Panic Scrip Issues of 1893, 1907 and 1914
One distinctive effect of panics from the late 19th century onwards was the sudden dearth of currency, as depositors rushed to withdraw their funds from banks or, more perversely, as banks themselves stopped paying out funds in anticipation of their customers attempting to—take out their funds. Given how liquid reserves pyramided through the banking system, the suspension of payments by New York City banks would quickly ramify throughout the country, imposing a cash famine everywhere. As O.M.W. Sprague described it in his classic study of crises, “Country banks drew money from city banks, and all the banks throughout the country demanded the funds deposited or on loan in New York” (Sprague 1910, p. 259). The bizarreness of this dilemma was well recognized at the time. Sprague, a severe critic of what he considered a failure of leadership on the part of the New York banks, put it this way: “One of the unfortunate effects of suspension is the creation of seemly conclusive evidence for its necessity” (p. 275).
Types of Panic Scrip
To the extent that the banking system’s problem was illiquidity and not insolvency, one way to exit this dilemma was to give to the public the liquidity it demanded in forms other than official currency. If the existing currency supplies were too inflexible to accommodate the public’s liquidity preferences, then banks and even private employers could contrive some sort of temporary substitute until normal conditions returned.
Although all rather similar to each other, the currency substitutes called Panic Scrip used in 1893, 1907, and 1914 took a number of typical forms.
Clearinghouse certificates
These small-denomination versions of clearinghouse loan certificates were issued to the public in a range of denominations as low as twenty-five cents (in 1893) and hardly ever above twenty dollars. Individual banks within the clearing house association obtained supplies of these certificates by hypothecating the appropriate assets with the association. Depending upon the type of bank, these assets might have been bills of exchange, commercial paper, or bonds, but in the case of the Portland (OR) Clearing House, at least, the assets as described on the clearinghouse certificates themselves were charmingly specific: “notes, bills of exchange, and other negotiable instruments…secured by wheat, grain, canned fish, lumber actually sold…"
Following this procedure for procuring scrip meant that banks were paying an interest cost (or penalty) for doing so, and thus had a financial incentive to minimize its use. This scrip was a collective liability of the clearing house and its members, not of any individual bank that paid it out. From the public side, clearinghouse certificates were for the most part non-interest-bearing instruments, although in some cases (Danville, VA, for instance), certificates promised to pay a rate of interest for specified periods. Presumably this feature was meant to enhance public acceptability of the scrip.
Clearinghouse checks
Similar to clearinghouse certificates, this scrip was issued by a bank against collateral deposited with the clearing house. Unlike certificates, however, these checks were not liabilities of the clearing house, but of the individual bank whose name appeared on the check. In a few cases, the use of clearinghouse checks by an individual bank accompanied the issue of clearinghouse certificates by the corresponding bank association. In these cases, the checks were issued for small amounts (one dollar and under) and were used to make change for larger denomination (but circulating) clearinghouse certificates without the need to expend precious cash.
Cashier’s checks in round amounts
These instruments were issued neither by clearing houses, nor did they involve the deposit of collateral with clearing houses. Instead, they were issued simply against the credit of the bank. Typically, banks made these payable either to bearer, or to a fictional name (“John Smith” was favored moniker in many places).
This instrument was particularly favored in industrial areas of the country (notably Pittsburgh) where employers had large factory payrolls to meet. The standardized appearance of these checks from company to company clearly indicate that banks coordinated with employers to create an acceptably-common cash substitute.
Certificates of deposit in round amounts
Practically identical to cashier’s checks, these might be issued in the name of an actual individual, but with the promise that any bearer of the certificate could cash it at the bank, with or without interest, at some specified future date. These would have been the obvious instrument of choice for savings banks.
One recourse available to savings banks during panics that was unavailable to commercial banks was their ability under the law to impose withdrawal delays on their accounts. Savings deposits were not demand deposits, and these institutions had the right to impose withdrawal delays (usually 60 days) in the event that the volume of depositor withdrawals outpaced the banks’ ability to liquidate their assets. Given savings banks’ ability to do this, issuing paper certificates of deposit with the promise of redeeming them at some point in the future was well within their existing powers under the law.
Bank drafts on Eastern exchange in round amounts
Banks issuing these instruments were simply encumbering balances that they were holding at their correspondent banks in some larger reserve, or central reserve, city. In theory, the holder of such a draft might try to present it at the distant correspondent bank. However, that institution might be only willing to accept it on deposit rather than pay out actual cash—just as banks around the country were also doing.
Payroll checks in round amounts
Large employers could pay their workers in such checks, rather than meet a cash payroll, with the cooperation of local merchants and financial institutions, all of which would need to cooperate by accepting the checks for various payments. Workers and their labor unions did not always take kindly to this emergency scrip. In some ethnic communities, the lack of English speakers created language barriers that provoked misunderstandings. Suspicious of companies’ motives and fearful of being cheated, some workers resisted by engaging in strikes or other, violent actions. In response, some issuers of cash substitutes took care to print explanations and instructions on their notes in multiple languages. This was widely done in Pennsylvania. In Cleveland, Ohio, some banks included on the back of their certified checks explanatory advice in English, German, Italian, Czech, Polish, and Hungarian. Despite the differences in their background arrangements, all these versions of Panic Scrip were intended to do the same thing: substitute for cash on a temporary basis until the shortage subsided. One common, and essential, element to all these instruments was the printed stipulation that they were “payable through the clearing house”, meaning that while they would be taken in on deposit by any bank, no cash would be paid out for them in return.
Cotton Certificates
During the Panic of 1914, very few issues of unofficial scrip of an emergency nature occurred, from clearing houses or otherwise, as almost all the public's increased liquidity demands were met with supplies of the new Aldrich-Vreeland currency, as provided for under the 1908 Act. One unusual exception was the appearance of "cotton certificates" issued in a few Georgia towns. These circulating notes were essentially warehouse receipts backed by supplies of graded and stored cotton priced at some fixed amount per pound.
The note illustrated here, from Cordele, Georgia, was issued by the Crisp County Cotton Association. According to the advice on the reverse of the note, the Association held on deposit "a sufficient quantity of merchantable lint cotton, graded, weighed, stored, insured and valorized at six cents per pound, middling basis, to guarantee the payment of this certificate."
Why Were Different Types of Scrip Used?
During the Panic of 1907, when these cash substitutes were used at their widest extent, there appeared to be no systematic pattern as to which variety would be used under what circumstances. As a general matter, the resort to scrip posed a basic public relations problem since its sheer use implied that a bank’s financial condition was unhealthy. If banks could avoid using it, they would. New York City banks never issued circulating certificates at all, even though that city was the epicenter of the panic.
If banks had to resort to a cash substitute, then the clearinghouse certificate kind seemed to be the most credible. Clearinghouse certificates were joint liabilities of the clearing house association. Moreover, the ability of clearing houses to do other things—like pool cash reserves, expand reserves through clearinghouse loan certificates, or even hide information that might embarrass individual member banks—all underscored the strength that came from numbers.
Nonetheless, clearinghouse certificates were not the invariable first choice of banks. Due to the resistance of their leader, James B. Forgan, Chicago banks delayed deploying any scrip at all despite public clamor for it, and only finally made use of clearinghouse checks issued by four members of the clearing house, all national banks. Of particularly conservative temperament, Forgan opposed any remedy that smacked of “asset currency”, a monetary reform proposal that was widely debated at the time. Likewise, in St. Louis, the nation’s third (and smallest) central reserve city, banks contrived to issue only their “John Smith” money—cashier’s checks made out to that fictitious everyman.
It may well have been that clearinghouse certificates (as opposed to other cash substitutes) were particularly favored by smaller banks which individually felt vulnerable to the panic and thus had a greater incentive to seek safety in numbers than did larger banks. There is some indirect evidence for this in Oklahoma, where in about two dozen instances banks opportunistically formed ‘clearing houses’ in small communities simply in order to issue cash substitutes.
Otherwise, the prototypical country bank that operated outside of any clearing house association and that had no other resources to draw upon other than its own reserves (part of which were lodged with its correspondent bank in some reserve or central reserve city), might have had no choice but to resort to cashier’s checks, certificates of deposit, or drafts on Eastern exchange. In order to accommodate the public’s demand for cash, they were better than nothing.
It seems natural for employers to want to issue scrip in the form of payroll checks, but in view of their employees' skepticism towards scrip, firms might have preferred banks to provide the scrip (and take the blame for it). This is seems to be what happened in Pittsburgh. Chicago clearinghouse checks were also procured in large amounts by employers, in order to meet their payrolls, in places as far away as Indiana and northern Michigan.