United States: New York Clearing House Association, The Panic of 1907

The NYCH issued CLCs to allay public fears about bank solvency and stop the bank runs. CLCs had gained a reputation that they “always proved effective at in lessening financial strain, and in this way increasing public confidence” (NYT 1907a). A member of the Loan Committee “felt that Clearing House certificates must be resorted to if we wished to check the run on the banks and trust companies” and cited the reputation of CLCs as a reason to issue them (NYT 1907b). With this success came the belief that CLCs would allow cash to flow out of NYC even though expansion in lawful money—a measure that included specie as well as notes and securities issued by the Treasury—was limited by the amount of gold in the banking system.

Historically, CLCs had been used to conserve banks’ reserves, stop bank runs, release cash for use by interior banks, and, in 1893, to finance gold imports. Though CLCs allowed banks to funnel funds to interior banks, it is unclear how this objective ranked against other goals, specifically importing gold and stopping bank runs.

It is not clear if CLCs were issued to release funds to interior banks at a large scale, despite the belief, evident in news stories, that the point of CLCs was to allow more cash to enter the interior in spite of the limitations created by the gold standard (NYT 1907a; NYT 1907b; WSJ 1907g). The NYCH did not state that out-of-town depositors were the beneficiary of CLCs, and the public records of NYCH bank reserves are not conclusive. Though NYCH banks settled the vast majority of October, November, and December clearinghouse balances using CLCs, their reserves stayed above $210 million throughout the crisis (CHC 1908; CFC 1907). Sprague (1910, 311) writes that, while NYCH banks accommodated local depositors, they exhibited “[n]o recognition of the peculiar responsibility incurred in accepting bankers’ deposits” from interior banks—a responsibility that the NYCH boasted about after the Panic of 1873. This account fits with comments by the president of the NYCH, who said that it was imperative that NYC banks run a healthy cash reserve “to provide the pay-rolls for its own industrial organizations and those numerous large corporations scattered throughout the country whose headquarters are in New York” (Gilbert 1908).

In addition to spurring confidence, CLCs could help end the crisis. Tallman and Moen (2012) write that CLCs “provided a means to import gold and eventually the money base more durably.” When NYCH member banks requested gold from their London dealers or affiliates, they booked a liability to that institution, which was funded by CLCs (Sprague 1910, 191–92). We do not know how much funds were used to import gold, but news reports in 1893 say that the NYCH issued “a large amount” to fund the expenditure (CFC 1893). Figure 3 shows how CLC issuance plateaued as gold imports began arriving and fell as more gold arrived.

Without a central bank to administer public liquidity assistance during the National Banking Era (1863-1913), the NYCH employed CLCs as a private liquidity tool to manage financial crises (Fulmer 2022b; Gorton and Tallman 2016). CLCs occupied a tenuous legal position: While national banks could issue circulating notes if they first deposited government bonds of higher value with the Treasury (National Bank Act of 1864, vol. 13, sec. 23), the law at the time effectively banned state-chartered banks and other financial institutions from issuing their own notes by applying a steep 10% tax. The CLCs did not pay this tax. CLCs also clearly were not legal tender—the US government was not compelled to accept them as payment for debts or taxes.

However, contemporary sources and scholars tend to agree that CLCs used entirely for interbank transactions did not break this law because they did not circulate as currency. If courts had considered CLCs in circulation, the certificates could have been subject to the 10% tax; no documents indicate that NYCH, or its members, paid such a tax in any crisis (National Bank Act of 1865, vol. 13, sec. 6).

As a practical matter, the legality of NYCH CLCs was not challenged (NYT 1907c). CLCs issued by some other clearinghouses circulated outside their membership as currency and thus may have been subject to the tax. The NYCH, by contrast, believed “that under prosecution [it] should be able to show that [CLCs] did not come within such construction of the law as is necessary to subject them to the” 10% tax imposed on circulating notes (Warner, Brawley, and McLaurin 1893, 262). Timberlake (1984) notes that the government settled the matter by not prosecuting CLC issuers, at the urging of several current and former state officials. See Fulmer (2022b) for a more detailed discussion of the legality of CLCs.

Separate from CLCs were certified checks and pay checks. In the 1873 crisis, the NYCH announced that all checks issued by any member bank would be certified as “payable through the Clearing House.” Although the NYCH may not have made similar announcements in subsequent crises in the National Banking Era, banks handed out certified checks stamped, “Payable through the Clearing House” in lieu of cash during later crises when they had partially suspended the convertibility of deposits (Gorton and Tallman 2016).

As in earlier crises, in issuing CLCs, the NYCH immediately suspended the weekly publication of banks’ balance sheet information. Also, as in 1873 and 1893, NYCH banks limited cash payments to depositors to preserve bank reserves. Certified checks issued by member banks but marked “payable through the clearinghouse” circulated in place of cash. This also provided relief to trust companies. The press reported that trust companies agreed to pay depositors in cash up to a certain amount and give certified checks on NYCH banks for the balance (WSJ 1907d). Later accounts agree that banks continued to pay out cash, but much less of it, and that they prioritized New York City depositors over out-of-town depositors (Gilbert 1908; Sprague 1910, 260; Tallman and Moen 2012). Banks coordinated limits on payments through the NYCH, but there is no evidence that limiting payments was an official act of the clearinghouse (Wicker 2000, 8).

 The limitation lasted through November and December before gold imports arrived, and normal payments resumed on January 1, 1908 (Wicker 2000, 9). During the suspension of payments, banks still made limited, and often slower, payments to interior banks. In fact, the suspension of payments allowed banks outside New York to continue receiving payments at the expense of smaller depositors. Large NYCH banks borrowed CLCs so that they could fund deposit demands by banks outside New York City (Tallman and Moen 2012).

NYCH banks had also limited cash withdrawals and paid depositors partly or wholly through certified checks in the crises of 1873 and 1893. In contrast, the Panic of 1907 featured immediate limits on payments, where banks in prior crises had waited several weeks. A Wall Street Journal (WSJ 1907c) article ahead of the NYCH’s approval of CLCs stated, “Their issue practically amounts to a suspension of cash payments,” and the president of the NYCH (in retrospect) said that the Clearinghouse Committee “knew that the issuance of Clearinghouse certificates would immediately bring about a restriction of cash payments throughout the country” (Gilbert 1908).

Sprague (1910, 261) questions the speed with which NYCH banks limited payments, arguing that most members’ reserves could have compensated depositors, especially with the introduction of CLCs. Sprague focuses on the largest six NYCH banks, the subjects of Tallman and Moen (2012), and shows that their reserves barely shrank or grew throughout October 1907. Meanwhile, the New York Times (NYT 1907a) reported that NYCH banks, on the whole, found the use of cash “inconvenient,” while another article said they were “sound and solvent” (NYT 1907b).

However, the successive reports of the NYCH throughout October 1907 showed that the worst-performing NYCH banks were bleeding reserves. Figure 4 shows the distribution of NYCH banks’ reserve levels. The wider the shape, the more NYCH banks had reserves at that level during that week. On September 30, 1907, all NYCH banks held between 18% and 28% of their total deposits in specie or legal tender, with 39 of 53 banks’ ratios falling within 2 percentage points of the legal requirement. By October 19, days before the Panic began, NYCH reserves had begun to diverge. A core of 29 NYCH banks held reserve ratios within 2 percentage points of the legal requirement, but the range for all banks’ ratios had grown to between 15% and 33%. Treasury deposits and depositors fleeing other banks had made some of the largest NYCH banks more sound, while more banks fell below the 25% legal requirement. And, on October 26—the last public report of the NYCH—five members reported reserve levels below 15% (CFC 1907). In this view, the limitation of payments makes more sense as a tool to protect members than it does in Sprague’s analysis. The reserve data reveal that the panic endangered more members than the four connected to the Heinze-Morse companies, which were publicly considered the weakest banks (three of which had received direct loans from the NYCH).

Before the NYCH issued CLCs, business magnates established money pools to lend to non-NYCH financial institutions. J.P. Morgan, the country’s most influential banker, assembled $25 million to support New York City trusts; this pool considered lending to the Knickerbocker, ultimately refused, but rescued the Trust Company of America (Wicker 2000, 94). Oil magnate John D. Rockefeller assembled an additional $10 million. These money pools came in addition to the direct loans provided by the NYCH to ailing member banks, discussed further in Key Design Decision No. 15, Other Options.

On October 24, the US Treasury placed $25 million in NYCH banks, with $36 million on deposit by October 31 (US Senate 1908). This increase and the Treasury’s total deposits with NYCH banks are shown in Figure 5. Sprague (1910, 264) says that banks passed on this deposit to their customers but also argues that historians should credit Treasury policy—not the management of the NYCH banks or issuance of CLCs—with the release of funds.

Source: US Senate 1908.

The NYCH membership, Clearinghouse Committee, and Loan Committee coordinated to issue CLCs. The Clearinghouse Committee consisted of six elected officers and handled the day-to-day affairs of the clearinghouse such as setting procedural rules and maintaining the NYCH’s building. They proposed resolutions for the membership, including the resolution that approved CLCs and appointed a Loan Committee, which was not a standing committee within the NYCH (CHC 1908). The membership voted on resolutions. In 1907, the membership was more divided than in previous crises about issuing CLCs. J.P. Morgan, a nonmember, urged the NYCH not to issue CLCs “to preserve New York as an international money market from” the “advertisement of panic” that CLC issuance might signal (WSJ 1907c). Morgan’s view reflected, if not influenced, others in the NYCH. There also seemed to exist a sense of propriety whereby the NYCH did not want to help nonmembers such as the Knickerbocker Trust Company and hoped that other private actors would act as a lender of last resort (Wicker 2000, 90–91).

During the Panic of 1907, the Loan Committee’s membership was identical to that of the Clearinghouse Committee, though no documents indicate that this was by rule. The Loan Committee set the interest rate for CLCs, reviewed collateral brought to it by applicants, and ultimately decided whether and how much CLCs to issue (CHC 1908; WSJ 1907h). After the Panic of 1907 subsided, the Loan Committee issued a report to the membership that detailed the amount of CLCs issued and the collateral received (CHC 1908).

New certificates were issued when a member approached the Loan Committee to request a certificate and presented sufficient collateral. Until late in the crisis, at least three members of the Loan Committee met each business day—always in the morning, frequently after noon as well—to review loan certificate requests and collateral (CHC 1908). The Loan Committee was advised by presidents of four member banks. Four vice presidents (of different member banks) helped review collateral (CHC 1908; WSJ 1907h). The Loan Committee met around the time that the NYCH conducted clearing, a process detailed in the Appendix. Once the certificates were issued, members could use them in the clearing process. CLCs did not circulate beyond the NYCH (Cannon 1910a).

CLCs were available only to members of the NYCH association. Membership in the NYCH was limited to those nominated and accepted by the current membership. In 1907, all 53 members were banks located in New York City (Cannon 1910b). Trust companies numbered among the membership until 1903, when the prospect of reserve requirements caused all member trusts to leave. Several other clearinghouses, including the Chicago Clearing House, had allowed trust companies to become members before the panic (documents surveyed did not indicate the reserves required by other clearinghouses; Moen and Tallman 2000). The NYCH considered offering loans and membership to trust companies during the Panic of 1907 but never followed through (US House Stanley Committee 1911, 20; WSJ 1907e). On January 13, 1908, the NYCH voted to allow trusts as members, subject to a 25% reserve requirement (Cannon 1910a). During the panic, the NYCH membership did not grow; instead it lost two banks—Oriental and Mechanics’ & Traders—to failure (Gorton and Tallman 2016).

Of the 53 NYCH member banks, 32 took out CLCs (CHC 1908). Six big banks, representing half of the total assets of NYCH membership, borrowed 53% of CLCs issued (Moen and Tallman 2013). Borrowing amounts varied from $250,000 for two banks to an average of $3.1 million and to a maximum of $17 million for one member (CHC 1908; OCC 1908). For some banks, these amounts represented more than their total capital (Moen and Tallman 2013).

CLCs were funded by the balance sheets of accepting institutions and guaranteed by the NYCH. If borrowers defaulted on CLCs, the membership paid the holding banks in proportion to each bank’s capital and surplus (Moen and Tallman 2013; NYCH 1907b).

Member banks approached the NYCH when they needed CLCs (Woodward 1907). This resulted in the issue of 3,548 CLCs totaling $101 million. At their peak on December 16, there were $88 million in CLCs outstanding (CHC 1908).

NYCH banks could borrow up to the value of their collateral, after the NYCH imposed haircuts.

When the Loan Committee authorized CLCs, it specified that they bear 6% interest, a figure confirmed by the Loan Committee’s April 1908 report (CHC 1908). Though Cannon (1910a) claims that the rate was set at 6%—high enough to be a burden—to entice banks to redeem the CLCs once they had sufficient liquidity, 6% was in line with 30-day to seven-month loan rates, though slightly above call loan rates, for September 1907 (OCC 1907).

Borrowing banks paid interest to holders through the NYCH clearing process on the 15^th of each month (Moen and Tallman 2013; Woodward and Sherer 1907). If a CLC was transferred by an accepting bank to a second member bank in payment of an account, the interest payment was transferred to the second accepting bank (NYCH 1907a).

The Loan Committee reported that collateral was composed of commercial paper, stocks, bonds, short-term railroad notes, and similar securities (CHC 1908). The resolution authorizing CLCs prohibited haircuts smaller than 25%. Moen and Tallman (2013), who accessed the Loan Committee’s files, suggest that 25% was commonly imposed, though haircuts in other panics reached at least 31% (Fulmer 2022a). This collateral was held at the NYCH and returned to the borrower upon redemption of the certificate (Tallman and Moen 2012).

CLCs did not carry a maturity date. When borrowing banks wanted to redeem their CLCs, they approached the Loan Committee, which notified the membership that a series of CLCs would be redeemed and that they could receive payment on a specified day. A sample redemption notice is shown in Figure 6. The borrowing bank, once it had the requisite cash on deposit with the clearinghouse, then paid accepting banks through the daily settlement process (NYCH 1907a). After settlement, the borrowing bank received its collateral back from the clearinghouse.

Source: Cannon 1910b.

As shown in Figure 2, most CLCs were redeemed in early January, after imported gold arrived from Europe (Tallman and Moen 2012). The Loan Committee announced in February that full bank statements would resume publication and developed a plan to collect the $5.6 million in outstanding CLCs. By this time, only four bank balances remained. The NYCH appointed some of the members who examined collateral for the Loan Committee to supervise the collection of these debts; the National Bank of North America paid the final balance of $250,000 to a receiver on March 28 (NYT 1908b; NYT 1908d). See Figure 7 for a sample redemption notice.

Source: NYCH 1907a.

A condition of membership in NYCH was accepting CLCs as payment for settlement balances (Cannon 1910b; NYT 1873).

The NYCH did not consider questions of monetary policy, let alone how to counteract the effects of CLCs on medium-term rates.

Between October 14 and 20, the NYCH considered emergency loan applications from three member banks and two nonmember trusts. The membership rejected the applications of the nonmember Trust Company of America and Knickerbocker Trust Company but accepted applications from member banks Mercantile National Bank, New Amsterdam National Bank, and National Bank of North America (US House Stanley Committee 1911, 20; Wicker 2000, 89–91). These banks were associated with the failed cornering of the copper market and were among the weakest NYCH members (Sprague 1910, 262; Wicker 2000, 89). NYCH member banks extended loans to Mercantile National Bank and New Amsterdam National Bank that week; the Bank of North America was able to raise funds from other sources (Wicker 2000, 90). The loans stabilized these banks, but sources do not note that the loans had any effect on the broader financial panic. The NYCH did not publicize loan terms.

More cities' clearinghouses used CLCs in the Panic of 1907 than in any previous crisis. The Panic of 1907 also resulted in more CLCs being issued than in any prior crisis and, in smaller cities, significant circulation of small-denomination CLCs among the general public outside clearinghouses. Of clearinghouses in the 145 largest metropolitan areas, 71 issued CLCs or other substitutes for legal money; an additional 20 clearinghouses used CLCs only for large transactions, and preserved cash payments for small transactions. Many of these clearinghouses voted to issue CLCs on the same day that the NYCH announced its decision, October 26. That these clearinghouses followed so quickly reflected the reserve status of many New York banks in relation to other cities^FNNational banks around the country were required to keep reserves in banks located in select cities; in turn, banks in these cities were required to keep reserves in New York City banks (National Bank Act of 1864, vol. 13, sec. 31). As a result, all national banks were no more than one step removed from New York City banks, many of which were members of the NYCH. and the NYCH’s status as the nation’s first and largest clearinghouse, responsible in 1907 for 62% of the $154 billion in nationwide clearings (Andrew 1908; OCC 1908).

The press interviewed NYCH members frequently but did not publish its official statements as some newspapers had done in previous crises (NYT 1907a). Newspapers were also rife with editorials and opinion pieces arguing about the appropriateness and efficiency of CLCs in arresting the financial panic (WSJ 1907a; WSJ 1907b; WSJ 1907c; WSJ 1907i).

The NYCH did not disclose daily CLC issuance. It only responded to requests by newspapers, or the Office of the Comptroller of the Currency notified the public of CLC usage until the crisis subsided (NYT 1907d; WSJ 1907f). In April 1908, the Loan Committee issued a report summarizing the usage of CLCs. This followed reports in previous crises and seems to have been a feature of NYCH loan committees (NYT 1893). Data regarding loan certificate issuance was kept internally by the NYCH, preserved in its archives, but was not used here.

As in previous crises, the NYCH suspended the publication, normally released each Saturday, of detailed bank statements for its members and certain nonmembers (NYT 1907d). Publication was suspended October 26 and resumed on February 8, 1908 (New York Evening Telegram 1907; NYT 1908c). These measures addressed stigma that individual banks might face should outside actors learn of their financial condition.

The NYCH itself also faced stigma in issuing CLCs and did not disclose daily CLC issuance (WSJ 1907f). Before the membership approved CLCs, some voices—including nonmember financier J.P. Morgan—said that issuing CLCs threatened New York City’s reputation as an international financial center, which delayed passage of the resolution (WSJ 1907c).

The NYCH issued its last CLCs on January 30, 1908. It had signaled a week before that it would do so, citing the unanimous opinion of the Clearinghouse Committee that normal liquidity conditions had returned, making emergency currency unnecessary (NYT 1908a). However, as of January 30, 1908, four member banks had not yet redeemed their CLCs. The NYCH appointed some of the members who examined collateral for the Loan Committee to supervise the collection of these debts (NYT 1908b). Eventually, these banks paid their debts, though Oriental Bank failed in the course of doing so (Gorton and Tallman 2016).