A History of Banking in the United States/Chapter 9

by William Graham Sumner

CHAPTER IX.

The Liquidation on the Atlantic Coast.

D

URING the summer and fall of 1819, on the Atlantic Coast, the good and bad banks were being rapidly separated from each other, the former growing steadily stronger, and the latter rapidly falling or their notes becoming uncurrent. In July, the Committee on Banks of New Hampshire reported all the banks solvent, although one was thought to have made excessive issues, and the New Hampshire Bank, in which the State owned $25,000 stock, had made some bad debts. A legislative committee in Massachusetts reported all the banks solvent. From Connecticut it was reported that no bank had failed or suffered a run.^[1] In the Middle States laws to restrain banking were passed by nearly all the States. In New York there was a penalty of ten per cent. for non-redemption. Pennsylvania passed an act, March 29, 1819, providing that any one of "the forty" banks incorporated in 1814, which did not pay specie on and after August 1st, on demand, should forfeit its charter. The Governor in his next message said that this act had not been enforced against any one of them,^[2] but the Treasurer of the State gave notice, in February, 1820, that the charters of five specified banks were null and void.^[3] In Maryland a law was passed providing for a scire facias to annul the charter of any non-specie paying bank. Several of the New England and Middle States passed laws within a year or two, forbidding notes under $5. Thus the currency was steadily improved during 1820. As early as October 16, 1819, the Bank of the United States gave notice that it would receive, at any office, its notes for $5 issued at any office. It had saved itself and thrown the consequences of all its folly and misdoings on its customers (who were not indeed blameless), and on the public. The loans and discounts of the Bank, in July, 1817, were $26.2 millions. They steadily increased to $41.4 millions one year later. Then they declined to their minimum for the period, $28.0 millions, in January, 1822. The circulation was lowest in July, 1820; $3.5 millions.^[4]

The difficulties which the Bank of the United States experienced in equalizing the exchanges became especially manifest at Savannah and at Cincinnati. At the former city, the balances due to the branch by the local banks, chiefly on account of the accumulation of their notes in it by the payment of duties, were $100,000 or $200,000, during 1817, 1818, and 1819. Sometimes they were more than $400,000, and at the beginning of 1820 they exceeded $500,000. These balances they at length refused to pay, whereupon the Bank refused to accept their notes and account for them as cash to the credit of the United States. The Bank agreed to allow them $100,000 as a permanent deposit, the payment of which should not be demanded; but when payment of the excess was required, they refused it. The local banks, defending themselves, objected to daily cash settlements, which the Bank had required. A committee of the directors at Philadelphia said: "The practice of daily settlements prevails, it is believed, among four-fifths in number and in amount of capital of the banks of the principal cities of the United States." Other evidence does not support this assertion, and if it was true at the time, in the days of penance after the panic, the custom soon after fell into disuse. The committee of directors, however, recommended to relax this so far that the settlements be weekly. The Savannah branch was also forbidden to issue its own notes while the exchanges were adverse. The president of that branch reported that weekly settlements would probably be as little palatable as daily ones. He thought that monthly ones would be agreed to, but gave his own opinion that there was no need for settlements more frequently than semi-annually or annually. From this discussion it is very easy to see that, if there had been no Bank of the United States, the local banks could have followed an unrestrained policy of inflation, but that the drift of their notes into the Bank, which was the same as to say the Treasury of the United States, brought about a demand upon them which limited their issues. We learn from the same correspondence that the notes of Georgia and the Carolinas circulated far into the West and Northwest, were received for lands, and were sent into the eastern branches to be collected. Thus the collision between the national bank and the local banks was direct and violent. It was only by means of it that the local currencies could all be equalized by all being brought to par. It is clear that the first requisite of success in this duty was that the Bank of the United States should itself be as sound and as correct in its methods as any bank could possibly be, and that the thing which lamed it in its efforts to regulate others was the revelation by the Committee of 1819 of what its own misbehavior had been.

In July, 1821, the notes of the Planters' Bank of Georgia were thrown out by the branch of the Bank of the United States because it had suffered them to be protested. Out of this another quarrel grew. Cheves said that "the avowed object of the Planters' Bank is to prevent the office from receiving its notes, in order that it may be in no shape called upon to redeem them in legal money." The amount which the Bank now had locked up in Savannah was over $400,000.^[5]

The Bank and the local banks reached a concordat in January, 1821, the latter agreeing to pay interest on all over a maximum balance, but their notes still continued to accumulate in the Bank. In the followihg summer, the Planters' Bank broke the arrangement, and again entered into open hostility with the Bank. In a letter to Crawford, the president says: "Aided by such an immense capital, and having the additional weapon of the federal revenue, it is impossible to maintain intercourse with such an institution." "A feeling of dissatisfaction or irritation against the government never existed in the banks or in this community, until this mammoth came here to destroy our very substance." "You will perceive readily that our main object is to prevail on the Bank of the United States to refuse our paper and to deal on their own. While they decline issuing their own bills, and none comparatively of the public revenue is expended in this quarter, it is impossible for the State banks located in the same place with it to exist."^[6] To this Crawford replied that if the local notes were not received by the Bank, people who had duties to pay would demand specie of the banks, with the same result. "Experience has shown that so long as the notes of the Bank of the United States and its offices are everywhere received in payment to the government, they will circulate only where the principal part of the revenue is disbursed." He explained that the drain of specie from Georgia to the North and East was "in no degree ascribable to the Bank. It is the result of the operations of the government." He tried not to be drawn into the controversy, but put the Planters' Bank entirely in the wrong.^[7] In a later letter the president of that Bank regretted that the discretion of the Treasury could not have been "exercised in behalf of the community that has suffered so much as this under the lash of the United States Bank." "Congress can hardly consent to see the southern States torn to pieces and rendered disaffected towards the federal government, which would seem to be the inevitable consequence of the present measures of the United States Bank, which it is enabled to pursue only by the means derived from the collection of the revenue."^[8]

During this controversy, the Georgians had made constant threats that they would invoke the interference of their own Legislature.

A Committee on Banks made a report to the Senate of Georgia, November 30, 1821,^[9] in which they say that Georgia has aimed to furnish herself with a currency by her own banks, and at the same time to get an investment for her State funds. She has been frustrated in this by the intrusion. of the Bank of the United States which long refused to issue notes. It got posession of the notes of the State banks and by demanding specie for them, drained away specie. The Committee advises against any collision, but recommends that no notes presented by anybody with a demand for specie shall be paid unless an oath is taken that the notes do not belong to the Bank of the United States and are not presented in its interest.

December 24, 1821, it was enacted that State bank notes presented by the Bank of the United States for specie should not be paid unless the agent would take oath that they were not collected for this purpose. If an officer of a State bank suspected that a person who demanded specie was an agent of the Bank of the United States, he might demand of him to take an oath before a magistrate that that Bank had no interest. If such person refused to take this oath, he might be refused redemption of the notes. Whenever the Bank of the United States demanded specie, it must send with the notes a schedule of their numbers, date, letter, amount, and page, dated the same day. The notes of the State banks in the Bank of the United States should not bear interest on account of any refusal to redeem them.

This law was repealed December 20, 1824.

In April, 1822, the branch at Savannah was taking no Georgia notes except on special deposit, "inasmuch as an act of the Legislature authorizes ' them to refuse specie payments to the Bank of the United States or offices thereof, and interest, if sued."^[10]

In South Carolina, at the session of 1819-20, "nothing but the great exertions of some able and distinguished men probably prevented a system of State paper money from being adopted." In the opinion of Cheves, the motive was to get a currency the redemption of which could not be enforced by the Bank of the United States.^[11]

A similar quarrel occurred at Cincinnati. In August, 1818, the Bank called on the banks of Cincinnati to pay 20 per cent. of their debt to it monthly, and to pay interest on it. The local banks replied, through a committee, in a tone of astonishment and indignation, saying that they were ready to meet all demands in the ordinary course of business, but "are not prepared to redeem, at a few months' notice, all the paper they have issued for years past." They have paid to the branch $1.4 millions in eighteen months, which has forced them to withdraw almost all their circulation. They are called upon to pay, either in specie, United States notes, or eastern funds, none of which can be had. "We consider the liquidation of an interest account at the expiration of every thirty days as a grievance unprecedented. An interest account, it is believed, is not usual between banks. In the western country it certainly is not." To this Jones replied: "He must be a sturdy debtor indeed who boldly withholds both principal and interest, and defends it as a matter of right."^[12]

The office at Cincinnati was discontinued in September, 1820. In 1822 the debt to the Bank in Ohio and Kentucky had been reduced not quite $1 million.

These cases show why it was that, during the years of liquidation, the Bank of the United States found it impossible to maintain any circulation in the western and southern countries. Its notes were gathered up and used as a remittance to the North and East. At the same time the local banks, whose notes had been paid into the Bank in the public revenue from lands, were unable to redeem them. The local banks thus became possessed of the capital of the Bank of the United States, and the latter was forced to pay out their notes in order to make any use of them, thereby neglecting its own circulation.

The dividends of the Bank of the United States were as follows: 1817, eight per cent.; 1818, five and one-half per cent.; 1819, nothing; 1820, nothing; 1821, four per cent.; 1822, five per cent.; 1823, five per cent. In the meantime, the United States was paying five per cent. quarterly on its stock notes, so that in 1824 it was calculated that $500,000 had been lost by the public Treasury through its shares in the Bank. The stock was at 122 1-2. Niles thought that the public shares should be sold.^[13] The average of the dividends from 1817 to 1831 was a little over five per cent., paid semi-annually; so that the public investment showed, until that time, neither gain or loss.^[14]

In a report on the currency, February 12, 1820, Secretary Crawford estimated that the circulation in 1815 was $1 millions and that it was greater in 1816. At the end of the year 1819, he estimated it at $45 millions. Nearly two-thirds of the circulation had been reduced to waste paper. The Secretary said: "As the currency is, at least in some parts of the Union, depreciated, it must in those parts suffer a further reduction before it becomes sound. The nation must continue to suffer until this is effected. After the currency shall be reduced to the amount which, when the present quantity of the precious metals is distributed among the various nations of the world in proportion to their respective exchangeable values, shall be assigned to the United States, when time shall have regulated the price of labor and of commodities, according to that amount, and when pre-existing arrangements shall have been adjusted, the sufferings from a depreciated, decreasing, and deficient currency will be terminated. Individual and public prosperity will gradually revive, and the productive energies of the nation resume their accustomed activity."

It took time for this liquidation and readjustment to be accomplished. Specie was imported in the winter of 1819-20, and in July of the latter year Niles said: "It is stated, and we think with probability, that there was never more specie in the United States than at this present time."^[15] It was largely imported from Mexico, through New Orleans, during the next years.^[16]

The international relations, however, had changed since 1816. The European nations, England especially, were struggling in 1819 to resume specie payments. Specie was moving from country to country in an unprecedented manner. Several of the great nations were contracting loans, partly in order to resume. The whole civilized world was in the midst of the financial storm through which the equilibrium of peace was restored, after the prolonged artificial disturbance of the Napoleonic wars. Prices were falling and business was stagnant the whole world over. The reaction therefore went on, as it always must under such circumstances, to a point below the real point of equilibrium. The nations had to bid against each other for the supply of the precious metals by lower and lower prices. The exchanges were in constant fluctuation and produced strange and complicated phenomena which lay outside the experience of people then living. Since 1797, England had had inconvertible bank paper which had been depreciated from one per cent. to 25 per cent.—for the greater part of the time, about eight per cent. or ten per cent. Since 1814 there had been a redundant and depreciated currency here. Thus there had been various combinations working on the sterling exchange on both sides; sometimes both currencies had been good; sometimes both bad; and sometimes the English had been good and the American bad, and vice versa. At the ratio of 15 1-4 to 1, the par of exchange would be $4.64 for £1 sterling, and as $4.44 4-9 was traditionally taken as 100, the par, under the fashion of quoting, was 104 1-2. Americans had been accustomed to see the exchange quoted between 90 and 100, which figures were especially calculated to produce confusion and error. In 1821 it averaged above 108; in 1822, 112. In 1822, it reached 114; it had been seen as low as 80.^[17] There was also a change going on in the relative value of gold and silver, on account of which, under the false rating of the American coinage at the time, gold was exported from this country. It was said that, between 1820 and 1822, the last gold coin was carried away. The ratio of the metals was for a time above 16 to 1. $10.60 or $10.70 in silver were given here for eagles to be exported to England in order to draw exchange against them. The consequence was a check to imports, an encouragement to exports, and a discouragement to the investment of capital here if the profits were to be paid here. The Bank of the United States found it necessary to recede from an offer it had made to pay dividends in London, on account of the loss on exchange. The amount of American stocks held in England at this time was estimated at $30 millions.^[18]

During the years of liquidation, the rate of interest was very low, and first rate securities were so high as to net only four or five per cent. In 1821, Spanish dollars were at par of the currency in all the chief cities of the coast, except Boston, where they were at one-quarter or one-half of one per cent. premium.^[19] In May, 1822, there was a flurry in the money market of the chief cities. United States Bank stock fell at New York from 110 to 98. The banks there and at Philadelphia and Baltimore stopped discounting, "and it appeared as if some frightful mischief was rapidly approaching." A great stringency in the money market of Boston, and numerous failures, was the report from that quarter. In June and July, there were said to have been more than eighty failures. The best explanation which was offered of these incidents was that they were due to weakness left behind by the crisis of 1819, in which Boston was not spared, although it had been outside of the earlier troubles between 1814 and 1817.^[20]

 

1. 16 Niles, 321.
2. 17 Niles, 401.
3. Ibid, 447.
4. Treas. Rep., Jan 15, 1838.
5. 4 Folio Finance, 931.
6. 4 Folio Finance, 1069.
7. 4 Folio Finance, 697.
8. Ibid., 1075.
9. Session Laws of 1821, p. 130.
10. 4 Folio Finance, 963.
11. 4 Folio Finance, 931.
12. 4 Folio Finance, 859.
13. 24 Niles, 241.
14. 41 Niles, 118.
15. 18 Niles, 365.
16. 24 Niles, 160.
17. 22 Niles, 132.
18. 20 Niles, 273.
19. 21 Niles, 38.
20. 22 Niles, 161, 245, 353; 23 Niles, 358.