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 Natiomil 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 nourishing 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 companies for years, and this panic demonstrated absolutely the correctness of the contention of the Clearing House banks that trust companies should carry a cash reserve against commercial deposits the 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 contain complete information as to the number of failures of banking 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 generally 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 confidence 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 central 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, 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 failures 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 Secretary of the Treasury by amending the law to except Government 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 Department. 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 Treasury 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 utterances and private conferences with bankers on the reserve question, was much more so.