The Aldrich-Vreeland Act of 1908

The panic had one immediate legislative result: the Aldrich—Vreeland Act of 1908. This act provided for an emergency bank note currency which might be called into being by the deposit of other collateral than government bonds. Since this provision was avowedly intended as a purely make-shift arrangement we need not consider its details here. In two ways, however, it gained historical importance. In the first place, although it was at first provided that the act should expire in 1914, it was later extended so as to cover the period until the Federal Reserve Act went into effect in 1915. The outbreak of the Great War in August, 1914, led to large shipments of gold to Europe and to a small-sized panic in the money market. To relieve the situation emergency notes to the amount of $386,000,000 were issued by 1363 different banks. It is very likely that the fact that the Aldrich-Vreeland Act was in effect prevented a serious panic like that of 1907. All of the notes issued under the act were retired before the act expired. They were subjected to heavy taxes which were increased as the notes remained in circulation, so that it was to the banks’ interests to retire them as soon as feasible.

In the second place, the Aldrich-Vreeland Act is important because it utilized a machinery which, in earlier panics, the banks of large cities, organized in clearing- house associations, had improvised for themselves. In times of stress banks had sometimes been permitted to pay adverse clearing balances in instruments called clearing-house loan certificates, representing the joint credit of the banks associated in the clearing house, and advanced or loaned to the individual banks whose reserves were deficient. The borrowing banks gave security to the other clearing-house banks by depositing approved collateral. In the shortage of cash in the panic of 1907 these clearing-house loan certificates in many cities were issued in small denominations and were paid out by the banks and put into general handto-hand circulation. The Aldrich-Vreeland Act utilized clearing-house associations where these existed, and provided for corresponding organizations of banks in country districts. There is much in the present federal reserve system which, in a general way, is similar to these Aldrich—Vreeland provisions. In fact, although in the reform of the American banking system much was learned from other countries, notably from the central-bank systems of Europe and the elastic note issue of the Canadian banks, it nevertheless remains true that this great reform is based fundamentally upon the monetary experience of the United States, and that it utilized machinery which in one way or another has been shown to be particularly suited to the conditions that exist in the United States.