A plan of operation was therefore settled upon, which should become binding upon all the banks in the Association, when adopted by three fourths of them. By this plan the banks agreed that, for the purpose of enabling them to expand their loans, the specie reserves held by them should be treated as a common fund and, if necessary, should be equalized among the banks by assessments laid upon the stronger for the benefit of the weaker;and that, for the purpose of settling balances between the banks, a committee should be appointed with power to issue certificates of deposit to any bank placing with them adequate security in the shape of stocks, bonds, or bills receivable, and that these certificates should be received in payment by creditor banks. The effect of this arrangment was that any bank which experienced an unusual demand for specie would be supported by the whole of the common stock, and that the debt to the others, which it thus incurred, could be met by a pledge of its securities. Whatever course might

242 National Banks of the U. S.

The effect of this arrangement was instantaneous. The announcement that it had been made quieted the money-market and ended the panic. In the next week the banks increased their loans rapidly, and nearly the whole of the additional loans went to swell the mass of deposits, with only an inconsiderable loss of specie. The expansion was continued at a more moderate rate for several weeks until, under the natural effect of the revulsion in business, the demands for loans fell off and specie began to accumulate.

The issue of Clearing House loan certificates and the equalization of reserves were again resorted to in 1861 with equally good results The situation in 1873 was more serious. The money supply of the country could not be enlarged in any way, even by the importation of gold, since it consisted of a definite amount of irredeemable government paper and bank-notes. The reserve strength of the banks, while sufficient to carry them through the worst of the storm, was not enough to enable them to avoid the resort to suspension.

In 1884, the next occasion when Clearing House loan certificates were issued, the opposition to the provision for the equalization of reserves was so widespread that it does not appear that it was even formally considered. The ground for this opposition can be readily understood. In 1873 the practice of paying interest upon bankers' deposits was generally regarded with disfavor. Only twelve of the Clearing House banks offered this inducement to attract deposits; but by this means they had secured the bulk of the balances of outside banks. It was in meeting the requirements of these banks that the reserves of all the banks were exhausted at that time. The non-interest paying banks entered into the arrangement for the equalization of reserves in expectation of securing a Clearing House rule against the practice of paying interest on deposits. But their efforts had resulted in failure. Some of them had employed their reserves for the common good most reluctantly in 1873, and the feeling against a similar arrangement in 1884 was naturally far stronger and more general. Moreover, the working of the pooling agreement in 1873 had occasioned heartburnings which had not entirely disappeared with the lapse of time. It was believed, and doubtless with reason, that some of the banks had evaded the obligations of the pooling agreement. It was said that some of the banks had encouraged special currency deposits so as not to be obliged to turn money into the common fund. Further, as the arrangement had not included bank-notes, banks exchanged greenbacks for notes in order either to increase their holdings of cash or to secure money for payment over the counter. Here we come upon an objection to the pooling arrangement which doubtless had much weight with the specially strong banks, although it is more apparent than real. In order to supply the pressing requirements of some banks, others who believed that they would have been able to meet all the demands of their depositors were obliged to restrict payments. That such an expectation would have proved illusory later experience affords ample proof. When a large number of the banks in any locality suspend the others cannot escape adopting the same course. But in 1884 the erroneousness of the belief had not been made clear by recent experience.

The New York banks weathered the moderate storms of 1884 and 1890 without suspension, by means of the Clearing House loan certificate alone, and in the course of time all recollection of the arrangement for the equalization of reserves seems to have faded from the memory of the banking community. There was, however, in those years another potent influence which tended to lessen the likelihood of suspension following the issue of loan certificates. Many banks were unwilling to take them out, fearing that such action would be regarded as a confession of weakness, and continued the payment of cash in the settlement of Clearing House balances. In 1893 also only a small part of the balances between the banks was settled in certificates at first; but by the end of July practically all balances were settled in that way and suspension followed at once. In 1907 all the banks having unfavorable balances, with but one important exception, took out certificates on the first day that their issue was authorized, and suspension was then for the first time simultaneous with their issue.

The connection between suspension and the use of Clearing House loan certificates as the sole medium of payment between the banks was simple and direct. The bank which receives a relatively large amount of drafts and checks on other banks from its customers cannot pay out cash indefinitely if it is unable to secure any money from the banks on which they are drawn. So long as only a few banks are taking out certificates and the bulk of payments are made in money, no difficulty is experienced; but as soon as all the banks make use of that medium, the suspension of the banks which have large numbers of correspondents soon becomes inevitable. The contention of bankers both in 1893 and in 1907 that they had not suspended since they had only refused to honor drafts on other banks was untenable. The Clearing House loan certificate was a device which the banks themselves had adopted and they had failed to provide any means for preventing partial suspension as the result of its use.