The Online Library of Liberty

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• Editor’s Preface.
• Author’s Preface.
• Banks In the United States.
• Period I.—1630 To 1780.: The Colonists Experiment With Joint Stock Banks of Issue On Land Security, and With Provincial Mortgage Loan Offices Issuing Currency.
• Chapter I.: Banks In the Colonies.
• Period II.—1780 To 1812.: Banks Are Incorporated In the States, Also a Bank of the United States On the Type of the Bank of England. the Colonial Idea Is Continued In Banks of the States, Being Institutions Based Either On the “faith and Credit” of the St
• Chapter II.: The Earliest Banks of Discount, Deposit, and Convertible Circulation.
• Chapter III.: The First Bank of the United States and Its Times.
• Chapter IV.: The Earliest Banks In the Mississippi Valley.
• Period III: 1812 to 1829-32.: Local Banks Are Multiplied to Replace the Bank of the United States. Their Issues Are Stimulated By Their Fiscal Functions, Soon Intensified By War Financiering. a Commercial Crisis Is Produced With a Prolonged Liquidation, a
• Chapter V.: Inflation On the Atlantic Coast.
• Chapter VI.: Inflation In the Mississippi Valley.
• Chapter VII.: The Crisis On the Atlantic Coast.
• Chapter VIII.: The Crisis In the Mississippi Valley.
• Chapter IX.: The Liquidation On the Atlantic Coast.
• Chapter X.: Liquidation In the Mississippi Valley.—relief Measures.
• Chapter XI.: The National Bank and the Local Banks Co-ordinated Into a New System.
• § 1. —: Local Banks On the Atlantic Coast From the Liquidation of 1819-1822 Until the Bank Expansion Produced By the Bank War.
• § 2.—: The Bank of the United States From Biddle’s Accession Until the Bank War.
• Period IV.—1829 To 1845.: The War of the Jackson Administration On the Bank of the United States Breaks Up the Existing System of Banks and Brings In Local Banks Again As Currency-providers and Fiscal Agents. Another Bank Inflation, Crisis, and Liquidatio
• Chapter XII.: The Bank War.
• Chapter XIII.: Measures and Events Antecedent to the Crisis of 1837.
• § 1.—: The United States Bank of Pennsylvania.
• § 2.—: The Multiplication of Local Banks.
• § 3.—: The Inflation of 1835 and 1836.
• Chapter XIV.: The Financial Revulsion; 1837 to 1842.
• § 1,: 1837. The Suspension of Specie Payments. the United States Bank of Pennsylvania In the Crisis. Its Cotton Operations. the Federal Treasury In the Crisis.
• § 2.—: The Resumption of 1838. The New York Plan Versus the Philadelphia Plan.
• § 3.—: 1838 and 1839. Treasury Notes and Bank Notes. Continuation of the Cotton Operations. Second Failure of the United States Bank of Pennsylvania. Second General Bank Suspension, South and West of New York.
• § 4.—: The Banks In the States; 1837 to 1840.
• § 5.—: 1840 and 1841. The Third Failure and Final Bankruptcy of the United States Bank. the Bank Failures of 1841. The Extra Session of Congress of 1841. The Last Attempts to Charter a National Bank. the Pennsylvania Relief System.
• Chapter XV.: The Liquidation; 1842 to 1845.
• Period V.—1843-5 To 1863.: Under the Independent Treasury System, the Regulation of Banking and Currency Is Left Entirely to the States. the Federal Government Handles Only Coin. Banks Organized Under General Joint Stock Laws Gradually, and to a Great Ext
• Chapter XVI.: The Local Bank System. the Gold Discoveries and Consequent Expansion. the Commercial Crises of 1854 and 1857. The Aid Given By the Banks to the Federal Government At the Beginning of the Civil War.
• § 1.—: The Local Banks, By States; 1845 to 1860.
• § 2.—: The Banks At the Outbreak of the Civil War; 1860 to 1863.
• Period VI.—FROM 1863.
• Chapter XVII.: The National Bank System.

§ 4.—

The Banks in the States; 1837 to 1840.

In reading this chapter it should be borne in mind that the decision in Briscoe’s case was rendered in January, 1837.

In 1837-8, eleven banks failed in Massachusetts, nearly all in Boston or the immediate neighborhood, with $4 millions capital. The investigation of the affairs of these banks showed that they had violated the law in respect to the organization and management of banks. “We find bank directors indicted for merely signing a false return. How far would the grand jury have to go should the fourth section of the bank law requiring that the capital must be paid in in specie before a bank might begin business, be applied to the origin of every bank in this Commonwealth, particularly within ten years past? It is the gross violation of this section which has been winked at by the Legislature in receiving bank returns, that has laid the foundation of the worthless, broken banking capital of Massachusetts. The money has never been there, the capital has never been paid in. The hard earnings of industry, and the portions of widows and orphans who were deceived by Mr. Degrand’s ‘leetle word confidence,’ have been actually paid in and not borrowed out by the owners of the stock; but this constitutes a small portion of the banking capital. The bulk of it has been made up of stock notes of the borrowers who got up the banks, put into its vaults bits of paper, and then drew out double or quadruple the amount in loans. Had the capital been actually paid in, in conformity to the statute, none of this trouble would have happened. * * * Our banks were manufactured by those who wanted to borrow all the fictitious capital they could create.”*

A law was passed in Rhode Island, in 1837, to restrict the loans and discounts of banks to a percentage of the capital “together with the amount of the sums deposited with or due from them, bearing interest.” For a bank with $50,000 capital, the percentage was 180; for larger banks the percentage was less, until for those having over $400,000 capital, it was 130. A bank of $50,000 capital was allowed circulation to the amount of seventy-five per cent. of the base sum; one of more than $400,000 capital only twenty per cent.

Upon the suspension, the Merchants’ Bank of Providence and the Rhode Island banks grouped around it fell heavily in debt to the Suffolk Bank. The president of the latter wrote to the Merchants’ Bank: “I hope you will take measures to induce the banks of your State to reduce their circulation to their means of redeeming as early as possible.” They did not comply, and in September, 1838, they were threatened with a return of their notes. In December a new arrangement was made, and the amount of over-draft allowed the Merchants’ Bank by the Suffolk was fixed at $50,000, “with the understanding that, if the banks of that State could not keep themselves in a condition to meet this limit, the Suffolk Bank would decline to receive their bills.”*

No bank failed in Connecticut in this period. Legislation was aimed against the indebtedness of directors, which was limited, in 1840, to one-third of the capital for the whole body of directors of any bank.

New York.—Before the suspension of 1837, some banks in Albany had adopted the custom of buying country bank notes at a small discount and sending them home. During the suspension, the city banks gave the country banks time for redemption, according to distance. After resumption, this ceased. A voluntary arrangement was then made by which time was given to the country banks to redeem in New York funds and take home their issues at their own risk and expense, the city banks receiving the country notes at one-half or three-quarters of one per cent. discount. When the crisis came on in the fall of 1839, the city banks could not spare capital for this purpose, and the country notes depreciated. The country banks then arranged an exchange of notes at Albany; but the arrangement was imperfect and unsatisfactory because it did not include New York City. The Bank Commissioners, in their report of 1840, after reciting this history, go on to discuss plans for redeeming the notes at New York, in order to avoid exchange and produce a uniform currency. They say: “The vice of banking here, particularly in the country, has always been a tendency to investments in accommodation paper, and too great a reliance upon credit in carrying on the active operations of trade; and many able and experienced financiers consider it a fault of the system that its organization is such as to bring the borrower of money directly in contact with the bank which issues the currency. That its effect is to increase or diminish the amount of currency according to the supposed rather than the real wants of business, and that its tendency is to create a reciprocal stimulus between trade and banking, there can be no doubt.”

The better writers on banking and currency in this country from 1820 to 1840 moved toward a concurrent opinion similar to that of Jones-Lloyd in England, although proceeding as much from considerations of profitable banking as from care for the interests of the note-holder, that it was expedient to separate issue banking from discount and deposit banking.

The general banking law of New York, of 1838, must be regarded as an outcome of this train of reasoning and reflection on the operation of banks. As early as 1831, a proposition of the same character was proposed in Maryland by C. F. Mayer.*

The Governor of New York outlined the plan and recommended it in his message of 1837. He thought that it would be necessary to pass the act by a vote of two-thirds of all the members of both Houses, because it might be construed as an act of incorporation for all the associations which might subsequently be formed under it. It passed the Assembly, 86 to 29, the democrats generally in the negative. The vote in the Senate was 20 to 8. A resolution declaring that two-thirds were necessary was defeated in the Senate.† The features of the law, which bore date April 18, 1838, are as follows: The Comptroller is to cause circulating notes in the similitude of bank notes to be engraved and printed, countersigned, numbered, and registered. Any association of persons for the purpose of banking who transfer to the Comptroller bonds of the United States, or of New York, or of such other States as he shall approve, shall receive from him an equal amount, in blank bank notes. The stocks are all to be or to be made equal to the New York five per cent. bonds. The bank is to execute and sign and may then circulate the notes. If any such bank fails to redeem any of the notes issued by it in lawful money of the United States upon a lawful demand, the note may be protested and the protest filed in the office of the Comptroller. The bank is then given ten days to pay. After that the Comptroller is to give notice in the State paper that all the notes of that bank will be redeemed by him out of the trust funds in his hands for that purpose. Interest on the bonds deposited is to be drawn by the banks owning them unless the bonds deposited become, in the opinion of the Comptroller, inadequate security for its notes, in which case it accumulates to make the security good. The banks may surrender their notes and take up the bonds. Instead of bonds, as above, bonds and mortgages upon real estate in the State, bearing at least six per cent. interest, payable annually or semi-annually, may be deposited for one-half of the total amount deposited by any bank. The mortgages must be upon unincumbered lands, independent of any buildings thereon, and worth double the amount of the mortgage. Nothing in the act is to be construed as a guarantee by the State of the notes beyond the application of the securities to their redemption. The banks are to pay the expenses incurred in executing this act. No bank may be formed under it with a capital of less than $100,000. Each bank shall make semi-annual reports to the Comptroller of its affairs under separate heads which are prescribed, and shall be liable to every note-holder to whom it refuses redemption at the rate of fourteen per cent. per annum from the time of refusal until the time of payment, by way of interest, and damages besides. No note for less than $1,000 shall be issued by any bank organized under this law, payable at any other place than its banking house. “No association of persons authorized to carry on the business of banking under this act shall at any time, for the space of twenty days, have on hand at their place of business less than twelve and a-half per cent. in specie on the amount of the bills or notes in circulation as money.”

As soon as the free banking law was passed the chance to carry on banking was seized with avidity. Before the end of 1839, one hundred and thirty-four certificates of the formation of associations were filed. Seventy of the associations commenced business. Also certificates of three private individual banks were filed. $6 millions of circulation had been issued on bonds to the value of $7.1 millions. “During the influx of this new medium, in the absence of organization and concert among the new banks, it is not surprising that the emission should become somewhat depreciated, more especially when it is considered how extremely difficult it has been to preserve the safety fund circulation of the country banks from a like depreciation, notwithstanding an organization of years’ standing and the great experience of the officers of these institutions, and the privilege of availing themselves to some extent of the aid of the State by receiving its deposits.”*

When this banking law went into operation, the mortgages which were deposited as security were transferred in many cases to the associations by individuals, who insisted as a condition, being in necessity, that accommodation loans should be made to them at once on long time for nearly or quite all the value of the security deposited.†

Comptroller Fillmore declared, in 1848, that the act of 1838 was passed because bank charters had been treated as the spoils of party, which practice had become so shameless and corrupt that it could no longer be endured.

The question whether a two-thirds majority had been requisite to pass this law came before the Court of Appeals in 1845, and was decided adversely to the constitutionality of the law, and the corporations created under it were declared null;‡ but this decision was reversed a year later.§ In a similar case, under a law of 1837, in Michigan, subject to a similar constitutional restriction, the decision was that the law was invalid for lack of a two-thirds vote.∥

Among the banking curiosities of this period may be mentioned the following: In May, 1837, four persons were arrested in New York City, on suspicion of being counterfeiters. They were at work in an attic, printing notes of the Ottawa Bank of Montreal. They were indignant at their arrest, claiming to be a true bank. One was president, another cashier, etc. They had $20,000 in notes and $800 in silver, and explained that it was cheaper to get their notes printed in New York. They were discharged because they had violated no law.*

Virginia was one of the States in which an extra session of the Legislature was called as soon as the suspension of specie payments took place. A stay law was adopted June 22, 1837, providing for a stay unless bank notes were received in payment. By an act of April 2, 1838, it was extended until April 1, 1839, and later there were further extensions until February 1, 1841. June 24, 1837, an act was passed for the relief of the banks, suspending all the penalties of non-redemption.†

A characteristic of the Virginia legislation was, that the laws for the relief of debtors and of the banks were repeatedly extended for short periods, as if they were enacted reluctantly and with a hope that the necessity for them would soon pass away.

The relief act was continued by an act of February 20th following, and later in the session still further extended until the end of the session; and the act to increase the capitals of the three old banks was suspended until April 1, 1839. April 2, 1838, the penalties on suspension were further suspended and the banks were allowed to issue one’s and two’s to the amount of four per cent. on their capital until April 1, 1839. These small notes, however, must be redeemed under a penalty of twenty-five per cent. damages. On the following day, severe penalties were imposed on savings banks, firms, and individuals for issuing notes under $5, all of which must be withdrawn.

The State subscribed to 4,500 shares of the Exchange Bank, March 19, 1839, by ordering the Treasurer to borrow the required amount on certificates of indebtedness having twenty years to run. Another loan was also to be contracted to pay the subscription to the Northwestern Bank. April 4, 1839, the Kenawha Bank was chartered. On the same day the banks were further relieved from forfeitures and penalties for suspension, and time was given to the Farmers’ Bank, the Valley Bank, and the Bank of Virginia to accept the acts increasing their capital, and this act. All the old stipulations are rehearsed as if nothing had been learned in two years. April 10th, the limitations on the debts of banks to twice their capital were suspended until January 1, 1840.

At the next session, December 11th, all the penalties of suspension were further postponed until March 1st, but as a condition the power was reserved to the State to modify existing charters. Other acts followed during the winter, so that at last the penalties and the prohibition of small notes stood postponed until April 1, 1841.

Banks of the State and Bank Wrecking.—When a State borrows capital and lends it to a bank, the taxpayers incur the risks and obligations of stockholders. The interests of stockholders are antagonistic to those both of depositors and borrowers, while the interests of the two latter may be antagonistic to each other. In strong, sound, and well-conducted banks these interests come to harmony, and illustrate well the true relation between social antagonisms and social harmonies. It is the interest of depositors that the bank shall be as strong as possible, even to a degree which would make it impossible that it should gain anything. It is the interest of the stockholders to make the borrowers pay as much as possible and to pay to the depositors nothing. It is the interest of the borrowers that the bank should fail, since they could then buy its obligations at a discount and pay their own debts to the bank with them. The debtor interest, so soon as the high and correct relations of sound banking and currency operations are abandoned, is a bank-wrecking, currency-debasing interest. It is these facts which make the play of interests through and around a bank so interesting. The strongest currents of interest there are in the economic organization run through it. The financial machinery, of which banks are one of the most important parts, keeps all the parts of the industrial organization in due correlation, discipline, and order. This is why the coercion of the financial system produces, upon occasion, so much irritation; it is also the reason why the banks, if they fail of their function, do so much mischief.

The great Banks of the States illustrate the truth of all these remarks. The debtors and taxpayers were at war. The latter were generally opposed to the bank schemes when they were first proposed, but were sometimes deluded into acquiescence by the hope of profits which would do away with the necessity for taxation. In time, when a great body of debtors had been formed around a bank, and when a large group of politician bankers had come into existence, the Bank of the State became a formidable political power. Two factions were then formed. One wanted to make the bank profitable. The other wanted to use it for “higher” purposes; to “develop resources,” to “accommodate,” to “give equal facilities,” etc. This latter series of hollow and high sounding phrases meant that it was to be sacrificed to its debtors. When crises arose, “relief” was called for, which always meant wrecking the bank that the debtors might be relieved from their obligations to it. Politicians sought popularity by bringing about that result. All these measures involved oppression to the taxpayers, but taxpayers are the one group who can be oppressed without exciting sympathy and almost with impunity. When the whole folly was over, they still had the bonds to pay, for the bonds were extant somewhere bearing the seal of the State.

If the taxes were repealed, and the State tried to live on the bank, perhaps at the same time with all the preceding—loading it up with payments for interest on the debt, for “education,” for “internal improvements,” etc.—the ruin was manifolded and hastened. As the president of the Bank of Tennessee set forth to the Legislature in 1845, they could not expect to live on the bank and plunder it too.

All the Bank of the State schemes rested upon a notion of the “credit” of the State as a metaphysical entity which could be called upon to do the work of capital, although capital cannot be produced without labor and frugality. This introduction into finance of the political glamour which surrounds the “State,” and which has done so much mischief in politics, was a multiplication of evils. That there may be “psychological elements” in finance is true enough, but it is well to analyze them rigorously when recognizing their existence. Confidence operations and swindles of all kinds would have comparatively little chance, if it were not for the psychological element, and it does not appear that that element has any place except amongst the dangerous delusions. As to the State and its credit we can define it rigorously. The State can tax its subjects, and can deliver the product to those who have acquired a right to it under such contract as may be made. The State can promise to do this, may be believed, and acts may follow which are beneficial according to the plan which was the motive of the State’s promise. This is the nature and limit of the credit of the State. The Bank of the State schemes assumed that the prestige of the “State” could be coined into food and clothes; that the imposing attributes of political power could do the work of an actual development of labor into product; and that, if the State talked about what it would do, never meaning to do it, all the same results could be obtained as if it did it. In politics we are very familiar with the notion that “resolutions” are effective social and political forces. They are used to make one set of people believe that they are about to have their wishes gratified while, at the same time, those who seem to be committed by the resolutions to some irksome responsibility are reassured by being told that they will not really have to do anything. Of course somebody is duped. The Banks of the States were attempts to transfer this method of operation to finance, but when capital is at stake the fact that somebody has been duped means that a vulgar crime has been committed. The most far-reaching vice in all these bank schemes was that they led the people to believe that the methods of a “boom” could be successfully employed in the place of the methods of thrift, and their most far-reaching corruption and demoralization lay in the fact that, in practice, they only offered a chance for a favored clique to win at the expense of the community.

To return for a moment to the antagonisms of the groups which have relations through a bank, it should be added that in stock banks which were formed with stock notes and were run for paper-mongering, the stockholder-debtors were the worst bank-wreckers of all. When they had used their bank to get possession of capital, often the best thing they could do with it was to ruin it. The greater the depreciation of its notes the more lucrative the traffic in those notes for the bank itself. When the notes had been bought up and the debts to the bank paid with them, the operation had raised their value. They were then put out again at a distance and the operation repeated. When the reputation of the bank was utterly lost, the stockholders paid their debts to it with their stock at par, slipped out, founded another bank and began again.

Georgia.—The Marine and Fire Insurance Bank was forbidden, December 23, 1837, any longer to do banking unless it should renounce insurance, and agree to pay the note-holders ten per cent. damages in case of non-redemption. The next day the Central Bank was ordered to borrow for the State $725,000 with which to meet the expenses of 1837. December 26th, the Bank of Brunswick was allowed to increase its capital to any amount which it should expend on the Brunswick and Florida railroad, not to exceed $3 millions. At the same time the Central Bank was authorized to borrow $150,000, “to carry out their distributions to the several counties not yet provided for.”

It was also enacted that no bank should issue any note payable otherwise than in gold or silver, upon which the Supreme Court of the State afterwards decided that a certificate of deposit payable “in current funds” was unlawful.*

A free banking act, like that of New York, was enacted December 26, 1838. December 28th, the Central Bank was directed to extend the loan contracted by it the year before, or to borrow $600,000 for State expenses. Its charter was extended until 1850.

The charter of the Central Bank limited its issue to the amount of its capital, but an act of December 21, 1839, authorized it to issue twice the amount of its capital. It need not pay specie to the agent of any suspended bank. The stocks of the State in the Bank of Augusta. Planters’ Bank, Bank of the State of Georgia, and Darien Bank were ordered to be sold for not less than par and the proceeds to be put in the capital of this bank. An appropriation act of the same day ordered this bank to put to the credit of the Treasurer enough to enable him to meet the warrants on him, “charging the same to the capital stock of said bank,” and to furnish him with its own notes or current notes with which he might pay the current demands on him. December 23d, no bank officer of a suspended bank might sell any bill of exchange payable within the United States after March 1, 1840, for more than two per cent. premium, under penalty of imprisonment for between one and four years. This was repealed a year later. Banks were also ordered to report the indebtedness of directors and stockholders.

The Central Bank was ordered, December 19, 1840, to pay the scrip issued by the Western and Arlington railroad, except such as was made payable in State bonds. December 18th, all the banks were ordered to resume January 1, 1841, or their charters would be annulled. Also, if they failed to do so, their notes might no longer be received by the State Treasurer or the Central Bank, the notes of the latter alone being receivable for dues to the State and to itself. This act was held to have condoned suspension and saved the charters.†

Florida.—In the Constitution, which was framed in 1838, it was provided that no person should be eligible to the office of Governor, Senator or Representative while he was an officer of a bank, or for a year after. No bank charter or other act of incorporation was to be granted for more than twenty years, and no bank charter ever to be extended. An article was inserted limiting at length the business which a bank might do. No bank was to have a capital of less than $100,000, consisting of specie actually paid in, nor borrow any addition to its capital, nor loan on stock, nor owe more than double its capital stock; nor make a note or security of any kind for a smaller sum than $5, which restriction the Legislature might raise to $20; nor pay more than ten per cent. dividends; any greater profits to be retained as a surplus; the stockholders were to be individually liable, upon dissolution, expiration, or forfeiture of the charter; banks were to be inspected by a Commissioner at least once a year; and to make quarterly returns of their condition to the Governor. “The General Assembly shall not pledge the faith and credit of the State to raise funds in aid of any corporation whatsoever.”

The District Attorneys were authorized and directed, March 4, 1839, to secure a forfeiture of banking charters, where forfeiture had been incurred, by non-user or otherwise.

The people of Florida now repented of their bank enterprises. The next thing to do was to throw the loss and blame on somebody else, and they set about it with a naïveté equalled only by that with which they had plunged into banking.

The Committee on the Judiciary, in 1840, raised the question of the validity of all the acts of incorporation which had been enacted by the Territorial Legislature. It gave a history of the legal question on this point. Kent, Binney, Peter Jay, and Webster had affirmed that the Territorial Legislature had such power.* The banks had already obtained from the Territorial government and issued $3.9 millions guaranteed bonds, and they claimed to be entitled of right to $5.6 millions more. The total population of the Territory in 1830 was 34,730; in 1840, 54,477.

The charter of the Union Bank, in 1833, as first passed, contained a clause that it should not be in force until approved by Congress. The Governor vetoed it until that provision was stricken out. This Committee of 1840 turn the matter in the other light, and claim that the people in the Territory are entitled to the protection of Congress. They propose resolutions that the Territory has no power to charter banks or to issue bonds to or for them, and that the pledge of the faith of the Territory is null and void. They refer very guardedly to repudiation, which had not yet been openly discussed anywhere, although their argument led up to it; but they state their purpose to be to prevent the issue of any more bonds to the banks.†

The Governor, in his message of 1840, uttered the earliest and most bare-faced defense of repudiation to be found in the literature of that subject. “So far from there being bad faith or a want of honor or honesty in repudiating these bonds, it is entirely consistent with good faith thus to deal with them. They were obtained through a legislation partial and unjust. What right had a few hundred stockholders to make the whole people tributary to their schemes of moneyed aggrandizement? Why should the holders of these instruments be longer deceived? They possess bonds which they never can collect from the Territory. It is proper they should distinctly understand this truth. It is to their interest to take the security which the bonds and mortgages of individuals afford and relinquish ‘the moonshine’ in the shape of Territorial faith, which when they attempt to touch, will elude the grasp.”

Default was made on the interest of the bonds which had been issued to the Bank of Pensacola, in January and July, 1840. The agent of the Bank of the United States in London paid the amount, $30,000, to save, as he said, the honor of the Territory. The United States Bank clique formed the Pensacola Association which took these bonds. They sold them, agreeing to pay the interest in London. Governor Call, in his message of 1842, described this transaction sarcastically, saying that Jaudon was one of those who were responsible on the endorsement, and hence that he was guarding his own honor, not that of the Territory. He went on to say that the bank, instead of building a railroad, as it was bound to do in consideration of the bonds, had removed and sold the materials for the railroad to the value of nearly $275,000. He ended by proposing that another bank should be founded on a specie basis.

The Union Bank petitioned the Legislature, in 1841, for permission to sell below par 704 territorial bonds which it held. The Committee on Banks reported favorably, connecting the concession with proposals for reorganizing the bank so as to separate the Loan Office from the bank. The Legislature peremptorily refused the petition.

The Bank of Pensacola became extinct in 1842. Its paper ceased to circulate; its assets had either been squandered or removed from Florida. In the same year the Union Bank ceased to pay the interest on the bonds issued to it. Its circulation had been reduced to $92,000; but was at two or three for one in specie. The Life and Trust Company’s notes were still worse, but there were not many of them. It returned the one hundred and fifty bonds which it held. The Governor hoped that it would retire all the bonds issued for it.

Alabama.—The Bank of the State and its branches were authorized, June 22, 1837, to issue notes “of less denomination than $5.” These banks were not to issue any notes under $5 nor receive any such, except their own,—that is, none from out of the State. June 30th, an act was passed with a preamble: “Whereas the Bank of the State of Alabama and its several branches have recently suspended specie payments, and whereas it is believed that said suspension has been produced by causes beyond the control of the president and directors of said banks in the exercise of ordinary prudence and caution;”—the suspension was therefore approved and sanctioned and the laws against it were suspended. All debts to the banks were divided into three installments, twenty-five per cent. to be paid between March and June of 1838, thirty-seven and a-half per cent. between March and June of 1839, and the remainder between March and June, 1840, with interest at eight per cent.; but every debtor who has $2,000 so extended shall have no accommodation until he pays, and he who owes less than $2,000 may apply only for the difference between his debt and $2,000 in the way of further loan. The banks are to require new security. Debts on foreign bills of exchange are excluded. The Bank of Mobile and the Planters and Merchants’ Bank are allowed to suspend until June 15, 1840, unless the State Bank resumes sooner, and provided that they accept this act and the other acts of this session; otherwise, forfeiture. The Bank of Mobile, when it resumes, must withdraw all notes under $5. All the banks in the State are required to buy, before July 1, 1838, specie to the amount of one-eighth of the capital; within the next year, one-eighth more; within the next year one-fifth; and within the fourth year one-quarter. This much specie they must have on hand and keep it. The Governor, Treasurer, Comptroller, and President of the Bank of the State are directed to issue six per cent. State bonds at two, four, and six years, in equal divisions, to the amount of $5 millions; $1 million to be deposited in the State Bank at Tuscaloosa, and $1 million in each of the branches, to be sold when it may be done at par, in aid of the capital of the banks, to the extent of one-half the amount for specie; the other half to be deposited in banks in New York. The note issues are to be kept up to the amount of the capital and these bonds together. In the apportionment of loans regard is to be had to the population of the counties. The banks are to discount “transaction notes” in payment of debts to the banks until March 1st, at seven per cent., not more than $2,000 to one borrower, with two good sureties, payable in one, two, and three years. The annual payments on these debts are to go to cancel the short bonds; the faith and credit of the State are pledged for the increased circulation. Every mortgage under this act is to contain a power of sale, and a default on one installment makes the whole due.

This act entailed more trouble and misery on the State than any other that was passed before the civil war. It was called the “Extension Law.”

The Commissioners to examine the Bank of the State, in 1837, reported that they could not balance the account of bills of exchange, the vouchers being in confusion, part of them in old receipt books of the bank attorneys since 1826. They could not find out the amount of bad debts, but thought it larger than had been reported; they had not had time to examine the account of notes discounted, but had no doubt that it was in the same condition as that of the bills of exchange. In the following year the branches were quarreling with each other, being almost entirely independent of each other, and not controlled by any central authority.

The Mobile branch was authorized, December 23, 1837, to increase its issues one-fourth more than was allowed by the act legalizing suspension; the increase to be used in advances on cotton at not more than three-fourths of its value.* On the same day the State officers were authorized to issue State bonds for $2.5 millions, in sterling, at five per cent., for twenty years, to be sold for specie; the proceeds to be deposited in the Bank of the State and branches, in equal shares, in aid of the capital. On the same day, also, a limit was set to the indebtedness which the president or any director might be under to the branch of which he was an officer. Any one who owed any branch $35,000 was ineligible as a director, and an oath must be taken by every candidate. Three Commissioners were to be appointed, in January, 1838, and annually thereafter to visit the Bank of the State and its branches twice a year. The president of each branch was to make monthly reports to the Comptroller, who was to publish them. The provision for Commissioners was repealed at the next session.

The report from Mobile, September 28, 1838, was as follows: “The State Bank and its branches, it is said, are to have a meeting on the 1st October, and if the Tuscaloosa Bank can be made to give up her absurd plan of advancing on cotton,† and come into the measure of resumption, but little notice will be taken of the two banks in the northern part of the State. We think everything looks fair for resumption, and on Monday next we shall get clear of shinplasters.” “If the thing [resumption] is practicable, why are they [the other banks] to be deterred from the step by the injurious and mischievous speculations into which the Tuscaloosa branch chooses to enter? Are the people forever to be oppressed and cursed with a depreciated paper, to enable bank directors and their favorites to job in cotton and fatten on bank agencies?”‡

“Stripped of all disguise, we ask, what is the proposition made to a sensible public? It is that the people at large shall continue to suffer the dishonor, the embarrassments and positive losses of a depreciated currency, in order that the debtors to the banks may make use of that currency to pay their debts. It is to tax the solvent, and enact a stop-law in favor of the embarrassed and insolvent—it is gross favoritism—to those to whose imprudences the State is indebted for its afflictions, at the expense of rank injustice to those who have not been seduced into engagements totally beyond their power to meet.”§

It was required, February 1, 1839, that the cashiers of the Bank of the State and branches should report to each Legislature the indebtedness of the president, directors, and members of the Legislature, to each bank, and also a list of debtors’ endorsers, and amounts of debt, by counties. These laws may be taken as evidence that these banks were in the hands of cliques consisting of their officers and leading members of the Legislature.

The banks of the State resumed January 7, 1839, but the Mobile branch was forced to suspend again February 2d, having paid out $217,987 in specie, besides checks on New York and New Orleans for half a million.* February 2d, it was enacted that the Bank of the State and branches should take for debts all bank and post-notes which had been issued by them, and they were forbidden to take interest in advance on loans under the act legalizing suspension. They were also ordered to require, on payment of the installments of the extended debt, only such amounts as the condition of the bank might compel them to call for. Those debtors who have not paid the first installment of the extended debt are allowed still to do so, and to give notes with security for the other installments to be paid as provided in the extension law. A Board of Control to govern the Bank of the State and branches was also constituted the same day, to consist of the Governor and the presidents of the bank and branches. It was now provided further that paper not having more than one hundred and twenty days to run might be discounted for persons who had taken the extension; but the proceeds were to be applied on the extended debt. The banks were directed to settle with their collection attorneys three times per year. Any president or director who was under protest for ten days was to vacate his place. The president and directors were made exempt from “working on the roads” and from jury duty. No corporation might tax the Bank of the State or its branches. On the same day it was further enacted that any one who issued currency without authority, or signed or passed the same, should be subject to a fine of not less than $100 nor more than $500. Any partner or stockholder was made liable to the note-holder. Passing a note was construed as endorsing it.

The Commissioners to examine the Mobile Branch, in 1839, approve heartily of the policy of the New Board in abandoning the advances on cotton.† They are most concerned about the possibility of collecting the loans. “The amount of bills under protest, on the 19th November, 1838, was $990,330.04. On the 18th November, 1839, they amounted to $3,345,374.88. We know not whether this extraordinary increase has been produced by the necessities of the times, or by the hope of extraordinary indulgence from the Legislature. So many individuals have a deep interest in preventing the collection of this debt, that the utmost caution, virtue, and firmness are now required in the selection of the agents to whom this great trust shall be committed—whether they be the ordinary Board of Directors, or extraordinary commissioners chosen for this purpose.”

In 1839 an attempt was made to prevent the United States Bank of Pennsylvania from doing business in Alabama. This raised the question of the right of a corporation chartered in one State to do business in another. That right, with some limitations as to banks, was affirmed in United States Bank versus Primrose and the other cases decided with it.*

Mississippi.—The “Free Trader” said, July, 1838: “Against the banking institutions of Mississippi we find the voice of their former warmest and most devoted friends becoming loud, indignant, and denunciatory. Every day only increases public imprecations against their unscrupulous swindling.” “They [the banks of the State] must raise the value of their paper, and they must do it soon. There is no time to be lost.” “In Lauderdale County, on the night preceding the time for the opening of the spring term of the Circuit, the court-house was burned down. The Judge, unwilling to be thus baffled, determined to hold the court in some other building, but the Sheriff resigned. The duties then devolved on the Coroner, but he too resigned; and the Judge was actually obliged to go home and leave the litigants to take care of themselves.”†

The Brandon Bank determined, April 10, 1838, to redeem its circulation with seventy-day post-notes payable in Philadelphia.‡ From the report of the Bank Commissioners in 1838, we get the following exposition of the proceedings and status of the Brandon Bank. In the statement of this bank the individual deposits appear under the resources to the amount of over $90,000. The reason was because persons who delivered cotton to the bank would not give notes when the amount received was less than the value of the cotton. The amounts thus appeared as over-drafts. “Their agencies exercised all the powers of a bank of discount, thus giving a locomotive character or the principle of ubiquity to the Brandon Bank.”

The bank intervened to give credit to planters who had put their cotton in its hands so that they could buy provisions. The Commissioners reckoned its profits for the year at fifty-one per cent. of its capital. If it is allowed to buy its own depreciated paper they will be much greater. “The mode by which such enormous profits are realized without other capital is very simple. A charter is first obtained from the Legislature. A small portion of stock is to be paid in before the bank goes into operation. A few honest planters desirous of promoting the improvement of the country, which the bank promises, take stock in good faith and pay it up in bona fide capital. Those, however, who are experienced in these matters pay up as little as possible, but as the latter are financiers they are elected to manage the bank. They soon discount paper for themselves and other stockholders of financial abilities. With this they buy more property to secure more stock, to get more discounts, to buy more property, to secure more stock, etc., etc., and finally they are able to write up a very respectable capital upon which they are permitted to issue double the amount. * * * So long as a few men can draw a profit of more than fifty per cent. from the labor of the country for merely writing their names on a slip of paper, promising to pay their own bank any given amount, it is natural that they should endeavor to protract their harvest. They could not be expected to know any limits but those of human gullibility and endurance. * * * The history of civilization affords no evidence of any device so simple and so efficient in reducing a country to vassalage as these principles of banking.”

“The practice pursued by the banks in advancing $60 a bale on cotton or $40 on the present and $20 on the coming crop is the principal cause of the great depreciation of our bank paper. Every dollar beyond the real price of the cotton was surplus and may be fairly adopted as the standard to measure the loss sustained by the country in the depreciation of the circulating medium. The banks made their discounts and the speculators who borrowed from them were enabled to change their creditors and protract the payment of their debts by the operation; but as soon as the paper passed into the hands of the community it depreciated, being inconvertible; the $60 would not pay for more pork or other necessary articles of consumption than the real value of the cotton would have purchased. The surplus circulation, therefore, was a total loss to the community. * * * No State in the Union was more deeply injured by an extended currency than Mississippi.” The depreciation doubles the cost of production without increasing the value of the cotton which must be exported. The ten directors of the bank have borrowed from it nearly $600,000; six of them have mutually endorsed for each other, so that the total liabilities as endorsers are over $2,600,000.

In November, a convention of the banks of Mississippi was held to agree upon a time for resumption; but they adjourned without agreeing.

The Commissioners to sell the Union Bank bonds, in 1838, were ordered in their commission not to sell them for less than par in current money of the United States. A select committee of the Legislature which reported on them in 1842 said that these Commissioners proposed to Biddle to make the bonds payable in London at four shillings and sixpence, although they also say that Biddle made this an indispensable condition. He agreed to pay $5 millions, lawful money of the United States, in five equal installments of $1 million each; the first four payments to be made in New Orleans and the last payment in Natchez, in July, 1839. It was agreed that the bonds should bear interest from their date, but Biddle was not to pay the accrued interest. His contract was guaranteed by the United States Bank, whose charter did not specify, amongst the things which it might do, the purchase of State stocks. The Committee of 1842 maintain that par means face and accrued interest. Biddle actually paid $5 millions; $1 million in specie; $150,000 in notes of the Merchants’ Bank of New Orleans; and the rest in exchange on New Orleans, on which the bank realized a premium.

In his message at the opening of the Legislature, January, 1839, Governor McNutt complained of the behavior of the Planters’ Bank and the Union Bank, which had refused to allow themselves to be examined by the Bank Commissioners, on the ground that the latter were not judicial officers; also because the Union Bank had issued depreciated post-notes whereby the borrowers had been forced to pay at the rate of twenty-two per cent. per annum.

In view of the complaints that were made that the Bank of the United States was not in due submission to the federal authorities, it is interesting to note the behavior of the State banks to the State authorities. The banks of the States, in which the State owned the whole or a large part of the capital, were the most recalcitrant and defiant; so that it seemed to be a rule that the nearer a bank was to the State authorities, the less the State was able to control it. The Planters’ Bank received the State deposits in a better currency and bought Brandon notes with which it paid the State creditors.* The banks of Mississippi generally responded to the Bank Commissioners in impudent terms.†

The following is from the report of the Bank Commissioners, January, 1839: “This company [Bank of Vicksburg] purchased pork in Cincinnati and Louisville at $13 to $14 per barrel, and sold it in Vicksburg at $28 to $32, and in New Orleans at $27 per barrel. The price of pork was raised in Cincinnati and Louisville, in less than two weeks, from $13.50 to $17 per barrel. These purchases were made with the date checks, which gave the company ample time to realize on the sale of the produce, and meet the checks without the investment of a single dollar of actual capital, of which they possess, bona fide but $120; the $100,000 [shown as capital] having long since been returned to New Orleans, where it belonged.”

This State now entered on the same course which we have noticed in some of the others. It began to use up so much assets as it possessed from its earlier operations. By a law of February 15, 1839, the 20,000 shares owned by the State in the Planters’ Bank were transferred to the Mississippi Railroad Company as subscription for its stock. The Mississippi Railroad Company was incorporated to build certain railroads. It built about twenty or twenty-five miles and then failed. The net returns from the railroad were $5,000 or $6,000.‡

A special examiner made the following report in December, 1839: “Nothing can arrest the Agricultural Bank in its ruinous course but the prompt interference of legislative power. It has existed in continual disregard of the law, as exemplified in its traffic in cotton, in its sale of post-notes, and in paying out Brandon Bank paper as money for notes discounted at its counter, when the said paper was at thirty-five per cent. discount. To terminate such gigantic frauds on the public, and to compel the bank to do equal justice to its debtors and creditors, it ought to be wound up and its charter abolished.”

The message of Governor McNutt, January, 1840, was chiefly about the Agricultural Bank and the Planters’ Bank. After showing what a bloated and rotten concern the former was, he said that both were indebted to the United States and were under bonds to pay at a set term. The Agricultural Bank had refused to answer the questions put by the special agent who was appointed to investigate it. As the Governor said, the bank used two rules at its convenience—what the charter did not forbid and what it did not impose on them. The United States District Attorney being instructed from Washington to examine the security which these banks offered, was apparently not satisfied. He obtained as collateral a large amount of their bills receivable. McNutt was afraid that he would put the bonds in suit in the federal court, and thus escape responsibility to the State institutions. He thought that the remonstrance of a sovereign State would not be unheeded, and he proposed to the Legislature to memorialize the federal government to remove the District Attorney. The suits were postponed by the intervention of Senator Walker.

In the references in this message of the Governor to the Union Bank there is as yet no repudiation. The same may be said of the report of a legislative committee at this session, although complaint was made of the terms on which the bonds had been negotiated. The committee stated that the losses of the Union Bank would be immense, and it was already evident that the State would have to pay the principal and interest of the bonds. Their argument is all directed to the point that the rest of the bonds should be withheld from the bank. They attributed the bad management of the Union Bank to the eagerness to provide “relief.” “When a community, by speculation, over-trading, and inflated prices, has become deeply involved, greatly increased banking facilities only increase the violence and malignity of the disease.”

Louisiana.—A committee of the Legislature made a report, March 14, 1838, from which it appears that twelve directors of the Gas Light Bank owed to it, December 23, 1837, $1.4 millions, as drawers, and nearly $400,000 as endorsers. Hermann, Briggs & Co. stand first on the list, debtors for a half million. The committee find that a large part of this indebtedness was for “kites or race-horses,” and that exchange operations to a large amount had been agreed to by the president, in which he was himself interested, when no one but the cashier and himself were present. The bank owed the Bank of the United States $2 millions, payable in one and two years.*

A statement of the condition of the sixteen banks of Louisiana, December 23, 1837, showed that they held undivided profits, $6.2 millions; protested paper on hand, $2.8 millions; besides $1 million held for account of the Bank of the United States. The total capital was $30.9 millions; the deposits, $7.4 millions; the circulation, $7.5 millions; the specie, $2.7 millions.†

The banks of Louisiana resumed about January 1, 1839. A healing act for the suspension was passed March 14th. This was not to be construed as authorizing any future suspension; weekly balances were to be paid between the banks.

Tennessee.—The Southwestern Railroad Bank was chartered by Tennessee December 5, 1837. The fourth Bank of the State of Tennessee was chartered January 19, 1838; capital $5 millions; all the school fund, the federal surplus revenue, and all the credits of the State were to be put into its capital, and the remainder was to be raised by bonds on the faith of the State. That part of the federal surplus which had been deposited in the three existing banks was to be paid over within two years to this bank. Six per cent. thirty-year bonds were to be issued to the president of the bank; the bank was also to negotiate bonds issued for internal improvement companies. The Governor, with the confirmation of the Legislature, was to appoint twelve directors; term of the charter, 1868; dividends to go to schools; lowest note $5; after January 1, 1841, $10; notes receivable by the State; the head and three branches to be in Middle Tennessee, two branches in the west and two in the east; the bank to pay interest out of the State dividends on the State bonds issued to internal improvement companies, which are also provided for in this act. It is enacted in general that the State shall take half the stock in any such companies which have been or may be incorporated. The president of the bank, in his report of 1839, said that there appeared to have been two motives for the establishment of the bank; one, to give relief, which required that its issues should be proportionately distributed over the State; the other, to provide a sound currency, assist commerce, education, and public works, by making large dividends. These purposes were somewhat antagonistic. The branches had been established with a view to the former purpose. Another president, in 1845, said that its profits had been sacrificed by the locations selected for its branches.

This bank apparently began under suspension June 27, 1838, for it was announced that its post-notes would be redeemed in specie as soon as other banks in the State should commence specie payments. On the 5th of December specie at Nashville was at twelve and thirteen premium.*

Its issues were pleaded against as bills of credit, but were held to be covered by Briscoe’s case.†

Ohio.—At the session of 1835-6, the United States Bank of Pennsylvania was forbidden to have any bank or banker as its agent in Ohio; the penalty on a bank which should act for it, $10,000, on a banker $1,000. It was made unlawful to circulate its notes; penalty $1,000, and any officer employed by the Bank was made subject to a penalty of $500. Action might be prosecuted by any citizen. This law was repealed January 26, 1838, but another law was passed February 9, 1839, making it unlawful for any bank or agent to act for that Bank or for any other bank, incorporated by any other State or by the United States. No foreign bank might establish an agency without the consent of the Legislature, and it was made unlawful to act as the agent to put the notes of such bank in circulation.

No State ever seemed to struggle so hard against unauthorized notes as Ohio. All unincorporated companies were forbidden, February 16, 1838, to issue notes without authorization. Any incorporated company which issued notes, not being authorized so to do, was to lose its charter. No individual, town, or city might issue notes; penalty, $50 for each offense. March 13th, the prohibition of small notes was repealed. Banks which would redeem them in specie might issue down to $1. The banks were required to resume by July 4, 1838, provided that the banks of New York, Philadelphia, and Baltimore should do so by that time; otherwise their notes would not be received by the State.

A convention of banks of the State was held April 30, 1838, for the purpose of equalizing the currency of the State by a system of mutual credits.*

All notes less than $3 were forbidden, February 9, 1939, after the following July 4th; also all under $5 after October 1st; the penalty for issuing or passing was $50 for each note, or an injunction might be obtained against the corporation. February 25, 1839, an attempt was made to establish a general law for the regulation of banks. Commissioners were appointed to visit. No bank was to owe, exclusive of its deposits, more than one and a-half times its paid-up capital, and shares paid for by stock notes were not to be considered paid-up. The circulation was never to exceed three times the specie; banks never to buy their own notes at a discount; twelve per cent. penalty for non-redemption; fine of $5 to $50 for refusal to endorse on a note the refusal to redeem it; the Commissioners to obtain a mandamus to the sheriff to close any bank which should not redeem for thirty days, and the Court to name three receivers to wind it up, the charter being annulled.

March 18th, another attempt was made to define more strictly unauthorized notes, so as to include all paper, no matter what its form, if it was intended to circulate as money.

The Auditor reported, December 3, 1839, that the Washington Social Library Company had commenced banking, declared a dividend, and asked the Auditor to draw for the State tax on it. The Granville Alexandrian Society had also taken the same step, the purpose being to win a recognition of their banking right. He had refused to draw for the tax and a quo warranto had been issued by the Supreme Court,

Gouge has the following story of an institution of this character. Some thirty years earlier a charter had been granted to a library company in Newtown, Hamilton County, Ohio, which company, after being in operation about ten years, sold its books by public auction and dissolved itself to all intents and purposes. In 1840, the shares were bought up by some eastern men on a pretext of establishing a manual labor school, but they began immediately to issue paper money. They have nothing with which to redeem these issues, “except the library, consisting of Harper’s family library, some old newspapers, and some rusty novels and tracts. The chief book in the collection is a copy of ‘Oliver Twist’ with engravings. It’s called the Bank of Hamilton County.”†

The report of the Bank Commissioners, January, 1840, showed that half the banking capital of the State was owned by non-residents; one-third of all the loans were to bank officers and directors as borrowers or endorsers. “The banks distrusted one another and the public distrusted them.” They had been warring on each other. Nine institutions are mentioned which have “illegal circulation;” one is the Orphans’ Institute. There are also a great many forged notes afloat and notes of Michigan banks payable in Illinois.

March 23, 1840, small notes were once more forbidden. Also it was forbidden to pass them except to redeem those now out; also it was forbidden to issue notes payable at a future day or elsewhere than at the place of issue. All notes were held payable on demand in specie at the place of issue. No broker might pay out illegal notes; no notes under $5 to pass if not issued by the banks of Ohio; no State officer was to receive or pay out notes under $5. The Bank Commissioners in their next report said that this law had greatly diminished the circulation of unauthorized notes.

Michigan.—The Farmers and Mechanics’ Bank was incorporated by the Territorial authority in 1829. A safety fund system was created. March 28, 1836.

A general banking law was passed March 15, 1837. Twelve freeholders of a county might form an association under certain conditions. The minimum capital was $50,000, of which $15,000 must be paid in before commencing. The allowed issue was $37,300. This law stimulated the formation of banking companies. In 1838, there were forty or fifty of them, for it appears that the number was not really known. It was a caricature of the New York system, and produced a swarm of small, swindling concerns. After the suspension, in 1837, the Legislature sanctioned the action of the banks in suspending, for one year, and a redemption law was passed for land sold on purchase-money mortgages, allowing the equity owner one year to redeem, with ten per cent. interest. The name “wildcat” banks is said to have originated in Michigan. Bank Commissioners were appointed, who made their first report April 6, 1838. In it we find the following: “On examination of the books of the Jackson County Bank, the following circumstances were exhibited: the names of all persons and corporations with whom accounts had been opened were written in pencil; the entries in ink. In a few minutes, therefore, the whole face of the business transactions of the bank could have at any time been entirely changed.” “The Commissioners proceeded to an examination of the specie of the [Jackson County] bank. Gold coin was exhibited loose in a drawer, which, being counted, amounted to the sum of $1,037,78; about $150 in loose silver was also counted. Beneath the counter of the bank, nine boxes were pointed out by the teller as containing $1,000 each. The teller selected one of these boxes and opened it; this was examined, and appeared to be a full box of American half dollars. One of the Commissioners then selected a box, which he opened, and found the same to contain a superficies only of silver, while the remaining portion consisted of lead and ten-penny nails. The Commissioner then proceeded to open the remaining seven boxes; they presented the same contents precisely, with a single exception, in which the substratum was window-glass broken into small pieces.” “On reference to the statement of the bank [of Jackson County], dated February 19, 1838, the third day previous to this examination it will appear that on that day the bank claimed, under the signatures of three of its directors, to be possessed of the sum of $20,000 in specie, independent of the certificate of deposit for $10,000.”

All the penalties of suspension were suspended, June 23, 1837, until May 16, 1838. The banks which availed themselves of this indulgence must come under the safety fund obligation, and submit to the visitation of the Bank Commissioner. December 30th, the number of Commissioners was increased to three, and they were to visit each bank at least once in three months.

Michigan money was reported in June, 1838, to consist of three kinds, red dog, wild cat, and catamount. “Of the best quality it is said that it takes five pecks to make a bushel.”*

The Bank of the State of Michigan was chartered April 2, 1839. It was imitated almost exactly from the Bank of the State of Indiana.† The difference in the history of the two shows how little the “plan” of a bank has to do with its success. December 30th following, the Bank Commissioners reported that this bank was under injunction and had been ordered to wind up. At that time all the banks in the State were broken.

Indiana.—The Bank of the State of Indiana suspended with the others in 1837. The Legislature at its next session declared by resolution that the suspension was “justifiable and necessary under the then existing circumstances, and that the approval thereof by the directors of the State Bank was properly given.” It was declared to be the duty of the bank to resume within thirty days after the resumption of the banks on the Atlantic coast, and with those of Ohio and Kentucky. The bank loaned to the State $286,751, the amount of the fourth installment of the federal surplus revenue. The State was then deep in expenditures for public works, which were all managed outside of the State treasury. The State Treasurer was alarmed at the growth of the debt; nevertheless, by an act of February 12, 1839, it was voted to contract a loan of $1.5 millions in that year, and $700,000 in each of the five following years, to increase the capital of the State Bank. This act only shows the mania of the moment. The State credit did not avail to contract the loan.

Inasmuch as this Bank of the State of Indiana is the only one of the great banks of the States which was successful, it is interesting to note any indications of the reason of its success. We note immediately that the Central Board exerted genuine and stringent discipline, and that their interests and feelings were not engaged in the banking business, because they had no bank to manage. In 1839, they issued peremptory orders to one of the branches to pay a sum due to the Treasury of the United States, and provided for the payment by the other branches, if the one in question should fail. They approved and allowed the dividend of each branch; inspected the branches and ordered their policy; gave or refused permission to take government deposits. They watched the tendency to accommodation paper and laid down banking rules.

The Bank of the State suspended a second time in the fall of 1839, with the exception of three of the branches. Its report for November, 1840, showed profits for the year of ten and a-half per cent. The president said: “There have been almost no difficulties in managing the bank, which have not arisen mainly from the purchase of stock by persons with the expectation of borrowing money on more favorable terms than could be allowed to others.”

Illinois.—As soon as the general bank suspension occurred, an extra session of the Legislature was called, at which all the acts against bank suspension were suspended until the end of the next session, but the banks were not to pay dividends nor sell specie nor increase the circulation beyond the paid-up capital; were to give monthly statements to the Governor, and to allow renewals to their debtors, ten per cent. being paid at each renewal.

Residents of Illinois, in June, 1838, owned $60,000 of the stock of the Bank of the State. The liabilities of these stockholders to it were about $900,000.*

The Bank of the State, having suspended again in 1839, was revived by an act of January 31, 1840, and the forfeiture of its charter was set aside, provided it would agree to the stipulations in the act of the extra session of 1837, authorizing suspension.

Arkansas.—The Governor, in 1846, said: “The financial history of the State exhibits a series of blunders.” A tax of one-fourth of one per cent. was levied by the first Legislature, 1836. It promised to produce more revenue than was wanted and the Governor hastened to call an extra session at which the levy was reduced to one-eighth, which did not, for ten years, give a revenue of $30,000. There was an annual deficit which was met by eating up the deposit of the federal surplus revenue. At that same called-session banks were planned to support the State and do away with taxation. The consumption of the federal surplus was a consumption of a part of the capital of the Bank of the State. The Governor also complained of the great amount of auditor’s warrants which had been issued during the first ten years of the State’s existence and which were at about fifty cents on the dollar.

The Constitution of 1836 provided that the Legislature might incorporate one Bank of the State, “which shall become the repository of the funds belonging to, or under the control of the State, and shall be required to loan them out throughout the State, and in each county, in proportion to representation. And they shall further have power to incorporate one other banking institution, calculated to aid and promote the great agricultural interests of the country; and the faith and credit of the State may be pledged to raise the funds necessary to carry into operation the two banks herein specified: Provided, Such security can be given by the individual stockholders as will guarantee the State against loss or injury.”

From this provision of the Constitution it is evident that the scheme of the banks was already in mind.

The report of the Committee of the Legislature, in 1836, on the proposition for the two banks, pointed to the example of the great Banks of the State in South Carolina, Georgia and Alabama; and spoke in general terms of the advantages of banking, with an issue of three for one on the capital. They said that the Bank of the State would gain not less than $50,000 per annum. Before it adjourned, the Legislature made plans to put the State in debt $3,040,000. Its population was about 90,000. It is one of the most astonishing facts in this marvelous period that communities like Arkansas, Illinois, Indiana, and Florida should have found anybody to lend to them, even if they were foolish enough to borrow. The best defense of themselves which they could make to their creditors afterwards was: We have all been crazy together.

The Real Estate Bank of Arkansas was incorporated October 26, 1836. It was on the model of the Union Bank of Louisiana, but its history was longer, fuller, and is better known to us than that of any other bank on that model. The capital was to consist of $2 millions, borrowed abroad by means of bonds of the State, and the stockholders were to subscribe $2.5 millions in mortgages, to be transferred to the State as its security. It was to begin with three branches, each to be independent. Each branch was to elect two of its directors, who, with the president of the branch and three members of the parent board, were to constitute the Central Board. They were to elect the president, hold all papers and records, receive the State bonds and negotiate them at not less than par, in current money; the bank to pay the principal and interest of them. Each stockholder was entitled to a credit equal to one-half his shares. All dues to the bank were to be arranged so as to run out twenty-two years from the date of the charter; non-stockholders might renew notes with mortgage, annually, for ten years; the incorporation was for twenty-five years, the last three years being allowed for liquidation. The bank was a preferred creditor, so that its mortgages are called privileged mortgages. All profits were to remain in the bank and accumulate until the State bonds were paid. Only at the end of twenty-two years could the surplus assets be divided amongst the stockholders. Borrowers paid to the bank eight per cent.

The fact that it was the State which organized this institution, and that it was called a bank, blinded the minds of its originators to the fact that it was a gigantic financial experiment, containing an enormous risk. When it failed, the mortgages for the stock and the mortgages for the loans, with the guarantee of the State to the bondholders, and of the stockholders to the State, were found to make an inextricable snarl. A Governor, in 1854, said: “It was never intended that the people should be taxed to pay the bonds or the interest on them.” This was naively true, but it implied that the loss, if the scheme did not succeed, was to be thrown on the purchasers of the State bonds. Fifteen hundred and thirty bonds were actually issued for the bank and five hundred more, a little later, for another branch. The latter issue was hypothecated with the North American Trust and Banking Company of New York for a loan, on which the actual amount received was $121,336. That bank failed and the collateral was sold, passing into the hands of Holford of London.

The number of acres mortgaged to the bank was 187,810, appraised at $3,380,772. Ten years later they were said to be worth about $2 millions. There were two hundred and eighty stockholders.

The Bank of the State of Arkansas was incorporated November 2, 1836; $1 million capital, to be raised by State loan; president and twelve directors to be elected by joint ballot of the Legislature; also a president and nine directors for each branch; lowest note, $5; never to issue more than three times the capital; to begin when $50,000 in coin paid in, and to establish a new branch for every $50,000 paid in; each branch to be independent in its business; the funds and revenues of the State to constitute the capital; trust funds might be placed in it for not less than a year and get the same dividend “as other stock belonging to said institution.” Not more than half, nor less than a quarter, of the means were to be used in the counties, in proportion to “representation,” in loans on real estate for five years. The number of bonds actually sold for this bank was 1,169.

The federal surplus revenue, which had been intended for the Bank of the State of Arkansas, was paid in drafts on the Agricultural Bank and the Planters’ Bank of Mississippi. After great difficulty, instead of $382,333, which was the State’s quota, the bank obtained only $286,757. The former amount was due to the United States in specie, but out of the amount which Arkansas obtained, only $91,167 was specie. The rest was in the notes of suspended banks in Ohio, Kentucky, Louisiana, and Mississippi. The bank put these notes afloat in Arkansas, and issued post-notes of its own. Of demand notes it issued only $8,310.

January 12, 1838, the directors of the Fayetteville branch resolved that as they received no compensation, the bank should lend them, on their notes at twelve months, $10,000 each, being the limit set in the charter. They were also to be allowed to renew their notes until all the debts should be called in. This branch was operating on a bare capital of $110,000, and these directors took $90,000 out of it. January 1, 1839, the bank was very strong and began to pay specie on its notes and post-notes; but each branch paid out the notes of others, keeping the circulation far away from the point of redemption. The Fayetteville branch suspended again October 31st.

The issues of this bank were assailed as bills of credit, but the State Supreme Court held* that, under Briscoe’s case, “by which in this case this Court is bound, whatever may be its opinion to the contrary, the notes issued by the Bank of the State of Arkansas are not bills of credit within the meaning of the federal Constitution, and that the act incorporating the bank is constitutional.” Referring to the cases of Craig and Briscoe, the Judge said: “Like Justice Story, we believe that the two cases stand on precisely the same ground and turn expressly on the same principle.”

The two banks suspended in the fall of 1839. This was done not from necessity but from policy. The immediate means of the Bank of the State were $469,949 and its immediate liabilities not over $400,000. It suspended in order to expand and inflate. In fact the banks lent out to the clique in control all the specie and real funds which they ever obtained, once for all, and then stopped. The bank at Little Rock resumed for a while October 1, 1840, to the great displeasure of the other branches. It had nearly twice as much specie as notes out. At the following session a legislative Committee was appointed to investigate the banks. Resolutions were adopted expressing dissatisfaction with the Real Estate Bank for suspending, and the report of the president was declared to be “not the most intelligible and satisfactory.” The report showed that the commissioners to sell the bonds for the bank sold $500,000 to the Secretary of the Treasury for the Smithsonian bequest, which had been imported into this country in specie. They paid $5,000 to a broker in Washington for negotiating the sale, and charged the same sum for themselves. They converted the money into southwestern paper, and pocketed the difference. They charged $28,394 for their expenses and services, and for considerations not stated loaned $8,500 to certain individuals in New York.†

More information was demanded in regard to specie, debts due to the bank, the amount of mortgage security to save the State from loss, etc. The Real Estate Bank paid the interest on the bonds issued for it until July, 1841, except on the Holford bonds, and on the cash received for a part of the same issue. December 15, 1842, the State appointed an agent to instruct and help the attorney of the Bank of the State in a suit aginst the North American Trust Company and its guarantors.

[* ] Boston “Advocate” in 1 Raguet’s Register, 308.

[* ] Whitney, 30.

[* ] 2 Raguet’s Register, 400.

[† ] 2 Hammond, 480.

[* ] Comptroller’s Report, 1840.

[† ] Bank Commissioners, 1841.

[‡ ] 1 Denio, 9.

[§ ] 2 Denio, 380.

[∥ ] 1 Douglas, 351.

[* ] 52 Niles, 164.

[† ] The acts of the extra session have not been accessible.

[* ] 21 Georgia, 297.

[† ] 1 Kelly, 27.

[* ] The Supreme Court of Louisiana affirmed the power of the Territory of Orleans to incorporate a Navigation Company. (11 Martin 309, 1822). See pages 53, 60, 248.

[† ] Treasury Report, March 3, 1841.

[* ] See page 298.

[† ] See page 297.

[‡ ] 2 Raguet’s Register, 252.

[§ ] The Mobile “Register,” in 2 Raguet’s Register, 349. November, 1838.

[* ] 55 Niles, 385.

[† ] See page 298.

[* ] 13 Peters, 519.

[† ] 2 Raguet’s Register, 43. July 1838.

[‡ ] 1 Ditto, 379.

[* ] Treasury Report, April 9, 1840, p. 591.

[† ] Ibid, 605.

[‡ ] Johnson’s Report on Assumption, March 2, 1843.

[* ] 1 Raguet’s Register, 332.

[† ] 1 Raguet’s Register, 270.

[* ] 1 Raguet’s Register, 222.

[† ] Craighead versus the Bank of Tenn. 1 Meigs, 199.

[* ] 1 Raguet’s Register, 379.

[† ] Journal of Banking, 91. (1841.)

[* ] 54 Niles, 224.

[† ] See page 255.

[* ] Committee on Banks, January, 1843.

[* ] 4 Pike, 44. (1842.)

[† ] 64 Niles, 5.