The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1933-03-08
BY HARRY ELMER BARNES

N'''H VI "aHh fNuultt
BY HARRY ELMER BARNES
The old adage that it never rains
unless it pours never was more true
than with respect TO banking and
currency panics In normal times
a vast volume Of transactions is
carried out by use Of checks, with
very little transfer Of cash
Exchange is, to a considerable de-
gree, merely a matter of residual
bookkeeping. Such currency as is
Withdrawn from banks is for the
most part in circulation. There is
no incentive TO put it in safe-de-
post vault or to hide it in sock or
mattress.
Along comes a panic and trouble
rolls up like SNOWFALL Lack Of
confidence sends depositors in
droves to the banks to withdraw
their cash. These runs close banks. /
When banks close checks can not
be collected and their use evapor-
ates
Cash Is HOarded
At the same time, fear of losing
boarded cash keeps it securely in /
the hands of owners who use it
sparingly. Both checks and cur
rency thus are depleted in volume /
and immediate utility, and a seri-
Gus stringency arises relative to
media of exchange. At a time /
when cash is needed specially, it
remains in hiding.
Therefore, it Is of interest to eX-
anime into what has been done in .
the past in such emergencies The .
most widely used eXpcdient in pre-
serving the cash reserves Of banks
in the past has been the issuance
OF clearing house loan certificates
These can be used to balance the
accounts between banks in the
clearing house association without
the transfer of any cash.
Used in 1860
They first were widely used in
1860 to deal with the crisis provoked
by the prospect Of the Civil war
The clearing house association Of
New York provided that member
banks might deposit with a select
committee approved commercial
paper, stock of the United States
and of the states, treasury notes
and the Ike.
In return, they could obtain loan
certificates-certif1cates of deposit
up to rs per cent of the value of
the paper deposited These GER
tifcates were issued in denomina-
tions of $4,000 and $4,000.
They called for interest Of 7 per
cent per annum and could be used
to settle the balances between tie
banks in the clearing house associa-
ton for any time up to thirty days
from the date Of issuance.
The great advantage Of this ar
rangement was that it saved the
banks from the necessity of digging
into their limited specie reserves to
even up their daily accounts in the
clearing house balancing process.
Pool Their Specie
Still further to protect themselves.
The New York banks pooled their
supply Of specie, so that the weaker
banks could pull through. About
$7000,000 of these loan certificates
were issued. While specie payment
was suspended temporarily as be-
tween banks, there was no Suspen-
sion so far as the public was con-
Cerned
The clearing house loan certih-
Gates were issued again in 1864 and
1878. The crisis Of 1873 was eSpe-
cially important in this respect. for
the practice spread from New Fork
city to the other important finan-
cial centers of the country.
The crisis of 1893 was in some
ways even more serious with regard
to circulating media. The resort to
clearing house loan certificates came
again on June 81, 1898, and be-
came rather universal in all cities
which had clearing houses.
Exchange Is Preserved
Where there were none, the banks
issued community banking certifi-
Gates These were temporary loans
made by the banks, which were
pledged to their redemption.
They were issued in $1-5-10-20 de-
nominations These did much to .
preserve orderly exchange during !
the crisis in the lesser cities of the .
land
Our experience down to 1907 thus
produced a cooperative measure !
among banks in the large cities
which enabled them to continue |
specific payment to the general pub
lie by suspending it among them
selves.
In other words, they permitted
sound bookkeeping ingenuity to be
a substitute for cash.
CTlI0IE& RANK EUI0ENHE /