,000,000 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 inciirrd — 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 Avould 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 shoi-t 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 clumsiW affixing signatures to the notes other than the names of the president and cashier of the bank. The arroTecate 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 ROMANCE 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 OF 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, which appears in the reports of the Comptroller for subsequent 3'ears, containing a list of receivers appointed for insolvent banks from the beginning of the national S3'stem, 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 banlcing" 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 KOMANCE 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 ROMANCE AND TRAGEDY OF BANKING 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 ability 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. Ayer 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 ROIVIANCE 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 liad 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 compan}^ 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 Older 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 d('y)ositors 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 these 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 tlie 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 waj'^ 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. Chittenden, 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 tenns 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 bank stock; prohibiting loans on 70 ROIVIANCE 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. »*»-l 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 71 tJ. o 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 Oi'lcans, 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 Avas 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, 1807, 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 ROIilANCE 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 8tli. Tliis 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 liouse 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 Y^ork, 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 Y^ork 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 Y'ork 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 TIIAGEDY 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- lying 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 $3-10,000,000 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 bants 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^ a large part of which never will be presented for redemption. 'June 30, 1922. ROMANCE AND TRAGEDY OF BANKING n 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- ino-s banks were established at Beaufort, S. C, and Norfolk, Va., o 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 w^as 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- pax'tment 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 $2,000,000. 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 does undertake to assume supervision over national banks, but it had no super- vision whatever over this institution. If Congi-ess 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 pa3'^ment 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 R01VLA.NCE 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 seme. 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 ^ank 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 wore 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 form as to bring about a similar condition of affairs in many banks as existed in the Freedman'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 ROIVIANCE 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 interpretation 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 186-i 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 by 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 any 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 pi'op- 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 ROIVIANCE 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. Banking 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 dut}' 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 ROIHANCE AND TRAGEDY OF BANKING This, he 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 Avhich 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 the 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 onU^ 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 KOMANCE 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 b}^ 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 the 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 ,$4!l3,750, 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 clearly 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 ^-^0 ^^ ^ :^- -^ -I^JjUy ^a-yv-K^. cv^ x^-?- ^ S,^^^'^^^ ^^'^^^ty. <^-y ^-^T*^ ///O. -SL^V^, ^ OCT. --? I ^..^^^.^r.^^ /^on-^^^rvtsXC^^iA^ ^/^:-^, ^O-'tJ y'h-i^*.-^ ^'i' ^ 7^- //' ^ ^ X /^^>f--fc-*^ aJ^-cLy^ ^a^«.^ H^v-z^^^^ /i-*<-'^^ai-t<2^ '1/ yt-^-t^ n^tyC^ a-^1 Assignment of the ^250,000 Forged Carnegie Note ROMANCE AND TRAGEDY OF BANKING 265 Her next deal with the Oberlin bank was to submit an offer to the president of a note purporting to have been signed by Mr. Andrew Carnegie for five hundred thousand dollars in exchange for the assignment of the five millions of securities which the bank held. The president of the bank readily accepted this proposi- tion, surrendered the assignment and received the Carnegie note, which he accepted without question as being genuine, relying upon his familiarity with the signature of Mr. Carnegie, which he said he had seen on other papers. When questioned as to how she became possessed of so much wealth and why Mr. Carnegie gave her his note for so large a sum of money, she stated that she was the illegitimate child of Mr. Carnegie, and that he had settled on her the securities before mentioned, amounting to over ten millions of dollars, for the purpose of righting the wrong occasioned by her birth. About this time the bank was due for examination and the examiner was likely to drop in any day. The president was anxious to conceal from the examiner the large unlawful loan to Mrs. Chadwick, and conferred with her in regard to making some arrangement that would pass the inspection of the examiner. The resourcefulness of Mrs. Chadwick was equal to the emergency. She enlisted the interest of some of her friends, who arranged to negotiate a loan through a trust company, but the board of directors of the company refused to make the loan when the ap- plication was brought to their attention. The regular examination of the bank was made in April, 1904. The loan to Mrs. Chadwick then amounted to two hundred and twenty thousand dollars, and was so reported by the examiner to the Comptroller, but the examiner reported that while the loan was largely in excess of the legal limit it was amply secured and that there was no danger of the bank sustaining any loss thereon ; that he had seen the security, and that it fully protected the loan. He reported this loan as having been made to C. A. Chadwick, but did not report that C. A. Chadwick was a woman, or that the security for the loan was a note of Andrew Carnegie. He assured the Comptroller that arrangements were being made to immedi- ately reduce the loan to the legal limit and that he had insisted upon this being done. 266 ROIVIANCE AND TRAGEDY OF BANKING Had this examiner advised the Comptroller that the recipient of this large loan was a woman and that the security consisted of a note of Andrew Carnegie, the Comptroller would have been put on his inquiry in regard to this woman and why Andrew Car- negie had executed his note to her for such a large sum of money, as Mr. Carnegie was not in the habit of having his notes in na- tional banks. At the time of the previous examination of this bank the loan was concealed from the examiner by a temporary loan negotiated by the president which was paid immediately after the examina- tion. In the meantime, while the president of the bank seems to have become alarmed over this large liability and appears to have made strenuous efforts to secure the payment or reduction of the loan, he continued to make further advances and when the bank failed Mrs. Chadwick was liable to the association for two hun- dred and fifty thousand dollars, or over four times the amount of the capital stock of the association. The credulous president of the bank apparently Avas com- pletely hypnotized by this woman and not only freely loaned to her the funds of the institution but made her liberal advances from his personal resources. So complete was his confidence in her honesty and her financial ability to fully discharge her obligations to the bank and to himself that for several days after the bank failed he still believed and maintained that she would come forward and meet her obligations. After the failure of the association and the sensational dis- closures which followed, the antecedents of this woman were thor- oughly investigated and exposed, and while much that was then written of her history was no doubt untrue, or at least greatly ex- aggerated, according to the statements published at that time it appears that her maiden name was Elizabeth Bigley, and that she was born at or near Woodstock, Canada. She was reported to have been indicted in her younger days for forgery, but on trial was acquitted on the ground that she was mentally unsound at the time she committed the act. Later she was known as Mrs. Hoover, having married one C. L. Hoover, a resident of Cleve- land, Ohio, who was many years her senior. She was next known o ITS N V3, O z CJ C u a u V bO u, O 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 f orgei-y. 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 KOJVIANCE 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 tlie 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 necessar}- 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 Ava}^ b}'^ 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 pJune .'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 dishonoi-able transactions in mining and banking, and Thomas W. Lawson made him the object of criticism in his articles on "Frenzied Finance." Morse, Heinze 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 KOMANCE AND TRAGEDY OF BANKING in which thej 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 b}' 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, 19v:8. 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 Avas 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 sufl^cient. 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 Wayneshurg, 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 $349,474.61, 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 v%-as 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 obtamed 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 OP BANKING 277 Many of the notes fqund 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 unsatisfactoi-y 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 Avhich 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 TRAGEDY 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 considei'ed 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. xt v v 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 m 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. KOMANCE 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 Avas 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 ComptroUer 284 ROIMANCE 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 iti 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 flourishmg 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 compames 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- 288 ROMANCE AND TRAGEDY OF BANKING ances 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- ROMANCE 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- RO^IANCE 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, particularl}' 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 OF 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 ROIVIANCE 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 ROAIANCE 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 OP BANKING 299 reserve The Act of March 3, 1903, providing for additional 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 ofl5cer 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. THE UNIVERSITY LIBRARY This book is DUE on the last date stamped below H ^ 1991 Form L-9 20m-l,' 42(8519) UNIVERSITY OF CALIFORNIA ' ^^ \.f A, -C^XA^J -Kl3r The mmfinco '^ •'^- and tragedy of banicing. SiQV 2 R 19F>t DEMCO 234N %* HG 2555 K13r .^.^ISflgpClLlTY AA 000 543 128