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BANKING - John Joseph Lalor, Cyclopaedia of Political Science, Political Economy, and of the Political History of the United States, vol. 1 Abdication-Duty 
Cyclopaedia of Political Science, Political Economy, and of the Political History of the United States by the best American and European Authors, ed. John J. Lalor (New York: Maynard, Merrill, & Co., 1899). Vol 1 Abdication-Duty.
Part of: Cyclopaedia of Political Science, Political Economy, and of the Political History of the United States, 3 vols.
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BANKING (IN THE UNITED STATES) Previous to the revolutionary war paper money was issued to a greater or less extent by each one of the thirteen colonies. The first issue was by Massachusetts in 1690, to aid in fitting out the expedition against Canada. Similar issues had been made by New Hampshire, Rhode Island, Connecticut, New York and New Jersey, previous to the year 1711. South Carolina began to emit bills in 1712, Pennsylvania in 1723, Maryland in 1734, Delaware in 1739, Virginia in 1755, and Georgia in 1760. Originally the issues were authorized to meet the necessities of the colonial treasuries. In Massachusetts, in 1715, as a remedy for the prevailing embarrassment of trade, a land bank was proposed with the right to issue circulating notes secured by land. John Colman, a merchant of Boston, urgently advocated its establishment. The land bank was forbidden by the province council, unless authorized by the general assembly. There was a large party, however, in favor of paper money in some form. The plan for the land bank was defeated, but the issue of paper money by the treasury was authorized to the extent of £50,000, to be loaned on good mortgages in sums of not more than £500, nor less than £50, to one person. The rate of interest was 5 per cent., payable with one-fifth of the principal, annually. The bills were in form the same as those previously issued for the benefit of the treasury. This round sum or aggregate of £50,000, to be so loaned, was styled a bank, and was the first of the so-called loan banks, which were afterward authorized by nearly, if not quite, all of the colonies. In 1733 an issue of bills to the amount of £110,000 was made by the merchants of Boston, which were to be redeemed at the end of 10 years, in silver, at the rate of 19 shillings per ounce. In 1739, the commercial and financial embarrassment still continuing, another land bank was started in Massachusetts. John Colman was one of the corporators. The stock of the land bank was to be £150,000. No one was permitted to subscribe more than £2,000, nor less than £100. The subscribers were to pay down lawful money at the rate of 40 shillings for every £1,000 subscribed, and for the remainder were to pledge security in lands to the satisfaction of the directors. They were to pay 3 per cent. interest per annum, either in bills of the bank or in produce and manufactures, at prices regulated by the directors. Circulating notes equal to the capital were to be issued, payable in 20 years in produce or manufactures, and 5 per cent. of the capital was to be paid annually in the notes, produce or articles manufactured. The "manufactures, being the produce of this province," were enumerated as follows:20 "Hemp, flax, cordage, bar iron, cast iron, linens, sheep's wools, copper, tanned leather, flax seed, beeswax, bayberry wax, sail cloth or canvas, nails, tallow, lumber or cord wood, or logwood from New Spain." This scheme was strenuously opposed by Governor Belcher, but in spite of all opposition £49,250 of its notes were struck off, of which the treasurer of the company issued £35,582, and £4,067 were employed by the directors in trade.
—A specie bank was also formed in 1739 by Edward Hutchinson and others, which issued bills to the amount of £120,000, redeemable in 15 years in silver, at 20 shillings per ounce, or gold pro rata. The payment of these notes was guaranteed by wealthy and responsible merchants. These notes and those of a similar issue in 1733 were largely boarded and did not pass generally into circulation.
—In 1740 parliament passed a bill to extend the act of 1720, known as the bubble act, to the American colonies, with the intention of breaking up all companies formed for the purpose of issuing paper money Under this act both the land bank and the specie bank were forced to liquidate their affairs, though not without some resistance on the part of the former. The governors of Massachusetts rendered themselves very obnoxious to the people by their determined opposition to these banks and to paper money generally,21 and governor Belcher was recalled to England on account of misrepresentations of the paper money advocates, but was subsequently appointed governor of New Jersey.
—The paper money of the colonies, whether issued by them or by the loan banks, depreciated almost without exception as the amounts in circulation increased. The bills as originally emitted were intended to be equal to coin, but when depreciation advanced to such an extent as to appal the authorities, a new set of bills would be issued, with new assurances that they would be kept equal to coin. In these new bills the old bills would be redeemable at their depreciated value. Sometimes this second set of bills, having also depreciated, was replaced by a third set in the same way. These various sets were designated tenors; the terms old tenor, middle tenor, new tenor, new tenor 1st, new tenor 2nd, being used to distinguish them. To give all the details of the depreciation of this currency in each of the colonies would require much space, but the best authorities agree that it underwent in all cases a constant diminution in value, inflicting loss and misery upon all classes of citizens. Pelatiah Webster says of this paper and the continental currency: "We have suffered more from this cause than from any other cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemies." The following table22 gives the price of £100 in coin in the currencies of the several colonies in the year 1748:
—The emission of bills by the colonies and the banks was not regarded with favor by the mother country, and the provincial governors were as a general thing opposed to these issues. They were consequently frequently embroiled with their legislatures. Felt, in his "Massachusetts Currency," gives examples of this controversy. Governor Belcher, in 1740, issued the following proclamation. "Whereas, a scheme for emitting bills or notes by John Colman, Esq, and others, was laid before the general court in their session held the 5th of December, 1739, and by a report of a committee appointed by said court, was represented, if carried on, to have a great tendency to endamage his majesty's good subjects as to their properties: and whereas, application has been very lately made to me and his majesty's council, by a great number of men of the most considerable estates and business, praying that some proper method may be taken to prevent the inhabitants of this province being imposed upon by the said scheme; and it being very apparent that these bills or notes promise nothing of any determinate value, and can not have any general, certain or established credit; wherefore, I have thought fit, by and with the advice of his majesty's council, to issue this proclamation, hereby giving notice and warning to all his majesty's good subjects of the danger they are in, and cautioning them against receiving or passing the said notes, as tending to defraud men of their substance and to disturb the peace and good order of the people, and to give great interruption and bring much confusion into their trade and business."
—Subsequently, on Nov. 6, of the same year, being assured that part of the military corps encouraged the circulation of the land bank paper, he published the following: "I hereby warn all commissioned officers in the militia from signing or giving any countenance to the passing of the said notes of hand, directly or indirectly. And as I apprehend that if these should obtain a currency, it will reflect great dishonor on his majesty's government here, and be very detrimental to the public interests of this province and people, I do hereby declare my firm resolution, that if after this publick notice given, any of the military officers of this province persist in being any way concerned in or giving any encouragement whatsoever to the passing of the said notes of hand, and full proof be made thereof to my satisfaction, I will immediately dismiss them from their said offices" These proclamations had but little effect.
—A gentleman writing to a correspondent in London, under date of Feb. 27, 1741, says: "Whole troops, nay almost whole regiments either resigned or told their colonels, who examined them, that they would resign rather than not encourage the bills." Later in the same year governor Belcher writes to Thomas Hutchinson: "You say it would be much better if some other way than by application to parliament could be found to suppress it (land bank). I assure you, the concerned openly declare they defy any act of parliament to be able to do it. They are grown so brassy and hardy as to be now combining in a body to raise a rebellion, and the day set for their coming to this town is at the election, and their treasurer, I am told, is in the bottom of the design, and I doubt it not. I have this day sent the sheriff and his officers to apprehend some of the heads of the conspirators."
—These continued disputes, which largely curtailed the use of an expedient which the colonists considered necessary to their prosperity, together with the action of parliament in restricting the issue of paper money, embittered the minds of the colonists against England, and had undoubtedly much to do with the final outbreak. The bubble act, which laid an interdict on all banking associations having no legal charter within the dominions of the king, was passed by parliament in 1720. In 1740 another enactment was made, extending the provisions of the act of 1720 to the American colonies, where it had been disregarded. Banking in those days consisted merely in the privilege of issuing circulating notes, and this act restricted all private enterprises of this kind. On June 25, 1751, parliament enacted a law forbidding paper money of the colonies to be passed, except for current expenses of the government each year, or in case of invasion by the enemy. It seems also that these exceptional cases where paper money was permitted, were to be under control of the crown, as Mr. Bollan, the agent in London of the province of Massachusetts, writes that he opposed the bill on the ground that it might open the way for the unconstitutional exercise of the king's authority in the colonies in other matters. Legal tender paper money was prohibited by this act of parliament, and in 1763 such issues were declared void; but subsequently, in 1773, they were allowed to be received as legal tender at the treasuries of the several colonies.
—The second continental congress was convened in 1775, and, in order to raise funds, having no power to institute taxation, naturally turned toward the expedient of an emission of paper money on the credit of the Union, but in the redemption of which each colony was to bear a part.
—The first issue was made in June, 1775. For a year these issues continued equal to gold; in two years they had depreciated to 2 for 1; in three years to 4 for 1; in nine months more their relative value was 10 for 1; in September, 1779, it was 20 for 1. Congress now determined that the total issues should not exceed $200,000,000, and renewed the declaration that this currency should be redeemed in full, and went to some labor to prove that the states had the ability to do so. In March, 1780, these issues had so depreciated that their value as compared with specie was as 40 to 1 Congress now required the whole to be brought in for redemption at its market value in coin, and also authorized the emission of new notes bearing interest at 5 per cent., and payable 6 years from from date in silver and gold. These were to be exchanged in the proportion of 1 dollar of the new for 20 dollars of the old emission. During the year 1780 the notes of the old issue sank first to 75 to 1, then ceased to circulate in the states north of the Potomac. In Virginia and North Carolina they passed for a year longer, and finally depreciated to 1,000 to 1, and then ceased to circulate.
—According to Thomas Jefferson but 200 millions of the first emission was issued, which was the amount authorized by resolution of congress; but other authorities state the amount much higher. Joseph Nourse, register of the treasury in 1828, places it at $241,552,780. The amount as given in the treasury statement of 1843 was $242,100,176. The aggregate loss to the people of the country from this currency was estimated by secretary Woodbury at $196,000,000.
—During the war paper money, distinct from the continental currency, was also issued by several of the states. The amount thus issued has been placed at $209,000,000, which is probably too high. It is, however, difficult to obtain exact information in reference to these emissions.
—At the close of the war the minds of all classes were imbued with a wholesome antipathy to paper money, and as a consequence when the federal constitution was under consideration, the power to emit bills which in the original draft was given to the United States was stricken out. Moreover, the original draft having contained a qualified permission to the states to issue paper money, an amendment was inserted which took away from the states all power to coin money, emit bills of credit, or make anything but gold or silver coin a tender in payment of debts. It has been held that the lack of power on the part of a state to coin money, taken in connection with the prohibition of the emission of bills, prevents the issue of paper money by banks chartered by the state, as well as such issue by the state itself. This view was held by Daniel Webster, in his speech on the bank of the United States, on the 25th and 28th of May, 1832, and his arguments are quoted with commendation by Mr. Justice Story, in his commentaries on the constitution, as follows: "It will be hereafter seen that this (the power to coin money) is an exclusive power in congress, the states being expressly prohibited from coining money. And it has been said by an eminent statesman that it is difficult to maintain, on the face of the constitution itself, and independent of long continued practice, the doctrine that the states, not being at liberty to coin money, can authorize the circulation of bank paper as currency at all. His reasoning deserves grave consideration, and is to the following effect: The states can not coin money. Can they, then, coin that which becomes the actual and almost universal substitute for money? Is not the right of issuing paper intended for circulation in the place and as the representative of metallic currency, derived merely from the power of coining and regulating the metallic currency? Could congress, if it did not possess the power of coining money and regulating the value of foreign coins, create a bank with the power to circulate bills? It would be difficult to make it out. Where, then, do the states, to whom all control over the metallic currency is altogether prohibited, obtain this power? It is true that in other countries private bankers, having no legal authority over the coin, issue notes for circulation. But this they do always with the consent of the government, express or implied; and government restrains and regulates all their operations at its pleasure. It would be a startling proposition in any other part of the world, that the prerogative of coining money held by the government was liable to be defeated, counteracted or impeded by another prerogative, held in other hands, of authorizing a paper circulation. It is further to be observed that the states can not issue bills of credit; not that they can not make them a legal tender, but that they can not issue them at all. This is a clear indication of the intent of the constitution to restrain the states as well from establishing a paper circulation as from interfering with the metallic circulation. Banks have been created by states with no capital whatever, their notes being put in circulation simply on the credit of the state. What are the issues of such banns but bills of credit issued by the state?" Mr. Justice Story says: "This opinion was not peculiar to Mr. Webster; it was maintained also by Hon. Samuel Dexter, one of the ablest statesmen and lawyers who have adorned the annals of the country."
—Nearly 30 years after, chief justice Chase, when secretary of the treasury, in his report to congress of Dec. 9, 1861, said: "It has well been questioned by the most eminent states men, whether a currency of bank notes, issued by local institutions under state laws, is not, in fact, prohibited by the national constitution. Such emissions certainly fall within the spirit, if not within the letter of the constitutional prohibition of the emission of bills of credit by the states, and of the making by them of anything except gold and silver coin, a legal tender in payment of debts."
—BANK OF NORTH AMERICA. The bank of North America, the first organized bank in the United States, had its origin in a meeting of citizens of Philadelphia, on June 17, 1780, the purpose being to devise means for furnishing supplies for the army, then in a state of great destitution. It was then resolved to open a "security subscription to the amount of £300,000, Pennsylvania currency, real money," Thomas Paine subscribing $500 and Robert Morris £200 to the fund. The system of the bank was devised by Robert Morris, then superintendent of finance, early in 1781, and was approved by congress, which, on Dec. 31, following, gave the bank a perpetual charter, with a capital of $10,000,000. Of this amount, however, but $85,000 was paid in by individuals. The government subscribed $250,000, of which but $50,000 was ever paid. The bank opened for business on Jan. 7, 1782, and within a period of six months thereafter had loaned $400,000 to the government.
—The state of Pennsylvania in 1782 also granted it a perpetual charter, which was subsequently repealed and again renewed, the renewal, however, limiting the term to 14 years, and the capital to $2,000,000. After successive renewals, it was converted into a national bank on Dec. 3, 1864, with its original title, and with a capital of $1,000,000.
—The Massachusetts bank in the city of Boston, and the bank of New York in the city of New York, which were the only other banks in operation at the time of the charter of the bank of the United States, were both converted into national banks in 1865, and these 3 banks are now transacting an active and successful business.
—BANK OF THE UNITED STATES. Alexander Hamilton, secretary of the treasury, in his report to congress on Dec. 13, 1790, recommended the establishment of a bank of the United States, and opposed the issue of paper money by the government. The amount of the bank's stock was fixed at 10 millions, one-fourth of ail private and corporate subscriptions to be in coin, and three-fourths in U. S. 6 per cent. stocks. Two millions were to be subscribed by the government, to be returned in 10 annual installments. The board of directors was to consist of 25 persons, all citizens of the United States, who were to serve without compensation; and the circulating notes of the bank were made receivable in payment of all dues to the United States.
—The act of incorporation passed the house of representatives by a vote of 39 to 19, those favoring the bill being mainly from northern, and those opposing it from southern states. Among the friends of the bill were Alexander Hamilton, secretary of the treasury, and Henry Knox, secretary of war; while the list of its opponents included James Madison, Thomas Jefferson, secretary of state, and Edmund Randolph, attorney general. The opposition to the bank was based upon the alleged general inutility of banking systems, and the want of power in congress to grant the charter. The bill, however, became a law on Feb. 25, 1791, and the bank at once went into operation, and was immediately successful. Between the years 1796 and 1802 the government disposed of its $2,000,000 of stock at a profit of $1,137,152.29, equal to 57 per cent. on the original investment.
—The bank was required to make weekly reports to the secretary of the treasury, but the following, for Jan. 24, 1811, is one of the only two balanced statements found of record:23
—The charter of the bank expired March 4, 1811, but, prior to this, efforts were made for its renewal, favored by Albert Gallatin, then secretary of the treasury, and by Crawford and Pickering in the senate, and opposed by Mr. Clay. The bill was defeated in the senate on Feb. 20, 1811, by the casting vote of the vice-president, George Clinton, and subsequently failed in the house by a minority of one vote.
—During the war with Great Britain which soon followed, the state banks, in whose interests the recharter had been opposed, failed to meet the exigencies of the government, and in September, 1814, nearly all of them south of New England suspended specie payments. Following this their issues expanded rapidly, and floods of unchartered currency were also poured out, of all denominations, from 6 cents upward.24 The result was a great depreciation in the value of the currency, ranging from 20 to 25 per cent. at the close of the war, the failure of many of the banks, and corresponding distress among the people. The root of the evil lay in the attempt of the government to carry on a great war through the aid of state corporations, over which it could exercise no control. In 1814 there was nearly 9 millions of dollars of government funds in the suspended banks, and the loans of the government, in 1815, amounted to more than 35 millions; while 6 per cent. stocks issued by the government were sold at rates of discount varying from 5 to 15 per cent.
—The effect of this experience was to revolutionize opinions in congress, and on Jan. 20, 1815, in accordance with a previous recommendation of Mr. Dallas, then secretary of the treasury, a bill was passed reorganizing the bank of the United States. The bill was vetoed by president Madison on Jan. 30, following, on the ground that the proposed bank did not appear calculated to accomplish the purposes for which it was designed.
—SECOND BANK OF THE UNITED STATES. The plan proposed by secretary Dallas was again presented to congress, and, without material change, was approved by president Madison on April 10, 1816. The charter was limited to 20 years, and the capital to 35 millions, 7 millions to be subscribed by the government, payable in coin or in U. S. 5 per cent. stocks. Other subscriptions were payable, one-fourth in coin and the remainder in coin or government stocks. The directors were to be resident citizens of the United States, and to serve without compensation, five of them to be appointed by the president. The bank was to be made a public depository, and to aid the government, free of charge therefor, in negotiating its loans. It was empowered to establish branches, and to issue circulating notes receivable in all payments to the United States. No other bank outside of the District of Columbia was to be established by congress during the continuance of this charter, and in consideration of the grants therein, the bank was to pay to the United States $1,500,000, in three installments.
—The bank commenced doing business on Jan. 7, 1817, at nearly the worst stage of the monetary troubles resulting from the late war, and at the verge of the financial crisis which culminated in 1819-20. It consequently met with many difficulties and embarrassments, and on Feb. 9, 1819, a resolution was moved in the house, looking to a repeal of its charter, but which failed of adoption. At this period of its existence, by its efforts to restore the soundness of the currency through large importations of specie, the bank was on the brink of failure.
—From 1820 to 1835 the country was prosperous, the bank recovered from its embarrassments, and its stock rose steadily in value. Long before 1828 the bank had lived down all opposition; and it was therefore a surprise to all parties when general Jackson, in his first message, in December, 1829, took ground against a renewal of its charter, when it should expire in 1836. The agitation thus awakened grew in intensity, until it culminated, on July 16, 1832, in the veto by president Jackson, of a bill rechartering the bank. The interval of about six years between the commencement of Jackson's warfare upon the bank and the expiration of its charter is memorable for the violence and persistence of the struggle between the administration and its supporters, and the bank and its friends, both in and out of congress.
—The most important event of the struggle was the removal of the government deposits from the bank of the United States to various state banks. The order for this removal was issued in 1833, by Mr. Taney, who was made secretary of the treasury for this purpose, his predecessor, Mr. Duane, having declined to issue it. When congress re-assembled in December, 1833, resolutions on the subject were adopted in both houses; those of the senate censuring the president and secretary of the treasury for usurpation of powers, while in the house it was declared that the bank ought not to be rechartered, that the public deposits ought not to be restored to it, that the state banks should be continued as depositories, and that congress should further regulate the subject by law.
—Among the early results which followed the removal of the deposits was the expansion of their issues by the state depositories, and the wild and general inflation of the currency by a multitude of other banks, old and new; the aggregate of circulating notes, exclusive of those of the bank of the United States, increasing from 61 millions in 1830 to 149 millions in 1837. In 1830 the currency of the country had been characterized by the finance committee of the senate as being more sound and uniform than that possessed by any other country; and yet within seven years after this all the banks then in operation, including the great bank of the United States, which had then been rechartered by the state of Pennsylvania, went into suspension. The bank, when denied a renewal of its charter by congress, did not close up its affairs, but applied for and obtained a charter from the state of Pennsylvania, Feb. 18, 1836, just 13 days before the expiration of its charter from the government. This was substantially a renewal for 30 years of the old charter, and under the old corporate name, but with a change as to the amount and terms of the bonus to be paid for it to the state. This bonus, had the bank remained solvent and in existence long enough, would probably not have fallen short of 5 millions of dollars. Col. Benton characterized the Pennsylvania charter of the bank as indicating, by every circumstance of its enactment, corruption and bribery in the members who passed it, and an attempt to bribe the people through the bonus to be distributed among them.25
—The history of the bank subsequent to the crisis of 1837 was a disastrous one. It suspended payments as frequently as other state banks, and finally succumbed to difficulties which prudent management should have enabled it to overcome. It made three several assignments in 1841, to secure various liabilities, the last and final assignment being on Sept. 4, of that year. The 7 millions of stock held by the United States previous to the institution becoming a state bank was paid back in full, and the government realized a very handsome profit upon its investment, as will appear by the following statement, derived from the treasury records:26
—Nicholas Biddle was president of the bank from January, 1823, to March, 1839. At the time of his resignation the shares were selling at 111, having in 1837 sold at 137; but in 1843, after the failure of the bank, its shares were quoted at 1 7/8; per cent. The circulating notes of the bank, together with the deposits, were paid in full, principal and interest; but the whole capital of 28 millions was lost to the shareholders.
—MASSACHUSETTS. The success of the bank of North America in Pennsylvania, induced the organization of the Massachusetts bank, which received its charter from the state of Massachusetts on Feb. 7, 1784, with a capital of $300,000. It existed 80 years as a state bank and became a national bank in 1864. The Union bank was the next one, chartered in 1792, with a capital of $1,200,000, of which $400,000 was subscribed by the state. In 1795 the Nantucket and Merrimac banks were established. Up to 1799 but one more bank was chartered. In that year a law was enacted prohibiting the establishment of unincorporated associations. In 1803, an act requiring semi-annual returns to be made by the banks to the governor and council was passed, and in 1805 an amendment required these returns to be sworn to. In 1805 16 banks banks were in operation. From 1805 to 1811 but one bank was chartered. Two more were chartered in 1811. In all the charters granted after 1793, provision was made for a state subscription, and in 1812 the state held about $1,000,000 out of the $8,000,000 of stock of the banks of the state. Nearly all the banks were rechartered in 1811. In 1812 the state first imposed a tax on bank capital. In 1813 the system of compelling the redemption at par in Boston of the notes of the New England banks, by assorting and returning the notes to the place of issue, was inaugurated by the New England bank, organized that year. This was the beginning of what was afterward known as the Suffolk bank system, but it was not fully developed until 1825. There was at first some opposition, but the Suffolk system was finally successfully established, and continued down to the establishment of the national system. The Massachusetts banks did not suspend in 1814, owing largely to the fact that a law of the state imposed a penalty of two per cent. a month for non-payment of their notes. The first comprehensive law regulating the banking business was passed in 1829. In 1837 there had been organized 134 chartered banks—of these, 32 failed in the financial panic of that year. The loss was about 30 per cent. of their entire indebtedness. From 1793 to 1836 only 10 banks had failed. A result of the crisis of 1837 was the adoption of a system of official examinations. A free banking act was passed in 1851, similar in its provisions to that of New York state, but only 7 banks were organized under it, the previously existing chartered banks occupying the field. In October, 1865, all but one of the state banks, with the exception of four which discontinued business, had been converted into national banks.
—NEW YORK. The first bank in the state of New York commenced business in 1784, under the name of the bank of New York. Its articles of association were drawn by Alexander Hamilton. It was the first bank chartered by the state legislature, and received its charter on March 21, 1791. It was organized with a capital of $900,000 in shares of $500 each. The state afterward subscribed for 100 shares, making the capital $950,000. In 1832 $50,000 additional was subscribed by the state. May 1, 1852, it was re-organized as a free bank under the general laws of the state, with a capital of $2,000,000. It became a national bank with a capital of $3,000,000 on Jan. 6, 1865. Up to June 11, 1812, the date of the declaration of war with Great Britain, 19 banks were chartered by the legislature—7 of these, the bank of New York, Merchants, Mechanics, Union and City bank, of New York city, the New York State of Albany, and the bank of Utica, are now national banks, and the Manhattan company and bank of America are the leading state banks. Twenty-four more banks were chartered between 1812 and the date of the passage of the safety fund act, in 1829. During27 the period from 1791 to 1812, political feeling between the federalists and the republicans was bitter, and the obtaining of the charters of the banks organized during this time was, in many cases, the occasion of much party strife and intrigue. Governor Tompkins, in the year 1813, who was subsequently twice elected vice-president of the United States, prorogued the legislature, assigning as one reason for his action the attempt to use corrupt means to secure a bank charter.28 These charters were in the nature of special privileges, granted to particular persons, and all others were specially restrained by law from participating in the business of banking. The restraining act of 1804 was passed to prevent private banking institutions from continuing their business, for the purpose of leaving a clear field to the chartered corporations. This act prohibited any person, under a penalty of a thousand dollars, from subscribing to or becoming a member of any association for the purpose of receiving deposits, or from doing any business which incorporated banks by their acts of incorporation were permitted to do. This was followed by the more stringent act of 1818, which provided that no person, association of persons, or body corporate, except such bodies corporate as were expressly authorized by law, should keep any office for the purpose of receiving deposits, or discounting notes or bills, or for issuing any evidence of debt to be loaned or put in circulation as money; which statutes were not repealed until 1837, a year before the passage of the free banking act. The safety fund system was authorized on recommendation of governor Van Buren, by act of April 2, 1829. The main feature of this system was the requirement that each bank operating under it, should pay annually to the treasurer of the state a sum equal to ½ of 1 per cent. of its capital stock, the payments to be continued until each bank had paid in 3 per cent. of its capital. This common fund was to be used to pay the notes and other debts of any bank belonging to the system which might become insolvent. In practice the amount required to be contributed was found to be inadequate. Eleven banks belonging to the system failed, and the whole of the fund at that time was but little more than 5 per cent. of their debts. The whole sum contributed down to 1848 was little more than 75 per cent. of the debts of these insolvent institutions. The deficiency was made up by the issue of 6 per cent. stock by the state, the latter to be reimbursed by future payments of the banks. In 1842 the act was amended so that the common fund became responsible for the payment of the circulating notes only of banks fail thereafter. This system was also a monopoly, as it did not provide for new banks. These, as before, had to be specially chartered. The occasion of it was that the charters of 40 banks previously organized were about to expire, and these 40 banks came in under the new system. Three commissioners were appointed, one by the governor and senate, one by the banks in southern New York, and one by the banks elsewhere in the state, to inspect the banks and report to the legislature. Many abuses consequent on a desire to obtain bank stock arose, and after some changes in the manner of appointing commissioners had been made, the office was abolished in 1843, and the power of examining the banks was conferred on the comptroller of the state.
—The free banking system was authorized April 13, 1838. All restrictions confining the privilege of banking to certain classes were swept away. Any number of persons were authorized to form banking associations, upon the terms and conditions and subject to the liabilities of the act. As originally passed, the law provided for the issue of circulation by the state to these associations, upon the deposit of stocks of the state of New York, of the United States, of other states equal to a 5 per cent. stock, or of bonds and mortgages on improved and productive real estate, worth, exclusive of buildings thereon, double the amount secured by the mortgage, and bearing interest at not less than 6 per cent. The amount of circulation issued was to be equal to the amount of the deposit. From 1838 to 1843, 29 of these banks failed, and the securities deposited were sufficient to pay 74 per cent. only of their outstanding circulation. The losses occurred only in the case of those banks which had the stocks of other states than New York. The act was therefore amended so as to exclude all state stocks except those of New York, and they were required to be kept equal to a 5 per cent stock. An amendment in 1848 required the stocks deposited to bear 6 per cent, and bonds and mortgages 7 per cent., and that the latter should be on productive property, and for an amount not exceeding two-fifths of the value of the land covered by them. In 1849 the law was again amended so as to require one-half of the securities to consist of New York stocks, and not more than half of stocks of the United States, the securities in all instances to be, or to be made, equal to a 6 per cent. stock, to be taken at an amount not above par, and at not more than their market value.
—In 1840 a law was passed requiring the banks of the state to redeem their notes at an agency of the bank, either in New York city, Albany, or Troy, at ½ of 1 per cent. discount. The discount was reduced, in 1851, to ¼ of 1 per cent. The discount was in practice divided between the redemption agent and the bank whose notes were redeemed, and banks which did not provide means to redeem their notes were forced to close. The constitution of the state, of 1846, provided that the legislature should have no power to grant special charters for banking purposes, but that corporations or associations might be formed under general laws. The constitution also provided that, after 1850, the stockholders of banks issuing circulating notes, should be responsible to the amount of their shares for all debts and liabilities of any kind, and in case of insolvency, bill holders should be preferred to all other creditors.
—The banks were under the supervision of a commissioner, appointed under the safety fund act, until 1843. In that year they were required to report to the state comptroller, but in 1851 the present office of bank superintendent was created.
—OHIO. The first institution in the state of Ohio, in the nature of a bank, was chartered under the name of the Miami exporting company, in 1803, 5 months after the admission of the state into the Union. It was chartered for 40 years, with a nominal capital of $500,000, divided into shares of $100 each, the subscription for the same payable 5 dollars in cash, and remainder in produce or merchandise. Although in form a trading company, it issued bills and redeemed them in notes of other banks. It was finally compelled to close its affairs. The first regular bank was chartered in 1808, with a capital of $500,000. It was located at Marietta. During the same year another bank was established at Chillicothe, then the capital of the state, with a capital of $100,000. From 1809 to 1816 4 banks were chartered. In 1816 6 other banks were chartered by one act. This act required, among other provisions, that each new bank and every old bank rechartered should annually set apart out of its profits, for the use of the state, such sum as would, at the expiration of its charter, amount to one twenty-fifth part of its whole capital. In 1825 this provision was amended, so that in lieu thereof the state was to receive 2 per cent. on dividends previously declared, and 4 per cent. on subsequent dividends. The rate of interest to be taken by banks was limited to 6 per cent. Legislation in Ohio relating to banking was evidently shaped with the purpose of enabling the state to participate in whatever profits might accrue from the exercise of the privilege within its borders. From 1816 to 1832 charters were granted to 11 banks, and in 1833 and 1834 2 other banks were chartered. Branches of the bank of the United States, established at Chillicothe and Cincinnati, were subjected to a tax of $50,000 each if they continued business after September, 1819. Upon an attempt being made by the auditor of the state to collect the tax, the United States supreme court again decided that the state had not the right. In 1845 a state bank with branches was authorized, on the safety fund principle. For creating the fund an amount equal to 10 per cent. of the circulation of each of the branches was to be paid to a board of control, to be invested in stocks of the state or United States, or in bonds and mortgages on unincumbered real estate of at least twice the value of the amount secured thereby. Each branch was entitled to receive the interest on the stocks and bonds in which its portion of the safety fund was invested. In case of failure of any branch, its own stocks and bonds were first to be used to redeem its circulation before any portion of the safety fund could be so applied. The state was divided into 12 districts, and a portion of the capital of the state bank was allotted to each. Sixty-three branches in all were authorized, with charters continuing to 1866, and 5 other banks, previously chartered, were authorized on certain conditions to avail themselves of the privileges of this act. The issue of circulation was under the supervision of a board of control, consisting of one member from each branch. The act of Feb. 24, 1845, creating the state bank and branches, also authorized an independent bank system, requiring United States or state stocks equal to the full amount of the issues to be deposited with the state treasurer.
—In March, 1851, the legislature passed an act authorizing free banking, the circulation to be secured by a pledge of bonds of the United States and state of Ohio. A new constitution was adopted in June, 1851, prohibiting the organization of additional banks, without the approval of the people at the general election succeeding the passage of the law chartering the same. In 1852 a tax law was passed, which, through a forced construction, levied upon banks twice, and in some instances three times, the rate imposed on any other property. Most of the banks organized under the act of 1851 were ultimately forced to go into liquidation by the oppressive taxation. In April, 1856, an act similar in its provisions to that of 1845 was passed, incorporating the state bank of Ohio and other banks, the charters to continue until May, 1877. The act contained a personal liability clause, and prohibited the general assembly from imposing any greater tax on capital employed in banking than is or may be imposed upon the property of individuals. In 1856, 36 of the banks which had been organized in the state had failed, their notes being entirely worthless, while 18 others were in process of liquidation, their notes being quoted at 50 to 75 cents on the dollar. In 1863 there were 56 banks organized upon three different plans, viz., 7 independent banks with a capital of $350,000, 13 free banks with an aggregate capital of $1,270,000, and the state bank of Ohio with 36 branches, with an aggregate capital of $4,054,000 and $7,246,000 circulation. The total capital of all the banks in the state in that year was $5,674,000; circulation, $9,057,837; specie, $3,023,285.
—INDIANA. The state of Indiana was admitted into the Union in 1816, and in 1820 2 banks had been established. In 1834 the state bank of Indiana was incorporated, with 10 branches, the branches being mutually liable for each other's debts. Each share was to be liable to an annual tax of 12½ cents, and when any general system of taxation should be authorized by the state, the shares were to be liable as other capital. The tax on them was, however, in no event to exceed 1 per cent. The capital was mostly borrowed from abroad, through the credit of the state, which took $1,000,000 of the stock, and also loaned its credit to individual stockholders to the extent of one-half of their subscriptions, taking real estate at one-half its improved value as security. Although this bank commenced business during the very critical condition of financial affairs which culminated in the panic of 1837, it was the only enterprise started by the state which was successful. The bank paid dividends averaging from 12 to 14 per cent. annually, and in 1854, on the expiration of its charter, when it went into final liquidation, it returned to its stockholders nearly double their original investment. The state realized fully 3½ millions in profits from the 1 million invested. In 1841 the branches were authorized, on payment of 1 per cent., to issue not more than $5,000,000 in notes of denominations of less than five dollars. The banks of Indiana suspended specie payments in 1838, and resumed in 1841. In November, 1851, a new constitution went into effect in the state, which prohibited the organization of banks except under a general law. In 1852 such general law was passed, providing for the deposit of United States and state stocks with the auditor as security for circulation. In October, 1854, there were 84 of these banks. The oppressive tax laws of Ohio drove much banking capital to Indiana. In 1856, of 94 of the free banks 51 had suspended, and their notes were selling in Cincinnati at from 25 to 75 per cent. discount.
—When the charter of the state bank expired in 1854, a new bank with a capital of $6,000,000 was authorized by the legislature. This bank was carefully and skillfully managed, and did not suspend in the crisis of 1857.
—ILLINOIS. The first bank in the state of Illinois was established under its territorial government, in 1813, at Shawneetown, and three years thereafter was incorporated, with a capital of $300,000, for a term of 20 years. In 1835 its charter was extended to January, 1857, and its capital increased to $1,400,000, the additional capital being subscribed by the state, which issued its bonds for that purpose. It subsequently failed, having $46,909 of unavailable funds on deposit belonging to the government. The state bank of Illinois was chartered in 1821, with a capital of $500,000, the state constitution of 1818 having prohibited any other new organizations. This bank was owned by the state, and its circulating notes were receivable for taxes and for all debts due to the state or the bank, and $300,000 of circulation was directed to be issued and loaned on mortgages, in sums not exceeding $1,000 to any one individual, upon notes for one year at 6 per cent. interest. The notes of the bank were soon thereafter quoted at 75 cents on the dollar, then at 50 cents, finally at 25 cents, when they ceased to circulate altogether. In February, 1835, a new bank was incorporated with a capital of $500,000, which was subsequently increased to $2,000,000, owned and controlled by the state. It was soon after compelled to suspend specie payments, and in 1843 acts were passed, placing the state bank and the bank at Shawneetown in liquidation. The stock of these banks subscribed for by individuals was lost, as well as $900,000 belonging to depositors and bill holders. The state took possession of its bonds amounting to $3,050,000, and they were canceled and burned in the presence of the legislature in the capital square at Springfield.
—In the year 1843 a general banking law, similar in its provisions to the free banking law of Indiana, was passed.
—In 1861 the circulation was $12,300,000, secured largely by bonds of the state of Missouri, and the bonds of the southern states, which subsequently became much depreciated.
—The constitution of 1870 prohibits the creation of a state bank, and requires all acts authorizing corporations with banking powers to be submitted to the people. It also requires that banks in operation shall make under oath, and publish, full and accurate quarterly reports of their affairs, but no law was ever passed carrying into effect this constitutional provision.
—Secretary Crawford, Albert Gallatin and others made estimates of the capital, circulation and specie held by the banks in the United States,29 from 1784 to 1830, and from these estimates the following table has been compiled, showing the amounts of these items at various dates within that period:
—Banking associations, especially in the southern and western portions of the country, were established under charters granted by state legislatures, the shares of which were held wholly or in part by the states themselves, and in character similar to those in the states already referred to. The banks operating under special charter were in high favor, the amount of currency issued greatly exceeding, in some cases in the proportion of 3 to 1, the amount of their nominal capital. Charters of this class were naturally regarded as of great value, and the parties seeking such concessions from the legislatures were exceedingly numerous.
—In 1813 a bill authorizing the establishment of some 25 banks, with a proposed capital amounting in all to 9 millions, passed the legislature of Pennsylvania, but was annulled by the veto of governor Snyder. The following year, however, a bill of similar character was successfully passed over the repeated veto of the governor of that state, authorizing 41 banks to commence business, with an aggregate nominal capital of 17 millions, while it required only one-fifth of such capital to be paid in. Thirty-seven of these went into operation. The capital of a large number of them was merely nominal, being represented by stockholders' notes for the amount of their respective shares. As might have been expected, the lifetime of such institutions was exceedingly brief; 15 of those in Pennsylvania became insolvent within four years after their establishment. In other cases the banks whose charters had been authorized by the New England and southern states were disposed of to non-residents, who organized such associations with but little real capital, and the currency of these banks was almost certain not to be circulated at home, but among the citizens of remote states, who suffered great loss from such issues. As late as 1854 the circulation of the northwestern states consisted largely of the notes of two or three Georgia banks, which circulated upon the personal credit of western shareholders, and without any regard to the management of the issuing banks.
—Observing the results in the state of New York, which had followed the passage of the free banking law, a number of other states, chiefly in the east and west, after the year 1850, adopted similar systems of banking.
—The free banking acts of the states of Massachusetts and Louisiana required an ample reserve to be kept on hand, and contained other restrictions, which were subsequently incorporated in the national bank act.
—Charters for banks were still granted in most of the states which adopted the free banking system, and the former were more profitable and generally preferred, so that but few organizations comparatively were perfected under the latter system. The free banking acts which were passed by the legislatures of the western and southern states, almost without exception, omitted the most important provisions contained in the laws of the three states already referred to. No provision was made for the redemption of the circulation at any common centre; the security required was not sufficient; the notes were issued in excess of the cash capital, the shareholders were not made personally liable, and a majority of both directors and shareholders were often non-residents. These organizations were frequently associations without capital, located at places not easily accessible, and owned by non-residents who, taking advantage of such laws, converted state bonds into currency and drew the interest on the bonds without transacting much if any business at the place of issue. The governor of Indiana, in his message for 1853, says. "The speculator comes to Indianapolis with a bundle of bank notes in one hand and the stock in the other, in 24 hours he is on his way to some distant point of the Union to circulate what he denominates a legal currency, authorized by the legislature of Indiana. He has nominally located his bank in some remote part of the state, difficult of access, where he knows no banking facilities are required, and intends that his notes shall go into the hands of persons who will have no means of demanding their redemption."
—The governor of Michigan, in his message for the same year, says: "At present we are giving charters to the issues of banks about which we actually know nothing, in whose management we have no participation, and are thus literally paying a large tribute for what generally in the end proves to be a great curse." Governor Ford, in a message to the legislature of New Jersey, in referring to the same subject, says: "In many cases our banks, although ostensibly located in New Jersey, have their whole business operations conducted by brokers in other states. The facility with which they may be organized and located, without reference to the wants of the community or the business of the place, is destructive to all the legitimate ends of banking."
—The adoption of the free banking system under such laws was not favorable to its extension in other states, and only a small portion of the circulation outstanding was issued upon bonds deposited with state officers for the purpose of securing the same. Specie payments were suspended in 1814, in 1837 and in 1857. The notes of the banks, with the exception of those located in the large commercial cities, were during the whole period at a discount for coin. The notes of the New England states, which were redeemed at the Suffolk bank, were worth 1/8 per cent. less than coin in New York, and many New York state notes, issued previous to the passage of the free bank act, were at a discount of ½ to ¾ of 1 per cent., while the notes of the banks in other states which were only redeemed at the counters of the issuing banks, were all at rates of discount varying from 8/4; to 5 per cent, and at times at much higher rates. The losses to billholders were estimated to be not less than 5 per cent., annually, upon the whole amount of circulation outstanding. The losses upon exchange, between different portions of the country, were still greater than the losses arising from the insolvency of the banks, and the number of counterfeit and worthless bank notes in circulation is estimated to have been more than 6,500.
—The sketches given of the banks organized in the states of New York and Massachusetts, and in three of the older western states, exhibit the general outlines of the bank legislation of the country previous to 1863. They present in a favorable light the operations of the charter system, the safety fund, and the free banking system in two of the most prosperous states of the union, while they expose many, but by no means the worst, imperfections of those systems as they existed in some of the other states during the period when circulation was issued by state authorities.
—Congress, by a resolution in 1832, directed the secretary of the treasury to procure and publish as full returns as possible of the resources and liabilities of the state banks. In many states no reports were required for banks chartered under their laws; in others, infrequent ones only were required; and in those which made reports there was an entire absence of uniformity as to the dates upon which their condition was stated. No reliable information could, therefore, be given at any given date of the circulation, the specie, the deposits, or of their resources and liabilities generally; and the returns were in many instances based upon statistics which were made from reports that in themselves were unsatisfactory. From these returns the following table has been prepared, giving the principal items contained in the returns of the state banks at the dates named:
All banks organized under state laws, and all private bankers, have been required, for some years past, to make returns to the treasury department of their capital and deposits, for purposes of taxation, and from these returns the following table has been compiled, showing the number of the state banks and trust companies, of the savings banks with and without capital, and of the private bankers of the whole country, together with their average capital and deposits for the six months ending May 31, 1880:
—NATIONAL BANKS. A financial writer in the Analectic Magazine, Philadelphia, for 1815, at which time the bank currency was in its worst state proposed that the public funds should serve, in the absence of specie, as the basis, support and limit of a paper currency.30
—Albert Gallatin also, in his celebrated essay in 1831, suggested the issue of circulating notes secured by government bonds. At that date the debt of the government was in process of rapid reduction, and was entirely paid within the next four years. He proposed that existing bank notes be taxed out of existence, and suggested a resort to mortgages on real estate for want of public stock, which plan, however, he found liable to the objection that the accommodations which the banks could, in that case, afford to individuals might be too much curtailed; and he concludes that "if these objections can be removed, the plan proposed would give to the banking system of the United States a solidity, and inspire a confidence, which it can not otherwise possess."
—The bank of England was organized in the year 1694, upon a capital of £1,200,000 which had been loaned to the government, and the capital of that bank since that date has not differed materially from the permanent advance to the government; and three-fourths of the stock of the bank of the United States, in 1790, was authorized to be paid in United States stock, bearing 6 per cent interest. In 1844 notes of the value of 14,000,000 pounds sterling were authorized to be issued by the bank of England, on government securities; additional issues to vary with the amount of coin or bullion on deposit.
—The free banking system of the state of New York, as has been seen, was authorized six years previous, in 1838, and was the first system of banking which required securities to be deposited for bank issues. Secretary Chase, in his report for December, 1861, recommended the gradual issue of national bank notes, secured by the pledge of United States bonds, similar to the system then in operation in New York, in preference to the issue of United States notes, 50 millions of which had already been issued.
—The advantages claimed by the establishment of the banking system were. "A currency of uniform security and value, protection from losses in discounts and exchanges, increased facilities to the government in obtaining loans, a diminution in the rate of interest or a participation by the people in the profits of circulation, an avoidance of the perils of a great money monopoly, and a distribution of the bonds of the nation to the leading monetary associations of the country, thus identifying their interests with those of the government."
—A bill was prepared in accordance with his views during that month, and printed for the use of the committee of ways and means, but it was not reported, and a notice to print extra copies in July was laid on the table; and on the 8th of July following, Mr. Stevens, the chairman of the committee of ways and means, submitted the bill with an adverse report. The immediate necessities of the government compelled the issue of legal tender notes instead of the issue of national bank notes as recommended by the secretary, and the consideration of the bank act was deferred.
—A general suspension of specie payments took place on Dec. 28, 1861, and two months thereafter the act of Feb. 25, 1862, was passed, authorizing the issue of 150 millions of legal tender notes, which amount was afterward increased 150 millions by the acts of July 11, 1862, and March 3, 1863, the latter date being but a few days subsequent to the passage of the first national bank act.
—On Jan. 30, 1864, when the whole amount of national bank notes outstanding was but $3,700,000, nearly the whole amount of legal tender notes authorized, $449,338,902, had been issued, which was the highest amount outstanding at any one time.
—In his report for 1862 secretary Chase again earnestly advocated the passage of the national bank bill. He presented at considerable length the arguments for and against the system, and urgently renewed his previous recommendation for its passage. One of the advantages which he said would arise from its passage was "that the United States bonds would be required for banking purposes, a steady market would be established, and their negotiation greatly facilitated, a uniformity of price for the bonds would be maintained at a rate above funds of equal credit, but not available to banking associations. It is not easy to appreciate the full benefits of such conditions to a government obliged to borrow;" it will "reconcile as far as practicable the interests of existing institutions with those of the whole people, and will supply a firm anchorage age to the union of the states." The bill is said to have had the sanction of every member of the administration. President Lincoln earnestly advocated its passage in his annual message in 1862, and in 1863 he said: "The enactment by congress of a national banking law has proved a valuable support of the public credit, and the general legislation in relation to loans has fully answered the expectations of its favorers. Some amendments may be required to perfect existing laws, but no change in their principles or general scope is believed to be needed."
—About 14 months after, the national bank bill was printed for the use of the committee of ways and means; it was introduced into the senate by senator Sherman and referred to the finance committee, from which it was reported by him on Feb. 2, 1863, with amendments. Ten days later it passed that body by a vote of 23 to 21, and on the 20th of the same month it also passed the house of representatives by a vote of 78 to 64.
—The bill encountered earnest opposition, and the secretary, in a letter to a friend at about that date, said that "a majority of both the house and senate finance committees were incredulous or hostile."
—Senator Collamer, in his speech in the senate, Feb. 11, 1863, said: "It will be found that the people will not break up their present system of banking, interwoven as it is with all their transactions, bound up as their business life is with it, to establish banks under this bill, and they will never buy United States stocks for this purpose." One of his reasons for opposing the bill was that the schools of some of the New England states were supported by the tax fund collected from the existing state banks. Senator Harris of New York, who afterward voted for the bill, proposed an amendment, authorizing the state banks to receive circulation under state charters, and said: "The banks in the state of New York can. I believe, be induced, without surrendering their charters as state banking associations, to take out circulation under the provisions of this bill, but I do not suppose that a single banking institution in the state of New York would ever be induced to surrender the privileges it derives under the state law, and become an association organized under the provisions of this act." Three senators only from the middle states voted in its favor. The two senators from Vermont, one from Connecticut, and seven from the middle states, voted against it. In the passage of the act in the house, some of the most eminent of the representatives from New England and New York, now distinguished members of the senate, voted against it.
—The bill was thoroughly revised, discussed, and repassed a little more than a year afterward, June 3, 1864; all of the senators from New England then voting in its favor, and all of the senators from the middle states who were present, except those from Pennsylvania and Delaware, and all but three from the western states. The vote was 30 in favor and 9 against the bill. In the house it received the votes generally of the republican members. The vote was 78 to 63. The bill was afterward passed, upon a report of a conference committee of both houses in reference to certain amendments upon which there had been a disagreement.
—The constitution of the United States provides that no state shall emit bills of credit, but it was decided by the supreme court in 1836, in Briscoe vs. The Bank, when there were 713 state banks in operation, with 281 millions of capital and 140 millions of circulation, 36 of which banks held 41 millions of public deposits and only 16 millions of other deposits, that a private corporation authorized by the state, which was the principal stockholder, could issue circulating notes which the state itself could not issue, and make them receivable for public dues. In 1861 the number of state banks had increased to 1,601, with a capital of 429 millions, and more than 10,000 different kinds of notes were in circulation, issued by the authority of 34 different states, under more than 40 different statutes. The right to issue such notes had obtained a firm foothold, and nothing but a great war could have brought about a revolution in this respect. The circulation of the banks was 202 millions, distributed as follows:31
There was, as has been seen, determined opposition to the interference with the right of state banks to issue circulating notes. But circumstances favored the substitution of the new issues in place of the old, which had become largely discredited, and which might have been classified as follows:
The charters of the state banks of Ohio and Indiana, and of other banks, were about to expire, so that fully one-half of the bank issues of the country were either discredited or depended upon legislation for continuance.
—The act of Feb 25, 1863, and the subsequent act of June 3, 1864, which superseded the former, provided for the establishment of a national bank bureau in the treasury department, the chief officer of which is the comptroller of the currency, and authorized the issue of 300 millions of national bank notes to associations organized in compliance with law, and composed of any number of persons, not less than five. Circulation was authorized to be issued at a rate equal to 90 per cent. of the current market value, but not exceeding 90 per cent. upon the par value of United States bonds deposited. The notes are guaranteed by the government, and if the avails of the bonds deposited as security for circulation are not sufficient for the reimbursement of the government, it is entitled to the first lien upon all the assets of the bank. The law provides that they shall be received by the government in payment of all taxes and other dues, except duties on imports, and payable for all debts or demands owing by the government, except interest on the public debt and in the redemption of national bank notes; and that each bank shall "take and receive at part for any debt or liability to it, any and all notes or bills issued by any lawfully organized national banking association."
—The effect of the passage of the act was to create a demand for the 6 per cent. bonds, which soon thereafter advanced from a discount of 7 per cent to a premium in the market. There was a delay in printing the notes, and no issues were made until Dec. 21, 1863. The act authorized the conversion of state banks; but the new system was not favored by them, and such conversions were not numerous until the passage of the act of March 3, 1865, which provided that every banking association shall pay a tax of 10 per cent. on the notes of any person or state bank used for circulation or paid out by them. The constitutionality of this act was subsequently affirmed by the supreme court. The comptroller, in his report for December, 1865, says that there were 731 conversions during that year, and that of the 1.601 national banks then organized, 922 were conversions from state banks. Nearly all banks in the New England states, and many in other states, became national associations, and during the following year nearly the whole 300 millions of circulation authorized ($298,588,419) had been issued.
—There was at this time more than 1,275 millions of temporary obligations of the government outstanding, 830 millions of which were in treasury notes, bearing interest at 7 30 per cent.32 The banks soon thereafter held 440 millions of government securities, and the system was of immense service in funding this floating debt during the three years which followed the close of the war. The act of July 12, 1870, increased the authorized issue of national bank notes to 354 millions, and the largest amount outstanding at any one time was on Dec. 1, 1874, when it reached $352,394,346. The act of June 20, 1874, authorized any national bank desiring to increase its circulation, to deposit lawful money with the treasurer in sums of not less than $9,000, and to withdraw a proportionate amount of bonds held as security for its circulating notes, and under this act the circulation decreased in volume more than 30 millions during the next three years. The act of Jan. 14, 1875, repealed all previous laws restricting the aggregate amount of circulation, and since that date all banks have had the right to increase and decrease their circulation at their pleasure, subject to the restrictions of the act. The same act required the secretary of the treasury to retire legal tender notes to an amount equal to 80 per cent. of the national bank notes thereafter issued. This provision was repealed on May 31, 1878, but not until $35,318,984 of legal tender notes had been cancelled, which reduced the amount of legal tender notes from 382 millions to $346,681,016, which is the amount now outstanding. The effect of the passage of the act was to reduce the volume, both of the legal tender and bank notes, and until May 20, 1881, the amount outstanding of the latter at any one time, was not equal to the 354 millions authorized by the act of 1870.
—One of the most important requirements of the act is that the capital stock of every association shall be fully paid in. The organization of banks without capital, or with stock notes, was one of the great abuses of previous banking systems. At least one-half of the authorized capital stock must be paid in before a national bank can commence business, and the remainder in installments of not less than one-fifth monthly thereafter. The minimum capital of any bank is $50,000, and such bank may be organized only in places having less than 6,000 inhabitants. In larger places the capital must not be less than $100,000, and in cities whose population is 50,000, the capital must not be less than $200,000. The proportion of capital to liabilities is much greater in this country than elsewhere, which is undoubtedly owing to the fact that the national bank act requires that the full amount of authorized capital shall be actually paid in. In England, as a rule, only a part of the capital is paid in; but in the limited banks the stockholders are individually liable for the full amount of their subscriptions, the stockholders of other corporations, not limited, being each liable for all the debts of the corporation.
—Tables of the comptroller in his report for 1878, compiled from the London Economist, give the capital, surplus and liabilities of 3,417 banks in the United Kingdom, including the bank of England. The ratio of capital to liabilities of the 3,417 banks in the United Kingdom was 16.78 per cent., and the ratio of capital and surplus to liabilities was 23.07 per cent.; while the corresponding ratios of the national banks were 40.88 and 54.73, the ratios of the latter banks being in each instance more than double those of the United Kingdom.
—The whole number of shares of national bank stock in 1876 was 6,505,930, and of shareholders 208,486.
—It is not probable that the capital stock of any other class of corporations is so widely distributed among people of moderate means. The average amount of stock then held by each shareholder was about $2,400. In the eastern states it was about $2,100, and in the western states about $4,800, and more than half the whole number of shareholders held each but $1,000 or less of such stock, while 767 persons only held as much as $50,000 each. It was distributed among residents in every state of the Union, in 11 countries or provinces of this continent, and in 25 countries of Europe, Asia and Africa.
—The banks are prohibited from loaning money upon real estate or upon the security of the shares of their own capital stock, or on the security of their own circulating notes or of legal tender notes, and from making accommodation loans to any person, company, corporation or firm, to an amount exceeding one-tenth part of their capital. They are also prohibited from borrowing money upon their own circulating notes, or becoming in any way liable to an amount exceeding their capital stock actually paid in, except on account of their circulating notes, their deposits and bills of exchange drawn against money actually on deposit, and liabilities to stockholders for reserve profits. Thus they are required to be lenders and not borrowers of money. They are restricted in the rate of interest which they may take to the rate allowed by the laws of the state in which they are located, and the penalty for charging a usurious rate of interest, as determined by the supreme court, is a forfeiture of the interest agreed to be paid, or, if actually paid, twice the amount may be recovered back by the person paying it.
—The total amount of loans of national banks on Oct. 2, 1879, was $875,013.107. The number of pieces of paper discounted was 808,269. The number of notes and bills of $100 each, or less, was 251,345, or nearly one-third of the whole; the number of less than $500 each was 547,385, or considerably more than two-thirds of the whole, while the number of bills of less than $1,000 each was 642,765, more than three-fourths of the whole number. The amount of discounts in the New England states was considerably more than those of the western and southern states; but the number of loans in New England was only about one-half the number in the south and west. The banks in New York city held 2,970 pieces of paper, in Boston 2,258, in Philadelphia 809, and in Chicago 322, of $10,000 each and over; and the number of loans of this class held by these four cities was more than half of the total number held by all the national banks in the United States. The average amount of each discount was $1,082.59. The average amount in New York city was $3,962.13; in Boston, $3,083; for the 228 banks of the principal cities it was $2,930.90, and the average for the remaining banks, 1,820 in number, was $685.85.
—If the average time of all the discounted notes was 60 days, and the banks held continuously the same amount, the number of discounts made during the year would be nearly 5 millions, and the total discounts more than 5,000 millions, which would be equal to a discount of $700 annually for each voter, or $500 for each family in the country.
—The comptroller is authorized to cause an examination of the banks at any time, and such examinations are to be made at least as often as once a year. Reports showing the detailed condition of the banks may also be called for, for any past date, and must be returned not less than five times during each year.
—In Jan., 1864, there were 139 banks in operation, with a capital of 14 millions; in 1865, 638 banks, with a capital of 135 millions; in 1867, 1,648 banks, with a capital of 420 millions.
—The following table exhibits the number, resources and liabilities of the national banks for eleven years at nearly corresponding dates, and upon May 6, 1881:
—Banks are required to pay 1 per cent. tax upon their circulation annually, and ½ of 1 per cent. upon their average deposits and upon capital not invested in United States bonds. The total amount of this tax collected to July 1, 1880, was, on circulation, $45,941,161; on deposits $47,703,404; on capital, $6,716,903; making an aggregate of $100,361.469. Taxes are also imposed by authority of the state within which the association is located. The table below gives the national and state taxation for the years specified therein:
—The average amount of taxes paid during the past twelve years has been 16 millions, or considerably more than 4 per cent. upon the amount of circulation issued. The ratio of taxation, state and national, in the New England states, in 1879, was 2.7 per cent.; in the middle states, 3.6; southern states, 2.7; western states, 3.6. The rate of taxation in New York was 5 5; in Boston, 2.6; Philadelphia, 2 8; Baltimore, 2.5; Cincinnati, 4.3, Chicago, 5 8.
—The law requires that each association shall, before the declaration of any dividend, carry to its surplus fund one-tenth part of its semi-annual net profits, until the same shall amount to 20 per cent. of its capital stock. It also prohibits associations from withdrawing, either in the form of dividends or otherwise, any portion of their capital, and requires that losses and bad debts shall be deducted from net profits before any dividend shall be declared. If a bank suffers a loss greater than its accumulated earnings, there are but two courses open to it, so far as dividends are concerned The first is to pass the dividend, and the other to pay an illegal dividend from the capital stock, which latter course would subject the bank to being declared insolvent and placed in the hands of a receiver. The capital and surplus together form the working fund of the bank, and the banks which make the largest dividends in proportion to their capital are those which have accumulated a large surplus. The amount of the surplus in 1865 was 17 millions; in 1870, 90 millions; in 1875, 131 millions; and on March 11, 1881, it was 122 millions of dollars. The ratio of dividends to capital, and to capital and surplus, for each of the last six years, has been as follows:
During the past five years the average number of banks semi-annually passing dividends on account of losses was 279. The average amount of capital of these banks was $42,266,244, or nearly one-tenth of the total capital of all the banks. The aggregate losses which were charged off by the national banks in operation during the past five years, before declaring dividends, was more than 100 millions of dollars, about 20 per cent. of which it is estimated has been since recovered.
—There are no means of definitely ascertaining the losses sustained through the failures of banks operating under the systems of the several states, prior to the establishment of the national banks. The losses under those systems, both to note holders, to whom there can be no loss from national banks, and to the general creditors and shareholders, is known to be large.
—In "Elliot's Funding System" it is stated that in 1841, the total capital of the state banks being then $317,642,692, and the circulation outstanding $121,665,198, 55 banks failed, with an aggregate capital of $67,036,265, and a circulation of $23,577,752; and in nearly every instance the entire capital of the banks which, failed was lost. The comptroller of the currency, in his report for 1879, gives a table by states, showing losses amounting to $32,616,661 sustained by creditors of 210 state and savings banks and private bankers, during the three years ending Jan. 1, 1879.
—Since the establishment of the national banking system, 86 national banks have become insolvent and have been placed in the hands of receivers, who are appointed by the comptroller, and are required to report to him their transactions. The total amount of claims proved by the creditors of these banks is $25,966,602, of dividends paid thereon, $18,100,818. The estimated losses to creditors from the failures of national banks, during the 18 years since the passage of the original national banking act of 1863, have not exceeded $6,240,000, and the average annual loss has therefore been about $346,000.
—Of the 86 failures of national banks, 6 were those of banks located in New York city, having a capital of $2,700,000. The amount of claims proved by the creditors of these banks was $5,583,049. Four of them paid dividends amounting to 100 per cent., and the average dividends of the 6 were 98 per cent. of the claims proved against them. Twenty-one of these insolvent banks have paid their creditors in full, and 40 have paid more than 75 per cent. The average expense of settling the affairs of the banks in the hands of receivers has been about 7 per cent. of the total amount of cash collected.
—The individual liability of shareholders of insolvent banks has been enforced in 53 instances, and about $2,700,000 has been collected from this source. The law provides that the shareholders of every national bank shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts and engagements of the association, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares.
—The supreme court of the United States has decided "that in the process to be pursued to fix the amount of the separate liability of each of the shareholders, it is necessary to ascertain (1) the whole amount of the par value of all the stock held by the shareholders; (2) the amount of the deficit to be paid after exhausting all the assets of the bank; (3) then to apply the rule that each shareholder shall contribute such sum as will bear the same proportion to the whole amount of the deficit as his stock bears to the whole amount of the capital stock of the bank at its par value." The limit of the shareholder's liability is, however, the par value of his stock, and the insolvency of one stockholder does not in any way affect the liability of another.
—The percentage of circulating notes unredeemed of 15 national banks which failed previous to 1870 is 0.75 per cent. of the amount issued. The total circulation issued to 23 national banks, which include the 15 banks already mentioned, that failed previous to 1870, was $3,196,693, and the proportion of notes remaining unredeemed is 1.43 per cent. of the amount issued.
—It is estimated that the ultimate loss to the people from the destruction of these notes, or from failure to present them for redemption, will be from 1 to 1½ per cent. This amount of loss will be a gain to the government, and not to the banks, and will, if this estimate is correct, amount to from 3½ millions to about 5 millions during each period of 20 years.
—No notes of a less denomination than five dollars have been issued to the banks since the date of resumption of specie payments, as provided by law, and the amount of ones and twos since that date has been reduced $5,033,185. The increase of legal tender notes of these denominations since that date has been $3,518,060. The following table gives the amount of each denomination of these notes that were outstanding on April 1, 1881:
—The laws governing the national banks, as has been seen, contain numerous restrictions. They also prescribe many and severe penalties for their violation. The only privilege they have over other banks is the right to issue circulating notes.
—The profits of a well conducted bank are not derived mainly from circulation, but from the use of deposits; and national banks at the present time are not organized so much on account of the profits upon circulation, as for the reason that these institutions have established a character which is of value to them in the accumulation of deposits.
—The amount of interest received by the national banks from the United States bonds held as security for their circulation, and on which circulation has been actually issued, is much less than is generally supposed. On 10 per cent. of the bonds on deposit with the United States treasurer to secure circulation the banks receive interest, without other privileges, in the same manner as any other holder of United States bonds. Thus while the bonds held to secure circulation by the banks in operation on Aug. 1, 1881, amounted to 358 millions of dollars, the total amount of bank notes issued on these bonds was 321 millions only. On the difference of 37 millions of dollars the banks have no special privilege over any other bondholder.
—There are national bank notes outstanding in excess of the 321 millions mentioned, but such notes are those of insolvent banks and of those retiring circulation, and are not secured by bonds, but are provided for by a deposit of an equal amount of legal tender notes, in the United States treasury, where they are redeemed and canceled when presented.
—Of the bonds securing the notes of the banks in operation, 92 millions consist of 4 per cents., 32 millions of 4½ per cents., 229 millions of 3½ per cents, converted from 5 and 6 per cents, 3½ millions of Pacific railroad 6s., and the remainder, amounting to 5½ millions of called 5 per cent. bonds, upon which interest will cease; on the 1st day of October, 1881. The 4 per cent. bonds are now selling at a premium of about 16 per cent., and at this rate do not net the holders 3½ per cent. It is therefore fair to say that for future years the national banks will not as a rule receive as much as 3½ per cent. in interest upon the United States bonds held as security for their circulating notes outstanding.
—The banks are required to pay a tax of 1 per cent. on circulation, to keep on hand with the treasurer an amount of lawful money equal to 5 per cent. of such circulation, and to pay the expense of redeeming the same as it is presented.
—The following table shows the profit on an investment in bonds to secure circulation, when the bonds bear interest at 4, 3½ and 3 per cent., and the rates for bank loans are as specified:
—The profit is greatest when the bank rate of interest is least, for the reason that the bank receives 10 per cent. less in circulation than it deposits in bonds. If a bank has a capital of $100,000, it receives $90,000 only in circulating notes. If the bonds are 3½ per cents and the commercial rate of interest 10 per cent., there is a loss of 6½ per cent. on the margin. If the commercial rate is 6 per cent., then the loss is 2½ per cent., instead of 6½ as in the previous case.
—In the computation on which the foregoing table of profits is based, the amount of the 5 per cent. reserve which banks are required to keep on their circulation has been deducted from the loanable circulation. But this reserve on circulation is also allowed to form part of the reserve on deposits. If it is not deducted from the loanable circulation, the profits of the bank from this source are somewhat increased.
—The premium on the bonds will disappear if they are held until paid by the United States. The bank holding such bonds until maturity will consequently lose the premium. In the case of the 4 per cent. bonds, the loss of 16 per cent. will be distributed over 26 years, making a loss of a little over ½ of 1 per cent. per annum, to be deducted from the profits in the table. The 3½ per cent. bonds, continued in the place of the 6s, being redeemable at the option of the government, the banks holding them are liable to lose the 1 per cent premium at any time. If a 3 per cent. bond be issued, a bank taking it at par and holding it till maturity would experience no loss; but if at any time prior to maturity the bank should desire to liquidate its affairs, a loss would arise if the 3 per cents. should then be worth less than par.
—The national banks in 16 of the principal cities are required to keep a reserve of 25 per cent upon deposits, half of which, except in the case of New York city banks, which are required to hold all their reserve in lawful money, may be on deposit with other national banks in the city of New York.
—The banks outside of these cities are required to hold a reserve of 15 per cent upon deposits, three fifths of which may consist of balances with their correspondents in the reserve cities. The following table exhibits the amount of net deposits, together with the amount and classification of reserve, held by the national banks at the dates mentioned:
From this table it will be seen that the amount of reserve held largely exceeded the amount required.
—It is estimated by the best authorities that the joint stock banks in England and Scotland do not hold exceeding five per cent. of their liabilities in ready money; the remainder of their reserves being largely invested in English consols, or deposited in the bank of England.
—The amount of cash reserves held by the national banks in this country is usually more than 12 per cent. of their liabilities. The banks held on Oct. 1, 1875, more than 133 millions of lawful money, of which only about 8 millions was in specie, the remaining 117 millions being in legal tender notes; and on Jan. 1, 1879, the date of the resumption of specie payments, the banks held nearly 100 millions of legal tender notes. The average value of the legal tender paper dollar on July 1 of each year from 1864 to 1878, and on Jan. 1, 1879, which was the date of the resumption of specie payments, will be seen in the following table:
On Oct 1, 1880, the amount of specie, consisting of $102,851,032 of gold coin and $6,495,477 of silver coin, was more than 109 millions, and the amount of legal tender notes 64 millions. The amount of specie held on May 6, 1881, was 122 millions, and of legal tender notes 70 millions. This large increase of specie is owing to the gold production of the mines, which, since the date of resumption, is estimated to have been $72,000,000, and to the excess of imports of gold over exports, which, in the same period, has been $150,241,747. The following table exhibits the total amount of paper currency, and the estimated amounts of gold and silver coin in the country on Nov. 1, 1880, together with the amount of each then in the treasury of the United States, in the national banks, in the state banks, and in the hands of the people at that date:
—From the date of resumption to that of the table, the gold in the treasury had increased $20,976,007, in the banks $73,976,149, while the paper currency has decreased $50,768,829, and in the banks $37,008,585. The increase of gold in the hands of the people had been more than 80 millions, and of paper currency more than 108 millions, since that date.
—The amount of silver coin was but 6 millions, which would be largely increased if the number of standard silver dollars to be issued were limited in amount, and the number of small legal tender notes outstanding diminished.
—During the next two years the legal limit of the existence of a considerable number of the national banks will expire, and congress will be asked to extend their existence for a second period of 20 years. In the absence of prohibitory legislation by congress, many of these banks will probably go into liquidation, and reorganize again under the same system.
—If at any time the national bank system should be discontinued, it is probable that the provision imposing a tax of 10 per cent. upon state bank notes would be repealed. These notes would then again be issued under laws now existing, or under new laws enacted for that purpose. These various state issues would not all be secured or redeemed at any one point, and the loss and exchange upon such notes would again be a burden to the business interests of the country: the cost of exchange between the various commercial points of the country, at the rate of ½ of 1 per cent., being estimated at not less than 20 millions annually. If the government, as has been proposed, should issue the entire paper currency, now amounting to nearly 700 millions, it should maintain a coin reserve equal to that of the bank of England or the bank of France, which is not less in either case than one-third of its issue. Interest upon this reserve at 3½ per cent. would exceed 8 millions, and if to this is added the expense of the issue and redemption of the notes, the total amount would considerably exceed the profit upon the circulation of the national banks now outstanding. The preference of the people for paper money instead of coin is exhibited in the last table, and there is danger that if the government, under authority of future legislation, should assume the right to the exclusive issue of the circulating notes, it might extend such issues beyond the bounds of prudence, and again involve the country in a new suspension of specie payments.
—The above table exhibits for corresponding dates in each of the last five years, the aggregate amount of capital and deposits of national banks, state banks and savings banks of the United States.
—Included among the state banks in the total for 1880 there are 2,802 private bankers, employing a capital of $26,120,000, and having deposits amounting to $182,670,000.
JOHN JAY KNOX.
[20.]An Historical Account of Massachusetts Currency, by Joseph B. Felt, Boston, 1839, p. 103.
[21.]The History of Massachusetts Bay, by Lieut. Governor Hutchinson, vol. 2, p. 396. Boston, 1767.
[22.]A Short History of Paper Money and Banking in the United States, by Wm. M. Gouge, Phila., 1833, p. 10.
[23.]American State Papers—Finance, vol. 2, pp. 352 and 470.
[24.]Finance Report, vol. 12, page 59.
[25.]Benton's Thirty Years in the United States Senate, vol. 2, p. 24.
[26.]Report of the Comptroller of the Currency, 1876, p. 13.
[27.]Hildreth's History of the U. S., vol. 5, pp. 548-50.
[28.]Hammond's Political History of New York, vol. 1, p. 309, Buffalo, 1850.
[29.]Report of the Comptroller of the Currency, 1876, pp. 39-42.
[30.]Address of Comptroller Knox before the Merchants' Association of Boston; Banker's Magazine, vol. 15, p. 545.
[31.]Report of Comptroller of Currency, 1876, p. 92.
[32.]Report of Comptroller of Currency, 1878, p. 33.