Financial panics in America were common before the adoption of the Federal Reserve Act of December 23, 1913. They were chiefly due to the want of a centrally controlled banking system. That there had long been a movement among American bankers to remedy this deficiency is strikingly shown by the following extract from an article by the Hon. A. Piatt Andrew, published in the "American Academy of Political and Social Science" for November, 1910.
"No phase of recent American banking is more striking than the groping of over 25,000 independent banks toward some coherent organization and leadership. This is shown not merely in the consolidation of great city banks and the affiliation of banks and trust companies, but in the development of association and joint control through the clearing houses, and the absorption on the part of these institutions of new and far-reaching functions. The adoption of methods of mutual supervision through clearing-house bank examinations which has been so much in evidence in western and middle cities during recent years is one step in this direction. The more careful regulations governing the conduct of firms which are admitted to membership in the clearing-house, and with regard to the non-member institutions which clear through members, about which so much controversy has centered during, recent years in New York, is another instance of the same tendency. Above all, the resort to clearing-house loan certificates in times of unsettlement which became so surprisingly general throughout the country in 1907 is the best illustration of the way in which our banks are forced at times to act together under common leadership. It shows, too. how an ingenious people can improvise a needed institution if it does not already exist.
"The operations of the clearing-house associations during the panic of 1907 were essentially akin to the ordinary functions of the Bank of England, the Reichsbank, and the Bank of France. With the banks as customers, these clearing-house associations made loans on collateral, re-discounted notes, and made the reserves of all of the banks available for each other in practically the same way as do the great national banks of Europe. The operations were of an identical nature, but there were two essential differences in form and in measure of effectiveness. First, the arrangements had to be devised in the stress of an emergency, and only began to operate after the panic had become acute, and it was no longer possible to forestall the general collapse. Second, there was no general clearing-house association for the country as a whole, and even though the banks of each locality were able by a belated expedient to pool their reserves and transform their commercial paper into available, liquid assets, there was no arrangement for a similar settlement of accounts as between different cities. Hence the struggle which was witnessed, of each locality endeavoring to fortify itself at the expense of every other locality — a spectacle which could not have occurred in any European country and which we ought to make impossible of recurrence here."
Previous entry Next entry