The Evolution Of The Banking System

1790 words - 8 pages

The United States banking and financial system between the adoption of the National Banking Act and the establishment of the Federal Reserve System in 1914, was in a constant state of evolution. This period was further marked by numerous banking panics with major panics or crises in 1873, 1893, and 1907, and minor or what Elmus Wicker referred to as “incipient” banking panics in 1884 and 1890 (2000). The panics of 1884 and 1890 are referred to as incipient because there was no general loss of depositor confidence in either New York or the interior banks. At first, one would imagine with no government-mandated lender of last resort, i.e. a central bank, that these panics were very painful and caused numerous bank failures. This is flawed, however, because there were institutions in the United States at the time that did provide lender of last resort activities. A prime example is the New York Clearinghouse, which some have argued stopped the incipient panics of 1884 and 1890 from becoming full fledged banking panics. There is a dearth of information on clearing houses in other financial centers of the United States, like Chicago, and as such the New York Clearing House will be the focus of this paper with respect to private institutions having a role in preventing or lessening the effects of banking panics. The United States Treasury Department also played a role in stemming the effects of banking panics or incipient banking panics. This was the beginning of the Treasury’s philosophy of being independent of the banking system.
The first major banking panic to occur after the adoption of the National Banking Act occurred in 1873. The New York Clearing House had successfully used two methods of dampening a banking panic in 1860 and 1861. These methods were loan certificates and the pooling of reserves from the member banks. The loan certificates were essentially IOU’s that were backed by collateral and could be used by the member banks of the New York Clearing House to settle accounts between banks during the check clearing process. A loan certificate helped member banks expand loans during a panic without the loss of reserves to local banks. This is because the loan certificate provided another means of payment besides cash, and they also prevented any one bank from trying to strengthen its position at the expense of the other banks. Member banks that were tight on specie and currency could appeal to the clearinghouse for loan certificates, and banks that borrowed certificates were charged a rate of interest and have acceptable collateral. The pooling or “equalization” of reserves was the other instrument used by the New York Clearinghouse to forestall the Banking Panic of 1873. When the New York Clearinghouse deemed necessary to the pool the reserves of its member banks it did so by assuming control over the reserves by transferring funds from banks with an excess of cash to banks that had a cash deficiency. The instrument of pooling...

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