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A History of Banking in the United States/Chapter 5

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PERIOD III: 1812 TO 1829-32.

Local Banks are Multiplied to Replace the Bank of the United States. Their Issues are Stimulated by their Fiscal Functions, soon Intensified by War Financiering. Commercial Crisis is Produced with a Prolonged Liquidation, Attended by Various Experiments in Bank Issues and Stay Laws for Relief. A Banking System is Created Consisting of Local Banks Co-ordinated Around a Bank of the United States, as a Regulator of the Currency, and Fiscal Agent of the Government.



CHAPTER V.


Inflation on the Atlantic Coast.


T
T
HE war of 1812 was undertaken in the belief that it could be conducted by loans, and without the necessity of taxation. Gallatin was relied upon as a competent financier, but the role which had been assigned to him he was not willing to undertake. He accepted an appointment as one of the Peace Commissioners, and departed to Europe. As soon as the attempt was made to obtain resources by loans, the fact was developed that they could be obtained only in the Middle States. The New England States were strongly opposed to the war. In the South there was no superfluous capital. The Middle States were enthusiastic for the war as a continuation of the embargo system, and a "protection to domestic industry." The stringent measures which were taken to prevent importations, as a war measure, cut off the revenue. The loans met with only slight success, and the real financial resource consisted in treasury notes, bearing five and two-fifths per cent. interest. These at once stimulated banking issues in the Middle States. Campbell, Secretary of the Treasury, in 1813, wanted the exportation of specie forbidden, believing the banks would then loan to the government more freely, and the President recommended it in a message, but Congress would not adopt it.

In order to supply the place of one bank with $10 millions capital, 120 ​banks with $30 millions capital were created, according to the best statistics we have, between 1811 and 1815. A few banks in Maine suspended early in 1814, and the three banks of New Orleans in April. The English having invaded the District of Columbia and burned Washington, in August, the District banks suspended. Those of Philadelphia followed on the 30th, and the other banks of the Middle States immediately afterward. In explanation of this action of the banks, it is stated that a large amount of English government bills had been sold here at a very heavy discount. In his report of February 12, 1820, in which he reviewed the financial history of the last eight years, Secretary Crawford attributed the suspension to bank inflation, small notes banishing specie, and accommodation paper. Isaac Bronson attributed it to the anomalous state of things produced by the war, cutting off intercourse, so that inflation produced no demand for export.[1]

From the time of this suspension the banks of the Middle States entered upon a career of reckless increase of their issues stimulated by the public loans. "It is impossible," said Crawford, "to imagine a currency more vicious than that which depends upon the will of nearly four hundred banks, entirely independent of each other, when released from all restraint against excessive issues."

The banks of New York City agreed to take each others' notes and pay interest on debtor balances monthly. No bank was to increase its loans unless bound to lend to the State, and the debtor banks were to diminish their discounts when the general committee of the banks should recommend that this be done.[2]

The notes of the Connecticut banks disappeared from circulation and those of the suspended banks further south took their place. "At a special session, January, 1815, the General Assembly [of Connecticut] empowered each incorporated bank in the State to issue bills to the amount of one-half the actually paid capital, receivable for all debts due the same, and payable in specie on demand two years after the close of the war. Presidents and cashiers were to make statements semi-annually to the General Assembly of the amounts outstanding at the time of such returns. In October, 1814, the General Assembly had authorized them to issue promisory notes of less denomination than $1 for the payment of money only."

"Our banks now put out bills under two forms, the first promising to pay the bearer —— dollars in notes of New York banks, on demand at the —— bank in New York, or in specie two years after the war; and the second promising to pay the bearer —— dollars two years after the war. Both were receivable for all debts due the several institutions issuing the same. The public named them 'facilities.' Fractional notes ranging from six and a quarter to fifty cents were also freely injected into the currency. Individuals and corporations, barbers and bartenders, as well as manufacturers and capitalists, the solvent and the insolvent, further variegated the ​assortment of 'shinplasters' by liberal contributions, some professing to call for money and others for services."

"At the May session of 1815 the power granted to the banks to emit post-notes payable two years after the end of the war was made to cease and determine from the first day of January, 1816. The issue by any unauthorized person, persons, or corporation of paper intended to pass in lieu of money was prohibited under heavy penalties."[3]

The southwestern part of New England did not, therefore, escape the contagion.

The currencies of the various parts of the Union at once began to fall to different stages of depreciation, and the internal exchanges were thrown into confusion because the quotation contained the depreciation.

In some respects the period on the study of which we are now entering is without a parallel. The question uppermost in a man's mind in regard to whatever is offered as a circulating medium is: Will it pass? That means: is it the money of account, in which prices and contracts are set, so that it will be accepted as cash, without discount, dispute, or delay? If the money of account is specie, paper notes may still be cash; namely, if they are at once exchangeable for the coins whose name they bear. If they are not so exchangeable, they degenerate at once into negotiable instruments, and are not cash. Ifthey fall to a uniform discount, as negotiable instrument?s, they may become the money of account, superseding specie. Then they are cash again. The discount is included and accounted for in the prices and terms of contract. People who are unfamiliar with affairs then do not know that there is any discount or any negotiation. If the discount of the paper. varies, an insurance rate is included in the prices, etc., but, as it is uniform, it is unnoticed. These latter suppositions were fulfilled in the case of our paper money after the civil war. It was our money of account, or "current funds," and was cash. This is why people came to think that it was money and lost the sense of its relation to money. In 1814 the notes of each bank were at a different rate ofdiscount. Each town or county accepted some one kind as its local money of account. Others in the same place and groups of them in other districts were quoted with reference to that one, but the great characteristic of the period was, that the varieties were so great, and the badness of all was so extreme, that there was no money of account. The state of things is very difficult to understand and realize, and is almost incredible. It was the differences at the same time between the existing media of exchange which produced the result that there was no medium. Exchanges were maude by barter of such paper as one had for the goods which the other had.

Specie became very scarce in the Middle States and remittances could hardly be made. We are told, however, that the places where the currency was worst were the best places at which to import foreign commodities; ​no doubt because there was a double transaction in converting the currency obtained, and bringing home the proceeds in specie or in government securities.

The Treasury, as we have seen, after the expiration of the charter of the Bank of the United States, received duties in the bank notes of the port at which the goods were entered. Consequently there was a further advantage to import commodities at the port of entry where the currency was most depreciated. Hence Philadelphia and Baltimore enjoyed a period of great apparent prosperity, for, in July, 1815, New York paper was at 14 per cent. discount, and Baltimore paper at 16 per cent. discount, compared with Boston paper or silver. The discount on southern and western paper, at that time, was small.

The government suffered the greatest loss and embarrassment from the derangement of the currency. Boston was the money market of the country, and there were heavy disbursements there, which must all be made at specie par; but there was no revenue there, all being obtained further south in depreciated notes. If any one had payments to make at Boston to the Treasury, he bought notes of the suspended banks to the southward with which to do it. Hence Secretary Crawford stated that "until the resumption of specie payments in the early part of 1817, treasury notes, and the notes of the banks which had suspended payment, formed the great mass of circulation in the eastern parts of the Union. Specie, or the notes of banks which continued to pay specie, formed no part of the receipts of the government in Boston, and the districts east of that town, until about the close of the year 1816."

June 15, 1815, the Secretary of the Treasury gave notice that he would not receive the notes of any non-specie paying banks which did not take treasury notes at par with their own notes. If the notes of any bank stood higher than treasury notes, it refused to receive the latter at par. Such banks were in general the creditor banks, and the best ones, and the Secretary's rule led him to refuse their notes while he accepied those of the worse banks. August 15th he published a list of the banks whose notes he would no longer receive. He said that the proposition which he had made to the banks had been generally acceded to by them "with the exception of those which pay their own notes on demand, in gold or silver, and those who are specified in the subjoined list." The specie paying banks of New England so far as they received treasury notes, suffered for it, and were afterwards petitioners for redress.[4]

Advertisements were made by the Secretary for subscriptions to a public loan, March 10th, the object of which was to fund treasury notes and get a "supply of the local currencies of different places in some proportion to the probable amount of the local demand." Up to April 19th, he received no bids over 89, and some as low as 75. "Upon this experiment," he says, in his ​report for 1815, "it was seen at once that the new situation of the Treasury required a new course of proceeding, and that neither the justice due to the equal rights of the public creditors, nor a fair estimate of the value of the public property, nor an honorable regard for the public credit would permit the loan to assume the shape and character of a scramble, subservient to the speculations which create what is called a market price, and shifting in every town and village of every State, according to the arbitrary fluctuations of what is called the difference of exchange." He, therefore, fixed the price of his stocks at 95, not specifying in what, and he gives a table of the subscriptions received at different places, distinguishing subscriptions in money (i.e. the bank note currency of the place) from subscriptions in treasury notes. The table shows how little "arbitrary" was the difference of exchange. The quotations on the 19th of August were as follows: at Boston, treasury notes, fourteen and fourteen and one-half discount, local currency at par of specie; at New York, treasury notes, par; specie 12 per cent. premium in local currency; at Philadelphia, treasury notes, par, specie 15 per cent. premium; at Baltimore, treasury notes three and four premium, Boston notes premium, Philadelphia notes two premium, New York notes seven premium, specie 16 premium; at Washington about the same as at Baltimore. Turning now to the Secretary's table, we find that he received his largest subscriptions at Washington, Baltimore, and Philadelphia, and less and less further East. At Washington, only one-eighth of the subscriptions were paid in treasury notes, the rest in the local currency. At Baltimore not quite one-third were paid in treasury notes, the rest in currency. At Philadelphia nearly one-half were paid in treasury notes. At New York very nearly all were paid in treasury notes. Elsewhere nothing but treasury notes were received. The case is a remarkably good one to prove how absolutely certain the facts of value are to vindicate themselves against any attempt to juggle with them.

It must be added that, as between different bank notes, the Treasury received the worst. In a Treasury report of February 12, 1821, it was stated that there were then $818,590 to the credit of the Treasury, as special deposits in suspended banks. The Treasury also held $482 in counterfeits. In a report of February 1, 1838, it was stated that the amount of bank notes received between 1814 and 1817, and still on hand in 1838, amounted to $178,470, and that "the direct loss to the United States on bills that were depreciated but were still received and paid out again on public account probably equaled five or six millions of dollars."[5]

In December, 1816, before the Bank of the United States went into operation, the Secretary had to borrow $500,000 from it, with which to pay interest at Boston. In his report for 1816, he complained that he could not tell which notes were at par and which not. The depositories would only accept the notes which he had received, as special deposits, and he was obliged to keep four accounts, "cash," (i.e. local currency, special ​deposits, treasury notes bearing interest, and treasury notes not bearing interest. He too had no money of account.

The financial exigencies had become so great, even in 1813, that the minds of men began to turn once more to a national bank. There were fears about the proceedings of the local banks. The very men who had so jauntily declared, in the debate on the renewal of the charter of the United States Bank, that the fiscal affairs of the government could be carried on quite as well by the local banks, saw already grave reason to doubt whether that would prove to be true. The old dilemma was renewed between the social sentiments and political opinions hostile to the bank on the one side, and the financial exigency on the other. It was not at all on account of a change of political opinion about a bank in the administration party that the project of a national bank was taken up again; but, against their will, and with deep misgiving and dissatisfaction, they turned back to that device.

The subject of a national bank was brought up in Congress, January 4, 1814, by a petition from New York City, but nothing was done at that session except to appoint a Select Committee. As soon as Congress re-assembled in September, the subject was taken up again, the finances being in a desperate condition. Secretary Dallas proposed a national bank, October 14th, the leading motive being to obtain financial resources. In order to serve this purpose in the way desired by the administration, the proposed bank must be a non-specie-paying bank. One bill was completed and brought to a vote in the House, January 2, 1815, when it was defeated by the double vote of the Speaker, Cheves. Then, having been re-moulded, it was passed, 120 to 38, containing a provision against suspension. The Senate restored the provision for suspension, but afterwards receded and the bill was passed on the 20th, for a bank which might not make loans to the government and might not suspend; that is to say, it created a national bank of a general and permanent character, suitable for peace times, and not such a machine for war finance as the administration wanted.

President Madison vetoed the bill, because the bank, as provided for, "cannot be relied on during the war to provide a circulating medium or loans or anticipations of revenue," on account of the clauses forbidding it to make loans or suspend. In this history we have seen Madison vote against the Bank of North America, furnish the leading argument against the constitutionality of a Bank of the United States, in 1791, and the one which was most relied on by the opponents of the re-charter in 1811. Now, as President of the United States, in the midst of a war, his action must be taken to mean that he not only thought a bank constitutional if it was a sound institution, but even if it was to begin under a suspension of specie payments. The only excuse was that such an institution was "necessary" to the purposes of the State—that is, that it was constitutional in such form as the Legislature or the administration, under the circumstances, might find necessary. The position of the Senate had been that the chief reason for wanting the bank was to get loans from it for the war. If these were obtained, it could ​not maintain specie payments. Why, then, make it at all without a provision for suspension? This leaves us face to face with the fact that the mismanagement of the war finances was forcing the federal government to set up a paper money machine.

February 6th, another bill was introduced in the Senate for a bank with $50 millions capital, $20 millions in treasury notes, fundable in six per cent. stock, $15 millions in six per cent. stock, $5 millions in specie, $10 miliions by the government in four per cent. stock. It was not to pay its notes in specie until the last installment on the capital was paid. There were to be five equal installments, the first payable April 1st, and the four others quarterly thereafter. Congress might at any time authorize a suspension of specie payments on petition of the directors. February 10th, the Senate refused to strike out the last provision and passed the bill. February 17th, the day on which the news of the signing of the treaty of Ghent arrived, and as it appears, under some premonitions of that news, the bill was indefirotely postponed in the House. Jacob Barker, who had a great speculation on this project, was in Washington at the time. He says that the bill had passed both Houses, and lay on the clerk's table for assent to be given by the Senate to a change in respect to the date of organization, "when an express on its way to Alexandria for a speculation in flour passed through Washington with the news of peace, which so elated Congress that the members left their seats without waiting for an adjournment, and they could not again be induced to consider the question of a national bank during that session. This bill was framed with a view to induce moneyed men to subscribe to its stock. It was the best ever devised. It did not impose any bonus, and if it had then become a law would have worked wonders." * * * "Had the news been delayed a single hour, the bill would have passed and its stock would have been worth 100 per cent. premium."[6]

At this point, then, all demand for a national bank as a means of war finance ceased, but a new demand arose for it to regulate the currency, which had now fallen into great disorder. We lay emphasis here on the story of the legislative birth of the second Bank of the United States, the circumstances which led to it, the motives which impelled the actors, and the necessities which gave the controlling ideas, because this is all-important with respect to the character of the institution which was produced. This has been sufficiently apparent already in the struggle over the question whether the bank, for war finance, should suspend or not. We shall hear no more of any suggestion that the bank, if created, should contemplate suspension as a possibility. It was as a regulator of the currency above everything else that a bank was now called for, and the motive for it was weariness, contempt, and disgust, in regard to the local banks and the currency provided by them.

​One of the chief reasons given by the opponents of the old Bank of the United States for winding it up was to find out whether it had been useful or not. In 1815 it was almost universally believed that this question had been fully answered by experience, and that the experience had been costly.

During the year 1815, the bank note currency became worse and worse. The story is told of a "little Frenchman and his bank notes," who entered the country at Savannah with specie and travelled up the coast to Boston. He found his "money" all the time melting away. His American adviser told him that if he would begin at Boston and go back again, he could recover it all. The Frenchman, "holding up a parcel of ragged, dirty bills, pregnant with filth and disease," said: "Voila! it's like making a difference between the rags of one beggar and the rags of another."[7]

Another traveller gives his own experience: "Such was the state of the currency that, in New Jersey, I met with an instance where a one dollar note I had taken in change, which was current on one side of a turnpike gate, would not pass at an hundred yards' distance on the other side."[8]

The following case illustrates the difficulty of enforcing rights against a bank: A gentleman of Richmond wanted to enforce the payment of ten notes for $100 each against the Bank of Virginia, in 1815, but he could not get a lawyer to take his case until the following year. The president refused to obey the summons of the Court. The Sheriff brought him by force to Court, and, as the bank still refused to pay, the Sheriff closed its doors. The bank then brought suit for damages against the plaintiff, and instituted proceedings against the Sheriff. It re-opened its doors and went on with its business. No means were found to make it amenable to law. The "Richmond Enquirer" said that it was perfectly sound and able to resume, but held its opinion that it was not expedient to do so until others did.[9]

Another cause of irritation with the banks was that they were held to have failed completely as agents for the fiscal operations of the federal government. Gouge quotes a statement from a pamphlet by "A Friendly Monitor," attributed to W. Jones, first president of the Bank of the United States, that the State banks, depositories of the public money, refused to make the necessary transfers for the government expenditures, and finally refused to pay the balances due by them, except in the ordinary course of public expenditure at the places in which they were, claiming indulgence on various pretexts, while they held the paper of the other banks, which had come to them in payment of the public deposits, and prevented those banks from resuming.[10]

The President, in his message for 1815, urged Congress to provide for a "uniform" currency, either by a national bank or by government issues. The Committee on Currency asked Secretary Dallas, December 23d, for his opinion as to the amount of capital, the form of government, the privileges, and the organization of a national bank, and as to the amount of bonus ​which the bank ought to pay and the measures by which it might be aided in restoring specie payments. He replied the next day by a sketch of the bank as subsequently established. As to resumption, he thought that the best way to assist it, would be for the Treasury to refuse to receive notes of any bank which did not pay specie after December 31, 1816. He declared resumption impossible without a "contraction" of the existing issues.

The charter of the Bank of the United States became a law April 10, 1816. It passed the House, 80 to 71, and the Senate, 22 to 12. The federalist opposition at this session was due to the fact that the Bank would be in the hands of the opposite party. An amendment to establish the Bank in New York City was passed, but Dallas obtained a reconsideration. The New York members held a conference to secure its location at New York or its defeat; but one of the New York City members said that he had promised the administration to vote for the Bank and that he should do so. Upon this the effort was abandoned.[11]

It was chartered for twenty years. Its capital was to be $35 millions, $7 millions in specie, $7 millions by the United States in five per cent. stock, and the rest in specie or public stocks of the United States. It was to pay a bonus of $1,5 millions in three installments after two, three, and four years. It was not to issue notes under $5, and was not to suspend specie payments under a penalty of 12 per cent. There were to be twenty directors chosen by the stockholders, and five, being stockholders, appointed by the Presidefit of the United States. No person might subscribe over 3,000 shares, unless the total subscription should be less than $28 millions. In that case, one person might subscribe the deficiency. The subscriptions were to be paid in three installments: 1—At the time of subscribing, $5 in specie and $25 in specie or stock; 2—Six months afterwards, $10 in specie and $25 in specie or stock; 3—Six months later, $10 in specie and $25 in specie or stock. The Secretary of the Treasury might at any time redeem the public stocks in the capital of the Bank at the rates at which it was provided that they should be received in subscription; namely, the six per cents at par; three per cents at 65; seven per cents at 106.51, and accrued interest. He might also redeem the five per cent. stock to be given by the government for its subscription. The directors were to be chosen annually and no one of them might be a director in any other bank. The Bank was to commence operations when the second installment was paid. The stockholders were to have one vote for one share or two shares; one vote for every two shares above two and not above 10; one vote for every four shares above 10 and not exceeding 30; one vote for every six shares above 30 and not exceeding 60; one vote for every eight shares above 60 and not exceeding 100; or one vote for every 10 shares above 100; but no one was to have over thirty votes. Stockholders actually resident in the United States and none other might vote by proxy. Five of the elected directors and one of the appointed directors were to go out each year, and ​no one might be a director more than three years out of four, except the president. The Bank might not buy public stocks nor take over six per cent. for loans. It was forbidden to loan the United States more than $500,000, or any State more than $50,000, or any foreign prince or state anything. It was bound to transfer public funds from place to place at the demand of the Secretary, without charging for difference in exchange. Congress was to charter no other bank during the period of this charter. The Bank was to give to the Secretary of the Treasury, reports of its condition as often as he should require them, "not exceeding once a week." It was allowed to issue post notes for not less than $100, having not more than sixty days to run. The directors of the parent Bank appointed the officers of the branches, and fixed their compensation, and established by-laws for them. It might accept deposits of specie, paying not more than one-half of one per cent. for them. It was bound to keep in separate books the accounts of the government and of private individuals. The total amount of its debts, exclusive of cash deposited, was limited to the amount of its capital, unless Congress should otherwise allow.

This charter was evidently imitated from Hamilton's charter of the first Bank as nearly as personal and party pride would allow. The best criticism on it will be its history, but there are two or three points in regard to it, which produced immediate consequences. The country was suffering from excessive banking, upon which this Bank was to act as a check. It began with a very large capital which it was forced to employ. In the course of events the Secretary found the revenues of 1817 so large that he was able to redeem $13 millions of the public debt in the capital of the Bank during that year. The Bank was therefore forced to employ this large sum actively, even if it had been content otherwise to leave it quiescent in government stocks. At the same time, it became the creditor of the State banks for the vast amount of their notes, with which the Secretary accomplished that redemption. This put it in the power of the Bank, it is true, to exercise the great function, for which it had been created, of regulating the currency, by exerting great pressure on the State banks. It could force them to retire their issues and resume specie payments; but it was sure to arouse angry opposition and complaint. The banks had no desire whatever to be regulated.

In the second place, if the plan of putting public stocks in the capital had had very little ground in the first Bank, it had none in the second, after the war was over. The construction of the Bank on this plan gave unnecessary occasion for cavil at the favor shown to holders of government bonds.

In the third place, there was no reason why the nation should hold any stock in the Bank. The government itself, being destitute of capital and involved in the difficulties of disordered finance, although it was no longer compelled to find means for heavy war expenditures, the example of creating a great stock note with which to buy bank stock, repeating the operation ​which it had performed with great profit, as we have seen, in the first Bank.[12] it made a note at five per cent., interest payable quarterly, to take stock in a bank which could not be expected to pay over seven per cent. semi-annually. When the troubles came and the Bank paid no dividend, its enemies were fond of figuring up how much the public paid annually for the privilege of being a stockholder.[13]

This, however, only touched upon the profit or loss of the arrangement, not on its propriety. When the government gained by the Bank, as it did later, private individuals naturally asked themselves why they might not, by associating themselves, do the same. Ten men who, individually, could not have borrowed ten dollars apiece, associated themselves into a "bank" and by circulation and deposits borrowed $100,000.

In the fourth place, the arrangement about voting on stock in the Bank, although it was universal and had been borrowed from England, proved mischievous. Some gentlemen at Baltimore who had had great experience in organizing financial institutions had devised the plan of subscribing by attorney. George Williams a government director took 1,172 shares as attorney in the name of 1,172 different persons. In his testimony before the Committee of 1819, he declared that this was a common procedure, which indeed it was, and that the market price of proxies was eleven pence. Baltimore took in all 40,141 shares on 15,628 names, and got 22,137 votes out of 77,759, which was the total number of votes which all the stockholders were entitled to under the rule, taking the subscriptions as they were actually made. The clique at that place thus took less than one-seventh of the shares and got over one-fourth of the votes. At Philadelphia, where one-third of the shares were taken, only two-ninths of the votes where held.

We must also notice that the public expected of the Bank faultless performance of two functions. It was to provide a uniform currency or equalize the exchanges, and it was to collect and pay, on behalf of the Treasury of the United States, at all points and without delay. Under the former head, it was expected not only to furnish notes of its own at a uniform value everywhere, but also to force the local banks to come to an equality by coming to the same standard. The notion of equalizing the exchanges, or making a uniform currency is elusive and illusory. What people meant was that they wanted to be able to put a note in a letter at one place and have it current at par of specie at any place to which it might be sent. In the discussions which arose it was often unclear whether it was expected that all notes should be equally valuable at all places, or at all times, or all equal to each other. The only realizable equality was that all should be brought up to specie at the place of issue and redemption, and in that sense, be equal to each other. The more intelligent demand on the Bank was that it should make its own notes a universal currency, and force the local banks everywhere to keep theirs up to par with those of the Bank.

​There was also a very general popular expectation that it would do more than this, and would do away with any rates of exchange, properly speaking, between different points. Great fault was found with it for charging for drafts. It is very clear that too much was expected of it under this head. Considering the immense extent of territory over which its nineteen branches were scattered, and the difficulty, delay, and expense, of transportation and communication, it was not possible, in the early years of its existence, that it should do what was expected of it under either of these heads.

The Bank had also to contend with clamorous demands for branches at a great number of points, with all the familiar phenomena of local jealousy and ambition.

The only measure which was at once adopted, which was calculated to enforce specie payment, was a rule in regard to the currency which the government would receive for its dues. Dallas wrote to Calhoun, March 19, 1816, urging that Congress should designate specie or its equivalent as the only currency which might be accepted at the Treasury; also that it should forbid the deposit of public funds in non-specie-paying banks, and should lay a very heavy tax on any bank notes which were not redeemed in specie on demand. The bank interest in Congress was too strong to allow any such stringent measure to be passed. The result was the resolution of April 29, 1816, that the Secretary should take measures, as soon as may be, to secure payment in specie or United States Bank notes, or treasury notes, or notes of specie paying banks, and that nothing else ought to be received after February 20, 1817. This took from the Secretary the power, after the nominal resumption of specie payments, to reject the notes of banks which pretended to pay specie. The history of the years 1817 to 1819, as far as the interests of the federal Treasury were concerned, would have been quite different if Dallas's recommendation had been adopted. Matthew Carey[14] objected earnestly to this resolution, with the resumption of specie payments which it contemplated. He declared that there was not specie enough on hand or to be had to maintain the system proposed. He wanted specie notes to be used only in part, and for the rest credit notes, by which the bank should pledge itself to receive the notes for specified sums in the payment of debts to itself.

This period was, considering the circumstances, one of active literary discussion on topics of currency, and Carey was one of the most active writers. In a public letter to Calhoun on resumption, he objected to it until the balance of trade should come around so as to protect the specie stock. He objected to the stamp tax, which, as we have seen, Dallas had proposed to be laid on non-resuming banks, because the specie stock was quite inadequate to sustain a general resumption. In his Letters to the Bank Directors of Philadelphia, he described the great prosperity of 1816. It was the golden age of Philadelphia. An immense business was done with great profit, ​upon bank credit, the banks being very liberal. Superficial observers have blamed them for too free loans, over-issues, and over-trading. These charges were highly unjust. They were only to be blamed for too great loans to some individuals, and for curtailing their loans in order to invest in government securities. He expected the national bank to emancipate men from slavish dependence upon the local banks for loans.[15]

One of the current notions of the time, which always recurs under similar circumstances, was that it was the specie which had advanced and not the paper which had depreciated; and another was that by the advance of civilization and its arts, paper had superseded specie as money. These notions were very wide-spread in England at the time, under the suspension of specie payments by the Bank of England, and they can be traced in the writings of the American pamphleteers. Of the former notion, Raguet said that it was beginning to be abandoned in 1816.[16] Both these doctrines were most ably expounded by Dr. Bollmann in his "Plan of Money Concerns." In this "Plan" he maintained that the general government ought to agree to pay the interest of the public debt in coin, and that the notes of the national bank ought to be payable on demand in six per cent. stock at par, or in specie at the option of the institution. The national bank ought to have no branches, but to be the bank of the banks. The notes of all the banks in any one State should be made convertible on demand in the notes of one designated central bank, and the notes of these chief State banks ought to be redeemable in notes of the national bank. There should be no notes of the national bank under $5, and said notes should be made legal tender. The charter of the Bank of the United States was published in time for him to notice it in a postcript. He was extremely displeased with it. "A volume might be written on this ill-judged scheme."

Carey pronounced Dr. Boilmann's plan a magnificent one, and said: "It would be a sovereign remedy for all the financial difticulties of the country."[17] That plan seems to have influenced the minds of the persons who invented the Pennsylvania "relief" system of 1841.[18]

An anonymous writer of 1819[19] ridicules the notion of a lack of circulating medium urged in favor of banks of circulation. "Everyone ought to, and will, receive of the circulating medium that quantity which he is entitled to by his property or industry, unless it is diverted from its natural channels by the knavery of banking Legislatures, which is the case in this country." He regarded note-issuers as robbers.

Dallas issued a circular July 22, 1816, in which he called upon the banks, especially those of the Middle States, to meet the Treasury in an effort to put the resolution of April 29th into effect. He proposed that the banks should agree to the publication by the Secretary of a notice that he would not receive, after October 1st, any notes of any bank which did not pay its notes for five dollars or less in specie, and that, after February 20, 1817, the ​joint resolution should be the rule of the Department. August 6th, a meeting of representatives of the New York, Philadelphia, and Baltimore banks was held at Philadelphia, at which it was voted not to approve of any such notification by the Secretary, and to express to him the opinion that resumption ought not to be attempted before July 1, 1817. It being thus clear that nothing could be obtained from the banks in the way of voluntary co-operation, the Secretary published a notice, September 12th, that the Department would receive after February 20, 1817, only the currency approved in the joint resolution of April 29th. The fact was that there was no authority which could deal with the banks. W.H. Crawford, of Georgia, became Secretary of the Treasury, October 22, 1816. There were at this time 89 banks of deposit.[20] In a letter to the Senate, in 1823,[21] Crawford says that, when he took office, the Treasury had $11 millions in the State banks. Urging them to join the Bank of the United States in resuming, he offered not to draw on them before July 1, 1817, unless his receipts should prove less than his expenditures, which there was no reason to apprehend, and that then he would only draw gradually and not in favor of the Bank of the United States, unless it should be necessary in order to protect that bank against the State banks. They refused. Here certainly there was very dainty action with regard to the "removal of the deposits." His further correspondence with them shows the same disposition on their part, and the same lack of authority on his side.[22] No such insubordination was ever manifested by either Bank of the United States as characterized the State banks in the dealings of the government with them.

Subscriptions for the stock of the Bank of the United States were opened at various points July 1, 1816. When the reports were received, it was found that the subscriptions fell short of the $28 millions open to the public by $3,038,300. Stephen Girard subscribed this sum. The Secretary of the Treasury informed the Commissioners at Philadelphia, August 16th, that the stock had been subscribed, and recommended them to proceed with the necessary preparations for opening the bank.

It has been said above that the public conception of the way in which this bank was to bring about resumption and "equalization of the exchanges" was very vague; but the fear in the State banks that in some way or other it would force resumption was also vague, and their reduction of their liabilities, with an improvement in the exchanges, commenced from the time that the bank stock was subscribed. The banks held large amounts of public stock, as we have seen. These they were unwilling to dispose of for the reduction of their issues, and some complaints arose that they confined their reductions entirely to their discounts. Some of them had lost on public stocks in 1814, and as those securities were now rising, it was a good investment to hold them. These bank contractions arrested the speculations which were in progress, which accounts for Carey's complaint. ​Others complained far louder than he. Virginia tried to force resumption by a State law, but the opposition prevailed to secure a postponement of the day set and, subsequently, a return to inflation. However, in the latter part of 1816, no crisis or panic at all occurred. No evidence of distress in the business of the country appeared. The exchanges steadily improved down to the day fixed for resumption. At the end of July, specie was at par at Boston, at five per cent. premium at New York, at eleven or twelve per cent. premium at Philadelphia, at fourteen or fifteen per cent. premium at Baltimore. Southern and western notes were generally at a discount of about the cost of shipping specie from the place at which they were issued to the place at which the quotation was made. In September, it was announced that the New York banks were paying specie.[23]

In November, the comparative quotations of public stock show that the currency of Boston and Charleston was at par, that of New York, at one and a-half per cent. discount, that of Philadelphia at six per cent. discount, and that of Baltimore at nine per cent. discount. A Treasury circular was issued January 28, 1817, to the banks of Pennsylvania, Delaware, and Maryland, stating that the Bank of the United States had been authorized to receive the public deposits in those banks, the manner of transfer being left to that Bank.[24] February 1, 1817, the banks of New York, Philadelphia, and Baltimore agreed to resume on the 20th of February, the day which the Treasury Department had proposed and always adhered to, the Bank of the United States promising not to call on them for balances until after it should have discounted for individuals at New York $2 millions, at Philadelphia $2 millions, at Baltimore $1.5 millions and in Virginia $500,000. February 22nd, the quotations of the exchanges were at New York, in the local currency, Boston one premium; Philadelphia par to one-quarter discount; Baltimore three-quarters discount; Virginia and North Carolina one-half discount; South Carolina and Georgia par; New Orleans two discount.

During the whole of the Fall and Winter, the foreign exchanges were favorable and silver was imported in great amount. It must be remembered that irredeemable paper was in use at this time nearly all over Europe, except in France. The English bank notes were depreciated from six per cent. to ten per cent., although rapidly improving during this year by the destruction of large numbers of country banks. This depreciation abroad made it easier to draw specie to America.

The important point now, for our purpose, is, that on the day appointed for resumption, February 20, 1817, the currency had been, in fact, brought to specie par all over the country. To secure resumption it was only necessary to still further withdraw bank notes, which would have been replaced by silver, and would have been no contraction.

The Bank of the United States was organized November 1, 1816. Ten of the elected directors were federalists and ten republicans. The President ​appointed five republicans. November 28th, Niles's Register reported: "United States Bank scrip has sold at Philadelphia for $42.50 on the original installment. Speculation is the order of the day." Such indeed was the fact. Stock jobbing with the shares of the Bank began from the first subscription and was carried on most vigorously by the officers and directors of the Bank.

The second installment was due January 1, 1817. Ten dollars per share would then become due in specie. Specie, however, was then still at six per cent. premium in Philadelphia. At a directors' meeting December 18th, it was voted to make loans on stock in order to facilitate the payment of the specie portion of this second installment. December 27th, other votes were passed, in form restricting these loans somewhat, but really only limiting the advantage to a few. Measures were taken to buy and import specie for the account of the Bank. During the two years, 1817 and 1818, the Bank imported $7,311,750 in specie, at an expense of $525,297. Upon the inquiry which was subsequently made, the bank officers declared that they could not distinguish in their accounts so as to tell how much specie had been paid in at the second installment. The amount of specie in the Bank, in January, 1817, was $1,724,109, which was only $324,109 more than the specie part of the first installment, and the latter sum is therefore the utmost which could have been paid in on the second installment, when it was intended and expected that $2.8 millions would be paid in specie. Checks on the Bank and on other banks which claimed to pay specie, as well as notes of the latter, were taken as equivalent to specie. Everyone who was acquainted with the methods of banking of the time declared that no specie would be added to the stock of the Bank by the second or third installment.[25] Crawford, in 1820, showed that such was the usual practice in organizing banks. "The reason why a bank of $35 millions could be created in 1816, was simply that there was then a large amount of funded debt of the United States incorporated in the capital, rendering it necessary for the subscribers to raise less than $5,000,000 in specie before the Bank went into operation."[26]

The measures which had been adopted in the Bank encouraged the stock jobbing. The discounts were not even restrained to the coin part of the second installment, but, in some favored cases, reached the total amount of the first two installments. After February 20th, this became the general rule, although the second installment, in many cases, had not yet been paid.

"The discounts, the payment of the second installment, the payment of the price to the owner, the transfer, and the pledge of the stock were, as it is termed, simultaneous acts."[27] At the end of December, 1816, the stock was at 41 7-8 for 30 paid; in April at 81, and in May at 98 for 65 paid; August 20th, at 144 for 100 paid; and August 30th, at 156 1-2, where it stood for a few days.

Some suspicion of the proceedings in the Bank was aroused in the public mind, and strong criticism was provoked. January 6, 1817, Forsyth ​introduced in the House of Representatives, a resolution of inquiry whether the payment of the specie part of the second installment had been avoided. The Committee on Currency addressed an inquiry to Mr. Lloyd, a director of the Bank, who chanced to be in Washington. He replied, on the 9th, admitting that discounts had been made to facilitate the second payment, but excusing it on the ground that the payments would not otherwise have been made. The only penalty for non-payment was to lose any dividend which might be declared, and this, he said, was not sufficient. In fact, the discounts did not cause the installments to be paid, but enabled the stock to be carried until it could be sold at an advance. The Committee transmitted Lloyd's letter in answer to Forsyth's resolution, whereupon Forsyth introduced another resolution, January 13th, that the bank should not be allowed to go into operation, or to receive public deposits, until the second installment was paid, according to the charter. This resolution was not acted on until the end of the session, when it was indefinitely postponed for want of time, on Forsyth's own motion.

January 30, 1817, the directors of the Bank voted to issue post notes at sixty days for loans granted.

Thus it was that the great Bank, instead of acting as a check to inflation, adopted all the worst methods of bank organization of the time, and joined in the career of inflation. "The Bank did not exercise with sufficient energy the power which it possessed and might have retained, but rather afforded inducements to the State Banks to extend the amount of their circulating notes, and thus increased one of the evils it was intended to correct."[28] From the very brink of resumption the great Bank carried the whole country back into the slough of inflation and depreciation.

Its notes, being redeemable at any branch, became at once a good and cheap remittance. Boston was then the money market of the country, and the Middle States were in the debtor relation to the East. Notes of the Baltimore branch were advertised for sale at Boston a few days after the branch at the latter place went into operation. The Boston and New York branches were busy redeeming the notes issued by the Baltimore branch, and the parent Bank had to send them continually new supplies of silver. From March, 1817, to December, 1818, $1,622,800 in specie were sent to Boston and $6,293,192 to New York. During the latter half of the year 1818, the sum sent to Boston was small, because treasury drafts were issued to the Baltimore branch on the northern branches, drawing to it the public deposits. First, therefore, the Baltimore branch drew to itself the capital of the Boston branch, and then it drew to itself the public deposits. January 3, 1818, the Baltimore branch owed the other branches $9.5 millions. The silver paid out by the northern branches was shipped to India and China, for which fact the merchants in that trade were denounced as enemies of their country. The banks of Massachusetts resisted the payment of deposits to ​the Bank of the United States, because they held specie paid in by the people of Massachusetts, and wanted the same or their own notes paid out to them. It seemed that the Middle States, which had gone so deeply into the paper system, had now organized a big bank to draw the specie which the Eastern States had kept during the war, giving United States bank notes for it. Here, then, we find that in the East the operation of the Bank was to draw into the paper system this section which had thus far kept out of it. In 1814, the Boston banks had circulation and deposits to the amount of $1.66 for every $1 in specie they possessed; in 1815, $2,07; in 1816, $3.45; in 1817, $4.08; in 1818, $5.78. The ratio then improved until 1821, when it was $2.58.[29] Silver was at seven per cent. premium in Boston, October 17, 1818.

If we now turn our attention to the Western States, we find that the notes issued by the branches there were obtained on easy credit and remitted East in purchase of commodities. The cashier of the branch at Lexington, Kentucky, being alarmed at this remittance of his notes to be redeemed at Philadelphia, thought best to use the notes of the State banks, and to restrict his own circulation. For this he received a rebuke of extraordinary severity from the president of the parent Bank, who instructed him that his business was to issue and circulate his own notes, and directed him to sell drafts at a low enough rate to hinder the shipment of his notes, and to buy drafts when he could get them. This drew out a remonstrance from Crawford, who warned the Bank that the public, who had been pleased at the apparent success of the Bank in equalizing the exchanges [that is, the improvement of the exchanges up to February 20, 1817], would be very much dissatisfied if it should now appear that the Bank and its branches were about to establish a system of internal exchanges, "without reference to the commercial relation which exists between the two places."[30] In fact this arrangement made little difference in respect to the operation of the Bank on the western country. The loans were repaid in local notes, which accumulated in the branch until they were presented for redemption; then the silver obtained for them was shipped eastward. At the same time the notes of the United States Bank and the local banks together increased to occupy the space left, and then to become redundant and depreciate.[31] Therefore in this section also the operation of the Bank was mischievous, and we find it drawing into the inflation another section which had not yet taken part in it. In the South it had very much the same effect, although that effect was not developed until somewhat later.[32]

The Bank had scarcely gone into operation before it began to make difficulties about paying specie for its notes without reference to the place of issue. Jones wrote that it would furnish weapons for its own destruction by so doing. He illustrates this as follows: "During the existence of the late compact between the Bank of the United States and the State banks ​[that the former would not demand balances of the latter until it had discounted to a certain amount in the large cities], it became necessary to level the exchange from Washington to Boston, whatever might be the cost or hazard of the undertaking, inasmuch as the Bank of the United States had engaged to receive on deposit, and of course to pay in specie, the paper of all the contracting banks, and to permit them to check on each other for the liquidation of the public balances, the payment of which was suspended. The consequence was that each check impaired the value of the debt due to the Bank of the United States by substituting paper less valuable than that of the original debtor. It was soon discovered that this practice was not confined to the liquidation of the public balances, but was made to embrace the current business between the banks of the respective cities. The banks in New York discounted paper payable in Philadelphia, and those in Philadelphia discounted paper payable in New York. The Bank of the United States and its offices were made the instruments to place the amount of these transactions in specie wherever money was most in demand."[33]

The pretended resumption of 1817 was unreal. It never was accomplished. In 1820, Secretary Crawford said that, for most of the time since resumption, the convertibility of bank notes into specie had been rather nominal than real in the great portion of the Union.

By May, 1817, complaints began to be heard that the resumption was only nominal. May 17th, Niles said: "Though our banks ostensibly pay specie, it is almost as rare as it was some months ago to see a dollar."

The third installment of the capital of the Bank became due July 1st. Little notice was taken of it, and it seems to have been paid much as the subscribers chose. No specie was paid in, although $2.8 millions should now have been paid, according to the charter, and as public stocks had risen above the rates at which they were receivable in the capital, and as the amount of public stocks held by the Bank was subsequently found to be deficient, it appears that a large part of this installment was paid in bank notes or by stock notes. July 25th, the directors voted that the branches might make loans on pledge of Bank stock. August 26th, they voted to make loans on the stock of the Bank at 125, giving as a reason that it had been taken as collateral for loans at that rate in New York. The Committee of 1819 could not find that this was true. An endorser was at first required for the amount above par, but later this was not insisted on. September 30th, the president and cashier were authorized to renew notes discounted on pledges of stock. The president and some of the directors were deeply engaged in the stock jobbing. The former had a very large interest, on which he suffered a loss. The stock began to decline at the end of September, and in December, 1818, was at 110.

October 11, 1817, Niles said: "Though the Bank of the United States and its branches has had a considerable effect to equalize the exchange of ​moneys between different places, being assisted in its operation by the natural courses of trade, still the people are inundated with paper called bank notes at almost every depreciated rate, one-half to seventy-five per cent."

The important incidents of the period of inflation; in the banking history of the several States, were as follows:

The Legislature of Massachusetts, in 1812, tried to reduce the number of banks by refusing to renew the charters which expired in that year. The New England Bank was chartered June 6, 1813. It constituted another attempt to deal with the circulation of the country notes in Boston, on which the discount was then from three per cent. to five per cent. It undertook to send home these foreign bills, as they were called, to the banks which issued them, at the cost of the operation. This rapidly reduced the discount on the country notes. In January, 1814, it sent certain New York bank notes home for redemption to the amount of $138,874. "This silver Was put into three wagons, which proceeded on their way hither as far as Chester, 14 miles. There they were seized by order of the Collector of New York, commanded back, and the money deposited in the vaults of the Manhattan Bank, of which he was a director. Though a protest was handed to him against such a course as illegal, by the agent, yet he declined to alter his purpose. He assigned as a reason for this procedure that he suspected such cash was going to Canada. Many this way supposed that he was chiefly actuated by dislike to the frequency with which the New England Bank dispatched large sums of the New York bills which flooded Massachusetts, to be redeemed with dollars. On being made acquainted with these facts, the General Court resolved that the conduct of the collector in this respect is a violation of his duty and an infringement on the rights of the New England Bank. They also decided to have the matter laid before the President of the United States, with the expression of their judgment, that the collector had committed an outrage on one of their corporations, ought to relinquish the deposit, and be dismissed from his office. Such application so far succeeded as to have the money restored."[34]

During the war, the banks would not lend to the State, at the risk of increasing their issues. February 6, 1816, an act was passed to compel them to do so when necessity might arise. In the summer of that year, the Dedham Bank issued a quantity of paper in the form of drafts on a bank at Middletown, Connecticut, payable to bearer, which led to an act of December 13, 1816, which enacted that all the notes and obligations of banking institutions should be payable in specie at their own counters. The Court in King vs. the Dedham Bank,[35] held that this law was void as to issues made before its passage. Before that, therefore, these Massachusetts banks had been able to issue drafts which were used as currency. In 1817, notes for less than $1 became very abundant. They were forbidden February 3, 1818.

​New York.—Credit notes, by their tenor only receivable by a bank for dues to itself, were, by a law of 1816, made recoverable in money, and banks were forbidden to issue any notes payable otherwise than in money.

The law of this State forbade any unauthorized association to issue notes. In 1818, this prohibition was extended to persons, and both persons and associations were forbidden to do any kind of banking unless chartered so to do. Jacob Barker's Exchange Bank was excepted for three years. The act was called for on account of the mass of fractional notes which had been issued by all kinds of persons and corporations.

Pennsylvania.—At the session of 1812 and 1813, twenty-five banks were chartered by the Legislature in one bill. The total capital was $9,525,000. The bill passed both Houses by a majority of only one vote in each and was vetoed by the Governor. "At the following session the subject was renewed with increased ardor and a bill authorizing the incorporation of forty-one banking institutions, with capitals amounting to upwards of $17 millions was passed by a large majority." It was vetoed by the Governor, but passed by the constitutional majority and became a law March 21, 1814. Under it thirty-seven banks were organized; four of them in Philadelphia.[36]

Virginia.—The Bank of Virginia and the Farmers' Bank were authorized October 19, 1814, to issue one's, two's and three's, but not to increase their total circulation, until six months after the peace.

February 19, 1816, perhaps with some reference to the incident narrated on page 70, provision was made by law for suits against corporations including banks, and for writs of execution against them; service to be on the chief officers; levy might be made on the current money as well as on the goods and chattels. February 23d, a summary proceeding was provided against any bank which did not pay specie after the 15th of the following November, six per cent. interest being imposed and a levy on property of the bank anywhere in the State being authorized. This remedy was not given to any bank or its agent. This appeared to commit Virginia to a resolute policy of resumption; but on November 14th following, this act was suspended for a month, and then for six months, although banks which did not pay specie for their notes under $1 after January 10, 1817, were excepted from the indulgence.

All unchartered banks were made illegal, February 26, 1816. If any such issued notes, the officers and partners were liable to fine. Such notes were null and void. The fine for signing was threefold the amount of notes signed. Such a company could not recover in any court in the State. Such illegal notes under $1 being in circulation, the holder of one of them may recover $5 from the issuer or signer. November 15th, this act was suspended as to ten enumerated companies and banks until August 31, 1817, in order to give them more time to wind up. On the following day this extension was granted for four more. ​January 5, 1816 a long report on banks, resumption, etc., was presented to the House of Delegates. It ended with a proposition to establish fourteen banks in various counties up and down the State.[37] This committee stated that, before the war, the notes of eastern banks were at a premium of two or three per cent. in the West. During the war those of the western banks came to bear about the same premium in the East. Since the war the former state of things had returned. This no doubt refers especially to Virginia and Kentucky, and it may be only a reminiscence of the effects of the rising tide of inflation in the two sections at different times.

The Northwestern Bank of Virginia was chartered February 5, 1817, at Wheeling; capital not less than $400,000 nor more than $600,000; to be paid in in coin. A peculiar provision was here introduced that 15 per cent. of the capital should be created in additional stock to be given to the State as a fund for internal improvements. It was to be paid for "by charging an equal proportion of the amount thereof on each share disposed of to subscribers."

This amount was to be paid in in thirty semi-annual installments, the first one on the day of the first dividend, out of which such installment was to be retained, if the dividend sufficed for it; if not, the shares were to be assessed and any stockholder who did not pay the assessment was to forfeit his stock. Three branches were provided for. It was to last until 1834. Evidently the payment to be made by each stockholder on his stock, in order to pay for that given to the State, was one-half of one per cent. each six months, which was to come out of his dividend if it exceeded that amount. This bank was to make no loan for longer than 120 days; to issue no notes under $5; and to have three State directors. In the same act the Bank of the Valley in Virginia was chartered with similar details throughout. The State might sell its stock in each at will, and 15 per cent. penalty was imposed, with forfeiture of the charter, for failure to redeem.

The complaints about the unauthorized note issuers came up again in 1820, for they continued their operations. New penalties were imposed, including imprisonment from one to twelve months for individuals, and a fine of $50 on corporations. A fine between $10 and $100 was imposed on bringing such notes into the State with intent to circulate them, and a fine of $10 for offering to pay or pass them.

The Northwestern Bank did not pay the contributions to the State stock promptly. Therefore an act of January 7, 1822, provided that the notes of the Northwestern Bank and the Valley Bank should be receivable for taxes as long as they pay specie, and if the former pays up its arrears on the State stock. The charter of the Farmers' Bank was extended March 6, 1824, for fifteen years, and it was brought under the same law of penalty for suspension, etc., as the Northwestern Bank. A bonus of $50,000 was exacted for internal improvements, which sum must be paid out of dividends on the stock not owned by the State.

​North Carolina.—The charter of the Banks of Cape Fear and Newbern were extended, in 1814, until 1835; the capital of the former might be increased $525,000; that of the latter, $575,000. Each bank was bound to lend to the State not more than one-tenth of its capital at not more than six per cent. An option was reserved for the State on 1,000 shares in each, of which 180 shares were to be given to the State as a bonus, and the State might pay for the 410 shares with its own treasury notes. The remaining 410 shares were to be paid for at the convenience of the State. The debts of either bank might not exceed all cash deposits by more than $2,400,000. The State paper was not to be a legal tender to either of these banks, but only to the Bank of the State after January 1, 1816. No notes were to be issued under $1. Treasury notes were to be issued for the sum of $82,000 in denominations of five cents, ten cents, twenty cents, etc., all of which were to be paid over to the two banks in payment of the first installment ($10 per share) on 410 shares in each. They were to bear no interest; were to be issued by the banks and redeemed by the Treasurer; to be re-issued by him. If the Bank of the State should be voluntarily dissolved before December 18, 1816, these banks were to take up the State paper with their own paper, at the rate of $1 for 10 shillings. If this was done, the Governor was to proclaim that the State notes were not a legal tender, except to these banks until their charters expire, after which, if State notes are still out, they were to be legal tender again; but the dividends on the stock owned by the State were to be employed in redeeming them.

A Committee of the Legislature in 1828-9 reported, in regard to the banks of Cape Fear and Newbern, that the increase of their capital in 1814 was paid for by stock notes of favored individuals. "It follows that the whole amount of the interest drawn from the people on the loans made on this fictitious capital was a foul and illegal extortion. * * * Taking the issues made on this fabricated capital, to be in proportion with those made on the former capital, they must have put into circulation on the faith of the assumed stock, between $3 millions and $4 millions of notes, and thus a parcel of individuals under the name of stockholders, but who in fact held no stock, contrived to exchange their notes without interest to the amount of $3 millions or $4 millions for the notes of the people bearing an interest of more than six per cent., and while the property of the people was pledged for the payment of the notes they had given to the stockholders, there was not a dollar or an atom of property pledged to them for the payment of the notes they had received from the stockholders."[38]

This State passed a law against due bills and small promissory notes in 1816, declaring that the abuse was increasing and was very detrimental to the true interests of the State. It appears that schools and academies were making such issues. "It shall not be lawful for any person or persons to pass or receive any check or checks drawn for less than $1 on the State ​Bank, the Banks of Newbern or Cape Fear, or the various branches or agencies thereof, for the benefit of any academy, school, or corporation, or company of private citizens, or any check or checks drawn on any person or persons whatever." The penalty was £10, half to the prosecutor. Issuing notes without authority was punishable with a fine of £100 and imprisonment for six months. At the same session so much of an act to incorporate a school, and of another act to incorporate a manufacturing company, as might by construction authorize either of them to issue notes was repealed. If they did not pay on demand, the holder might recover, as the law expresses it, 100 per cent. on the principal sum. An alteration was also made in the charter of the Bank of the State, providing that the Treasurer should cause $80,000 to be printed in treasury notes, in denominations from five cents to seventy-five cents, redeemable and re-issuable by the Treasurer, to be in part payment of the debt of the State to the bank.

In regard to the Bank of the State, the committee of 1828-9 said that: In 1818, the proportion between its notes and circulation, was one to twelve; in that year $424,000 of stock unsold was sold for their own notes, in order to reduce the amount of them. This the committee calls a "scribbling process." While this operation was pending, the three banks entered into a formal agreement, July, 1819, not to pay specie, and their notes fell at once to 85. Up to this time there had been inflation and prosperity. "A scene of extortion and usury ensued which has no parallel in the annals of avarice; the strange spectacle of moneyed institutions exacting specie in exchange for their notes, which they themselves refused to redeem with specie."

South Carolina.—The Bank of the State of South Carolina was chartered, December 19, 1812, as a measure of relief after the sufferings from the embargo,[39] and the preamble of the charter stated that it was "deemed expedient and beneficial, both to the State and the citizens thereof, to establish a bank on the funds of the State, for the purpose of discounting paper and making loans for longer periods than have heretofore been customary, and on security different from what has hitherto been required." All stock of the United States, loan office bonds, bank shares, and credits belonging to the State are to be put in this bank, and the faith of the State is pledged to make good any deficiencies; public deposits to be placed in it; to lend on two-name paper and on real and personal property, the borrower giving power of attorney to confess judgment; no loan to run more than a year; no renewal to be granted unless the next year's interest is paid in advance; no loan to one person to exceed $2,000; one-tenth of each loan to be called in in each year; prompt execution to be enforced against defaulters; the Legislature to elect a president and twelve directors; to issue no note under $1; to be called the Bank of the State of South Carolina; to be situated at Charleston, with a branch at Columbia. The loans on mortgage were to be apportioned between the election districts; all stock owned by the State in ​other banks might be sold and the proceeds turned into this one. The State might issue $300,000 of six per cent. stock, the proceeds to go into the funds of this bank. The notes were to be receivable by the State. Five commissioners were to be appointed in each district to appraise the lands on which loans were wanted. In an explanatory act, a year later, it was enacted that no other bank should issue notes under $5, which gave this bank a monopoly of small notes. December 21, 1814, the Bank of the State was required to issue notes under $1, and no one but the chartered banks was to be allowed to issue circulating paper. The city of Charleston was given until January 1, 1816, to call in its bills of credit. The Bank of the State was authorized to deal in inland exchange, December 15, 1815. At this time, also, the connection of the State with the old "State Bank" was dissolved, except by virtue of the stock which it still held. The Bank of the State was charged, December 17, 1816, with the liquidation of the old loan office of the State, which was still dragging along a load of bad debts. It was to sell the land which had been mortgaged to that office, but was not to call up in any one year more than one-third of the debt. The effect of the war finance is seen in an act of December 17, 1817, that all the banks in the State may invest not over half their capital in stocks of the State or the United States.

In 1819, October 1st, the directors of the Bank of the State of South Carolina published an anti-bullionist argument against resumption. It did not resume until 1823. The United States Bank at Charleston used its paper.[40]

Georgia.—The Bank of the State of Georgia was chartered December 16, 1815, with a capital of $1,500,000, $600,000 of which was to be reserved for the State until January 1, 1817; the State to appoint six out of fifteen directors; to organize when $250,000 in specie paid in; the circulation never to exceed three times the capital; to last until 1835. The Governor was at once authorized to act upon the right reserved to the State. He was to make the subscription as well as he could, so as to give the next Legislature a chance to appropriate for it. The Governor in his message of 1816, tells how this bank was organized. It was forbidden to go into operation until $250,000 were on hand in specie. The State had to come forward and subscribe the requisite amount from its own part of the capital. This it did in notes of the Augusta and Planters' Banks. Instead of presenting these for redemption, the Governor entered into a negotiation with those banks to "advance" the specie on "a deposit of their own notes." No doubt therefore this bank was organized after the fashion of others at the time, by borrowing specie long enough to defeat the law.[41]

December 18, 1816, the Governor was ordered to assign to the branch of the Bank of the State at Milledgeville a room in the State-house, to be used as its banking office. December 19th, it was enacted that no unincorporated association should thereafter issue a note for $2 and above. In case ​of violation, the holder might recover one hundred and twenty-five per cent. of the note. If any one but an incorporated bank should issue notes for less than $2, the noteholder might recover three times the value. Twenty per cent. tax was laid on such unauthorized notes already in circulation. The banks of Georgia were ordered to resume when the Bank of the United States and the banks of the neighboring States should begin specie payment. After that time, any noteholder might recover twenty-five per cent. until the notes were paid in specie. Two years later another very stringent act was passed against unlicensed banking.

The Bank of Darien began a very checkered career December 15, 1818. Its capital was to be $1,000,000, half of which was reserved for the State until January 1, 1820. It was to last until 1837, and its charter was to be forfeited if it did not pay specie on demand.


  1. ↑ Raguet's Register, 12. (1832).
  2. ↑ Publicola; Letter to A. Gallatin, 1815, in 5 Examiner, 8.
  3. ↑ Woodward, Hartford Bank, 115.
  4. ↑ 4 Folio Finance, 1006, 1033.
  5. ↑ See page 356.
  6. ↑ Life of Jacob Barker, 123.
  7. ↑ Gouge; Journal of Banking, 259.
  8. ↑ Thomas; Reminiscences, 84.
  9. ↑ 9 Niles, 370.
  10. ↑ Gouge, Journal of Banking, 284.
  11. ↑ 1 Hammond, 573.
  12. ↑ See page 49.
  13. ↑ 20 Niles, 289; 21 Niles, 335.
  14. ↑ Essays, 167.
  15. ↑ Essays, 161.
  16. ↑ Report on the Distress, 1820.
  17. ↑ Letters to the Directors of the Banks, 1816.
  18. ↑ See page 344.
  19. ↑ Cause and Cure of Hard Times, 12.
  20. ↑ 3 Folio Finance, 719.
  21. ↑ 4 Folio Finance, 266.
  22. ↑ Ibid., 494.
  23. ↑ 11 Niles, 81
  24. ↑ 4 Folio Finance, 283.
  25. ↑ Gouge, Journal of Banking, 284.
  26. ↑ 1 Raguet's Register, 163.
  27. ↑ Committee of 1819.
  28. ↑ Committee of 1819.
  29. ↑ Mass. Senate Doc. No. 38, Feb. 1838.
  30. ↑ 4 Folio Finance, 539.
  31. ↑ See page 109 and the table, page 140.
  32. ↑ See page 113.
  33. ↑ 4 Folio Finance, 808.
  34. ↑ Felt, 218.
  35. ↑ 15 Massachusetts, 447.
  36. ↑ Raguet's Report on the Distress. Senate of Pennsylvania, 1820.
  37. ↑ 9 Niles, Supp. 155.
  38. ↑ See pages 45, 176.
  39. ↑ Report of the Bank, 1841.
  40. ↑ Gouge, Journal of Banking, 334.
  41. ↑ 11 Niles, 233.
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