for the several sections the banking power, composed of capital, circulation, and deposits of reporting institutions, and the relative amount per capita (excluding slaves in the Southern states).

NOTE. For 1830 the figures include the Bank of the United States distributed according to branches, but omitting $14,000,000 of capital invested in United States bonds.

The table illustrates not only the disparity referred to, particularly in the Western states, but also the location of the enormous expansion in 1840.

CHAPTER VII

1850 TO 1861

THE element of federal politics incident to the competition for public deposits having now been definitely eliminated from the banking business, commercial banking developed in a greater degree than ever before. Issuing currency, instead of being the primary object of banking, began to be regarded as of less importance in most of the older sections of the country.

ment in state

banks.

The distressing experiences already described pro- Improveduced a revulsion of sentiment in some of the states which led to the severest restrictions upon all banks by legislation and in a few by constitutional amendment. Nine states had no banks in 1852.1 After a few years this rigidity relaxed and local bank-note issues were again reported from nearly all of the states. The scarcity of silver coin, discussed in another chapter, had caused a large increase in small note-issues.

Many states adopted the New York free banking and bond deposit plan, but not without modifications that operated more or less to neutralize its beneficial features. Bonds of states that afterwards depreciated, railway bonds some of which proved of little value, and miscellaneous securities, were permitted to be used, entailing losses upon the note holders. Many banks reported. no deposits and no specie, the bonds deposited to secure circulation being all the protection note holders could expect.

1 Sumner, History of Banking in United States.

Greater supervision.

The clearing

house sys

tem.

The publication of reports of condition, now required by law in many states, no doubt assisted in correcting many evils and removed much of the mystery which had surrounded the business.

In New England compulsory specie reserve laws were enacted, and the Suffolk system, supplemented by other wise legislation, served to maintain prompt redemption and a safe bank currency, acceptable almost everywhere in the Union. In 1858 the Suffolk Bank made over that special business to the Bank of Mutual Redemption, organized for the purpose by country. banks. In 1856 the Boston Clearing-house was established, following the lead of New York City, where a similar institution was organized three years earlier.

The New York State Banking Department was established in 1851. The Metropolitan Bank of New York City was established to act as a central redemption bank (like the Suffolk) in the same year. These circumstances and the establishment of the clearing-house in New York City in 1853 brought about a much more stable and secure system of paper currency.

In the metropolis weekly reports were required to be made to the clearing-house by the associated banks, and in 1858 a fixed ratio of cash reserve to be held against deposit liabilities was agreed upon. The clearing of checks obviated the use of currency to a considerable extent, and in other particulars the association of the banks of the city, voluntarily imposing restrictions upon their business, contributed greatly to make them strong and influential.

There is one fundamental principle underlying the clearing-house system. Each bank settles its daily business with all the other banks of the city precisely as it would if there were but one other bank in the city. For instance, the First National Bank delivers to the

tion.

clearing-house at ten o'clock A.M. every day all the Its operadebit items it holds against all the other banks and receives credit for the amount by the clearing-house. The clearing-house in turn, having received the same from the other banks, delivers to the First National all the items which all the other banks of the city hold against it and debits the First National with the amount. The First National is either debit or credit according to whether the amount of checks, etc., it brought to the clearing-house exceeds or is exceeded by the amount of checks, etc., which the other banks brought against it, and pays or receives the difference or balance in cash, as the case may be. The average daily exchanges of the New York banks for the year 1902 were $245,898,649 and the average cash balances were $11,110,210. The average daily use of money was lessened by the clearing-house system of exchanges $234,788,439, being the difference between the cash actually used and the amount of the checks exchanged. The system not only minimized the use of actual cash, but removed the risk involved in sending so much cash about the streets and greatly reduced the expense involved in messengers, runners, and bookkeeping.

The making of the settlement at the clearing-house involves only about forty-five minutes on the average. The payment of debit balances is made at a bank's convenience any time prior to 1.30 P.M., at which time all credit balances are paid.

required.

The clearing-house fixed a cash reserve and bound Reserves each member to maintain the same; took the public into its confidence by publishing weekly reports of condition showing the standing of each bank. This action, more than any legislation, more than anything else, aided in building up a sense of moral responsibility to the public on the part of banks throughout the country,