Clearinghouse certificates

The major device used in the United States to cope with bank runs prior
to the creation of the Federal Reserve System was the clearinghouse cer-
tificate, which is a near-money substitute that was the liability of a group
of large local banks. A bank subject to a run could pay the departing de-
positors with these clearinghouse certificates rather than with coin. The
New York clearinghouse was established in 1853 and the one in Philadel-
phia in 1858 after the panic of 1857. During the panic of 1857, New York
banks failed to cooperate to halt the run. The Mercantile Agency of New
York took the position that if four or five of the strongest banks had
come to the assistance of the Ohio Life and Trust Company, enabling
it to meet its obligations, the business and credit of the country would
have been preserved.36 By 1873 the New York banks were ready to accept
payment on cleared checks in clearinghouse certificates rather than in
currency or bank notes. The advantage of the use of these certificates was
that the incentive for any bank to bid deposits away from its competitors
was reduced. Sprague insisted that this system had to be accompanied
by an agreement to pool bank reserves; otherwise, a bank that was not
subject to a net drain might be forced to suspend payments after it paid
cash to its own depositors if it had not received cash in settlements from
other banks.37 In 1873 reserves were pooled.
One serious drawback of clearinghouse certificates was that they were
acceptable only in the local area—New York, Philadelphia, Baltimore.
Thus these certificates helped maintain domestic payments such as pay-
rolls and retail sales within a city but they dampened the effective flow of

payments between cities. In the 1907 panic, 60 of the 160 clearinghouses

in the United States adopted clearinghouse certificates to facilitate local

payments. Nevertheless Sprague claimed that the dislocations of the

domestic exchanges were no less complete and disturbing than on pre-

vious occasions. The prices of New York funds in Boston, Philadelphia,

Chicago, St. Louis, Cincinnati, Kansas City, and New Orleans between

October 26 and December 15, 1907 varied from a discount of 1.25 per-

cent in Chicago on November 2 to a 7 percent premium in St. Louis on

November 26, an increase from 1.5 percent the previous week.38 In De-

cember 1907 Jacob H. Schiff wrote: ‘The one lesson we should learn from

recent experience is that the issuing of clearinghouse certificates in the

different bank centers has also worked considerable harm. It has broken

down domestic exchange and paralyzed to a large extent the business of

the country.’39

Other devices of the same general character were clearinghouse checks

and certified checks that were both close substitutes for money and

increased the means of payment in circulation.

Nonbank groups can also organize to mitigate a panic. Consider, for

example, the stock market consortium. On October 24, 1907, a bankers’

pool, headed by J.P. Morgan, loaned $25 million at 10 percent in call

money in an attempt to stem the collapse of the stock market.40 Twenty-

two years to the day later, on Black Thursday in 1929, Richard Whitney

went from post to post on the floor of the New York Stock Exchange and

placed bids to buy stocks on behalf of a syndicate headed once again by

J.P. Morgan and Company.41

Banks have also collaborated through rescue committees (as in Vienna

in May 1873 and earlier), loan funds, funds for guarantees of liabilities,

arranged mergers of weak banks and firms, and other devices whereby

the strong banks support the weak and failing banks.42 Three examples

include the role of the Paris banks in the 1828 crisis in Alsace, various

devices employed by Hamburg in meeting the difficulties of 1857, and

the Baring Brothers loan guarantee of 1890.

Three firms in textiles failed in December 1827 at Mulhouse. The Paris

banks then refused to accept any Alsatian paper, and the Bank of France

set a limit of 6 million francs on the amount it would support, a figure

‘scarcely the fortune of two Alsatian houses.’ The Bank of France then

decided against accepting any paper with Mulhouse or Basel endorse-

ments and that decision precipitated a panic. On January 19 two more

Mulhouse merchants failed. On January 22 in Paris there were rumors

of the failure of two Schlumberger firms. The Paris banks sent Jacques

Laffitte as an emissary to Mulhouse; he arrived on January 26 and offered

to lend 1 million francs on the consignment of merchandise. Before he

came, however, two textile merchants, Nicholas Koechlin and Jean Doll-

fuss, had left Mulhouse for Paris. To raise cash, these merchants had been

selling inventories on the market at discounts of 30 to 40 percent from

the traditional market prices for these goods. Nine houses failed from

January 26 to February 15. L ́ vy-Leboyer wrote that it could have been

e

worse. At the last minute a syndicate of twenty-six Paris banks, presided

over by J.-C. Davillier, extended a credit of 5 million francs to Koechlin

and Dollfuss, who returned to Alsace on February 3 and distributed 1 mil-

lion francs to those of their colleagues who offered guarantees and kept

4 million for themselves. These measures restored confidence.43 Those

who qualified for neither the Koechlin-Dollfuss fund nor Basel money

failed.44