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 directing the Committee on Banking and Currency to make an investigation of the cause of the failure of these two banks, and to report to the House the amount of Government money deposited 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 National Bank was organized in September, 1864, by eleven shareholders, all of whom were resident business men of Washington, except one, who resided in Prince George County, Maryland. William Bayne, a brother of L. P. Bayne, of the firm of 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 necessarily 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 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 bondsman. It was shown by the testimony that King induced this paymaster to make a deposit amounting to over $500,000, for the purpose of assisting the bank, which was known to be embarrassed. Of the $765,572 of public moneys deposited in the bank at the time of the failure, all but $7308 was paymasters' or disbursing 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 possibility 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 emergency 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 indebtedness of Bayne & Company, declined to advise Paymaster Paulding 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 presented by the cashier of the Merchants National for two hundred thousand dollars, and were paid and placed to the credit of Bayne & Company through different concerns in New York, except such as were paid in cash for Bayne & Company's benefit.
It also appears from the testimony that $50,000 was secured from Paymaster Robinson by transfer of public moneys to his credit in the Bank of the Metropolis, upon representations made to him that the Merchants National was embarrassed and needed assistance. This amount was apparently used by the cashier of the Merchants National to pay his individual debts to the cashier of the Bank of the Metropolis and to the bank itself, instead of for the purpose of supplying the Merchants National with the additional currency which its officers represented it needed so badly.