The Panic of 1907, 2nd Edition

Chapter 8Clearing House

… the action of the Clearing House on Saturday and Sunday had eliminated practically all elements of danger from the banking situation.

—Wall Street Journal, October 22, 1907

Augustus Heinze’s abrupt resignation from the presidency of the Mercantile National Bank focused the attention of a wider audience—depositors—on the condition of the bank. As depositors fled with their money, the erosion of the Mercantile’s deposit base soon came to the attention of the New York Clearing House (NYCH). Founded in 1853 to simplify the settlement of payments among member banks, it had proved to be a source of systemic stability in times of panic. But how much stability it could provide depended on which of many kinds of financial institutions had joined the clearing house.

A Patchwork System

Unlike most European countries, the United States did not have a central bank or regulator to backstop its financial system in 1907. Ever since President Andrew Jackson had withdrawn the charter for the Bank of the United States in 1837, the prevailing political sentiment had reflected a distrust of the economic and political power of banking institutions and sought to promote a financial system consisting of small, widely dispersed banks. In 1907 various types of banks conducted business:

• National banks operated under charters issued by the federal government, had to conform to stricter capital and reserve requirements, submitted periodic reports of condition to the Comptroller ...