Front Page Titles (by Subject) § 1.—: The Local Banks, by States; 1845 to 1860. - A History of Banking in all the Leading Nations, vol. 1 (U.S.A.)
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§ 1.—: The Local Banks, by States; 1845 to 1860. - William Graham Sumner, A History of Banking in all the Leading Nations, vol. 1 (U.S.A.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 1: A History of Banking in the United States.
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The Local Banks, by States; 1845 to 1860.
THE banking capital of the country reached its lowest ebb in 1846, $196.8 millions. The bank note currency was at its lowest in 1843, $58.5 millions. It cannot be doubted, therefore, that the liquidation of this period went far below the normal line before the financial system of the country could be started again in its regular activity. From this time until the civil war the country depended entirely upon the local banks. After the re-enactment of the sub-treasury system, in 1846, the federal government went its own way, using specie in all its transactions, and giving up all responsibility for the currency used by the people. No solution of all the great currency controversies of the last fifteen years had been reached, but this state of things was brought about by a deadlock between all the factions which had been developed by those controversies. No one of them could carry its point. In general, it may be said of all the banks in this next period, that they had developed to a new stage, as compared with anything in the previous history. They ceased almost entirely to be political. This was in part a consequence of their great number and of the smallness of each. They constituted, of course, a strong interest in each State whenever they were united; but in federal affairs they were not influential. They also ceased to be mysterious. In spite of their opposition, it may be said that they had, in this period, been brought to submit to the visitorial power of the State and to make public statements of their affairs. Their relative importance in the community also fell very much at the middle of the century. Other financial institutions were developed by the side of them, and great corporations were formed for other purposes, which grew so great as to overshadow the banks. In the earlier part of the century, they had been the only possessors of corporate power. In the older parts of the country also the accumulation of capital had now become so great that the old banking system of paper-money-mongering was out of date. Not that that system was given up by any means by the banks in the country towns. The banker’s art consisted still, to a great extent, in getting a “good circulation” for his notes, and knowing when to put them out and when to take them in; but, at least in the largest centers, the accumulation of capital was such as to feed the deposits and give the banker an opportunity for a higher art of banking. In such places the circulation sank in importance. The check began to supersede the bank note, and the predominance of the currency over the affairs of men began to decline.
The effects of the financial catastrophe through which the country had passed in the previous period were seen in legislation for perhaps a decade, but then they were gradually forgotten. The literature of this subject for fifty years had repeated the same inferences, lessons, and warning; but all the doctrines of currency have to be learned over again apparently every ten or fifteen years, if indeed they are ever learned at all. From the landing of the first settlers at Massachusetts Bay until to-day, the country has never enjoyed ten years of peace, rest, and security, with an established and satisfactory system of currency. In 1852, there were no banks in Florida, Texas, Arkansas, Illinois, Wisconsin, Iowa, Minnesota, Oregon, California, and the District of Columbia.* This was, however, no security. The States could not escape from a repetition of the woes they had endured by simply renouncing banks. Iowa was flooded with notes from New England. The Governor of Arkansas, in 1854, complained bitterly that that State was full of foreign notes and counterfeits, especially small notes, although it had no bank and was determined not to have any, and had legislated vigorously against small notes and change tickets. The coinage laws were such, until 1853, that fractional coins of the federal coinage could not be kept in circulation with bank notes redeemable in gold. There was, therefore, a constant stimulus to the issue of fractional notes, and the people were led to acquiesce in it, and to use those notes, however great might be their dislike to them, because there seemed to be an absolute need which must be satisfied in some way.
The States which had no banks, therefore, generally had a worse currency than those which had banks, with the additional disadvantage that they could not control it.
Some concensus of opinion had also been reached in regard to correct methods of banking. Many of the old errors and abuses were no longer practised or practicable. When it came to details, however, the maxims which were advocated were very heterogeneous, and the laws which were passed in the different States were often very contradictory. Perhaps sufficient attention was not paid to the great variety of the cases which must occur in banking; to the flexibility of the banking system; to the elasticity of a great many of its terms. Although we speak of banks as a single and simple category, yet we know that banks are a group of very heterogeneous institutions. A bank in a great metropolis, dealing with merchants; another in a manufacturing town; another in an agricultural village; others in the region of the great staples, cotton and grain; and another on the Pacific coast will have such different classes of business that they must have varieties of system and different methods and processes, so that the maxims of wisdom for them all cannot be the same. If legislation, therefore, attempts to lay down maxims of business, it is very sure to do mischief.
During this period the general tendency was to supersede charters by general banking laws, and the free banking law of New York served as a model. It made its way against a great deal of opposition. It is difficult to see in the history of the chartered banks what could have been the ground of a certain feeling which existed that a “chartered institution” presented great safeguards. In Massachusetts, although a free banking law was passed in 1851, no bank had been organized under it in 1855. In the Western States, as we shall see presently, it was proved that the system, when abused, is capable of the very worst results. Half or more of the States, however, had adopted it before the civil war.
Massachusetts.—The Suffolk Bank system maintained itself in New England with great success. In 1850, the average daily redemptions were about $750,000, and the business was very remunerative. The Governors of Maine, in their messages, often found occasion to refer to the system, which they almost always did with approval. There was a certain coercion about the system which drove all the banks into it, because, as was proved in Maine, the notes of a bank fell to a discount, even when it paid specie at its counter and was well managed, if it was not in the system. The Bank Commissioners argued, in 1842, that currency which was not available at the great center of business of New England was not cash, and they raised the question whether the three banks which did not redeem at Boston were not under a moral obligation to do so.
A case is given of a bank in Bangor which, in 1853, secured the passage of a law granting a bank a delay in the redemption of notes presented at its counter. When the Suffolk Bank made demands, this bank used the delay by means of its agent in Boston to draw specie from the Suffolk Bank with which to meet the demand.* We also hear of the operation of the system in Vermont, where there was not much resistance to it and where all the indications are that its influence was good. The Commissioner reported, in 1853, the case of the South Royalton Bank, which was in failing circumstances, and which, when the agent of the Suffolk Bank presented $27,000 for redemption, caused the notes to be attached, and commenced a suit against the Suffolk for an attempt at malicious injury. The suit was decided in favor of the Boston bank. A messenger of the Suffolk went to the Newmarket bank, New Hampshire, in 1860, to present notes for redemption to the amount of $20,000. They were paid promptly, but $5,000 was at once attached in a suit for illegal annoyance.†
The statements of the Connecticut Commissioners also are always favorable. It is stated by them, in 1849, that the total bank note currency of that State was redeemed at the Suffolk every sixty days. There was a constant tendency, however, during the period now before us, for the Connecticut banks to turn to New York as their center, because the business of the State was being drawn thither.
In 1854, the redemption business of the Suffolk Bank had grown so large that it employed seventy clerks and it was scarcely possible to maintain accountability. A fund was created on behalf of the clerks, to which losses in the department were charged. It was credited with $5,000 annually, and the interest of the surplus over losses was to be divided amongst the clerks. The losses, however, exceeded the fund.
The Suffolk system, however, always produced irritation in the country banks. In 1855 they obtained a charter for the Bank of Mutual Redemption, which was a co-operative association of themselves. It went into operation in 1858. The Suffolk published a notice that it would not continue the system of redemption after November 30th. After some friction with the new bank, however, the business of redemption was divided between them. The reason given by the Suffolk for its position was that it would not consent to relax the stringency of the system in respect to “its main feature, the right to send home bills for specie.” “It was the underlying principle of the Suffolk Bank system that any bank issuing circulation should keep itself at all times in a condition to be able to redeem it; that it should measure the amount by its ability so to do; and that the exercise at any time of the right to demand specie of a bank for its bills was something of which the issuing bank had no right to complain.”‡
The Bank of Mutual Redemption certainly did not go on with its business on such conservative principles as the Suffolk. It violated the law by pledging its bills for loans, the notes not to be put in circulation for a specified time. It also did not keep the specie reserve required by law. The Bank Commissioners, in 1862, were forced to institute suits against it, in which the decision on all the important points was against the bank.
In discussing the point at issue about such pledges for loans, the Commissioners quoted the Superintendent of the clearing house at New York, that the action of the clearing house on the city banks had proved the positive principle of the “restriction of loans by the necessity of maintaining a certain average of coin from resources within the banks;” that is to say, that the prescription of the ratio of specie which the bank must maintain would limit its loans and control its business.
It will not have escaped the notice of the reader that the Suffolk system was established in Massachusetts only after several earlier attempts had failed; that it went through many vicissitudes; that it was sustained by the fact that Boston was the great emporium of the section in which the system was operated; that other attempts to set up the same system met with but slight success;* and that perhaps it must be regarded as having failed at Boston; at least that when it was superseded by the national bank system, it was in a condition of partial disruption.
The Legislature, May 18, 1852, appropriated the sum of $2,500 annually for five years, in aid of the efforts of any association for the suppression of counterfeit notes. This led to the formation of such an association in the following February. It offered prizes for the invention of paper, ink, etc., which would make counterfeiting impossible, and exerted itself in the prosecution of counterfeiters.
The Boston clearing house began operations March 29, 1856.
One of the tentative steps towards the invention of clearing-house certificates was the agreement of the banks in the Boston clearing house, in the crisis of 1857, that the notes of the banks, in a determined proportion to their capitals, should be received instead of specie in the settlement of balances.† It was said that the New England Banks had, at that time, sent their circulation to the West, to such an amount that they would have been ruined by its return, but for the united protection and defense of the Suffolk system.‡
A revision of the banking law, in 1857, provided heavy penalties for passing bogus bank notes, including uncurrent and worthless bank notes. The humble individual must therefore take the notes up to the moment of failure, and must not pass them after that moment, under penalty of the House of Correction.
In the following year the unceasing currency problem was taken in hand again, and it was enacted that every bank must hold fifteen per cent. of its circulation and deposits in specie, redemption balances being credited as specie in hand, and circulation was limited to capital. In 1863, Amasa Walker declared: “I know that the banks of Massachusetts are almost entirely regardless of the law which requires them to keep fifteen per cent. in specie.”*
In a banking law of Maine, of 1845, one-half of the capital was taken as a measure of what might be considered the permanent circulation of a bank, which would not be presented for redemption, and banks were required to hold in specie one-third of any issue beyond this amount.
The charters of all the banks in Maine expired by law, October 1, 1857. Sixty-five enumerated banks were re-chartered, April 14, 1857, for ten years, subject to a tax for schools of one per cent. per annum on their capital. The relation of specie reserve to circulation was kept as in the law of 1845. The reserve in the Suffolk Bank, not exceeding $3,000, might be counted as in the vault, but at least five per cent. of the capital must be actually on hand in specie.
The Bank Commissioners, in 1862, stated that the banks found that their redemption in Boston was not nearly so prompt as in former days. The only explanation the Commissioners could give was that, in the unsettled state of public affairs, the people had more confidence in the local currency than in any other paper currency.
Connecticut.—Under the system of deposit-stock, the civil list fund of the State, amounting, in 1852, to $406,000, was deposited in banks; likewise $359,900 belonging to the school fund. The income for that year was at the rate of eight and fifteen-sixteenths per cent.
When the national bank system was established the question of the status of these “qualified” shares became serious. The Supreme Court of the State decided that a bank which had surrendered its State charter, as a preliminary to becoming a national bank, must pay the State a share in its surplus, as it would do if winding up. Another bank, which had somewhat hastily included the State in its articles of organization as a national bank, was held to have waived its chance to exclude the State, and it was obliged to retain the State in the national bank.† In general the transition to the national system put an end to this old Connecticut arrangement.
A general banking law was passed in this State in 1852, after a hard struggle of two years’ duration. A special stress was laid upon the provision that every bank must be one of discount and deposit, and not simply of circulation. This law, however, was so modified in 1855 as to be in effect repealed, by converting all the free banks into joint-stock banks under a general law. The notes were to be surrendered and the securities taken up. Circulation was limited under the new law to one hundred and fifty per cent. of the capital. In case of failure, the note-holders “shall have a lien on all the estate of said corporation of every description.” No more banks might be formed under the law of 1852. June 26th, all the banks under the law of 1852 were compelled to accept subscriptions of charitable and educational societies, according to the Connecticut custom.
The crisis of 1857 played havoc with the small banks of Connecticut, especially with the newly established free banks. The failure of this system in Connecticut and New Jersey, adjacent to the commercial metropolis, is a noteworthy phenomenon. In the following year the ratio of circulation to capital was reduced to seventy-five per cent. One-tenth of the circulation and deposits must be held in specie, but a deposit for redemption might be counted as a part of this requirement, provided that the actual specie reserve should be one-tenth of the circulation. It was also forbidden to pay interest on deposits.
The Bank Commissioners reported, in 1860, that the banks were obeying the law. “Numbers of them have heretofore been reported for violations of law, some of which were of a flagrant character.”
During the summer of 1861, the circulation of the banks of Connecticut was reduced to a very low figure, but upon the collapse of the western currency it was increased for use in the western States, and reached a greater amount than at any time since 1857.*
One of the greatest difficulties with which the New England States had to contend, in respect to banking, was the repetition of the old fraud by which a “speculator” from one of the great cities bought up the charter of a remote and obscure country bank, in order to make an issue of notes which could be used either directly or indirectly in the furtherance of his schemes. Several such cases occurred in Connecticut between 1850 and 1860. They quite altered the aspect of banking in that State, where there had not been a failure of a bank since the Eagle Bank failure in 1825.
New York.—Upon the recommendation of the Comptroller, in 1845, the State issued bonds to pay the creditors of the banks in the safety fund system which had become insolvent, in order to relieve “the safety fund system from the odium of bankruptcy under which it has been suffering since 1842. The sound banks have been great losers by the swindling operations of some of their associate banks, and already the sum of $1,502,170 of the common fund of all the banks has been paid on account of the redemption of circulating notes of nine banks which have failed.”
In his report for January, 1846, the Comptroller gave a history of the safety fund and free banking systems. “The loss to bill-holders, on the supposition that all the securities had been stocks of this State and bonds and mortgages, would have been over sixteen per cent., while the actual loss has been nearly thirty-nine per cent. The loss to the first holders of the safety fund notes was from twenty to twenty-five per cent., and there has been a loss of about four years’ interest to subsequent purchasers; whereas, in the cases of the free banks the securities were sold and the proceeds paid to bill-holders, within a few weeks after the failure of the bank. If the bank fund of 1829 had provided only for the redemption of circulating notes, as is the case with the act for free banking, all the notes of the safety fund banks which have failed would have been paid at par by the contributions made to the safety fund from 1831 to 1845; and if the present plan of registering notes had also been in operation, the result would have been still more favorable, as fraudulent issues have been redeemed from the safety fund to the amount of $700,000.”*
In the Constitution of 1846 it was enacted that no banking association might be created except under a general law. “The Legislature shall have no power to pass any law sanctioning in any manner, directly or indirectly, the suspension of specie payments, by any person, association, or corporation, issuing bank notes of any description.” All circulating notes must be registered and secured. Stockholders in any association issuing circulating notes were to be “individually responsible to the amount of their respective share or shares for all its debts and liabilities of every kind contracted after January 1, 1850.” Note-holders were to have preference over all other creditors.
The amount of circulation of the free banks still exceeded the value of the securities deposited, in 1847, by $127,077, although the securities were so rapidly appreciating that the margin was vanishing.
The abuse of shaving one-half of one per cent., by putting a bank away in some obscure village in the country, having been invented, was continued. The Comptroller, in 1847, complained of it, and gave a number of cases. Consequently the act of April 12, 1848, was passed, by which it was enacted that the business must be done at the domicile of the bank, and that every return must bear an oath that this act had been complied with. The same act provided that only the stocks of the State of New York bearing six per cent, interest might be deposited in the Banking Department, never being taken above par or above the market.
The act of 1837, fixing the limit of circulation for the safety fund banks, was modified, in 1848, so that those which had more than $200,000 might have a circulation equal to their capital. The Comptroller urged that the two systems, the safety fund and the free banking system, ought to be reduced to one by a choice between them. The amount of State bonds which had been issued in loans to the safety fund was $900,828. The average rate at which bank notes of suspended bond-deposit banks were redeemed, down to 1848, was 67.71 per cent.
The law of April 5, 1849, was an elaborate act to put in force the new constitutional provisions. It became the constitution of the banking system of the State, until the national bank system came in. The safety fund banks were allowed to go over into the free bank system. United States stocks might be deposited as security in the ratio of one-half. The liability of a stockholder was fixed at double the amount of his stock. The receiver or a broken bank was to make a dividend on what he had realized at the end of six months, and then to proceed against the stockholders, under this liability, for a deficiency in the amount requisite to redeem the circulation. It was also enacted that all banks and bankers under this law should be institutions of discount and deposit as well as of circulation; but as no penalty was prescribed, the Comptroller, in 1850, reported that this provision had been evaded.
“It was not until 1849 that the general bank law became a fixed fact in the minds of the capitalists of this State.” Until that time they tried to use it to create unsound institutions, or banks of mere circulation. In 1851, it was required that country circulation should be redeemed at New York, Albany or Troy, at one-fourth of one per cent. discount. “This act literally closed the door to illegitimate banking in this State.”*
In 1851 two Wall Street banks had their nominal place of issue at Tom’s River, New Jersey. Besides the two banks, the village consisted of four stores and a public house. The landlord of the public house was president of one bank, and the keeper of one of the stores president of the other. It took three days to go there, present demands, and return to New York. The New Jersey law allowed a bank three days’ grace. The bank could therefore send to New York for specie after the demand was made.†
In 1851, it was found that the duties of the Comptroller were too numerous and various, and the Banking Department was organized independently under a Superintendent.
The Metropolitan Bank was started in 1851, in order to introduce the Suffolk system, the old troubles with the country notes being still experienced. The circular of the Metropolitan Bank set forth that it would receive all New York State country bank notes, crediting them on the following day at one-fourth of one per cent. discount, and all New England notes, good at the Suffolk, at one-fifteenth of one per cent. discount, provided that the par-redeeming banks should keep a deposit of not less than $5,000 each, paying seven per cent. on any over-draft with respect to that sum, and the Metropolitan paying four per cent. for any excess beyond it.‡
An attempt was made in 1855 to establish a co-operative system amongst the New York country banks for the redemption of their notes, but it failed. They did not propose to put the currency at par, but to keep it at the legal limit of one-fourth of one per cent. discount.§
In the New York system of redemption, the legal limit of one-quarter of one per cent. was not taken as a maximum of toleration, but as a standard of perfection, although there were some country banks which established a par redemption for their notes. The difference between par redemption and discount redemption was thus stated by the Supreme Court of Pennsylvania: “In the one case the notes are redeemed for the benefit of the holder without profit to the bank; in the other, at the cost of the holder for the benefit of the bank.”* The money of account of New York was one-quarter of one per cent. below that of New England.
The New York clearing house began operations October 11, 1853, in the basement of 14 Wall street. Its first effect was to force some contraction of bank loans. The same effect was produced by the requirement by law of weekly bank statements, which went into effect August 1st. Both had the obvious effect of forcing the banks to higher and more uninterrupted degrees of banking soundness and security.
Individual bankers doing business under the general banking law were forbidden, by a law of 1854, to sell the business. They were required, upon discontinuing, to pay back the notes and take up the securities.
The Superintendent, in that year, said that it was not believed that the mortgages in the guarantee fund of the free banks had brought more than seventy-five per cent. of their face value, when it had been necessary to sell them. He inferred that, for this reason, and also because they were not capable of prompt realization, mortgages were not properly available as security for currency. A year later he said that there had been only a single instance in which the circulation of a failing bank had been redeemed in full at par, when the circulation was secured by bonds and mortgages, and not any, when it was secured by the stocks of other States than New York. The use of mortgages as a basis of circulation was abolished April 29, 1863.
Any bank was required, by a law of April 30, 1857, if it held more than $10,000 in the notes of another bank, to present them as often as once a week, in the exercise of its right to demand redemption. Each bank must also elect, and make known its choice, whether it would take the redemption of its neighbor’s notes at the counter or at the redemption agent’s. This law was complained of as giving banks days of grace. Its constitutionality was disputed, as it was signed more than ten days after the Legislature adjourned.
From 1844, the railroads were constantly in the market, borrowing. Money could hardly ever be had outside the banks for six per cent.†
The discovery of gold in California and Australia at the middle of the century produced the same effect on the whole civilized world which is produced locally by an issue of irredeemable paper money, with the difference that it was limited in its amount, and in the rate of its introduction into the circulatory system, by the difficulty of production, and also that, having once been introduced, it was not again withdrawn. The trade to California was exceedingly speculative. A cargo might arrive when the market was bare, or it might arrive with a number of others. The increase of price fell first upon the things which the miners wanted. The new gold passed, in the first place, into the hands of the mercnants dealing in these goods. From them it passed to the producers of the same. From them to those who supplied their wants, in this case the European producers of articles of luxurious consumption; and so on in ever widening circles, the influence being less as the distance was greater. At every step it might be accumulated and serve to transfer capital into investments, such as mills, factories, and railroads, every one of which felt the stimulus of a rise in prices promising gain. The rise in prices became marked in 1853. In the first years of the sixth decade the harvests in England were good and the rate of discount low. Then followed the Crimean war and a bad crop in 1853, the result of which was a speculation here in wheat, and extensive railroad building in the West.
The market report in August, 1852, was: “Capital is accumulating rapidly in the large cities and is met by a large demand in behalf of various improvements, public and private, and for business purposes. Enterprise is now under full headway. Every portion of the country is teeming with new undertakings requiring a heavy outlay of capital and labor, and indicating rapid strides in wealth and prosperity.”*
The amount of American stocks held in Europe was estimated in that year at $261 millions.† This investment of European capital increased very rapidly during the following years.
The railroad construction in the Ohio States was checked for a time by the Schuyler frauds which were discovered in July, 1854. The president of the New York and New Haven Railroad was likewise transfer agent, whereby he was enabled to issue spurious stock to the amount of $2 millions. The genuine stock was only three millions, and the total cost of the road only about five. Frauds were also discovered in the Harlem and Vermont Central, consisting likewise in over-issues. These occurrences were well calculated to produce a panic in railroad shares, and to restrict the new enterprises which relied on an active demand for their shares.
The financial troubles of the summer of 1854 were spoken of as the most serious since 1837. “The abstraction of capital to a large extent for the construction of long lines of railroad in Ohio, Indiana, Illinois and other States has hampered this market for a year past. Such has been the pressing demand for capital for these new concerns that railroad paper has been amongst the heaviest in the market. Some companies have paid as high as one and a half or two per cent. per month for a series of months, and that too on large sums.”‡ A very great reduction in bank circulation took place, especially in the Ohio States, Kentucky, Maryland and South Carolina.§
In the United States the money market and share market were feverish and unsettled from the panic of 1854 until that of 1857. There is no real interval between the two.
It does not appear that there was any bank inflation on the new gold. From 1855 to 1856 the circulation decreased as well as the deposits, while the specie and specie funds also underwent a slight decrease. The New York City banks generally had more specie than circulation, while there were on all sides the greatest evidences of prosperity. It is true that the number of banks in the city increased from twenty-five in 1849 to fifty-two in 1853, and that the number did not go above fifty-five before the war. The capital also increased from $25 millions in 1849 to $44 millions in 1853, and $59 millions in 1857; but it went on steadily increasing to $69 millions in 1860. The deposits also, which were $36.9 millions in 1851, steadily and rapidly increased to $70.6 millions in March, 1857; but in June, 1858, they were $74.8 millions and kept on increasing until, in December, 1861, they were $91.4 millions. There was, therefore, no bank inflation at New York in the special period preceding the crisis of 1857. The justest view of the case is that there had been an expansion of prosperity and enterprise, stimulated by the new gold, which had gone on with such rapidity that a crisis was produced in its development. Comparing 1857 with 1849, the imports had increased one hundred and thirty-three per cent.; the bank capital, one hundred and sixty per cent.; the bank loans, one hundred and forty per cent., and the bank deposits two hundred per cent.* The leading features of this crisis were that it was world-wide, very sharp and sudden, and quickly over. The crisis was a very severe one, but it was only a halt in a course of rapidly advancing prosperity. It may be added that it was also especially a banking crisis.
A definite discrimination is intended here between the terms crisis and panic. When certain forces have been set in operation in the commercial organization by antecedent acts or occurrences, their consequences must follow. They may combine in such a way, or advance to such a pitch, that a “crisis” is produced. A “panic” is properly psychological. It is a wave of emotion, apprehension, alarm; it is more or less irrational; it is superinduced upon the crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy. It is not possible to preach down a crisis. It is a fact and is there; it must run its course and be accounted with for all there is in it. The soberest man appreciates the facts the best. It is useless to preach “confidence” to him in the face of the facts which infuse suspicion and warning. A panic can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts. The one thing, however, which kills a financial panic is a prompt and fearless offer by the banks to grant loans to all solvent customers at a rate such as the market calls for. A man who is told that he can have no help on any terms falls into a panic, seeing no escape from failure; one who is told that he can have a loan, if he cannot get along without it, but at some enormous rate, recovers from panic and goes home to see if he cannot manage some other way rather than pay such a rate. Banks, however, in order to be able to apply this remedy, must be strong and suffer from no panic themselves.
It was expected in the spring of 1857 that the crop in England would be poor, and a speculation began for a rise in grain. It turned out, however, that the crops were all good, and the price fell. The mercantile failures were numerous, even in the first months of the year, but a commercial crisis was so little expected that the discount rate was lowered in July. It was this failure to foresee the crisis and to prepare for it which allowed it to get such headway that it became necessary to suspend the bank act and issue uncovered notes.
There were a few failures here at the beginning of August. August 24th, the Ohio Life and Trust Company failed, and a few days later the Mechanics’ Banking Association at New York. The Pennsylvania and Maryland banks suspended immediately afterwards. A panic, however, did not at once develop.
The Ohio Life and Trust Company had been in excellent credit. McCulloch says that its failure was like a thunderbolt from a clear sky, and that its New York agents had speculated with its funds and ruined it, while the directors in Cincinnati thought it absolutely sound. The real trouble with it, however, and with the other banks also, was that they had advanced funds for railroad building, which at the time was particularly active in the Ohio States. This passive debt of the Ohio Company was stated at $5 millions. Towards the end of September, the pressure upon the country banks in New York to redeem their notes was very great, and they began to return their circulation and take up their bonds in order to execute their redemptions. If notes of any bank were presented at the redemption agencies at the Metropolitan and American Exchange Banks when there were not funds, those notes were immediately thrown out and the bank was posted in all the newspapers of the State as having failed.
“The suspension was preceded by a desperate struggle between all the banks themselves, and distrust and fear of currency was more apparent among them than with the public generally.” The banks began a savage contraction, being in no position whatever to meet the crisis by bold loans to solvent borrowers. It was afterwards said, with great good reason, that the panic was entirely unnecessary and need not have occurred;* but the banks put all the pressure on their loans to merchants because they could not recall those to the railroads. The loans were $95 millions January 5, 1856; $122 millions August 8, 1857; but were reduced to $101 millions on the 10th of October. At that time the rate for loans had advanced so far that it could not be quoted. Loans were not to be had, and during the following week the bank loans were reduced to $67 millions, with a run on the banks for gold, which carried the specie stock down from $13.5 millions, on the 19th of September, to $7.8 millions on the 17th of October; but this was comparatively unimportant. The circulation of the city banks fluctuated hardly $1.5 millions. The merchants organized a run on the banks for the deposits. “In New York City it became a question of the suspension of the banks or of the merchants as a body. Capital in the shape of deposits, for the first time in the history of this country, and I think I may say in the world, sided with the business men and against the banks. The great concentrated call loan was demanded, and in such amounts that a single day’s struggle ended the battle; and the banks went down before a storm they could not postpone or resist. * * * The most sagacious banker, in his most apprehensive mood, never for a moment deemed it possible to have a general suspension in this State from a home demand for coin; while coin itself was at little or no premium with the brokers.”*
The banks of New York City all suspended but one—the Chemical. The suspension became general except in the Ohio Valley, at New Orleans, in South Carolina, and some scattered exceptions elsewhere. Fourteen railroad companies, amongst which were some of those which are now the strongest in the world, suspended payments. The failures were put at 5,123, with liabilities for $299.8 millions. A meeting of representatives of the banks was held October 13th, at which it was resolved to send a committee to Albany to ask the Governor to call an extra session of the Legislature “to consider the necessity of enacting some law to give relief in the present financial emergency.” The Governor excused himself from action. The Constitution, in fact, explicitly forbade anything which the Legislature might have proposed to do. Resort to the judiciary was more successful.
During the run, October 14th, two one-hundred dollar notes were presented at the Bank of New York, with a demand for specie, which was refused. Application was made to a Judge of the Supreme Court for an injunction, which was refused, on the ground that, although, during a period of general suspension, a bank may refuse to redeem its notes, yet that does not prove that it is insolvent, since it may have assets greatly in excess of its liabilities. This was in accordance with an agreement which the Judges had entered into, and it was in line with earlier decisions interpreting State laws which provided for an injunction when note redemption was refused.† Nevertheless, it was nothing less that a coup d’etat. The Constitution had explicitly provided against any suspension of specie payments, on any pretext whatever, and this constitutional provision now proved as ineffective as all the old legislative enactments. The situation was somewhat paradoxical. It had been hoped that the severe constitutional prohibition would prevent the banks from ever putting themselves in a position to suspend. They had come into that position. It was said that the terror of forfeiture was what made them adopt their policy of self-protection, to the ruin of the mercantile world, although the construction of the bankers was that the public was in a panic lest the banks should all be wound up in case they suspended.‡ This was the knot which the Judges cut, and everybody was forced to acquiesce in their action. It was a most conspicuous failure of legal regulation of banks, and illustrated that dilemma of legislation in which a restriction to be effective must be intensely severe, and if it is intensely severe, proves impracticable when it is needed.
During this crisis the banks of New York City enclosed the country bank notes, of which they held about $7 millions, in packages of $5,000 each, and passed these packages to each other in the settlement of balances. This was another of the tentative steps towards the later device of clearing-house certificates. The country banks were called upon to redeem these notes November 7th.
The New York City banks resumed in the middle of December. It is said that they had never refused to redeem their notes. The other banks of the North and East generally followed them. The Pennsylvania banks did not resume until April following, and those of the West and South delayed much longer.
This crisis well illustrated the most subtle difficulty there is in the analysis of commercial crises. The rate of interest properly is governed by the supply and demand of loanable capital. At some point, which cannot be determined by analysis, in a time of crisis, that rate comes to be a rate for the money of account, whatever it may be, and it comes to depend on the supply and demand of that money. It is generally said that this results from a failure of credit; and that is true; if by credit is meant the holding open of credits for some time, until other credits on the other side are presented to cancel them. In the crisis this arrangement is suspended for various reasons. There is need and desire to touch cash. This is greatly increased by the panic element, if that comes in. A double operation is therefore performed, both parts of which are harmful. There is a holding of the currency, which is the solvent of debts, just at the time that there is a call for a greater supply than is required in ordinary times. In 1857 there was no stringency in the capital market antecedent to the crisis. The rate for capital was not high. The same was true of England. Confining our attention to New York, we note that there, as this crisis advanced, on account of the attitude adopted by the banks, the rate for current cash advanced until it could not be quoted. There was none to be had in the market.*
One safety fund bank failed before 1857 when there was nothing in the fund with which to redeem its notes, and three more during the crisis.†
The circulation in the State was 50.67 per cent. of the bank capital in 1850. The ratio steadily declined until 1858, when it was 22.02 per cent. In 1859 it was 24.18 per cent. The Superintendent argued from this that the note issue was declining in importance.‡
The New York Clearing House Association recommended its members, in March, 1858, to hold a reserve of twenty per cent. on cash liabilities, exclusive of circulation.§
The banks of New York State succeeded at last in establishing an “Assorting House” at Albany, by agreement, on the 5th of April, 1858. All the notes were to be redeemed at one-fourth of one per cent. discount and paid on the following day at Albany, Troy, or New York.*
In January, 1862, the Canal Department of New York had $2.5 millions on deposit in banks. Of this amount nearly $0.5 million was unavailable, of which $130,000 was represented as hopeless.†
When the last safety fund charter had expired, in 1866, there remained $129,499 of circulation of the last four banks which had failed still outstanding. After paying the last of the State bonds issued to meet the responsibilities of the fund, there was sufficient in the fund to pay forty per cent. of those notes. So few of them were presented, however, that the remaining sixty per cent. was paid on those which were presented. A final residuum of $13,144 was paid into the State Treasury.‡
The New Jersey Constitution of 1844 required a three-fifths vote in each House for granting or renewing bank charters, which were also to be limited to twenty years’ duration.
In 1855, the bank circulation was made a preferred debt, for which, according to each charter, all the assets were pledged; also each stockholder was liable for double his stock, and the directors were individually liable without limit. It was reported, in 1857, that all the banks under the General Banking Law of February 27, 1850, were trying to get special charters. The free bank system had fallen into disfavor in New Jersey, and was being abandoned.
March 7, 1866, the Comptroller reported that thirteen banks, organized under the General Banking Law, were winding up; six banks, having obtained charters, were winding up business under the General Banking Law; seven were being settled by decrees from the Court of Chancery.
Pennsylvania.—A general act for the regulation of banks was adopted April 16, 1850. It was a codification of the old rules of banking without a safety fund or stock deposit. It provided for a Suffolk system, with centers at Philadelphia and Pittsburgh, and contained a very stringent and comprehensive section against the circulation in Pennsylvania of notes for less than $5 issued by anybody outside of that State.
A great number of suits were brought against the Pennsylvania and Pennsylvania and Ohio Railroad Companies, in 1854, for passing foreign bank notes under five dollars. These suits were sustained by private individuals, and penalties to the amount of $30,000 were recovered. The Legislature passed an act to unite the suits into one for each company, on which the penalty would be $500, but the Governor vetoed it. The companies then caused the prosecutors to be indicted for conspiracy, and they were convicted and imprisoned.§
The old Bank of Pennsylvania, founded in 1793, failed and went into bankruptcy in August, 1857. Its stock was very largely held by charitable companies and other associations of a like character, by trustees, guardians, and women. Charges of criminal conduct against the officers were, upon a trial, not sustained.
In 1858 the banks of Philadelphia tried to enforce a redemption of country notes; all notes of banks east of the Alleghanies being redeemed at the Farmers and Mechanics’ Bank at one-fourth of one per cent. discount. The banks, however, became restive under this arrangement in May, 1859, and it came to an end. In 1861 an attempt was made again to enforce it by law, reviving the old law which had been repealed by the relief legislation of 1857.*
The Philadelphia clearing house was established in February, 1858.
The South escaped from the crisis of 1857 comparatively unscathed. Business was said to be healthy in that section, and there had been little wild speculation. The worst effects of the panic were not felt there until after January 1, 1858. Virginia was to some extent excluded from this description.†
Virginia.—A great number of banks were chartered in Virginia in 1851, 1852, 1853, and 1856, with a system of stock deposit on the New York plan. March 18, 1856, a law was passed to sell all the State stock in banks. It was re-affirmed April 3, 1858, with the expression of a determination to separate bank and State. An attempt was made to obtain a more uniform currency, April 2, 1858, by a provision that the branches should redeem at the parent bank, and that the independent banks should have a redemption agency at Richmond. The banks were all required to resume on the 1st of May or pay one-half of one per cent. penalty on that day, and the same amount monthly, retrospectively from the 1st of January.
Governor Wise, in 1857, held that, by the experience of that State, it was demonstrated “that an issue of bank notes is a heavy burden to a State without a center of trade,” because all currency tends towards such centers. “This makes the issue of bank paper immensely costly to a purely agricultural people.”
Another large group of new banks were organized in 1860.
The banks of North Carolina appear to have been prosperous about 1850. The Bank of the State paid eight and one-half per cent. dividend in 1849, and the Bank of Cape Fear six per cent.
By a law of 1850-1, each bank with its branches was regarded as a unit against every other bank with its branches. If one makes demands on another, it may be paid in its own obligations or those of any of its parts. Any person presenting a demand for redemption may be required to state whether he is acting on behalf of any bank. If he refuses to answer, he may be refused. Payments under this act are to be made in the notes of the particular branch presenting a claim, so far as the paying bank has them. This law was, however, at once decided unconstitutional so far as it applied to the exchange of notes.*
In the following years a number of small banks were chartered, and the old large banks were re-chartered until 1880 or 1885.
February 16, 1855, an act was passed “to more effectually secure a compliance with the terms of their charters by the banks chartered at the present session of the General Assembly.” The president and cashier are required to file a certificate before the bank begins that the capital has been paid in in specie, subject to a fine of from $1,000 to $3,000 for neglect; and of from $1,000 to $3,000, with imprisonment for not more than three months, for certifying falsely.
There was strong rivalry between the Bank of the State and the Bank of Cape Fear. At the session of 1856-7, they both obtained new legislation for the extension of their charters, the State subscribing largely to an increase of capital in each. The former was allowed to issue down to $1; the latter down to $3. It appears, however, that the extension of the Bank of the State was not accomplished. At the session of 1858-9, its liquidation was provided for and a new “Bank of North Carolina” was chartered, on the old plan of the banks of the States. The literary and other funds of the State were to be placed in its capital. It contained no novelty except that, in case of suspension, besides twelve per cent. penalty to the note-holder, it was to pay the State a fine of four per cent. on its circulation at the last return, as long as the suspension lasted. By an act of November 20, 1860, all the banks were relieved of the penalties of suspension, but they must not curtail while suspended.
A “Real Estate Bank” was proposed, in 1866; the capital stock to be not less that $10 millions nor more than $20 millions.†
South Carolina.—In a speech on the bank question by William Gregg, in the Legislature of South Carolina, in December, 1857, we find an interesting description of the methods of banking in the South at that time. If he had a charter in South Carolina for a bank with a capital of half a million, he would first have $2 millions of bank notes printed; a large portion of them fives. “The next move would be to get them in circulation. I would get my neighbors to swap off enough of them for Charleston bills to bring me specie funds.‡ My next object would be to appoint agents in Lexington and Louisville, Ky., to supply horse dealers and get drafts on Charleston, then in Nashville, Memphis, and Huntsville, Tenn., New Orleans, Mobile, Montgomery,—in fact, in all the towns where money is paid for cotton. At these points my bills should be freely put out for drafts on New Orleans; when collected, to be invested in Northern exchange. When the Northern funds matured I would purchase through an agent the notes of all the men in South Carolina that I knew to be good, as well as those of Georgia and other States of similar character. I would shave as deep as possible and get, I suppose, in quiet times from ten per cent. to eighteen per cent.; in tight times, from fifteen per cent. to thirty per cent. During the dull months of the year, when my funds could not be so employed, I would loan to New York bankers on call at seven per cent. and take good stocks for collateral. The shaved notes I would call domestic exchange; my call loans, reserved specie funds. * * * My great object would be to deal in domestic exchange.” If a borrower could not draw on New York or Charleston, he would cause him to draw on himself, payable in Columbia, and discount the draft at six per cent., and a half per cent. exchange per month. If a crisis came, he would hold out until he was petitioned to suspend and “relieve the community.” “I would then close the vaults and refuse to pay the bank’s debts, in order to save the people from bankruptcy and ruin, which I had helped to bring upon them.”
The Governor of South Carolina, in 1849, recommended the winding up of the Bank of the State, on general grounds of the impolicy of bank currency and of the union of bank and State. He added:
“I also desire, in this place, to express my settled conviction, that the Bank of the State was founded on a false and pernicious principle; that to grant to the members of a community almost exclusively devoted to rural pursuits unusual facilities for commanding money, is to inflict on them and their posterity unmitigated evil; that the more numerous and difficult the obstacles in the way of receiving bank accommodations by that class the greater their contentment and the more certain their success in their vocation.”
The banks which suspended, 1857, had to pay monthly at the rate of five per cent. per annum on their circulation. The one which had to pay the most was the Bank of the State, owned entirely by the State, which thus paid a penalty to itself under its own laws. This the Charleston “Courier” thought was very absurd.*
The Comptroller, in 1860, blamed Alexander Hamilton for introducing the paper system. He thought that the banking system of that State was founded on a much more stable basis than the credit system of the North. Of the latter he said: “As soon as the Southern prop is removed, it is doomed inevitably to topple to the earth.” This is what comes of accustoming people to hear all the time what Hezekiah Niles used to call “high pressure” statements.
The Governor was ordered, by the act of September 15, 1868, to take all the assets of the Bank of the State of South Carolina, which had long been closed, and sell them and deposit the proceeds in the treasury. This act was held void, as impairing the obligation of contract. The State was a stockholder and had no right to sieze the assets, which must be held for the creditors.† In Dabney vs. the Bank of the State of South Carolina,‡ the Court quoted the report of an investigating committee of the Legislature in 1868; the bank “really and in fact had no independent existence from the State, but was really subject to and controlled by it. Truly, it had a legal entity for business purposes, but was really nothing more nor less than the State engaging in banking business.” It was held that the fire bonds were not a prior lien on the assets of the bank, but that these were distributable for all debts alike. The bank was held not to be liable for the fire loan bonds of the State, issued at the same time, for a part of the rebuilding fund; also, the holders of the notes of the bank held them at their face against the bank, no matter for what price they were bought. In the absence of a special contract, depositors of Confederate currency were held to be entitled only to what it was worth when deposited. “The moneyed relations between the State and the bank might well be said to have identified them.” The bank was in liquidation in 1871.*
Georgia.—We find laws of 1847 and 1854 to “commute,” as it was called—that is, to fund in bonds of not less than $500 each, the small bonds which were issued for the circulation of the Central Bank of Georgia.† This State also, in 1851, was once more legislating against issues by unauthorized persons or corporations, with heavy fines and imprisonment as a penalty. The Bank of the State, in 1850, with a capital of $1.5 millions, had a circulation of $1.8 millions; specie, $489,409; bills of exchange, $1.5 millions; discounts, $1.2 millions. In 1852, the banks were allowed to issue notes under $5 for twenty per cent. of their capital, instead of 5 per cent. as before. This State also multiplied banks between 1853 and 1856. In 1857, the act of 1840 to enforce specie payments was suspended for a year, in spite of the Governor’s veto. The banks must resume, however, at the time set, or pay ten per cent. damages and interest for non-redemption. If a note-holder sues the bank, it must redeem all the notes he has or forfeit its charter.
The Governor recommended, in 1859, that a suspension of specie payments by a bank should be made a misdemeanor on the part of the chief officers, and punished by penal servitude for between five and ten years. The Legislature was not prepared to go so far, but a very stringent law was passed without penal features, giving the note-holder summary remedies.
The tax collectors of Alabama appear to have been speculating on the depreciation of the currency, for an act was passed February 4, 1846, to prevent them from doing so.
It was enacted March 4, 1848, that no foreign corporation should do discount banking in Alabama, unless it did so by the use of gold and silver or of notes issued under the authority of the State. Notes discounted contrary to this law were to be void. The Southern Bank of Alabama was chartered February 12, 1850; capital, $834,000; two-fifths being reserved for the State, as the Constitution required; but it appears that there was no intention that the State should subscribe. On the same day a free banking law on the New York plan was adopted. The lowest note was set at $5, which was changed in 1852 to $2. At that time, also, the Southern Bank was authorized to make its circulation thrice its capital. Then also the Northern Bank of Alabama was chartered, like the Southern Bank. In 1854, the lowest denomination of note was set at $1, and the Central Bank of Alabama was chartered on the same plan as the two already existing. In 1856, the Commercial Bank of Alabama, another one on the same plan, was likewise chartered, over a veto. December 19, 1857, the suspension of specie payments by the Central and Commercial Banks was legalized, on condition that they should pay, January 1, 1858, as much as $50,000 of their notes in the State treasury, with interest at eight per cent. from that date; and on April 1st as much as $200,000. After January 1, 1859, they must issue no notes under $5. They must resume February 15, 1858, and by November 15, 1858, they must get and thereafter always keep on hand coin to the amount of one-third of their circulation. If they do not comply with these conditions, they shall forfeit their charters. The Governor shall cause the notes to be presented, and shall institute proceedings as provided by the charter. If they accept these conditions and give bonds to fulfill them, their notes shall be received by the State. The Eastern Bank of Alabama was chartered February 8, 1858, on the plan of the great banks already founded, and on the same day the capital of the Southern Bank was increased $500,000, of which half was a surplus on hand, distributed in a stock dividend. February 8, 1860, all the chartered banks were allowed to issue down to $1. Another large bank, the Bank of Alabama, was founded February 13, 1860, for the stockholders in the South and North Alabama Railroad.
The Northern Bank of Mississippi failed in 1857. It had no circulation in that State, but some in Arkansas and a great deal in Texas. The only bank then remaining in Mississippi was the Bank of Manchester at Yazoo City, which made no reply to the Treasury Department when it was requested to send in a report.*
A proposition for a free banking law in this State, in 1854, obtained no support.†
Louisiana.—An assessment of $6 per share was levied, in 1847, by the liquidator, for seventeen years, on the stock of the Planters’ Association, which tax was construed by the Court, in 1883,‡ as a contract on the part of the State that the stockholders should, by paying the same, be discharged of responsibility for the State stock issued for the bank. A law of 1878, levying $40 per share, was therefore declared null. In 1861 provision had been made for the State bonds issued for this bank which fell due that year. There was still $550,400 to be paid, but there were assets, $598,506.§ The last set of bonds were payable in 1866. The stockholders paid all but $13,000 of the $612,000 which the above assessment was expected to produce. The Court said that the State had “squandered” this sum “in riotous living.” The expenses of the liquidation had been enormous. The salaries and fees, from June, 1876, to January, 1882, amounted to $58,630. The legislation about this bank was said to cover 65 pages of the statute book.
Early in the fifties there began to be complaint at New Orleans that there was a deficiency of banking facilities, which was crippling the business of the place. This deficiency was attributed to the undue stringency of the existing Constitution and the banking law.* Apparently in response to this complaint, the Citizens’ Bank was revived, by law, in 1852, as a bank of discount and deposit. The Governor vetoed the bill on the ground that it was unconstitutional, but it was passed over the veto. Although the existing Constitution was only seven years old a new one was made in this year, as it appears, in a great measure, in order to relax the barriers against the banks. The provision in the new Constitution, however, was by no means lax. “The State shall not subscribe for the stock of, nor make a loan to, nor pledge its faith for, the benefit of any corporation or joint-stock company created or established for banking purposes.” It might aid companies for carrying out public works under certain conditions, but “no corporation or individual association, receiving the aid of the State, as herein provided, shall possess banking or discounting privileges.” “Corporations with banking or discounting privileges may be either created by special acts, or formed under general law; but the Legislature shall, in both cases, provide for the registry of all bills or notes issued or put in circulation as money; and shall require ample security for the redemption of the same in specie. The Legislature shall have no power to pass any law sanctioning in any manner, directly or indirectly, the suspension of specie payment by any person, association, or corporation issuing bank notes of any description.” In case of the insolvency of any bank, the note-holders were to have preference over all other creditors. By a special section, laws to revive the Citizens’ Bank were authorized and such acts already passed were validated.
The scheme of 1852, however, to resuscitate that bank proved impracticable. By another law, April 8, 1853, the holders of the mortgage shares were given a preference in subscribing a new cash capital of $1 million for a bank of discount and deposit.† The amount of State bonds issued for this bank and outstanding, January 1, 1874, was $4,018,626. October 8, 1880, the assets were $1.5 millions, consisting of $1 million in the banking department and $500,000 mortgage stock assets, the latter worth not over $300,000. In 1883 the cash stockholders paid in $350,000 more. The value of the banking department assets, in 1889, was $300,000.‡ In 1874 the charter was extended for twenty-seven years. In 1880 the Legislature authorized the bank to compromise and settle the liability of its stockholders on their mortgages. This act was construed by the courts as in the interest of the State, because it would have been ruinous to have enforced the legal obligation against property devastated by the civil war.* This bank has recently undergone a revival and is reported prosperous.
A free banking law was enacted in 1853, a distinguishing feature of which was that each bank must hold, in specie, one-third of its cash liabilities exclusive of the circulation secured by the bonds.
The charter of the Union Bank expired in 1857. It then became a free bank, and is now a national bank. The statement occurs in a memorial of Hope & Co. to the Legislature of Louisiana that the Union Bank paid all the bonds issued to it, and paid to the State besides $1.3 millions from its earnings.
In 1857, the banks of New Orleans were required by law to record daily statements of the “movement” and to return to the Board of Currency weekly averages of the same. Each of the banks revived in 1842 was already required to keep constantly on hand one-third of its cash liabilities in specie. It was now enacted that each president and director should be liable to a fine of $100 for every day that this requirement was not complied with.†
The banks which suspended in that year were the New Orleans, Union, Citizens’, and Mechanics and Traders’.‡ “The banks at New Orleans that successfully maintained specie payments are the Bank of Louisiana, the State Bank of Louisiana, the Canal Bank, and the Southern Bank; the latter the only one of the free banks which stood the storm, except the private bank of James Robb. Of the suspended banks the Citizens’ Bank, aided by the chartered banks, was first enabled to resume.”§
The Louisianians exulted in the results of their banking system as shown in the panic of 1857.∥ There was a great flood of currency pamphlets, etc., after that panic, in which all conceivable views of the ills and remedies were put forward. In most of them it appeared that the course of events at New Orleans had powerfully influenced the opinions of the disputants.
In 1860 the Bank of the State of Louisiana had the largest specie reserve held by any bank in the United States, $4,133,000. The Citizens’ came next with $3,232,000.¶
The banks of New Orleans, with one exception, the Southern Bank, suspended, at the request of the Governor, September 16, 1861, one year later than the other banks in the seceding States. The purpose of the suspension was to sustain the credit of the confederate notes. Those banks were the financial mainstay of the Confederacy. As such they fell under the blows of both sides and were reduced to ruin. Their rights and wrongs in that period and the vicissitudes through which they passed are too intricate to be unraveled here. They belong to political, not to financial, history.
The current cash or money of account at New Orleans, in 1863 and 1864, consisted of city notes. In some way the city obtained possession of some old notes of the United States Branch Bank at Pensacola, in sheets and unsigned. The city notes were printed on the back of these crosswise, so that when they were cut apart each of the city notes had on its back the halves of two of the old notes, of a different denomination. To supply the deficiency of small change, the city notes were cut in two, so that on one side would be half of a $1 note, and on the other side, crosswise, the half of a $5 or $10 note. The paper was very good and the engraved design of the old notes was good, while that of the city notes was bad. The notes were counterfeited by photography.*
Texas came into the Union with a Constitution which provided that “No corporate body shall hereafter be created, renewed, or extended, with banking or discounting privileges. No private corporation shall be created unless the bill creating it shall be passed by two-thirds of both Houses of the Legislature, and two-thirds of the Legislature shall have power to revoke and repeal all private corporations by making compensation for the franchise, and the State shall not be part owner of the stock or property belonging to any corporation. The Legislature shall prohibit by law individuals from issuing bills, checks, promissory notes, or other paper to circulate as money.”
The Commercial and Agricultural Bank of Galveston possessed an old charter, obtained in 1835, from the State of Coahuila and Texas. It was reorganized December 30, 1847, as the Bank of Agriculture and Commerce. The Attorney-General commenced proceedings against it to recover the penalties for an unauthorized note issue, but the suit failed on a demurrer.† It went into liquidation in 1858.
Tennessee.—The Farmers and Merchants’ Bank of Memphis suspended and was enjoined, May 24, 1847. It presented a long memorial to the Governor, setting forth that a new board of directors, by endeavoring to make much needed reforms, had provoked hostility and persecution, which had forced it to suspend. It was required to resume before the next meeting of the Legislature. It went into liquidation.
The Bank of the State of Tennessee was authorized, February 2, 1846, to reduce its capital $200,000. February 3, 1848, it was allowed to issue notes down to $1. February 9, 1850, it was authorized to sell the stock owned by the State in the Union Bank and the Planters’ Bank and held by it, and to buy State stocks with the proceeds. This transaction, however, did not take place. Year by year we find the existence of this bank put in question. The public men of the State doubted its usefulness, and even its officers either recommended its discontinuance, or gave it only a half-hearted defense.‡ Still it was continued, apparently chiefly for the reason that there was a prejudice in its favor as, in some way, the poor man’s friend.
The president and directors, in their report of 1856, recommended that the bank be put in liquidation, saying that it seemed to have been injudicious to charter it after the State had taken stock in the Union Bank and the Planters’ Bank. The Legislature, however, preferred the contrary course and transferred the State stock in the two latter banks to the Bank of the State, with authority to sell, and after the payment of the five per cent. bonds of the State, falling due in 1858, to apply the proceeds to the increase of its capital. The president and directors adhered, in 1857, to their former opinion that the State might better dissolve all connections with banks or internal improvement companies as soon as possible, although at present the aid of some banking institution seemed indispensable to sustain the credit of the State. They think that the Bank of the State is best adapted to this function if put on an equality with the stock banks of the State. They complain that the authority of the mother bank over the branches consists mainly in the annual election of their directors and in the preparation of currency for circulation. The officers have been frequently changed on account of political changes in the State. The suspended debt in 1855 was $700,000. It was then placed under the control of the principal bank. “The examination since made into the condition of the branches shows that the principal losses arose from that feature of the charter requiring loans to be made to the different counties in proportion to their voters.” If the proposed changes could be made in the charter, the bank might do all the banking business of the State and win all the profits of it for the State. It now has the exclusive right to issue notes under $5, but they think this might better be abrogated.
The tables which are added show that the annual profits of this bank in the early fifties averaged nearly a quarter of a million. The annual requirements addressed to it by the State amounted, by 1855, to $275,000, which was 8.6 per cent. on the capital it then had.
There was great jealousy and hostility at this time between the stock banks and the Bank of the State.
Governor Harris, in 1858, stated in his message that he had made a computation of simple interest on each of the items of the cash capital of the Bank of the State since it was paid in, and had compared this with the profits of the bank; the result being that it does not pay to borrow at six per cent., payable semi-annually at New York, with exchange at one per cent., in order to go into the business of banking.
In the preamble of certain resolutions adopted November 21, 1859, it is stated that “the question of what shall be done in relation to the banks is one of vital importance to all the great interests of the State; is the great question of the present Legislature,” etc.
The Bank of the State seems to have been reconstructed at this time. Its annual report for 1859 speaks of it as having gone into operation July 1, 1859. The old suspended debt is still nearly $100,000. The capital consists of $1 million in State bonds, $850,000 in school fund, $932,000 of surplus revenue, $664,000 of Union Bank stock, $232,000 of Planters’ Bank stock. The stock of the two banks has been sold for cash and the capital has been redistributed between the branches in order to be more profitably employed. The Planters’ Bank and Union Bank resumed July 1, 1858, but the Bank of the State would not, which exposed it to abuse, and the other banks refused to receive its notes; so that it was compelled to follow suit. Nevertheless rumors were afloat injurious to its credit and the other two banks made very heavy demands on it for redemption. The president and directors also complain that the bank and its branches can only pay out at their counters their own notes, but are compelled to receive in payment of debts the notes of each other. The mother bank receives the notes of its branches, but cannot pay them out and cannot recover its own. Its business has therefore been almost suspended for one month. The great trouble is that the mother bank has by law no control over its branches as respects their business. Notes under five dollars are being withdrawn as fast as they come in. After the 1st of January, 1860, no bank is to issue anything under ten, but it is believed that the small notes of the neighboring States will come in. The capital of the Bank of Tennessee, after twenty years’ existence, has yielded to the State a net profit of $4.7 millions. The bank had ten branches.
A general law regulating banks was passed February 6, 1860. No notes were to be issued which were not redeemable where they were issued or paid out, and none under five dollars. All the capital was to be paid in in coin and a coin reserve of one-fourth of the circulation was to be maintained. No charter was to last for more than fifteen years. This law was said to dismember the Bank of the State, on account of the provision that no notes might be issued which were not redeemable where issued. The Planters’ Bank and the Union Bank refused to obey the law and it proved ineffective.
The Bank of the State removed all its assets to the South early in the civil war. They never could be recovered. It was wound up by order of the Legislature in 1866. The notes were redeemed but no other debts were paid.
In Kentucky, at the session of 1860-1, a plan was proposed for a “Sinking Fund Bank,” very nearly on the plan of the old Bank of the Commonwealth. Among other peculiar provisions was one that it should keep an amount of specie equal to one-third of its circulation; but that, if it failed to do so, it might suspend.*
Ohio.—A bank of the State of Ohio was founded on a new plan, February 24, 1845. Any number of persons, not less than five, might engage in banking. A number of companies are mentioned as already existing, with an aggregate capital of $6,150,000, which are to be combined in it. The State is divided into twelve districts, with a specified number of banks and amount of capital in each. Five Bank Commissioners are named for one year, after which the Auditor, Treasurer and Secretary of State are to constitute the board of Bank Commissioners. Each company is to file a certificate with a statement of its name, capital, etc., and whether it proposes to be independent or a branch of the State Bank. The capital of the independent banks is to range between $50,000 and $500,000, and of branches between $100,000 and $500,000. The certificates of the funded debt of the United States or of Ohio are not to be counted in the capital, which must be paid up in specie, all the details of organization and payment of the capital being inspected by the Commissioners. When seven companies shall have proposed to become branches of the Bank of the State they shall each elect a member of the Board of Control of said bank. That Board shall elect the president. The seat of the Board of Control is to be at Columbus. They are to decide on the amount of circulation of each branch; to procure and furnish it; and to establish rules for settling the balances between the branches. They have visitorial power and their salaries and expenses are to be paid by the branches in the ratio of their capital, as also the expenses of preparing the notes. The Board of Control is made a body corporate until 1866. Each member of that Board is to have one vote, and one more for every $50,000 in circulation which his branch has. The notes issued by any branch must be paid by it in specie. Those branches which have not over $100,000 capital are not to issue in excess of twice the capital, and larger banks a smaller proportion. The Board of Control is to replace worn and defaced notes. Each branch is to give to the Board of Control, as a safety fund, ten per cent. of its circulation in money, or stocks of Ohio, or of the United States. This fund is to be invested in mortgages, and the interest on it is to go to the depositing branches. All the stockholders in any branch are to owe to it, in the aggregate, not more than one-third of its capital. Any branch which does not redeem its notes is to be considered insolvent, and the Board of Control shall, upon examination, appoint a receiver and put the money in some solvent branch, with which to pay the notes, all the solvent branches contributing to this expense. Any noteholder may, through the courts, compel the Board of Control to take this action against a delinquent branch. Each independent bank is to deposit with the State Treasurer bonds of the State, or of the United States, to the amount of its capital, and he is to give to it its circulating notes to an amount not exceeding the value of the bonds, nor three times the paid-up capital. He is to have the custody of the plates and paper, and to replace worn out notes, the cost being assessed on the banks, and each bank is to have the interest on its bonds as long as it pays specie; but if, in New York for four weeks, the bonds fall below the value at which they were deposited, the interest is to be retained to make good the deficiency. Any insolvent bank is to be wound up by a receiver and the securities sold to pay the notes. All the stockholders of a bank may not be liable to it, in the aggregate, for more than three-fifths of its capital. The Bank Commissioners are to appoint an agent annually to examine the banks. No bank may lend on its own stock. The independent banks are to last until 1866. They are to issue ones, twos, threes, fives, and the decimal denominations only, the percentage of each denomination being prescribed; and they are to issue no other kind of note. Each of them and the branches of the Bank of the State are to take each others’ notes at par; each is to keep at least thirty per cent. of its circulation in specie; no bank is to hypothecate its circulation to get bonds to deposit for circulation. Six per cent. of the profits are to be paid semi-annually to the State as a tax, the interest on the bonds deposited not to count in the profits; no bank to circulate any notes which are not at par, nor any notes of any bank outside of the State for less than $5. Specified banks may come under this law and retire their old circulation.
The Ohio Life and Trust Company was allowed, by an act of February 11, 1846, to become either an independent bank or a branch of the Bank of the State, if it so desired, by setting off a banking capital in specie of not less than $300,000 nor more than $500,000.
In order to enforce the authority of the Board of Control of the Bank of the State, it was enacted, February 24, 1848, that any Judge of the Supreme Court should enjoin any branch which neglected or refused to obey the Board of Control, and that the Board should appoint a receiver for it.
In 1848, there were thirty-seven branches of the Bank of the State of Ohio and seven old banks. The Ohio Life and Trust Company had a total capital of $2 millions, but its banking capital was only $611,626, being the amount of permanent deposits or loans which it held. There were eleven independent banks. The Bank of the State, in the aggregate, had capital, $3.3 millions; circulation, $5.4 millions; deposits, $2.2 millions; specie, $1.9 millions; the safety fund was $621,339, besides $77,457 for the same to the credit of the Board of Control. The assets exceeded the liabilities to the public $3.4 millions.
The Constitution of 1851 provided that “No act of the General Assembly, authorizing associations with banking powers, shall take effect, until it shall be submitted to the people, at the general election next succeeding the passage thereof, and be approved by a majority of all the electors voting at such election.”
The Legislature once more took in hand the whole system of banking, and enacted a comprehensive free banking law, March 21, 1851. The Auditor was to prepare the notes and deliver them, on deposit of Ohio or United States bonds for an equal amount, not above the market value or par value, and not in excess of three times the paid-up capital; lowest notes, $1; all banks under this law to receive each others’ notes and to keep thirty per cent. of the circulation in coin; the Auditor to sell the bonds whenever the bank fails to redeem and he, with the Secretary of State, to appoint a special agent for examination, on whose report they might appoint a receiver; all the stockholders of a bank never to owe it in the aggregate over two-fifths of its capital; fifteen per cent. for non-redemption. This made four systems of banks in Ohio: those chartered before 1845, which in 1854 had $1.55 millions capital; the State Bank and branches, with $4.1 millions capital at that time; the independent banks, with $720,000 capital, and the free banks, with $695,000 capital. During these years repeated laws were passed to try to stop the circulation of out-of-State notes.
Taxes on banks were increased by laws of March 21, 1851, and April 13, 1852, by way of a war on banks. The banks succeeded in breaking down the law in the courts.*
The banks of this State received their first shock in 1854, when it appears that, as a result of piling one system upon another, they had produced an excessive inflation and a commercial crisis.†
A new act for the incorporation of a Bank of Ohio, with branches, was passed April 14, 1857. After five branches should be organized, each of them was to appoint one delegate, to constitute a Directory of the bank, which should procure and furnish to the branches their circulating notes. Ten per cent. on the circulation was to be paid over to the Directory in money or in bonds of the United States or of Ohio, to constitute a safety fund; the money part to be invested in bonds or mortgages. On the first $100,000 of capital notes might be issued only for double the amount; on the second $100,000, for 175 per cent. of the amount; and so on; lowest note, $1; non-redemption on the part of any branch constitutes insolvency, and thereupon its assets vest in the Bank of Ohio, and a receiver is to be appointed; all the branches are to contribute to pay the notes of an insolvent branch. The chief Directory is to get an injunction against any disobedient branch; the bank is to have offices at Cleveland, Cincinnati, and New York, and is to act at New York as the transfer agent of the State. At least half of the capital of each branch is to be in specie or its equivalent. Any existing bank or branch of the Bank of the State may come into this one, and the old corporation is dissolved. Thirty per cent. of the circulation is to be kept in specie funds, of which at least half must be real specie; the balance in New York or other eastern cities may be counted as cash. Bank Commissioners are appointed to set this bank in operation.
September 30, 1857, the Board of Control of the Bank of the State of Ohio resolved that its branches could and would maintain specie payments, and they did so.‡ There was great complaint all through this period of the anti-bank legislation in this State. It appears to be, thanks to that legislation, that Ohio was saved from the banking distress of the States further west.
Ohio adopted an independent treasury system in 1858. Taxes were to be collected in coin or notes of those specie paying banks of Ohio which issued no notes under fives—“a virtual exclusion of Ohio bank paper as well as all other.” After July 4, 1860, no notes under ten dollars were to be received; after July 4, 1865, none under twenty dollars. The State Bank would cease in 1866. The free banks would cease in 1872. After that nothing but coin was to be used by the State.§
In 1858, the Bank of the Ohio Valley was planned, to establish a modified Suffolk system of exchange at Cincinnati for the banks of that entire region. The following description of its purpose is taken from a letter of the president: “In exchange between the seaboard cities and the West, speculation had so controlled the rate of premium as to become a serious evil to the banks of Ohio, in common with those of Indiana and Kentucky. In order to exercise some control over those exchanges, a few gentlemen connected with the banks of Ohio, under the free banking law of 1851, organized this bank and made for it, so acquiring corporate form, a contract with the State Bank of Ohio, by which (in brief) the branches of said bank were to deposit with this bank an amount equal to four per cent. upon their authorized circulation, free of exchange interest; conditioned that this bank should sell the exchange upon eastern cities it could create, at, or a less rate than, one-half per cent. premium.”
An example of a bogus bank is mentioned in Ohio, in 1859. It had paid $165 for a plate, and a quarter of a cent on the dollar for printing, but had given $1,900 to the publisher of a bank note detector to “quote the money right.”* They had not wasted any of their “capital.” They had expended it where the return on it would be greatest. This is not the only evidence we meet with that the high function of the “Detector” under this system was used for revenue.
Michigan.—In 1848, the only bank reported was the Michigan State Bank, with a circulation of $216,526; coin, $61,965; total cash items, $151,362.
In the Constitution of 1850, it was provided that no banking law should have effect until it had been submitted to a popular vote and approved by a majority. Stockholders of every banking corporation issuing circulating notes were made individually liable for debts contracted while they were such. All bank notes were to be registered and stock security deposited for them. Note holders were to be first preferred creditors. No law might ever be passed authorizing or sanctioning the suspension of specie payments. A two-thirds vote of both Houses was required for altering or amending any act of incorporation previously granted, and no such act might be renewed or extended. In 1860, the individual liability of stockholders was made proportionate to their shares in the capital. By an amendment adopted in 1862, no corporations might be created by special act. General laws for creating them might be amended, altered, or repealed, “but the Legislature may, by a vote of two-thirds of the members elected to each House, create a single bank with branches.” No general banking law was to have effect until it had been approved by a popular vote.
Indiana.—Four new branches of the Bank of the State were established. January 10, 1849, with a capital of $160,000 each, of which the State was to subscribe, in each case, not less than $60,000.
By the Constitution of 1851, the Legislature was forbidden to establish any bank, save under a general law, which, if passed, must provide for registry of notes by a State officer, with ample security, in the custody of a State officer; but a bank with branches and without this security might be established, provided that the branches should all be mutually responsible, the stockholders individually liable to the extent of double their shares, the notes redeemable in gold and silver, the note-holders to be the first preferred creditors, and such bank to last only twenty years. No law might ever sanction the suspension of specie payments. The State should never be a stockholder in any bank after the expiration of the present State Bank, nor in any other corporation, nor lend its credit to anybody.
A general banking law on the New York model was passed May 28, 1852. Under it wild-cat banking was developed to an extent then unknown. It was contemporaneous with the inflation in Ohio.* “The speculator comes to Indianapolis,” said the Governor, 1852, “with a bundle of bank notes in one hand and his stock in the other. In twenty-four hours he is on his way to some distant part of the Union to circulate what he calls a legal currency, authorized by the Legislature of the State of Indiana. He has nominally located his bank in some distant part of the State, difficult of access, where he knows that 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.”
In 1854 the Ohio valley was the scene of a bank crisis at the time of the crisis in the stock market at New York.† The Auditor stated, in his report, that a heavy run commenced in May upon the State stock banks for coin. Nothing but coin would be taken. This continued for sixty days before any of the banks suspended. “A crisis then showed itself in the whole monetary operations of the western country.” The notes of many banks in Ohio fell to a discount and the banks suspended. “Chicago and Illinois generally were next the theater of the effects of this combined demand for coin; also resulting in the failure of several banking houses, and a depreciation of their notes. The fact that the notes of the Indiana banks, under the general law, were secured by interest-paying bonds of the several States of the Union, and in many instances by the very best securities that any State issues, seemed to be of no value in the estimate put upon their notes by the public. A general depreciation ensued.” At the same time, the deposited stocks declined in value on the New York market, so that if they had been forced to sale by the Bank Department, to redeem the notes of banks which had failed, there would have been a deficiency. It seemed to him that if notes secured by the best stocks could not command confidence, it was doubtful whether any system of paper currency would be regarded with public favor. On this occasion, the old-fashioned banks, with no securities in deposit, were so little upheld by public opinion, in Ohio and elsewhere, that their notes became almost valueless. He proposed a number of new rules for banking, the purport of which was generally that the banks should have a well-known and accessible domicile, and be open in banking hours of every business day.*
Before 1857, 94 banks had been organized under the general law, with a nominal capital of more than $35 millions; and circulating notes had been issued to them for more than $9 millions. Fifty-one of them had failed, and their notes were selling in Cincinnati at from five to eighty-five discount. These banks had been built one upon another, the notes of one being used to buy the stocks with which to organize another. The operation was called “shingling.”† McCulloch‡ tells of a case of a man who bought bonds with notes, deposited the bonds for circulation; with the notes bought more bonds, and repeated the process. With $10,000 capital, he got out, before 1857, $600,000 of circulation; he did no banking, but lived on the interest of his bonds.
The experience of 1854 was considered to call for a revision of the general banking law. The whole of the act of 1852 was quoted in a new act, of March 3, 1855, with certain new provisions, in effect remodeling the system. One hundred dollars in notes were to be issued only against $110 in stocks deposited. Every bank was to have a banking house, sign, etc., and do business from ten until three daily on all business days. The banks which have organized under the law of 1852 are to have until March 1, 1857, to wind up or comply with this act. Every bank under this law must have an agent at Indianapolis to redeem its notes in specie, or in exchange on New York; the former at one per cent. discount and the latter at the ruling rate.
The charter of the State Bank of Indiana was to expire in 1857. Its report of October 31, 1854, showed a suspended debt of $1.8 millions, a surplus fund of $1.1 millions, a circulation of $2.8 millions, specie $1.3 millions. During the previous year it had redeemed over $2.5 millions of circulation. The Auditor thought that the State should come to a settlement with the bank at once, whereby it would release itself from liability for the bonds issued and possibily realize a profit.
Indiana issued bonds on account of the first Bank of the State for $1,390,000, for which she obtained the net sum of $1,416,750. Of this, $880,000 were paid for stock in the bank, and $255,009 for loans to stockholders who could not pay their own subscriptions. The remainder, $281,741, constituted a sinking fund. Up to the first of November, 1858, the net gains of the bank and sinking fund were $2,356,659; to which the addition might be made of interest on a part of the fund which had been loaned to the State.* In comparison with the failure and waste attendant upon the financial enterprises of this character which had been attempted in other States, this case stands out as a subject of especial interest.
McCulloch, in defending the second Bank of the State, had occasion to state, in 1857, what he thought had been the causes of the success of this bank. He attributed it to “the peculiar features of its charter and the prudence of its managers.” “The State was powerless in the Board of Control and in the branch Boards. * * * The success of the State Bank is unquestionably owing to the facts that the State Board had full control of the business of the branches; that the branches, although independent in their profits, were mutually responsible for the circulation and deposits of each other, and that the men who managed them had both character and money to lose by maladministration of their affairs.”† In the case of a bank, at least, it is emphatically true that “what is best administered is best.”
On the same day on which the above-mentioned revision of the general banking law was passed, a new Bank of the State was chartered for twenty years, with very nearly the same features as the old one,‡ over a veto. There was great difficulty in raising the capital of the new bank, and it seems very doubtful if it could have been put in operation; but the plan was adopted of selling the new charter to the old bank, which thus went on as before. Hugh McCulloch was made president. He had been cashier of the Fort Wayne branch. There was a great deal of complaint by the anti-bank men that the Legislature had been outwitted, and the Constitution violated, by a trick, and there were even charges of corruption. McCulloch answered that the purchasers of the charter were innocent of any such proceedings. He predicted the panic of 1857, in April of that year.§ Reviewing his administration of the bank, in his book, he says that he was obliged to coerce the directors of the branches, and to prevent them from borrowing of the bank; and he adds, in regard to the numerous bank failures in the United States, that no bank ever failed there, “the capital of which was a cash reality and whose managers were not thieves, or the borrowers of its money.” This statement does not say as much as it might at first seem to say, for we have seen that the almost universal diseases of the banks had been that they had not a cash capital, and that the directors did borrow of them or plunder them. The wonder is that a great many more such did not go into bankruptcy. McCulloch’s administration of this bank has become justly famous. In view of what we have seen about the Banks of the States, any man deserved high honor who could pilot such an institution successfully through. The plan of this bank and that of the Bank of the State of Ohio were evidently attempts to co-ordinate and organize the petty banks into a unity where they could be regulated and restrained. It is plain that no such system could work unless there was firm discipline, unflinching integrity, and fearlessness at the head.
This bank did not suspend in 1857. Its notes bore a premium over all the western notes, and were at five per cent. above those of the State Bank of Ohio in Cincinnati.* McCulloch tells us that at that time “there was a tacit understanding between the branches and their customers, that deposits of bank notes were payable in bank notes.” There was a run for gold on the Bank of the State as long as there was a premium on sending gold from Cincinnati to New York. After three months the bank felt no further strain of the crisis, and was strengthened by going through it.† It should be noticed that the revulsion of 1854 was the real crisis in the Ohio valley, and not that of 1857. In the latter year that region was rather in the subdued and chastened condition which follows a crisis.
A convention of representatives of the free banks was held in April, 1860, to concert measures for redemption at Cincinnati. It was found that the interests of banks in different parts of the State were so different, that no agreement could be made. Their only common interest was antagonism to the Bank of the State, and the only common measures on which they could agree were those of war on that bank for returning their notes persistently.‡
The Bank of the State published a statement December 31, 1861: “Under no conceivable circumstances will the Bank of the State of Indiana suspend specie payments. We have frequently given to the people of the State the pledge that our notes should always be convertible into coin. This pledge we shall in good faith fulfill.”§
In January, 1862, the branches of the State Bank were warned by the Board of Control not to let hope of profit lead them to expand their discounts on an irredeemable currency. Coin was not to be allowed to fall for more than two days below fifty per cent. of circulation, and all productive investments were not to be increased beyond 175 per cent. of capital. The stock of coin was then $4.3 millions and the circulation $5.8 millions. The bank did not suspend until after the legal tender act was passed.
McCulloch obtained a decision from the Supreme Court of Indiana that it would be lawful for that bank to use legal tender notes in the redemption of its notes, even under the stringent provisions of its charter. Thereupon he put out the circulation again, but proceeded to hoard gold until, in 1863, the gold stock equaled the capital.
The branches of the Bank of the State were authorized, by act of January 19, 1865, to break up their relations with that bank and close up the business, so that they might go over into the national system if they chose. The president of the bank, in his report of January, 1865, said: “There is no disposition on the part of those who control it to abandon the charter to embark in a new and as yet unproved system.”∥ The branches made the change one by one during 1865.
The Illinois Constitution of 1848 provided that the Legislature should have “no power to authorize lotteries for any purpose, nor to revive or extend the charter of the State Bank or the charter of any other bank heretofore existing in this State.” The credit of the State might not be loaned to anybody; furthermore “no State bank shall hereafter be created, nor shall the State own or be liable for any stock in any corporation or joint stock association for banking purposes, to be hereafter created. The stockholders in every corporation or joint stock association for banking purposes issuing bank notes, or any kind of paper credit to circulate as money, shall be individually responsible to the amount of their respective share or shares of stock in any such corporation or association for all its debts and liabilities of every kind.” No act to grant banking powers should go into effect until after it had been approved by a majority of the votes at a general election.
Illinois adopted a general banking law on the New York model, over a veto, February 15, 1851. It was put to a popular vote and approved. It was amended, perfected, and extended February 14, 1857. A case arose in 1859, in which the Reapers’ Bank, being called on to redeem two packages of notes of $500 each, refused to do it for the total sum, but spent more than a banking day on each package, redeeming only a part of it, one note at a time, in dimes and half dimes. The unredeemed notes were protested and sent to the Auditor for redemption out of the deposited bonds. The bank sought an injunction, but the Court refused it in terms which characterized the proceedings of the bank as improper, and unwarranted, and not a compliance with its lawful duty.*
From 1859 to 1861 the bank note currency of this State fell into the utmost confusion and discredit, in common with the rest of the currency of the northern Mississippi valley. Apparently from a belief that the Bank of the State of Indiana had rescued that State from the similar condition into which it had fallen in the early fifties, a charter for the Union Bank of Illinois was passed February 20, 1861. It was a disguised Bank of the State which the Constitution forbade, and departed from the Indiana model in several very important respects, and in a questionable way. The law was rejected at the referendum in November, by a large majority.
In June, 1861, the Bank Commissioners made a call on twenty-three banks for additional securities, leaving only seventeen which were not under call. The “stump tail” currency, as it was called, was then disappearing; specie was coming into use, and bank notes were treated as merchandise. The Wisconsin paper was treated in the same way.
In August all new banks were required to redeem their circulation in Chicago or Springfield at not more than three-fourths of one per cent. discount, and after January 1st at not more than one-half of one per cent. The old banks were allowed to adopt the plan of central redemption and to increase their circulation by the deposit of Illinois bonds at par without regard to their market value.
In September the Illinois banks were not able to maintain their circulation. The Chicago “Times” said: “We believe the fiat has gone forth, and that all banks organized under the present banking law are worse than useless, either to the public or the owners.”
In September and October, under the influence of the political disturbances, a very thorough reform of the currency of the Northwest was accomplished.*
The Illinois Constitutional Convention of 1862 adopted an article which forbade the creation of any banking corporation for any of the functions of banking. Notes under $10 were forbidden at once; those under $20 after 1864; and all bank-notes after 1866. Upon the submission of this Constitution to a popular vote, the banking article was rejected by about four thousand majority; and the whole Constitution by about six thousand.
In July, 1862, the Auditor of Illinois advertised the rates at which he would redeem the notes of ninety-three free banks. Five were at par, the others at from 49 to 95 cents—most of them at from 50 to 60 cents on the dollar.†
Missouri.—A general banking law was passed at the session of 1856-7; probably over a veto, since it is not dated. There might be no bank with less than $1 million capital, and no notes under $5; if any bank suspended for ten days, its charter was to expire; one-tenth of the capital must be paid in in specie before beginning; every bank, within one year of its beginning, must invest ten per cent. of its capital in bonds of the State, and also ten per cent. of any capital subsequently paid in; it must also save two per cent. of its net gains every year and invest them in State bonds, as a contingent fund. It might not loan on its own stock, nor employ more than five-eighths of its capital in exchange dealings; it must pay a bonus or tax of one per cent. of its capital and issue not more than three times the specie on hand. Every bank of $1 million capital must have two branches. A Bank Commissioner was to inspect the capital of every new bank, and to cause the notes to be printed and delivered to each bank to the lawful amount. There was no provision for the deposit of bond security. Nine banks were organized under the act, and it was provided that the Bank of the State might come in as the tenth. This law was suspended November 5, 1857, until November 1, 1858, on behalf of the Bank of Missouri and the others which had suspended specie payments. Debtors to the banks were to have an extension, on the payment of twenty per cent., giving security. The suspended bank paper might circulate, but the notes issued after the passage of this act must have a distinguishing mark.
Missouri currency, which had, through all the first half of the century, been amongst the very best in the Union, became, in 1859, one of the worst. It became uncurrent in Indiana, Kentucky, and Ohio, except Cincinnati.‡ The State was busy during this decade with “public improvements,” issuing bonds in aid of railroads. As the latter did not pay the interest on the bonds the State finances became disordered. The presence of these bonds in the bank guarantee funds of several States also became a cause of trouble to them.
In Missouri the term “currency” was used for all kinds of uncurrent bank paper. The Bank Commissioner said, in 1860, “The truth of the whole matter is that, in a practical sense, our banks cannot justly lay claim to the name of specie-paying banks.” He found it very mortifying that Missouri currency was one per cent. below that of Indiana, Ohio, Kentucky, Tennessee and Louisiana. We are warranted in the conclusion that there was no “convertible” currency in the whole Mississippi valley, north of Arkansas and the Gulf States, even when “convertible” currency is understood with all the latitude customary in those days in the United States.*
The Supreme Court of this State rendered a decision, in 1863, in support of the action of a bank which, when called on to redeem several thousand dollars of its notes, took them one at a time, the lowest being for ten dollars, and redeemed each one by giving five dollars in fractional coin of the coinage of 1853, and gold for the rest.†
Wisconsin.—Some citizens of Milwaukee presented to Congress, January 31, 1837, a remonstrance against the charters passed by the Territorial Legislature for the Bank of Milwaukee, the Miners’ Bank of Dubuque, and the Bank of Mineral Point. The congressional committee reported favorably on the three, expressing the hope that the Territorial Legislature would not find it necessary to make any more for a long time. An act was accordingly passed ratifying these three charters, but with important modifications, which Congress thus imposed. An act of the Legislature of the same Territory creating a State Bank of Wisconsin at Prairie du Chien was disallowed, June 12, 1838.
In the summer of 1838, it was reported from a Wisconsin newspaper that wild-cat money had overrun the Territory, driving out all other. In 1840, the only bank in the Territory of Wisconsin was that of Mineral Point, with $100,000 capital; $90,000 circulation; specie and specie funds, $48,492. At a later date, however, it was reported that there had been, until 1841, a Bank of Wisconsin at Green Bay.‡ In 1839, the Wisconsin Marine and Fire Insurance Company of Milwaukee was chartered by the Territorial Legislature. It had authority also to receive money on deposit and to loan the same; but banking privileges were expressly excluded. If it received bank notes on deposit and loaned them, it was to endorse them by its president, and redeem them in specie, in case the issuing bank should fail. This charter was obtained by George Smith, who issued certificates of deposit in set denominations, for small amounts. The authorized capital of the company was $500,000, but it started with $8,104 paid up. The issue was continued until 1852. It became famous all over the Northwest as “George Smith’s money,” and reached a maximum amount of $1.5 millions. The certificates were redeemed in specie at Milwaukee, and there were agencies at Chicago, Detroit, Buffalo, and St. Louis, at which the notes were redeemed with drafts on New York. The notes were unflinchingly redeemed. In 1846 the Legislature repealed the charter of the Insurance Company, but did not instruct the Attorney-General to institute proceedings for forfeiture. The company was re-organized under the free banking law of Wisconsin. Its original founders having either died or left it, it failed a few years ago.*
The Secretary of the Territory reported to the Secretary of the Treasury in 1848, in regard to Smith’s money: “It constitutes, in a great measure, the paper circulation of the eastern portion of the Territory, and indeed of northern Illinois.”† This currency was often denounced, and the bankers of Chicago appear to have made constant war on it, but we get the impression that it was the best currency there was in the Northwest before the civil war.
In the Constitution of 1848, the Legislature was forbidden to create any bank in any way, unless the question of bank or no bank should have been decided at a general election in favor of banks. Then it might create banks by general or special law, but every such law must be ratified by a majority at a general election, before it should be valid.
A free banking law was passed in 1853. Under it the deposit of first mortgage bonds, on a first-class railroad, at not over 80, and not more than $8,000 per mile, as a security for circulation, was allowed. In this State also the possibilities of mischief in this free banking system were amply manifested. It would be a very great mistake to suppose that that system, where it had been tried before the war, had inspired confidence. In the majority of cases the contrary was the case.
Out of $5.3 millions on deposit in the Banking Department, in 1858, $2.3 millions were Missouri bonds, which were losing credit on account of the large issues.
In August, 1858, a number of the private bankers of Chicago threw out the notes of twenty-seven Wisconsin banks because the currency had been greatly increased by banks, “located at inaccessible points, having no capital, doing no banking business, providing no means whatever for the redemption of their issues, and in many instances having not even an office or known place of redemption.”‡ This led to the formation of an Association of forty-five Wisconsin banks to enforce redemption on a number of their comrades, specified by name, which were considered “wild.”
On account of the depreciation of stocks the Banking Department found it necessary to call on the banks for more stocks or a reduction of circulation, October 15, 1860. The Legislature, however, in February recommended the Comptroller to refrain from such demand, in accordance with existing law, until it could act. The Department held more than $3 millions in Southern bonds, and it was feared that if they were thrown on the market a panic would be produced. In April, the Legislature recommended the Comptroller to proceed with the calls. Two per cent. additional security was called for. Thirteen banks failed or refused to respond. When the Comptroller proceeded with the steps prescribed by law for winding them up and selling their securities, he was arrested by an injunction. The interposition of the Legislature, “instead of eliciting the gratitude of these parties, served them as a handle to obtain an injunction, and as a means to embarrass the lawful action of the Department.” They wanted to gain time to buy in their depreciated currency, and with it to release their bonds. June 3d, an additional call of eight per cent. was made, on account of the continued decline of Southern bonds. Fifty-eight banks did not obey the call; forty did not even acknowledge the receipt of the notice. An agent sent out to serve notices could find, in many cases, no banking-house, or no competent officer to receive service. In September the stocks of nineteen banks were advertised for sale. In October, another call of three per cent. was issued on Illinois, Michigan, Ohio, California, and Missouri bonds.
In 1863, twenty-two Wisconsin banks were closing business, whose notes were being redeemed at from 55 to 80 cents on $1. The notes of fifteen others, which had been wound up, were being redeemed in treasury notes at a somewhat higher rate.*
Iowa.—The Miners’ Bank, of Dubuque, mentioned above as having been chartered by the Territory of Wisconsin, was the only bank in Iowa in 1840. It suspended in March, 1841; resumed July 1, 1842; and its charter was repealed in 1844, by virtue of a power reserved in it to the Legislature so to do.
The free banking law of 1858 forbade the payment of interest on deposits, required a specie reserve of twenty-five per cent. of deposits, prescribed that the stocks deposited for circulation must pay six per cent. or more, and that the circulation issued should not exceed ninety per cent. of the value of the bonds.
A Bank of the State of Iowa, on the plan of the Bank of the State of Indiana, was chartered March 20, 1858.
Minnesota.—The Constitution of 1857 provided that banks should always be taxed at the same rate as other property; that the credit of the State should never be loaned to anybody; that a general banking law might be passed by a two-thirds vote of both Houses, but it must contain certain provisions; that suspension of specie payments should never be sanctioned; that all circulating notes should be registered and secured by stocks; that stockholders in any bank should be individually liable for double their shares; that note-holders should be first paid out of the assets; and that the names of all stockholders in banks should be recorded, with the amount of stock, time of transfer, and to whom transferred.
The general banking law was passed March 19, 1858, and amended March 8, 1861. On account of the depreciation of the stocks in the Bank Fund, the rate of redemption of the notes of failed banks, in 1862, was from 16 to 35 cents on the dollar.
Kansas.—The Constitution of 1859 provided that no bank should be established except by a general law providing for a deposit of stocks as security. The State might not be a stockholder in any bank. All banks must have offices of issue and redemption at convenient places in the State, to be named on the notes. No note might be allowed for less than $5. Every banking law must be submitted to the people, and might be amended or repealed.
The report from Nebraska, in 1860, was that the Territory had had six banks, all of which were broken. A Judge of the Third District of Iowa declared all the banks of Nebraska illegal in 1859.* The Secretary of the Territory calls it a “disastrous” system. He construes the act of Congress of July 1, 1836, as forbidding any Territory to incorporate a bank, but says that some hold that the Kansas-Nebraska act has repealed that prohibition. He appears to think that the prohibition would be very salutary.
Arkansas went through 1857 without sharing in the troubles. The people of that State were “enabled to laugh at the storm which makes the rest of the country tremble.” They thought that it was because their Constitution would allow them to have no banks.†
A law of that State, February 8, 1859, forbade the use or circulation in any manner whatever of notes under ten dollars after the following July 4th. After the same date in 1860 no note under $20 might be circulated.
California.—During the first years after the gold discovery some private firms coined gold. Only one of them kept up to the standard of the United States. Proof was offered that gold coins, under such circumstances, could become merchandise, requiring negotiation, and not money, and that their presence could deprive a community of any money of account, just as we have seen that bank notes could operate, under similar circumstances, of depreciation. We are told that some silver coins having been imported, they were at one hundred per cent. premium; an interesting statement which is unfortunately not further explained.‡
Technical definitions are largely a matter of expediency and convenience, but this case brings out into strong light the inexpediency and unfitness of a definition of money, which makes it a generic term for all media of exchange. That definition bridges over the gulf between money, properly speaking, on the one side, and any securities or commodities, on the other side, in the use of which some preliminary transaction is required, or some incidental transaction is involved, before they can be employed as makeshifts for the functions of money. The function to be defined is specific, positive, and sharply distinguished from any other; therefore the first step towards scientific accuracy and productive treatment is to give that function a precise definition and an unambiguous name. For popular use, in connection with a matter where the chief errors and difficulties arise from confusion of thought, the same precision of definition, upon lines which will throw out all the distinctions into the sharpest possible relief, is also of the first importance. In the last analysis, all the fallacies of bimetallism rest upon a lack of a due conception of the money function in its full distinctness and isolation from everything else.
The Constitution of 1849 allowed no banking institutions for anything but safe deposit, and explicitly forbade all issue of paper currency to serve as money. A law of April 19, 1855, prescribed as a penalty for issuing any circulating paper a punishment, for the first offense, of imprisonment in the county jail for not more than three months, or fine not to exceed $2,000, or both; for the second, and every subsequent offense, not less than one year’s imprisonment in the State prison; or the term might extend to five years, at the discretion of the Court.
The Oregon Constitution of 1857 forbade the existence in the State of any institution whatever issuing notes to serve as currency.
The average bank note circulation per capita was as follows:
For the whole thirty years $12.41.
The States in which, in 1859, the circulation of notes under five dollars was illegal were Pennsylvania, Maryland, Virginia, Alabama, Louisiana and Missouri.
The ratio of specie to circulation and deposits in the different States, in 1859, varied from $4.25 on $100 in Illinois to $52.46 in Louisiana. Massachusetts had $21.63; New York, $20.39.*
In the Spring of 1861 four banks failed at Albany. Apropos of these failures the Banker’s Magazine said: “A radical change in the banking system is required in this and particularly in Western States,” and it spoke of the New York country banks as mushroom concerns. “The recent course of events in Illinois, Wisconsin and Missouri has demonstrated more strongly than ever the insecurity of the bank note currency of those States, and of other States where bank notes are issued on the security of State bonds.”† This is the last general verdict on the old local bank system which we can quote from a friendly source before the upheaval of the whole currency and banking system by the civil war. If there had been no war, the banking and currency system of the country would have been a pressing, distressing, and unsolved problem. If the then-existing system was satisfactory, we find no proofs of it in the literature where that fact should have found expression.
In 1862 there were fifteen hundred banks, the notes of 253 of which had not been counterfeited. The variety of imitations was 1,861; of alterations, 3,039; of spurious notes, 1,685.* From 1853 to 1862 the Association for the Prevention of Counterfeiting at Boston caused 434 persons to be sent to State prison for an aggregate time of 1,425 years, 4 months.†
The Bank Note Detector did not become divested of its useful but contemptible function until the national bank system was founded. It is difficult for the modern student to realize that there were hundreds of banks whose notes circulated in any given community. The “bank notes” were bits of paper recognizable as a species by shape, color, size and engraved work. Any piece of paper which had these appearances came with the prestige of money; the only thing in the shape of money to which the people were accustomed. The person to whom one of them was offered, if unskilled in trade and banking, had little choice but to take it. A merchant turned to his “Detector.” He scrutinized the worn and dirty scrap for two or three minutes, regarding it as more probably “good” if it was worn and dirty than if it was clean, because those features were proof of long and successful circulation. He turned it up to the light and looked through it, because it was the custom of the banks to file the notes on slender pins which made holes through them. If there were many such holes the note had been often in bank and its genuineness was ratified. All the delay and trouble of these operations were so much deduction from the character of the notes as current cash. A community forced to do its business in that way had no money. It was deprived of the advantages of money. We would expect that a free, self-governing, and, at times, obstreperous, people would have refused and rejected these notes with scorn, and would have made their circulation impossible, but the American people did not. They treated the system with toleration and respect. A parallel to the state of things which existed, even in New England, will be sought in vain in the history of currency.
[* ] Treasury Report, August 31, 1852.
[* ] Whitney, 48.
[† ] 15 Banker’s Magazine, 890.
[‡ ] Whitney, Suffolk Bank, 60.
[* ] See Index. Suffolk System.
[† ] 12 Banker’s Magazine, 420.
[‡ ] 14 Banker’s Magazine, 173.
[* ] 17 Banker’s Magazine, 839.
[† ] 34 Conn., 205, 240. (1807.)
[* ] Bank Commissioners, 1862.
[* ] The Bank of Buffalo was entitled to $200,000 circulation. Up to January 1, 1844, $433,329 of its notes had been redeemed. (Comptroller’s Report, 1844).
[* ] Superintendent, 1859.
[† ] 6 Banker’s Magazine, 160.
[‡ ] 6 Banker’s Magazine, 111.
[§ ] 10 Banker’s Magazine, 306; 570.
[* ] 26 Pennsylvania, 451.
[† ] Martin; Boston Stock Market, 17.
[* ] 7 Banker’s Magazine, 251.
[† ] 7 Banker’s Magazine, 252.
[‡ ] 9 Banker’s Magazine, 158.
[§ ] 9 Banker’s Magazine, 665.
[* ] 12 Banker’s Magazine, 429.
[* ] 12 Banker’s Magazine, 430; 780.
[* ] Superintendent, 1857.
[† ] 5 Cowen, 161; 6 Cowen, 211.
[‡ ] 16 Banker’s Magazine, 628.
[* ] In 1893 resort was had, in the same case, to illegal issues.
[† ] Superintendent, 1858.
[‡ ] Report, 1859.
[§ ] 13 Banker’s Magazine, 574.
[* ] 12 Banker’s Magazine, 919.
[† ] 16 Banker’s Magazine, 906.
[‡ ] Superintendent, 1867.
[§ ] 9 Banker’s Magazine, 487.
[* ] 13 Banker’s Magazine, 314, 996, 18 ditto, 835.
[† ] 13 Banker’s Magazine, 639.
[* ] 13 Iredell, Law, 75.
[† ] 20 Banker’s Magazine, 905.
[‡ ] See page 37.
[* ] 12 Banker’s Magazize, 504.
[† ] 1 South Carolina, 63.
[‡ ] 3 South Carolina, 165. (1871.)
[* ] 3 South Carolina, 401.
[† ] See page 368.
[* ] 14 Banker’s Magazine, 6.
[† ] 9 Banker’s Magazine, 441.
[‡ ] Consol. Assoc., vs. Lord; 35 Louisiana, 425.
[§ ] Board of Currency, 1861.
[* ] 7 Banker’s Magazine, 468.
[† ] 12 Louisiana, 228.
[‡ ] 43 Louisiana, 742.
[* ] Citizens’ Bank vs. Assessors, U. S. Circ. Ct., E. D. Louisiana, 1893.
[† ] 11 Banker’s Magazine, 926.
[‡ ] 12 Banker’s Magazine, 505.
[§ ] 12 Banker’s Magazine, 584. (Jan., 1858.)
[∥ ] 12 Banker’s Magazine, 663.
[¶ ] 15 Banker’s Magazine, 750.
[* ] 17 Banker’s Magazine, 1004.
[† ] State versus Williams, 8 Texas, 255 (1852.)
[‡ ] See pages 327, 398.
[* ] 15 Banker’s Magazine, 750.
[* ] 16 Howard, 369.
[† ] See page 444.
[‡ ] 12 Banker’s Magazine, 427.
[§ ] 12 Banker’s Magazine, 961.
[* ] 14 Banker’s Magazine, 153.
[* ] See page 442.
[† ] See page 424.
[* ] Some forces which were brought to bear on “banking” ought not to be overlooked. A Lexington (Ky.,) banker was hung in effigy at Versailles, in 1855, for sending home bank notes issued by the bank in that place for redemption. (10 Banker’s Magazine, 41.) At Springfield, Ohio, in 1857, the citizens put a brush and far bucket at the door of the local bank in order to frighten off any brokers coming to demand specie. (12 Banker’s Magazine, 587.) A man who presented notes for redemption to a country branch of the Bank of Missouri, in 1859, was threatened with lynching by a mob who collected. (14 Banker’s Magazine, 323.)
[† ] 12 Banker’s Magazine, 165.
[‡ ] Men and Measures, 126.
[* ] Commissioners of the Sinking Fund, 1859.
[† ] 11 Banker’s Magazine, 928.
[‡ ] See page 255.
[§ ] 11 Banker’s Magazine, 930.
[* ] McCulloch, 133.
[† ] McCulloch, 135.
[‡ ] 14 Banker’s Magazine, 913.
[§ ] 16 Banker’s Magazine, 650.
[∥ ] 19 Banker’s Magazine, 824, 883.
[* ] 24 Illinois, 433. (1860).
[* ] 16 Banker’s Magazine, 489.
[† ] 17 Banker’s Magazine, 396.
[‡ ] 14 Banker’s Magazine, 152.
[* ] 14 Banker’s Magazine, 810.
[† ] 2 Whittlesey, 497.
[‡ ] Treasury Report, August 10, 1848.
[* ] White; An Elastic Currency.
[† ] Treas. Rep. August 10, 1848.
[‡ ] 13 Banker’s Magazine, 235.
[* ] 17 Banker’s Magazine, 1,002.
[* ] 14 Banker’s Magazine, 410.
[† ] 13 Banker’s Magazine, 586.
[‡ ] 7 Banker’s Magazine, 77.
[* ] 14 Banker’s Magazine, 30.
[† ] 16 Banker’s Magazine, 5.
[* ] Congressional Globe, 1862, p. 844.
[† ] 17 Banker’s Magazine, 845.