The failure of this bank was the subject of a Congressional investigation, under authority of a resolution adopted by the House of Representatives on February 10, 1874, a full report of which was made by the Committee on Banking and Currency during the first session of the Forty-third Congress.
From the report of the committee it appears that this bank had been a depositary of public moneys, and was largely employed at times as the financial agent of the government, acting in that capacity in the conversion of the seven-thirty bonds and in the negotiations and funding of various Government loans in connection with the several syndicates formed for that purpose. The bank's financial transactions as fiscal agent for the Government were of great magnitude, and large profits were supposed to have been realized from its dealings in United States securities of all kinds.
Another special feature of this bank's business was the conversion of mutilated currency for other national banks and bankers of the country, and acting as agent for the redemption of the notes of such national banks as kept a redemption account with this association. At the time of the failure of the bank, this redemption fund amounted to $750,000.
The redemption feature of the bank's business grew from small beginnings to great proportions, but through lack of proper system in the management of this branch of the business the greatest carelessness and looseness in methods prevailed. After the failure of the bank an investigation showed that no adequate checks were established to insure correctness and accuracy. It appeared that the mutilated currency did not enter into the general cash account of the bank, but was kept separate and apart and under the special control of a corps of clerks. No record was found of any cash settlements having been made in this department of the bank's business to prove the accuracy of the account, or to verify the amount of currency on hand. The books of this department were simply memoranda. When mutilated currency was received, it was entered on the memorandum books, and from this record remittances were made. When amounts were remitted for, the drafts were credited in the general books to the banks on which they were drawn and a debit in bulk was made to an account denominated "Mutilated Currency." A large amount of currency received was circulation of banks which kept no redemption deposit with this bank, and which it was necessary to assort and send in round sums to the cities where such notes were redeemable, for collection and returns. Such currency when sent was debited to the banks to which it was sent and credited in bulk to "Mutilated Currency" account. The notes of banks which kept a redemption deposit with this bank were assorted and held until an accumulation of five hundred dollars or more was received, when these notes were sent to the Comptroller of the Currency for cancellation and destruction.
At that time the notes were destroyed by burning instead of by maceration as now. Large amounts of these notes were sent over to the Comptroller's office daily. This bank was located on Fifteenth Street, opposite the Treasury Department, in the building subsequently occupied by the Citizens National Bank, which bank, on November 7, 1904, was placed in voluntary liquidation and merged with the National Metropolitan Bank next door and subsequently the building was demolished to make room for the theatre and office building which now occupies the site. These notes were debited to "Burning Account," and credited to "Mutilated Currency Account" on the books of the bank.
The Comptroller of the Currency issued to the First National Bank certicates of burning for such notes, which certificates were sent by the bank to the banks issuing the notes, with request for remittance of an equal amount of currency to make good the deficit in their redemption deposit fund. But instead of these amounts being debited to such fund, they were debited to "Burning Account," thus leaving the balance to the debit of that account to represent the amounts due from banks for currency redeemed and destroyed for their account.
It was stipulated on the part of the First National Bank that returns for mutilated currency should be made on the day following the receipt of the currency, but the practice had been to remit in from one to five days after receipt, and for longer periods by special agreement. In consequence, a large amount of currency was always on hand in the First National Bank not shown on its general books, and at the time of the failure of the bank the accumulation of such currency amounted to $340,000. At the same time $97,000 had been sent to the Comptroller of the Currency for burning without entry on the books of the bank.
On account of the loose method of handling this business, when the accounts of the bank were made up after failure, a deficit was discovered of about $40,398, which never was reconciled. It was afterward stated by some of the employees of the bank, who knew of the criminal carelessness in connection with the conduct of this branch of the bank's business, that it was an easy matter for any employee to help himself to some of this money at any time without fear of discovery.
The Treasury Department also seemed to be as lax in its methods of dealing with this bank as the bank was in handling its redemption accounts. At the time of the failure, the bank was largely indebted to the Government over and above the amount of the bonds which the Government held to secure such indebtedness.
It appears that as a designated depositary of the Government, the bank issued its certificates in favor of the Treasurer of the United States for fractional currency to be forwarded to different banks and bankers throughout the country which made their orders through this bank. In the natural course of business, such certificates would not be very large and the balance in bank would be kept down to a proper amount by transfer orders made as soon as the weekly transcripts or reports of the bank received at the Treasury Department could be examined.
At the date of failure, the bank was indebted to the Government to the amount of $287,782. Of this amount $125,000 was for certificates issued during the week preceding the failure, for fractional currency shipped Jay Cooke & Company, of Philadelphia, Pa.
At the time these large sums were forwarded by the Treasury Department, on the strength of the certificates of this bank, the bank was already indebted to the Government for a sum larger than the amount of its securities on deposit with the Treasurer of the United States. The transaction with Jay Cooke & Company amounted simply to that company obtaining a large loan from the Government upon the security of the certificates of the First National Bank, and the fact that the company was able to do this was due to the laxity in methods on the part of the Treasury Department, in accepting the bank's certificates instead of money in settlement of redemptions of national bank notes.
Fortunately, however, the Government was saved from loss at the time of the failure of the bank by the prompt action of the Secretary of the Treasury in obtaining satisfactory guarantees and securities for any deficiency that might arise in the payment of the bank's debts from the assets of the failed association, and new regulations were put in force in the Department to guard against any like conditions occurring in the future by fully protecting the interests of the Government in its dealings with depositary banks.
The firm of Jay Cooke & Company, which failed at the same time that the bank failed, seemed to have freely used the funds of the First National Bank to help it in its embarrassment, and at the date of failure the firm owed the bank, directly and indirectly, nearly nine hundred thousand dollars.