New-York tribune., 1896-08-28
RELIEF FOR THE BANKS
CHANGES IN THE SYSTEM SUGGESTED
BY THEODORE GILMAN.


THE INCORPORATION OF CLEARING HOUSES
UNDER UNITED STATES LAWS PROPOSED
THE METHODS IN FRANCE AND
GERMANY
To the Editor Of The Tribune
Sir: After a pes,ilence In city the authorities
can generally be induced to study modern method,
for the disposal of sewage Loss Of property and q,
life seems necessary TO awaken a community to con-
slider the recommendations Of experts or TO move a
corporation 10 change from old methods 10 new All
remember the cost Of life and property needed n
secure the abandonment OF side wheels on ocean
steamers. and many expensive reforms In railroad.
ing due to the same moving cause
The great loss Of property resulting from the do.
fects Of our banking system should be the incentive
to similar reforms and 1t is opportune az the pres
ent time to point out those defects while they ara
causing losses and derangng the business OF N.
country. In time of disturbance men do not turn
lightly away from the consideration OF measures o,
relief
The defect Of our banking system is that a forced
liquidation is the only way provided by law for III.
restoration Of depleted bank reserves
The National Banking law requires . per cent
reserve to be maintained. but by redeposit the ac
tual amount Of cash reserves is much reduced
from that percentage. The banks therefore are al
lowed by law TO do business on their credit and IN
cash on hand. But when they are called on for
that % per cent or any part of il. the law makes
provision by which they may restore protect
their reserves except by forcing liqudato on the
business community. Forced liquidation means dp
aster. It catches the community d sudden end
compels them to sell out their property at a sacrl.
flee to raise money to restore the reserves OF the
banks This causes great declines Of all values and
many troubles both known and unknown. II stops
business and wages and all for the sole purpose OF
restoring the reserves Of the banks.
It stands to reason that a system of banking IL
defective which works in this way. II Is the credit
system for the banks and cash system for their
borrowers. And our bank. are running on such
small margin Of reserves that the business COM
munity is at all times in danger Of being called
upon unawares TO quidate. 10 help the banks out
After losses have been incurred and depreciatoas
have taken place to the extent Of hundreds OF
millions. then the banks can resort 10 the extra
legal and extra hazardous method Of protecting
themselves and helping out the survivors BY trench
ing on their reserves, and issuing 70 themselves
clearing house certificates in place OF reserves paid
out 10 meet cash demands Before using this last
resort the public has been pretty well squeezed.
In all these matters the banks doing the very
best they for their customers and the business
community, and are not open 10 any criticism or
censure, for the blame is wholly and entioy on
the existing system and Is due 10 its pa1 and
asily remedied defects.
The remedy is that our banks should not only be
conducted on the credit system as now. win az. az
thOrity lend 20 per cent of their deposors money
and retain p per cent on hand as cash reserVe,
but also in case of need should have so some no sonrcs re
pledge of their commercial assets for a turtner
percentage OF their depositorS money, WHICH WIN
the cash reserve of % per cent would them suf
ficicnt funds to liquidate much OF their deposits
as might be demanded without forcing liguidatons
ar frenIentlv recurring Intervals on the borrowers
II is true that in ordinary times it is safe for
their money
and to hold but % per cent as reserve; but 10
or the panic of 1893 the Venezuela message. or
the silver scare power should be lodged somewhere
by which the banks could obtain ,sounh creut. u
the form Of circulating notes to liqudate the 20
per cent sufficient percentage thereof to carry
them over the extraordinary crises 10 queter tnes
without calling upon the borrowers OF the 20 per
cent to make forced qndations ana great iosses ,h
accomplish the same object 1t Is evident that
the banks could obtain sound credit IN me FORM OF
circulating notes. the liquidation would be accom-
plished without loss TO themselves or the business
a knowledge that the banks had this power to
protect their reserves in this way would aliay II
not prevent panics.
the Imperial Bank of Germany. During the twenty
five years in which this system has been in % op"r,
by serious financial disturbances. and has carried
through them al. a French bank. will advertise ia
condition. showing 10 per cent OF its liabilities IN
bills receivable Immediately discountabe AZ the
Bank of France" Such showing is impregnable
Incorporating our clearing houses under United
States laws. with power under suitable restrictions
TO issue clearing house currency 10 their mem-
bers This idea has been elaborated I'm my bill
H. r. 3.33S which was introduced In the House last
winter by the Hon Benjamin ;. Fairchd. and IN
explanation of which | made a statement before
subcommittee of the House Committee on Banking
and Currency in February both OF which docu-
ments were published in THE Banking Law Jour
nal' of March 1896
Any circulating notes issued to banks must he ot
a credit undoubted TO be accepted by all banks
in any panic This credit can be reached 10y the
supervision of the associated banks. and this super
vision by the incorporation Of clearing houses under
United States laws.
silver and hostile to National banks Will be de-
feated in the next general election. the completion
of the National banking system in harmony win
American institutions becomes a practical ara
pressing question \ good tariff will protect the
finances OF the general Government. ard easily
maintain all its obligations on a par with gold. a
sound banking system will give stability 10 our
commerce and protection TO the credit or the Dusi-
ness community. TheS two measures should MARI
the advent of the incoming Administrators ~
THEODORE GILMAN.
New-York Aug %. 1896