Of actual cash, then, the banks of the country at this date held but 466.4 millions, much less than the amount of reserve required for their liabilities, - the remaining sum, which apparently made their condition remarkably strong, consisting chiefly of debts due from one bank to another. The ability of the mass of banks, therefore, to meet the pressure of a financial crisis was dependent on the ability of the debtor banks, to pay upon demand the sums deposited with them and relied upon by the others as a part of their reserve, and in particular, on the ability of the banks of New York City to meet their demand liabilities. The reserve of those banks, however, on which all the others rested, was but little above the legal minimum at the date named, and sometimes under similar conditions has been below that point, so that with an apparently high reserve for the country at large, there was such weakness at the central and most exposed point as to impair seriously the value of this precaution.1

1 The reserve September 7, 1899, was divided between city and country, and classified as follows, in millions:

The relation of the New York banks to the other banks of the country, as the depository of their reserves,1 was plainly quite analogous to that of the Bank of England as the depository of the joint-stock and private banks of Great Britain. It was a relationship which had developed before the Civil War from motives of business convenience, step by step with the more intimate commercial relations which improvements in transportation made possible. Each city is a natural center for the settlement of payments for its surrounding territory. To facilitate these payments, banks in the vicinity of any city find it necessary to maintain balances with the banks of that city, even if such balances cannot be included as a part of their reserve. A few cities become centers for settlements for entire regions within a large country, and some one city is certain to become the center for settlements between all parts of a country and with foreign countries. It therefore came about that, as for example banks in the vicinity of Portland, Maine, found it convenient to maintain

1 The central position of New York was not seriously affected by the conversion of Chicago and St. Louis into central reserve cities, under the act of 1887.

balances with Portland banks, and the Portland and all other New England banks to maintain balances with Boston banks, so all banks of any importance throughout the country found it desirable to maintain balances in New York, the central money market of the country. In framing the national banking law these arrangements were recognized in the provisions authorizing within certain limits the inclusion of balances with other banks in meeting reserve requirements.

The central money market of a country is, however, much more than a center for making settlements. It is the one place in any country in which there is at all times an indefinitely large demand for loans. This is because average rates for loans in the central money market are lower than elsewhere in the country. Borrowers from all quarters resort to it for accommodation and financial business of every kind tends to become concentrated there. Elsewhere the demand for loans is more local and cannot be stimulated to any very considerable extent in short periods of time by the offer of a reduction in lending rates. Temporarily idle funds of all the banks of a country can therefore find employment in its central money market or may be attracted thither by the offer of interest on bankers' deposits. By the withdrawal of such funds, on the other hand, outside banks are able to shift to the central money market virtually the entire burden of meeting the situation in periods of financial strain. In the United be taken then, any bank was as strong in specie as any other. A general increase of loans and liabilities might for the time weaken all, and if there were a further loss of confidence in the community might expose all to a common danger; but no one bank, by holding back its loans, could strengthen itself above the others, since the specie which it might thus collect must be held subject to assessments for the common benefit.

States with its thousands of independent local banks the burden resting on the New York banks in emergencies has been particularly heavy. When banking is conducted by a small number of banks operating numerous branches, united action can be secured with comparative ease. New York, alone among money markets, has been obliged to contend against the efforts of thousands of outside banks to strengthen themselves, a cause of trouble which in successive crises proved far more serious than the withdrawal of funds by individual depositors.

For meeting the peculiarly heavy strain to which, as the central money market of a decentralized system of banking, it was subject in emergencies, the New York money market itself was not effectively organized. Banking was conducted by nearly a hundred banks, large and small, but none of commanding influence. None of these banks were accustomed to maintain in normal times reserves very much in excess of legal requirements, and although these requirements were imposed so that the banks might have cash on hand available for emergencies, the managers of most of the banks manifested a pronounced reluctance to make liberal use of it. Acting singly each bank was certain to adopt the policy of loan contraction, which, as we have seen in an earlier chapter, cannot be carried far without spreading universal disaster and which is certain to involve the banks in a general suspension of payments. This course was adopted in the crisis of 1857 with such disastrous consequences1 that in the crisis of 1860 and in subsequent crises arrangements were adopted for securing some measure of common action among the banks. For accomplishing this, the Clearing House Association, in which the banks were already united for important purposes, and from which no bank would willingly find itself excluded, was the natural agency.