Sec. 4. #Defects of our banking organization before 1913#.  Taken altogether, the banks in the United States since 1868 have represented great banking power and very efficient service for the community in times of normal business.  But in several respects it long ago became evident that our banks were operating less satisfactorily than those of several other countries.  American banking organization had failed to keep pace with the increasing magnitude and difficulty of its task.  Especially at the recurring periods of financial stress, such as occurred in 1893, 1903, and 1907, our banking machinery showed itself to be wofully unequal to the strain put upon it.  Financial panics were more acute here than in any other land, and the evil clearly was traceable in large part to defects in the banking situation.  In academic teaching and in public conferences of bankers, business men, publicists, and students, the subject was continually discussed after 1890.  At length Congress in 1908 created a “National Monetary Commission” to inquire into and report what changes were necessary and desirable in the monetary system of the United States or in the laws relative to banking and currency.  After the most extended inquiry and discussion that the subject had ever received, the commission submitted its report in January, 1912.  The defects to be remedied, as enumerated in the report,[4] may be reduced to the following five headings:  (a) Lack of system, (b) Inelasticity of credit, (c) Periodic local congestion of funds. (d) Unequal territorial distribution of banking facilities. (e) Lack of provision for foreign banking.

Sec. 5. #Lack of system#.  Only in a loose sense could the banks of the United States be said (before 1914) to constitute a system at all.  Both national and state laws dealt with individual banks only.  It was not legal for a bank to establish branches in another city as is done in most countries.  The several national banks in one city were legally quite separate.  It was only by voluntary agreement that in some of the larger cities they came together into clearing-house associations.  They made possible some measure of cooeperation which, small as it was, proved at times of stress to be of much service within a limited sphere for the local communities.  But even with the aid of these organizations the banks were unable in times of emergency to avoid the suspension of cash payments.

There was no provision whatever for the concentration of bank revenues so that each bank would be supported by the strength of the other banks, if a movement began to withdraw deposits in unusual amounts.  Each bank then was compelled for self-protection to call for any sums it had deposited with other banks,[5] and to keep for its own use all the reserves it might have in excess of its own immediate needs.  This threw a great strain upon the banks in the reserve cities, which in normal times had become the depositories of a good part of the reserves of the banks in other places.  Thus developed a spirit of panic, like the fright of theater-goers crowding toward the door at the cry of fire.