America's Money Machine

34 PART I / THE ROOTS OF REFORM
sury Department board. In addition to government bonds,however, the
bill authorized the use ofcertain types ofrailway bonds as security. Over
this stool his bill fell and something of Aldrich's influence. For railways
were in bad odor politically, and Democratic opponents as well as some
Republicans were prompt to make political hay of this aspect of the bill.
We shall come to the debate presently.
Meanwhile, a word about clearing house certificates. They were, as
remarked, notes payable to bearer issued by the clearing house ofthe city
or district, the notes being secured by notes, bonds, or other assets ofthe
individual banks that received the certificates.* The process worked as
follows: a bank with insufficient cash to meet its depositors' drafts would
deposit with the clearing house such notes or other assets as the clearing
house authorities considered acceptable, and receive in turn the certificates
of the clearing house. These certificates, which were the obligation
of the clearing house, would be accepted in lieu of cash by all member
banks of the clearing house association, and consequently they were a
limited currency. As rapidly as the banks were able to liquidate their own
"frozen" assets, by obtaining payment of notes and bills owing by customers,
they were able to payoff their own obligations to the clearing
house and reclaim their collateral; at the same time the clearing house
retired its certificates.
This whole operation, of course, depended upon the existence somewhere
in the economy of sufficient cash to payoff this circle of obligations.
The chain of reactions necessarily depended upon the success of
the individual borrower in laying hands on sufficient cash to payoff his
note to the bank; until he did so the bank could not payoff its note to
the clearing house, and the clearing house could not retire its certificates.
But where was the individual to find the cash in this period ofstringency?
What added difficulty to the process was the unwillingness ofthose who
had cash to release it except under pressure, for fear of another and
greater stringency. This was especially true of the Western and country
banks. Formerly they had been willing to send all their spare cash to the
centers-to their big city correspondent banks-for the sake of the interest
it would earn. The suspension of redemption-actually the defaultofthe
central city banks during the Panicnow made their country cousins
more cautious. They were keeping this cash in their own vaults and hang
*A "clearing house" was simply the association of banks that used a common agency or
facility to clear their checks or drafts on each others' banks. The clearing house matched
debits and credits arising from these checks or drafts and then credited or debited the
account of the particular member bank accordingly. This procedure economized time and
cash in settling accounts.