A History of Banking in the United States/Chapter 3

by William Graham Sumner

CHAPTER III.

The First Bank of the United States and Its Times.

T

HE act of 1789, laying duties on imports, provided that they should be received in gold and silver only. In April of the following year, Hamilton made a report on the operation of this law, in which he construed it to mean that he might receive the notes of banks "issued on a specie fund;" and he thought that this would be advantageous to the government, the banks, and the public. Hence he had ordered bank notes to be received where banks existed, but the measure was understood to be temporary, and would be changed whenever a national bank was founded.^[1]

One of his pet ideas was a national bank. He submitted a paper to Congress, December13, 1790, to prepare the way for the proposition he wished to offer. This paper shows that he had very much developed his ideas on this subject since the earlier plans made by him, which we have already noticed. The charter of the Bank of New York, which came from his hand, became the model on which numberless charters were afterwards constructed, and the charter of the Bank of the United States, which he now proceeded to make, was taken as a model by so many others that we must attribute to his opinions on banking a predominant influence in forming the banking institutions of this country. The first great advantage which he sees in a bank is that it augments "the active or productive capital of a country."

In the explanation of this, which he gives, he entirely avoids the fallacy which would seem to be involved in the statement. He illustrates it by the case of a man who deposits a surplus while waiting to put it to use, so that it "is in a condition to administer to the wants of others, without being put out of his own reach when occasion presents." He has in view, therefore, not any creation of capital, but a more effective organization of capital, by which small and scattered amounts are so concentrated as to be made effective instead of being idle. Upon this view it would follow that when one man wanted his capital some other man would probably be desirous of making a deposit; from which it would result that some constant amount within limits could be depended upon. Unfortunately, however, Hamilton mixed up this sound and useful view of a bank with the popular misconception: "It is a well established fact that banks in good credit can circulate a far greater sum than the actual quantum of their capital in gold and silver." This is the fundamental notion of all juggling with bank issues. He here planted a germ which, as we shall see, grew to a great size and produced most evil fruit. It taught the banker to believe that his legitimate business was to carry on a kind of high class confidence operation. Next Hamilton speaks about the cases in which the operations of banking legitimately consist in setting off things against each other, which balance; but he introduces the cases as if they explained the possible inflation of bank issues, and as if they explained the transactions with actual deposits mentioned in the first place. Having mixed and confused these three things, he concludes: "This additional employment given to money, and the faculty of a bank to lend and circulate a greater sum than the amount of its stock in coin, are, to all the purposes of trade and industry, an absolute increase of capital." The confusion here introduced was important and unfortunate, especially as regards the confusion between deposits of surplus capital and the supposed increase of capital by the circulation. The gains of a bank must come either from its deposits or its circulation. Until the middle of the nineteenth century the deposits of surplus capital, even in the larger cities, were small, for the reason that capital was always in such active employment that surpluses waiting for employment were not formed. Any encouragement, therefore, which was given to the-notion already so widely current that paper issues could increase capital was directly mischievous. Hamilton went on to connect this also with 'the opinion which he said prevailed that there was a lack of a sufficient supply of money. He thought that the use of barter in remoter districts was a proof of this, and he showed that he participated in the belief that a bank could increase the amount of circulating medium in a country,—that is, not only increase the amount of capital available for employment in industry, but also increase the amount of currency acting. on prices and available to pay debts. As the confusion of these two things has been the most profound and most mischievous error in the entire currency history of the country, the fact that he shared in it and lent it his authority was most unfortunate forthe subsequent history. "It is evident," he says, "that whatever enhances the quantity of circulating money adds to the ease with which every industrious member of the community may acquire that portion of it of which he stands in need, and enables him the better to pay his taxes as well as to supply other wants." This has ever been a popular notion, and his enunciation of it was no doubt one of the most effective recommendations of his plan.

Answering objections made against banks, he shows that they bring about punctuality, and he answered very correctly the complaint that, if foreigners owned the stock, there would be a drain of specie to pay their dividends; but it does not appear that these arguments had any effect on public opinion. He also laid down the doctrine, which may be called the kernel of the "credit system," which was made the subject of so much debate and eloquence in the next fifty years,—namely: that banks help honest, industrious, and enterprising men by furnishing them the capital, which is the only thing they need to become very efficient producers, and that they help the same class of men's when they have met with misfortune, to recover. As to the abundance or lack of the precious metals, that seems to him to depend on the balance of trade; and he is quite sure that each state ought to have a supply of "the money of the world," and of the metals which are a "species of the most effective wealth." "Notwithstanding some hypotheses to the contrary, there are many things to induce a suspicion that the precious metals will not abound in any country which has not mines or variety of manufactures."

He condemns State issues. "Though paper emissions under a general authority [i.e., federal] might have some advantages not applicable, and be free from some disadvantages which are applicable, to the like emissions by the States separately, yet they are of a nature so liable to abuse, and, it may even be affirmed, so certain of being abused, that the wisdom of the government will be shown in never trusting itself with the use of so seducing and dangerous an expedient." He next points out the exact difficulty and danger of such issues, although at the same time his argument exposes the fallacy of the doctrine which he had just stated, that banks could increase the amount of circulating medium. "Among other material differences between the paper currency issued by the mere authority of government and one issued by a bank payable in coin is this: that in the first case there is no standard to which an appeal can be made as to the quantity which will only satisfy, or which will surcharge the circulation; in the last, that standard results from the demand. If more should be issued than is necessary, it will return upon the bank."

That is so, how can a bank "enhance the quantity of circulating money?" If his reasoning is correct, (and it is that which is accepted by all the best authorities), it is far more certain that there can be no deficiency below the "standard" set by the "demand;" for it would be satisfied by obtaining specie. In short, the reasoning, in order to be thrown into correct and productive order, must begin with and proceed from the notion of the requirement as the predominant and coordinating conception.

We are not without a verdict of history upon these notions of Hamilton about bank currency. The keynote of his doctrine, and the keynote of the banking system of the next fifty years is in the following passage: "Gold and silver, when they are employed merely as the instruments of exchange and alienation, have been, not improperly, denominated dead stock; but when deposited in banks to become the basis of a paper circulation, which takes their character and place as the signs or representatives of value, they then acquire life, or in other words, an active and productive quality. "The Bank Commissioners of Ohio, in 1842, in the bitter retrospect of the previous five years, quoted these words in order to say: "The experience of more than half a century since this opinion was expressed has failed to convince the American people that gold and silver are to be regarded as dead stock, except when placed in banks as a basis for the issue of their paper. This idea that gold and silver acquire life, activity and productiveness, only when placed in banks as a basis for paper issues, rests upon the assumption that bank notes, to an indeterminate extent, may be thrown into circulation, and that a proportionate increase will be given to the commercial, manufacturing, and agricultural interests of the country." Out of the same period of sack-cloth and ashes, when delusions had been dispelled and things appeared in their naked truth, the Governor of Ohio said: "The great error which prevails on this subject [banks of issue] has its origin in the common, vague impression that we are dependent on the bank paper system for the supply of a sufficient quantity of the circulating medium, and that, without bank paper, commerce would not flourish, business would stagnate, and the country cease to advance in prosperity and improvement. This fallacy is the chief cause of that superstitious attachment to the paper system which with some has become idolatry:" "Vain indeed would be the attempt to hedge in the circulating medium of a country and pump it up to fullness by the ministry of banking institutions."

Hamilton also laid great stress on the function of banks to make loans to the government in case of financial exigency, and also to help tax payers to pay taxes. Loans to government lock up the capital of a bank and make it cease to be, as a bank. Although a bank might loan capital for the payment of duties (the case, in fact, which Hamilton puts in illustration), it certainly would not lend a man means to pay his personal taxes, which are an irrecoverable expenditure. These two points belong under the head of the political functions and benefits of a national bank. They were very prominent amongst Hamilton's motives for wanting one. Furthermore, without dilating upon it, he put into a very concise and pointed statement his view of the political philosophy of a national bank. It "is not a mere matter of private property, but a political machine of the greatest importance to the State." The history of the first Bank of the United States, and still more that of the second one, is a most instructive experiment to test the validity of this conception of such an institution under the political and social circumstances of the United States.

Finally he makes an argument against two of the pet ideas which we have already seen so active in connection with financial devices from the first settlement of the country—namely, the notion of paper issues on land security, and the notion of banking by the State, as a means of profit by which public expenditures may be provided for without taxation. His arguments on these points apparently had no effect, for we shall find that these two notions held sway for fifty years more, and were more destructive to the happiness and prosperity of one section after another than pestilence or famine.

This paper, therefore, consists of a jumble of ill-digested observations, in which correct and incorrect views are entangled with each other. In reading it, as in the case of Hamilton's other economic papers, the reader is constantly forced to think: If this writer had read Adam Smith, he would have been led to just that refinement of analysis and elucidation of his ideas, which would have led them out of crude inaccuracy into exactitude and correctness. That Hamilton had perused Adam Smith's book is unquestionable. This only makes it the more remarkable that a man of his well-proved mental power, should give such evidence that Smith's book had not affected his thinking, to any ascertainable degree.

In the debate upon the charter of the first Bank of the United States, in the House of Representatives, three elements may be distinguished, the constitutionality, the social antagonism, and the sectional antagonism. The first turned upon the question whether the government of the United States, which had been created by the Constitution, was endowed with the power to pass acts of incorporation. Madison was the leader of the negative, and, both by his authority and his arguments, furnished that side with its chief strength. He affirmed that the Constitutional Convention had refused to insert amongst the powers of Congress, that to incorporate, because it had been said that this would give the power to make a bank. Inasmuch as the question of power to incorporate a bank had arisen in respect to the Bank of North America under the Confederation, the non-conferment of this power in the new Constitution was undoubtedly a pregnant omission. The advocates of the bank had no little difficulty to find a clause under which it could be implied. Hamilton, when called on by Washington to submit an argument on the objections which had been raised against the bank, put its constitutionality on the ground that the Constitution had created a sovereign state, endowed with all necessary powers for the functions which it was called upon to perform. The opponents gave to "sovereignty" its most absolute and abstruse meaning. One of their chief reasons for detesting the bank was that they thought that it would help to support the conception of the federal Union as a confederated state with sovereign powers. Thus the bank was placed from the outset in the midst of the battle of State right. They also construed the power to incorporate as an especially majestic and prerogative function of a sovereign. Hamilton met the former issue quite squarely. He construed acts of incorporation as no more awe-inspiring than other acts of legislation, and presented the bank as a pure question of legislative expediency.

The social antagonism reached little other expression than a growl of suspicion and dread that this institution was to be an engine of the money power; that it was contrary to equality; that it would benefit only the rich.^[2] This antagonism was but an incident in the great warfare inside of modern society; numbers against capital; democracy against plutocracy; the struggle to acquire against the vested interest; the caprice of the moment against the established institution.^[3] This struggle in all its phases will be seen raging around both the first and the second Bank of the United States.

The sectional antagonism included also the antagonism of city against country. The North had the free capital, because the planters could always employ more capital than they could get, on their lands. The North also had commerce and a diversified industry. The South was agricultural; it had fewer and smaller cities; its views and prejudices were strongly marked by these peculiarities. It was a special complaint of the southerners that only federal stocks were subscribable into the stock of the bank. These stocks had passed into the possession of the North, the southerners having sold them in order to use the capital on the land. Their State stocks could not be subscribed.

The first objection, that about the constitutionality of the Bank, occupied by far the most attention in the debate. It suited the temper of the time. It deserves our especial notice because it never was silenced until, in Tyler's time, it extinguished a great national bank as an American institution.

The charter passed the House, February 25, 1791, thirty-nine to twenty. There were three votes from the north of the Potomac against it, and three from the south of the Potomac for it.

There is a tradition that Washington wrote a veto of the Bank act, but that Hamilton persuaded him to sign it. No evidence can be found to support this tradition.

The Bank was chartered for twenty years; to be located at Philadelphia; to issue no notes under $10; to have twenty-five directors; only stockholders residents of the United States might vote by proxy; seven directors were to constitute a quorum; no foreigner was to be a director; the directors were to elect the president, who was to be compensated while the directors were not to be compensated; one quarter of the directors were to be elected each year; one share was to have one vote, three shares two votes, five shares three votes, and so on until one hundred shares had twenty votes. The Bank was to report to the Secretary of the Treasury at his demand not oftener than weekly, and that officer might inspect the books except private accounts. The notes of the Bank were to be receivable for dues to the Treasury of the United States. The Bank was to hold no land or buildings except for its own use or by foreclosure. It was not to buy or sell goods except forfeited collateral. It might sell but not buy public stocks.^[4] The rate of interest was limited to six per cent. The Bank was not to loan the United States over $100,000 without an act of Congress, nor any State more than $50,000, nor any foreign potentate anything. Congress was to charter no other bank. The capital was to be $10,000,000 in shares of $400 each, $8,000,000 of which was to be subscribed by individuals, and $2,000,000 by the United States. The private subscriptions were payable in four installments, the first at the time of subscription, the second six months later, the third one year later, and the fourth after eighteen months. One quarter of each installment was to be paid in gold or silver, and three-quarters in public stocks; the six per cents at par and the three per cents at fifty. No private subscription was to exceed a thousand shares. The Bank might go into operation when $400,000 had been paid in in gold and silver.

A provision was inserted against Hamilton's plan and judgment, providing for branches. Sooner or later such were organized at Boston, New York, Baltimore, Washington, Norfolk, Charleston, Savannah, and New Orleans. For the fiscal operations of the government, the branches were very useful, and we have no information that any evils were produced by them in the first Bank; but later experience with branches in the United States has been almost uniformly bad.^[5]

Hamilton's Bank, created by this charter, fell in with the notion of a bank which then and long afterwards prevailed in this country. "What is that," said Daniel Webster, "without which any institution is not a bank and with which it is a bank? It is a power to issue promissory notes with a view to their circulation as money. Our ideas of banking have been derived principally from the act constituting the first Bank of the United States, the organization and powers of which were imitated from the Bank of England."^[6] "Banking in America," said Gallatin, "always implies the right and practice of issuing paper money as a substitute for a specie currency."^[7] The free banking law of New York, in 1838, first defined a bank without any reference to the function of note issue.

Let it be permitted to introduce at this point what it seems necessary to say in regard to the nature and functions of a bank.

The inconvenience of barter consists in the lack of coincidence between the persons who desire to exchange, with respect to the commodities, amounts, and qualities. Money overcomes this, but it is stiff and angular in its operation. Every step must be taken and no cross cuts are possible. What we call credit, in connection with currency, introduces harmony and rythm. By combination of steps, an accelerated movement, and abbreviated operations, many processes which are necessary in the use of money may be omitted in the use of credit. They are understood, or taken for granted, or are simply recorded until they are cancelled by some subsequent operation. These are the facts which led to the invention of banking, and to the devices by which it is carried on. Various paper instruments have been devised for convenience in these processes. It is a most mischievous mistake to include them in the definition of money. That introduces confusion at the first step and leads to fallacies at every step of deduction. The paper instruments abbreviate the processes and avoid the need of money.

A bank intervenes between lenders and borrowers and itself performs both operations. It gathers up capital from the lenders and distributes it to borrowers. Then it. collects it again from the borrowers and returns it to the lenders. The pulsations of this movement are the life phenomena of a bank. When the pulsations are high, sharp, and well accentuated, the vitality of the bank is high and its efficiency in rendering all the capital in existence as efficient as possible is very great. When the pulsations drag, are broken, and unpronounced, the efficiency of the bank is low. It tends to rest and idleness. The latter case is what is commonly called a lock-up of capital. It is a negation of the sense and activity of the institution. It is only banks whose movement is at the highest pitch of energy which can maintain a bank note circulation under the free control of the banker, and then the circulation will be involved in the business risks attending the discount and deposit operations.

The stockholders are also lenders of their own capital which is amalgamated with what they borrow to lend again. Banks hold an auxiliary or ancillary position in the economic organization. They hold a certain amount of capital free, which, since it is free, is in the form of money, which they bring to bear, now at one point, now at another, in the operations of the industrial system, as it is wanted, especially to bridge over intervals of time. They thus prevent any arrest in the operations; keep up the certainty of the movements of the market, and sustain the rythmical movement by virtue of which it is possible to calculate on the future. They prevent loss and waste, and maintain the efficiency of all parts of the system. They produce nothing at all directly. They are operative, not creative.

It follows that of course it is a question of organization how great the amount and proportion of bank capital should be. It is a part of the total capital which is set off to this auxiliary function. The total organization is more efficient by virtue of it, but it can easily enough be out of proportion either way. The question how great it ought to be in a given case can never be answered except by experiment.

In the supplementary charter of the Bank of England^[8] that institution is given the sole right to "borrow, owe or take up any sum or sums of money on their notes or bills payable at demand," etc. There was no delusion there about the difference between bank notes and money, nor about the fact that what a bank does, when it issues notes, is that it borrows and takes up money and therefore owes it. Any one who issues notes takes a corresponding amount of specie out of the circulation, which is there or would be there, but for this interference. It is proper to approach the matter by conceiving of the community as provided with specie enough to do its business with, according to the ratio of its business to that of the commercial world taken on the total amount of money metal in existence. The note issuers take this away and put their notes in its place; or, they obtain the possession of an equivalent capital which is imported when the displaced metal is sold abroad for real capital. This is the capital which they lend, and the one which produces the interest which they obtain on their notes. As there are four or five steps, and they are all out of sight, at least so far as their connection with the operation of the bank is concerned, there is room for a great number of partial and fallacious interpretations. It comes to be believed that bank notes have a substantive existence, that they, on which interest is obtained, are not like the notes of individuals, on which interest is paid; in short, that they are money, perhaps even capital.

The view of notes as supplanting specie to an exactly equal amount is what is called the "currency principle." According to it the note issuers have a monopoly privilege and strive with each other for shares in a quantum of gain which cannot be surpassed.

A very large class of credit operations, however, consists in what we might call suspended exchanges. Half the exchange operation is performed but the other half is delayed under a promise or contract of later delivery. A bank steps between. It fulfils the contract at once and does the waiting. If no defalcation occurs, all the givings and takings will be equal, plus a commission for waiting. If, therefore, a bank could intervene in all the cases of suspended exchange which occur in the market, it could keep an account of debit and credit with all the parties. At the end of a certain time all the entries would balance, except for the commission which would fall to the bank as reward for its services, and all the transactions would be closed. If, therefore, the bank could get all the transactions into its hands, and promise to pay everybody, it would need to pay nobody. The whole would be resolved into a book-keeping transaction. If, moreover, all those who had money would carry it to the banker for safe keeping, it is with this money that he would pay in the few cases in which for any reason the use of money was actually called for.

In these last observations lie the magic and mystery of banking. If only the requisite prestige ("credit;" "confidence") can be won to set the institution in operation, it is self-acting, and all that the happy manager has to do is to take toll from its operations. The legitimate way to win the prestige is by offering guarantees of capital and character. Another way is to impose by inflated words and pompous parade upon the credulity of the bystanders. This history will show the difference between the two.

We can go one step further. It would be a great additional advantage if the transactions were not only recorded on the books of the bank, but if also evidence of them was transcribed on portable records, which could be shown and transferred by the parties in the market as their interests in further transactions might render desirable. The bank therefore "issues" paper evidences of the existing contracts which may take any convenient form. Bank notes are one form. Their great convenience is that they are entirely impersonal, and betray nothing of the mode or occasion of the contract by which their possessor obtained them from the bank, while they enable him to divide his credit as he sees fit and to buy what he wants without further guarantee. Since all the transactions will cancel within a brief period, all the paper evidences will return to the bank within that period. It will then be found that the bank has only "furnished a medium" for all the transactions. We have here a striking illustration of the way in which phrases, in this domain, alter their meaning before the man who uses them is aware of it. To "furnish a medium," on the currency principle, means to provide the community with a currency, in the belief that, but for this provision, it would have none, while in fact the bank takes away specie to give paper. On the banking principle, the bank does, in a legitimate sense, furnish a medium of credit in operations in which money is dispensed with, and a kind of barter of a higher grade is reintroduced, money being used as a standard of reference for the terms of the barter. All the persons in the market may find themselves in a snarl of debts which would hinder them all from moving, but there would be a thread of mutual or consecutive obligations which, if it could be found and drawn out, would absolve them all. The bank operations effect this.

This latter set of facts is the one on which the "banking principle" is based. Both principles are true, but no one has yet succeeded in defining their spheres or their relation to each other. The only line which can be drawn between them is a vague and empirical one; that the small notes are under the currency principle, and the large notes under the banking principle. The latter are used in the greater transactions of business; the former in expenditures for consumption. Hence the earnest attempt of the banks, which we shall see in this history, to get the right of emitting small notes, and also the constantly repeated effort of currency reformers to forbid the same. The small notes, under the currency principle, were a permanent loan obtained by the banks from the public, but they also compelled simple and uneducated people to hold a stake in the prosperity of the bank with which they had nothing to do, and on which stake they might lose but never could gain.

It will be seen that the bank projectors of the th and tl centuries mentioned above, Chapter 1, had won a vague and imperfect perception of the facts underlying the banking principle. They were trying to enunciate its doctrines and devise an institution to operate upon them.

The arguments in favor of bank note currency in this country have always been made from the standpoint of the "banking principle." That currency was always on the currency principle: The banking principle fails entirely when loans are made on accommodation paper, or on land, or on long contracts of any kind. Hence in the history of American banking, the banking principle appears to have been a delusion.

In the paper in which he first laid before Congress the arguments for a Bank and the outline of his plan, Hamilton made a special explanation and defence of two features in it. The first was the provision that shares in the public debt might be subscribed into the capital. The purpose of this was "to enable the creation of a capital sufficiently large to be the basis of an extensive circulation, and an adequate security for it." He wanted to make a large issue; he thought it impossible to collect a large amount of specie; he had rejected the notion of an issue based on land security; therefore, taking his model from the Bank of England, he based the issue on debt. The best writers on banking, in the third decade of the nineteenth century, had generally reached the conviction that the capital of a bank ought to be invested in some permanent security, and that the operations should be carried on with the notes. Evidently, if a bank should be formed by an association of capitalists who should buy bonds with the capital and carry on the business with the notes; or if they should be already owners of government bonds, which they subscribed as capital, printing notes for use in banking; or if they should lend their capital to the government as a book debt and obtain the franchise of note issue with which to do banking, as the Bank of England did in the first place; or if they should organize, as our national banks now do, it would all amount to the same thing. When the first Bank of the United States was organized, the government did not need to borrow and did not obtain any loan by the subscription of the public stock into the capital. That arrangement never had any proper cause or excuse, and only served to give occasion for some clamor against the Bank, as a piece of jobbery and favoritism to the bondholder.

The other point which Hamilton felt it necessary to apologize for was that the government was to take shares in the Bank. The government possessed no capital and the Treasury had no surplus. What right had it to take shares in the Bank? Hamilton said: "The main design of this is to enlarge the specie fund of the Bank, and to enable it to give a more early extension to its operations." This is unintelligible. The government put bills of exchange on Holland into the Bank in payment for the stock; then it borrowed the bills of exchange out again, and gave its note at five per cent. for the amount. This was called a "simultaneous transaction;" a phrase of ill-omen for an ill-devised operation. The government had simply given a stock note and set the example, which impecunious and bankrupt individuals adopted and repeated during the next fifty years, in hundreds of cases, with the most disastrous consequences. It was bound to pay $200,000 annually on this note, which, as Hamilton said, would "operate as an actual investment of so much specie." He added another reason for this arrangement, which was the real one: that the government would thus share in the profits of the institution. He had, however, well argued against State banking for profit, in the same document.^[9] This arrangement was unnecessary and mischievous. It was right that the government should participate in the profits of the Bank either by a bonus or by taxes, but this device put the government in the wrong on the most fundamental and farreaching difference which can exist in regard to the conception and organization of a bank. If the stockholders of a bank are debtors to it and not creditors of it, it is a swindle. They take something out where they have put nothing in. They are not lending a surplus of their own; they are using an engine by which they can get possession of other people's capital. They print notes which have no security and make the public use them as money. They bear no risk of their own operations, but throw all the risk on others while taking all the gain. The government had no more right to subscribe stock when it possessed nothing, and put nothing in, than an individual would have to do the same thing.

The stock of this Bank and four thousand shares more were subscribed in two hours.^[10] It went into operation December 12, 1791. A very active speculation in the scrip sprang up as soon as the first installment was paid, and it was run up to a premium. This contributed largely to the financial crisis in the winter of 1791-2, "with distress for money unequaled in this country." A story is told that the son of the president of the Massachusetts Bank, and two others, borrowed the funds of the bank to such an extent that it stopped discounting for six or eight weeks, while they went to New York and speculated in government paper. They sold out to Duer. The next day the stocks fell 20 or 30 per cent., and he was ruined. He had high credit and had taken on deposit the savings of small people.^[11] He was put in jail, where he remained five years. Threats were made of lynching him.^[12]

The belief at the time, and subsequently, was that no more than the specie part of the first installment ever was paid into the Bank in specie.

In managing the relation of banks to each other, Hamilton set some precedents which deserve careful attention on account of the momentous consequences which afterwards followed from them. He naturally had a tender feeling for the Bank of New York, and one reason why he opposed branches for the national bank was that he foresaw a collision of interests. As soon as the charter was passed he wrote to reassure the Bank of New York, saying that he had explicitly directed the Treasurer not to draw upon it without special directions from himself. He declared his intention in lhe public interest to protect that bank against speculators.^[13]

In November, 1791, he assured the cashier that, although it would be his duty to put the public deposits in the branch, he would precipitate nothing, but would conduct the transfer so as not to embarrass or disturb that institution. In the commercial crisis of 1791-2 he ordered the Bank of New York to buy government bonds, in order to sustain their value and relieve the money market. In fact he followed the course of the panic with such interference as he judged would be useful. In May, 1792, he encouraged the Bank of New York to make loans to manufacturing companies on easy terms, giving the assurance that the bank should suffer no diminution of its pecuniary facilities by so doing.^[14] In March of that year, the Bank of the United States and the Bank of New York had agreed upon a policy of co-operation, but, in 1796, the president of the Bank of the United States having directed the New York branch to demand payment of an amount due from the Bank of New York, the latter was forced to contract, producing alarm. Thereupon Hamilton wrote to his successor, Wolcott, asking him to interfere to produce a mitigation of this order. He thinks that this will be good policy, the weakness of the New York Bank being due to its loans to the government. Wolcott replied: "I will thank you to inform the president of the New York Bank or any other confidential person that they may rest assured of as full and cordial assistance in any pressure of their affairs as shall be in my power. I think, however, that they must principally rely on sales of stock, and in my opinion any sacrifice ought to be preferred to a continuance of temporary expedients." In the same letter he also said: "These institutions have all been mismanaged. I look upon them with terror. They are at present the curse, and I fear they will prove the ruin of the government. Immense operations depend on a trifling capital, fluctuating between the coffers of the different banks." The significant facts in these proceedings are: the interference of the Secretary of the Treasury in the collision of interests between different banks, and the function of mediator or arbitrator which he assumes. His interference in the money market, although noticeable, was not nearly so important.

Wolcott wrote to Hamilton in 1795: "Banks are multiplying like mushrooms. The prices of all our exports are impaired by improper negotiations and unfounded projects, so that no foreign market will indemnify the shippers." And again: "It would astonish you to know how far the capital of this country has been placed in the power of France by speculations to that country and the excessive use of credit during the last season. If we have a good crop and the ardor of speculation can be checked so as to allow a loss which I know to be inevitable to fall gradually upon us, the merchants will struggle through; but if we proceed in our present course until a sudden revulsion takes place, the consequences may be serious." These fears were speedily realized in the financial crisis of 1796, which was connected, no doubt, with the financial crisis in Europe which produced suspension of specie payments by the Bank of England.

Early in 1796, before these troubles came on, John Adams wrote to his wife, in view of his approaching accession to the presidency, that the paper money of the country was the worst evil he saw.^[15] In 1799 he declared:

"Public credit [i.e., general mercantile credit, not the credit of the government], can never be steady and really solid without a fixed medium of commerce. That we have not such a medium, you know, has been my opinion for several years. The fluctuations of our circulating medium have committed greater depredations upon the property of honest men than all the French piracies. To what greater lengths this evil may be carried I know not. The Massachusetts Legislature are authorizing a number of new banks. The cry is the immense advantage to agriculture. Credit cannot be solid when a man is liable to be paid a debt, contracted to any, by one-half the value a year hence."^[16] The rise of a bank mania in Massachusetts, to which he here alludes, produced consequences which we shall soon have to notice.

In 1797, a federal tax was laid on all notes of banks, not exceeding $50, of six mills on a dollar, and lower rates on higher denominations. These taxes might be commuted at one per cent. on dividends. In 1798, an act of Congress made it felony to counterfeit notes of the Bank. In 1807, passing counterfeit notes was included. This latter was made necessary by a decision that the former law was inconsistent with itself, and void, so that it would not support an indictment for knowingly uttering as true a forged paper.^[17]

Under Gallatin's administration of the Treasury we find one case of "arbitration" between banks, and we find proofs of Jefferson's ideas of the proper relations between those institutions and the federal government. In 1802, the Bank of Pennsylvania applied to Gallatin for help. It fell one hundred thousand dollars per week in debt to the Bank of the United States. Upon this Gallatin comments: "They have extended their discounts too far."^[18] On an application of the Bank of Baltimore for a share of the federal deposits, Jefferson commented favorably, because he said that the stock of the Bank of the United States was almost all owned by foreigners.^[19] Jefferson wrote to Gallatin, July 12, 1803: "As to the patronage of the republican bank at Providence, I am decidedly in favor of making all the banks republican by sharing deposits amongst them in proportion to the dispositions they show. If the law now forbids it, we should not permit another session of Congress to pass without amending it."^[20] May 3, 1804, Gallatin reported to Jefferson that there was a great drain of dollars out of the country.

"There are not at present one hundred thousand dollars in Philadelphia, New York and Boston put together. More than three millions of dollars have been exported in six months from the vaults of the Bank of the United States alone."^[21]

The banks which were in existence at the end of the century were paying from eight to fifteen per cent. dividends. This stimulated a movement for the creation of more of them.

The first bank mania, with inflation and collapse, after the introduction of convertible note banking, took place in New England, and the rest of the country came tb look on that section as sunk in the follies and vagaries of paper money.^[22]

Massachusetts.—In 1799 a law was passed making it unlawful to join any association to do banking of any kind unless authorized by law. The penalty was $1,000; the notes were void. All such associations then existing were to dissolve by March, 1800. The period was one of great prosperity in New England, but in 1800 we hear that, "the tide of wealth which had flowed so long has considerably ebbed, and the effect of this change has become visible in everything. Property has fallen in price. Real estates especially are not worth so much by 20 per cent. as three months ago."^[23]

Although nearly every charter for a bank in Massachusetts required the bank to report annually or semi-annually, "few seem to have paid any attention to these provisions." A general act of 1803 led to systematic reports. A law of 1799 in that State had made it illegal to emit notes for less than $5, but in 1805 they were allowed for $1, $2, and $3. This measure was in obedience to a popular demand and was to be temporary only. Besides the branch of the United States Bank, there were then twenty-one associations for banking in Massachusetts, which were privileged to issue $13 millions.^[24]

In the first years of the century there was a great multiplication of country banks in Massachusetts, Maine, and New Hampshire. Their notes all flowed into Boston and displaced the circulation of the Boston banks. A double currency was thus introduced, one called foreign money or current money, and the other Boston money, differing by about one per cent. which was construed as a premium on Boston money. The brokers dealt in these currencies, reserving a quarter of one per cent. commission. The country issue then became excessive and the brokers sent it home. Hence it came about that a bank was profitable in proportion to its distance from Boston and the difficulty of access to it. The favorite locations became remote parts of Maine and New Hampshire. In order to equalize and extend the circulation of foreign bank notes the Boston Exchange Office was incorporated in 1804, its capital consisting of such notes and its business being done with them. It was not very successful. The brokers sent home the bills of the nearer banks and the discount on the currency continued to increase as the bills of the more distant banks predominated. Andrew Dexter, having studied the operations of the Exchange Bank, undertook the control and monopoly of the circulating medium of New England. He bought up at a great premium nearly the whole stock of the Exchange Office and of several distant banks in Maine, Berkshire, and Rhode Island. With these funds he bought real estate and built the "enormous pile, since destroyed by fire, known by the name of the Boston Exchange Coffee House." This immobilized his capital. The discount on country bank notes increased and the country banks invented ingenious ways of defeating and delaying payment.

In the autumn of 1808 the Boston merchants raised a fund for the purpose of sending home the country notes for redemption. The discount was from two to five per cent.^[25] This caused a crisis, and in 1809, "the greater part of the country banks in Massachusetts, Maine, and New Hampshire, having any considerable amount of bills in circulation, stopped payment. Some of them recovered, but a great number proved irredeemably insolvent. It would probably be a moderate estimate to put the losses by the bank failures of that period at $1 million.^[26] In the following year, a law of Massachusetts imposed a penalty of two per cent. per month on any bank which refused or delayed payment of its notes.^[27] A Boston firm writing to Matthew Carey, says: "We have heard that a bank mania is raging in your State. If this is true we wish your legislators could see some of the fatal effects resulting from a too free incorporation of banks in this quarter of the Union, and learn wisdom from our misfortune."^[28]

The most famous case which occurred was that of the Farmer's Exchange Bank of Gloucester, Rhode Island. It was incorporated in February, 1804, with a capital of $100,000, payable in gold and silver, in seven installments stretching over three years. The directors paid the first installment in specie, but in a few days borrowed of the bank the same amount without security, and gave their notes without endorsers for the first five installments; on the two last they made no payment whatever. The shares were gradually bought in with the property of the bank. Each director was allowed to take $200 in notes in order to exchange the same for specie, and the bills of other banks, as these could be found in the circulation.

This became one of the favorite devices. A grocer who was interested in a bank, or who was induced by a commission, took a quantity of its notes to exchange. He paid them out at every opportunity in "change" and retained the notes of other banks which he brought back to the bank. This provided that bank with "specie funds" without further trouble or expense. Hence arose also a fraud in the term "specie paying" banks. Two, neither of which had any specie, but each of which held a quantity of the other's notes, became thereby "specie paying;" because each returned its stock of notes of the other as "specie funds," or "cash items." Gouge, Raguet, and other writers of Jackson's time refer to the period before the second war as one in which there had been some sound, honorable, and high principled banking. Investigation does not verify this. Sometimes there was a certain naïveté and simplicity about the way of behaving, but these earlier bankers invented nearly all the later abuses, and they set about the exploitation or them with less reserve than their successors. Perhaps they and their contemporaries had not yet learned how mischievous the abuses might become. If so, that is the most which yet can be said for them; for they did not show any greater scrupulosity than their successors. The fact is that what New England did in the first decade of the century is what the Middle States did in the second, and the Southwest in the fourth, and the Ohio States in the sixth.

In 1808 Andrew Dexter bought up all the outstanding shares of the Farmers' Exchange Bank, giving for them his own notes or notes which were the property of the bank. He then put in a new set of directors. During January, 1809, he was writing constant letters from Boston to urge the cashier to sign notes as rapidly as possible and send them to him in great quantities, with complete secrecy. He also gave orders that notes should be redeemed only by drafts on Boston, or with vexatious delays. When at last the attention of the Legislature was drawn to the matter, Dexter tried to persuade the cashier to pay no heed to its summons. The Committee of Investigation found in the bank $86.48 in specie. The books were in such confusion that the actual outstanding circulation could not be definitely ascertained, but it was thought to be $580,000.^[29] "It is impossible for us to picture the ruin and distress that followed, the effects of which are still remaining. It is said, and we presume correctly, that in one county of this State there were $100,000 of the bills of the Farmers' Exchange Bank in circulation at the time it failed, and probably in the State there were $400,000 or $500,000, all of which, after being bartered at various discounts, became a total loss to the last holders, which, in most instances, were the poorer and less informed parts of the community. There is no doubt that thousands of farmers will be ruined, and leave their families in poverty, in consequence of the facility with which they obtained money at the banks by mortgaging their estates."^[30]

It was in the name of the Boston Exchange Office that Dexter first approached the Farmers' Exchange Bank. He had seen how the notes of one bank could be played off against those of another, especially if they were at a distance from each other. The second bank with which he was operating was the Berkshire Bank at Pittsfield. If a bank issued its own notes in very great quantities, they would become very abundant in the country around it. This would excite attention, and they would be brought in for redemption; but if the Berkshire Bank issued notes of a Rhode Island bank, and vice versa, and if they were widely scattered, these dangers could be averted. The Boston Exchange Office in fact accomplished this on a large scale for its constituents. It is also noticeable that amongst the notes which Dexter sent to the Farmers' Exchange Bank, in order to strengthen it, were notes of the Marietta Bank, Ohio. He thought them quite available, because there was such a demand for remittance to Ohio. We learn from other facts that the circulation of bank notes from one end of the Union to the other was, at that time, wide and easy, far beyond what one would have believed possible.^[31]

In 1814 the New England Bank adopted the plan of receiving the bills of all the banks in New England at a discount varying according to distance, but in no case exceeding one per cent., and on condition of a sufficient permanent deposit being maintained, they were returned to the banks at the price at which they were bought. The bills of banks which did not keep a deposit were sent home for payment. The other banks competed with the New England Bank for these deposits, and thus diminished the discount.

In the story of the early Massachusetts banks we see the first development of the antagonism between commercial banking and agricultural banking. In the larger towns of that State city industries were beginning. They could support banks of discount and deposit with short paper. Persons who were fitting out ships or tilling land could not use ninety day paper. Loans to farmers always had the character of accommodation paper with renewals, although a mortgage would give ultimate security. The Bank Commissioners of Connecticut, in 1841, expressed the opinion that "the practice of some banks to confine their discounts exclusively to business paper or paper that is subject to no renewal, is a great innovation, and denies to a worthy class of borrowers those facilities and advantages to which they are entitled in common with those of more various and extended business." True bank note circulation could not be maintained by the country banks, but if they could get a distant circulation they could live on an abuse of issue-banking. The jealousy of the rural population in respect to banks led them to insist on inserting in bank charters a provision that a certain fraction of the capital should be loaned on mortgage of land. We shall presently see the antagonism, which here arose between parts of the same State, marking the relations of parts of the Union.

We observe that a bank was conceived of primarily as a means of creating wealth. Every one wanted a share in its beneficent operation. If the Legislature created it, all the people ought to participate in its blessings. To do justice to this notion we must not forget that the banks then existing had been organized very generally on stock notes, and if they succeeded, were mines of wealth to their owners. A generation later, as we shall see below, people came to say that banks were a curse to all agricultural interests and persons. We shall see that, in the history of banks in this country it has been a question of paramount importance: What is the utility of banks to farmers and how is it to be realized? From the standpoint of commercial banking with ninety day paper, a loan to a farmer for a year with a stipulated renewal was bad banking, but, on the other hand, such a loan could never answer the purpose of a farmer. Repayment within a year is, for him, vexatious and impracticable. He needs loans for years or for an unlimited period. Never until modern institutions of credit suited to the necessities of the case grew up did this antagonism of facts, interests, and institutions pass away.

The incident of the Farmers' Exchange Bank led the Legislature of Rhode Island to pass a law, fining any officer of a bank $50 for every check, note, or bill signed by him, for a less sum than $50, payable at any place out of the State. A fine of $5 was also imposed on any one who should pass a note for less than $5 issued by a bank out of the State.

The banks of Rhode Island had a peculiar "bank remedy" or "bank process" against delinquent debtors, according to which execution issued directly without previous process and finding of judgment. The bank process was abolished in 1836, on the recommendation of a committee of the Legislature, who found that it was liable to abuse, and that the remedies provided for other people were also sufficient for the banks.

In Vermont, in 1803, two bank acts were vetoed, on the ground that banks demoralize the people by gambling, concentrate wealth in the hands of the few, and are useless to the many since they give credit only to the rich. Here now we meet with the first great State paper money machine. It was first proposed in o 5, and rejected; but November 10, 1806, it was adopted. It was to be called the Vermont State Bank; to have two branches; to be the property of the State; to be controlled by the State, and all the profits to go to the State. The directors were to be chosen by the Legislature, six for each branch. Each branch had a great degree of independent life and action. The directors of each branch were to borrow specie from time to time for that branch and on its credit, not issuing more notes than the actual specie on hand until that amounted to $25,000. After that they might put in circulation three times the amount of specie, provided that the last should never exceed $300,000. Five hundred dollars were appropriated to procure plates and paper, and the Legislature might appropriate money in the Treasury to fill the coffers of the bank. The directors were authorized to purchase, hold and transfer real or personal property, as it might be necessary to protect the interests of the State in the proposed operations.^[32] The next year the directors reported that, on September 30, 1807, there was due the bank, $139,757. The notes were of the denomination of fifty cents, seventy-five cents, one dollar, a dollar and a quarter, a dollar and a half, a dollar and seventy-five cents, two dollars, and three dollars. These had been printed and issued on mortgage loans. The institution was reported prosperous and successful, and in order that the State might win the expected profits it made a monopoly of its bank, just like the other banks, by enacting that no notes issued by any bank out of the State should be brought into the State to be loaned there.

The next year the trouble begins. It is charged that noteholders cannot get notes redeemed without paying a discount of one per cent. or two per cent. or taking a draft on a distant bank, payable after thirty or sixty days. The defense was that this rule was made only for defense against speculators or persons unfriendly to the bank, and it seems to have been held good. These, however, were the familiar tricks of banks formed by selfish private capitalists. The notes in circulation were now over half a million; the State was creditor of the bank for about $80,000, and the latter had cash assets, $187,000. In 1809, the banking crisis having taken place in the adjacent States, the Governor declared that although he had not favored the State Bank originally, he thought that the people, but for it, would now have been in possession of the worthless paper of the broken banks. The House replied that they valued the institution as a source of revenue; considered "the final redemption of the bills already guaranteed by the honor and wealth of the State," and that they were ready to do anything to remove real or imaginary obstacles to the prosperity of the institution. The accounts of the bank now showed a net gain to the State of $22,412. A committee of the House thought that all the loans were good, each note having two or more endorsers; but they are obliged to add: "Although causes unforeseen to the president and directors have produced a temporary suspension of punctual payment at the bank, yet it does not appear that this state of things will long continue." It is also very significant that two or three laws were passed at the same session to enforce the collection of debts due the bank. A summary process of execution, like the Rhode Island "bank process,"^[33] was provided. The next year it is enacted that the directors shall give a list of all who are in arrears to the bank, annually to the Legislature; and a similar list of delinquents is to be published in the newspapers. In 1811 the legislative committee hoped that if the bills were called in, as they had been during the last year, very few of them would, in another year, remain in circulation. They recommended the appointment of a committee with power to make a full examination of the bank during the recess. No notes were to be put in circulation until the specie equalled half the debts; and the loans were to be called in as rapidly as possible. A year later the report showed the bank in possession of lands taken on execution to the amount of $11,062; the loans outstanding were $95,418, of which half were in suit. The Bank held notes of broken banks, $3,052; the notes in circulation were $78,431; a balance unaccounted for was $13,680.

In 1812, laws were passed to wind up the institution. The State Treasurer was to give to noteholders treasury notes payable, half in one year, and half in two years, with interest at six per cent. In 1822, the State Bank owned lands taken on execution to the value of $21,685. The State redeemed all the outstanding obligations by receiving them for taxes, and in 1825, distributed the avails of the property which it had received from the bank amongst the towns for schools. The affairs of the bank were settled up in 1845. The loss by it never could be exactly ascertained. A tax of one cent per acre was levied in 1812 in order to retire the notes. It brought in $100,000 of them. There were in the State Treasury $130,000 received otherwise. The assets of the bank produced about $30,000, leaving the loss about $200,000.^[34] One Durkee of Boston, who demanded specie of this bank, was arrested, in 1808, and an indictment drawn against him; but the bill was not found.^[35]

Connecticut.—The bonds of the United States owned by the State having been paid, in 1803, the Legislature voted to put the amount in banks which would receive it as stock-deposit; that is; it was to be deposited, but to get the rate of dividend instead of the rate of interest, be withdrawable, but not transferable as stock.

The shareholders of the Hartford Bank voted, in 1806, that they would receive subscriptions from religious societies or school corporations on similar terms to those here provided for the State. The following year the Legislature authorized an increase of the capital stock of this bank to one million dollars, with the provision that "the bank should be open at all times to subscriptions of shares from the funds of schools, ecclesiastical societies, or other incorporations for charitable purposes in the State, without any advance thereon, and with the right, on the part of the privileged associations, to withdraw their moneys on giving six months' notice. Whenever the holdings of any favored society reached $50,000, the full capital of one million dollars having been otherwise filled, it was entitled at the annual meetings to the choice of a director. These shares were not transferable." In 1809 the bank petitioned the Legislature to relieve it from the necessity of receiving these subscriptions. In 1816 it had $212,800 of such non-transferable shares.^[36] This arrangement became customary in Connecticut, and was introduced into nearly all the bank charters which were granted before the civil war. The Connecticut charters, also, as a rule, did not run for a prescribed length of time, but they contained a clause allowing the Legislature to amend or repeal them.

New York.—In 1799 the Manhattan Water Company was chartered in New York City with a capital of two million dollars, and with power to use any part of the capital not required for water-works in any way "not inconsistent with the laws and Constitution of the United States or of the State of New York." Aaron Burr is mentioned as the inventor and chief promoter of this charter. When the bill came before the Council of Revision, the Chief Justice objected that, under the clause quoted, the corporation might engage in trade. No one seems to have noticed that the corporation might engage in banking, which was the real intention. In excuse of this subterfuge it was alleged that no Charter for a republican bank could then have been obtained. The charter was perpetual, but in 1808 the company was allowed to sell or lease its water-works to the city, and to use all its capital for banking. The charter was to expire thirty years from the date of such sale or lease. The State might subscribe for one thousand shares of the stock, and the Recorder of the City of New York was made a director ex officio.^[37] The right of this company to do a banking business was tried and affirmed by the Supreme Court of the State.^[38]

The next measure of this kind was the charter of the New York State Bank at Albany, which was petitioned for on the express ground that the bank already existing at Albany was federalist. This republican bank petitioned for an exclusive grant of the salt springs for sixty years. This request was not granted, but Hammond^[39] gives a description of the lobbying devices by which the charter was carried. "The company, before their petition was presented, had agreed on a dividend of stock between themselves, and reserved the surplus to be distributed among the members of the Legislature. It appears from the affidavit of Luther Rich, a member from the county of Otsego, and several other affidavits, that assurances were given that those members who voted for the bill should have stock, with a further assurance that the stock would be above par." A modified statement in regard to this, intended to excuse it, is to the effect "that the applicants founded their claim to a charter upon the ground that it should be a republican bank, and with a view, as was pretended, to insure it that character, they agreed that each republican member should be entitled to subscribe for a given number of shares, and that this privilege was secured to every republican member, whether he voted for or against the bill."^[40]

In 1804, two unincorporated partnerships doing a banking business, one in New York City and the other in Albany, tried to get charters, but the Legislature passed instead a restraining law forbidding all unincorporated companies from banking, and compelling these companies to go into liquidation. As Hammond says, this law established a monopoly of the issue of notes in the existing banks. In the following year the Merchants' Bank, one of the above-mentioned companies, renewed their application for a charter. They were opposed by the persons interested in the banks already chartered, some of whom, as DeWitt Clinton, John Taylor, and Judge Spencer, were among the most powerful politicians in the State. One of the strongest grounds of opposition which they openly alleged was that "the granting of the application would be injurious to the republican party." The petitioners were denounced as federalists and tories. They thereupon had recourse to lobbying and bribery. The whole affair constituted a great political scandal.

The charter of the Bank of America, in 1812, was an occasion of bribery and corruption. John Martin, a preacher and sub-agent of the bank, was convicted of attempting to bribe members of the Legislature, and was sentenced to confinement in the State prison. There was a Legislative investigation and a great political scandal.^[41] In April, 3, certain bank charters were extended until June, 1832. Among them was that of the Bank of New York. Certain colleges were allowed to subscribe a specified amount of stock in these banks, at the original price. The trustees of Hamilton College sold to the Bank of New York their right of subscription at $126 per share.

Pennsylvana.—The Bank of Pennsylvania was incorporated March 30, 1793, for twenty years. Its charter was renewed in 1810 for twenty years longer. At one time it had four branches, but they were not all maintained. In 1796, the State obtained from this bank, as dividends on the shares owned by it, about $100,000 per annum, which paid nearly all the State expenses.

In 1796, a defalcation was discovered in this bank, amounting to $111,000, and overdrafts for $100,000 more. This was a republican bank, some of the leading republican politicians of Pennsylvania being in control of it. As all banks in this period had a political character, their doings and fortunes were discussed in the partisan newspapers just as the personal qualifications of candidates were discussed.^[42] In the financial distress of 1796, Madison thought that the banks were powerful to persuade people to sign petitions in favor of Jay's treaty, on account of the general dependence on bank accommodation.^[43]

The Philadelphia Bank was chartered March 5, 1804, having previously been in operation as a partnership. Its first period was ten years; renewed in 1806 for ten more; in 1809 it was authorized to institute branches, of which it established four, but not all were maintained. At this time the farmers had come to believe that the prosperity of cities was largely due to banks. In 1810, the Farmers' Bank was established in the county of Lancaster, and others in other parts of the State. March 19, 1810, unincorporated associations were forbidden to issue notes; but they continued to do so, and circulating notes were emitted by bridge and turnpike companies. The Farmers' Bank of Lancaster made such large issues that it paid dividends of more than 12 per cent. per annum. This greatly stimulated the desire for banks.

In 1810, the State of Pennsylvania owned $1 million in the Bank of Pennsylvania, $523,300 in the Bank of Philadelphia, and $75,000 in the Farmers' Bank, which had just been chartered. It also had shares in the Mechanics' Bank. In 1810 it subscribed $396,920 to the Bank of Pennsylvania, whose capital was then raised to $2.5 millions.^[44] Perhaps the most influential publication on financial matters during this period was Blodgett's Economica, 1805. It favored an increase in banks, the use of public securities as money, land security for bank notes, etc.

The Farmers' Bank of Delaware was chartered February 3, 1807, with a capital of $500,000, of which the State took one-fifth. It was to be the State bank, but was free from fantastic features.

Virginia.—The Bank of Virginia was incorporated January 30, 1804, to last until 1818. It was to have $1.5 millions capital, of which the State subscribed $300,000, borrowing that amount from the bank at four per cent. The lowest denomination of notes was $5. In the following year it was made unlawful to pass a note of an unchartered bank. The next bank chartered by that State was the Farmers' Bank of Virginia, incorporated February 13, 1812, with a capital of $2 millions. Of the shares 3,334 were reserved for the State, if it should choose to take them. It was to last until 1827 and have four branches. It might not own more than two and two-third times its capital, nor owe more than three times its capital besides deposits, unless authorized by the State. By a subsequent law it was allowed for two years to make loans to the United States, in view of the impending war. It was forbidden to buy any stock but its own.

The banking history of North Carolina begins with the Mutual Fire Insurance Company, incorporated in 1803, which appears to have issued notes, although this is not certain. In the following year the Newbern Marine Insurance Company was incorporated, of which the same may be said. The president and directors were authorized to "direct the issuing of policies, notes, and all and every instrument in writing that may be necessary and proper in the transaction of the affairs of the company." In the same act a bank was established at Newbern, with a capital of $200,000, to last until 1820; $50,000 to be raised at once; the debts, exclusive of deposits, never to exceed three times the capital. In the earlier part of the century this ratio was the usual one in the southern States. The State reserved the right to subscribe $25,000. If it did so, the note issue might be increased in proportion. In the same year the Bank of Cape Fear was established at Wilmington, as was said, on account of increasing population and commerce, to last until 1820; capital, $250,000. The State might subscribe, within three years, $25,000. This bank might become a branch of the Bank of the State, if one should be founded.

A legislative Committee of Investigation, in 1828-9, reported: "It is in evidence to the undersigned that soon after they [these two banks] went into operation, they contrived to get possession of nearly all the paper money which had been issued on the faith of the State, which, being at the time a legal tender, enabled them to evade demands for specie, which they did by thrusting this ragged paper at those who presented their notes for specie." In 1814, the two banks were authorized to increase their capital to $800,000 each; which increase, this same committee said, was taken in the stock notes of favored individuals.^[45]

The State Bank of North Carolina was first incorporated in 1805. It was repealed in the following year, and is therefore important only as showing the trend of ideas at the time. The most peculiar provision was that the bank might open an account with any farmer, mechanic or manufacturer, for any sum between $100 and $1,000, on which he might draw or deposit not less than $50 at a time, paying interest on debit balances and receiving interest on credit balances. He must give security of land or other property satisfactory to the bank, and not over one-fifth of the capital of any bank or branch might be in these accounts at one time.

In 1807 the Treasurer was authorized to subscribe for the shares which had been reserved for the State in the Cape Fear and Newbern Banks, paying in three annual installments, with four per cent. interest. After paying the last installment, he might borrow the same amount from each bank "until the dividends received be sufficient to pay off the sum borrowed." A law of 1809 seems to show dissatisfaction with the Banks of Newbern and Cape Fear. As they were forbidden to issue notes under $1, it must be inferred that they had done so. The Governor was ordered to appoint State directors, according to the power reserved in the charters, in virtue of the State subscription. Annual reports were to be made of the outstanding circulation. If notes were issued beyond the lawful limit, the charters were to be forfeited. The banks were not to issue notes on account of their deposits beyond the minimum amount of them in the previous year. In the same year £5 penalty was imposed for passing any note under 10 shillings, because, as the preamble states, "the circulation of promisory notes or due-bills, by individuals, for small sums, has become so general in some parts of the State as to be very inconvenient and injurious to travellers and others."

At the following session, it is ordered that the banks be proceeded against for the tax laid on them in 1809, as delinquent sheriffs are proceeded against, and the State directors are ordered to examine the cash in the vaults of the banks as often as they think proper, and to report to the Legislature annually, whether the published statements are correct.

In 1810 it was enacted that a bank should be established "in the State." It was to have $1.6 millions capital, of which the State might subscribe $250,000; three-fourths of the subscriptions were to be in gold and silver, and one-fourth in the paper currency emitted by the State in 1783 and 1785, which was not afterwards to be a tender either to or from the bank. All judgments for and against the bank were to be in gold and silver. The State dividends were to go to redeem the paper currency. The State was to pay its subscriptions in United States stocks or in specie. There were to be six branches; it was to last until 1830, and no other bank was to be chartered during that time. It seemed to be hoped that it would absorb the two existing banks, for their stockholders were allowed a priority in subscribing to the stock of the Bank of the State. They did not avail themselves of it. The State Bank was to issue no notes under $1.

The subscriptions to this bank disappointed expectations, and the paper currency could not be retired. Accordingly at the next session greater inducements were offered; four per cent. might be reserved from the dividends due to the State, and the charter, with monopoly, was extended to 1835, if the bank would redeem the State paper by 1817, giving either its own notes or specie, at the option of the holder, and at the rate of $1 for 10 shillings. When this was accomplished the Governor was to make proclamation that the State paper was no longer a tender, and it was to cease to be such except to the bank; but if the funds did not prove sufficient to redeem it all before the bank expired, it was to be once more a good tender. Dividends accruing to the State were to be appropriated to pay the notes of the State held by the bank. In the loose and inconsistent wording of the clauses about this State paper money, we can see the play of opposing factions in the Legislature, which interjected amendments to preserve the State paper currency, or guard it against what was considered invidious action. This bank was not to be liable to taxation.

The attempt to retire the State paper proved vain, and similar stipulations were repeated three years later.^[46]

South Carolina.—By a law of December 21, 1799, it was peremptorily forbidden, under a fine of $10,000, to issue and re-issue bank notes founded on the paper currency of the State.

The Bank of South Carolina and the State Bank were chartered December 19, 1801, both being already in existence as partnership associations. They were chartered until 1823, the capital being undefined, the former being charged to pay, as a preliminary, into the State Treasury $15,000. The State might subscribe $300,000 to the State Bank in six per cent. bonds, which were not to be sold by the bank unless in the last necessity, upon the consent of the Comptroller; and the bank was not to have the interest on these bonds. Three directors were to be appointed by the Legislature. The State Bank refused to accept this charter, and a new one was enacted December 18, 1802, the capital to be $800,000, of which the State might subscribe $300,000 in certificates of indebtedness, at six per cent., saleable, and the interest paid quarterly; the bank to be free of taxes; to have the public deposits; to issue no note under $5 (which is enacted as to all banks), and to discount the Comptroller's warrants at seven per cent. for not more than $140,000, in order to retire the State paper money.

The State Bank at Charleston and the Manhattan at New York wanted to make an arrangement to redeem each other's post notes, but the Legislature of South Carolina forbade the former bank to give credit to any bank outside of the State. The terms were so wide that the prohibition prevented the State Bank from becoming a federal deposit bank.^[47]

The Union Bank of South Carolina was chartered December 20, 1810, but seems to have been previously in existence. Langdon Cheves was an incorporator. The capital is not fixed. Limit of property, $3 millions; duration, twenty-one years; bonus, $20,000; notes receivable by the State. On the same day the Planters' and Mechanics' Bank was chartered, with branches, until 1832; capital $1 million; limit of property, $3 millions; not to be taxed; to give the State 800 shares, at $25 each, which was the par amount. By an amendment, the following year, this bank and the Union Bank were allowed to deal in exchange. E.S. Thomas tells us in his "Reminiscences," that he was piqued because the State Bank threw out his notes, in 1810, and so he got up the Planters' and Mechanics' Bank. He subscribed as attorney for a great number of shares and sold them for double; that is, no doubt, on the first installment paid.

The first bank founded in Georgia was the Planters' Bank, December 5, 1807, with a capital of $1 million, increasable to $3 millions, but to begin when $300,000 were paid in in gold and silver. The president and directors were to have no favors over others in respect to loans. December 19, 1810, this charter was repealed. Apparently no action ever was taken under it, because the required amount of capital was never subscribed. A new charter was now enacted, the capital being $1 million, and shares being reserved for the State until January 1, 1812. It was to last until 1840. At the following session, however, another law shows that subscriptions had not been obtained; for the old subscribers were all released, and it was provided that it might begin when $30,000 were paid in in specie. December 6, 1810, the Bank of Augusta, which already existed as a free association, was chartered until 1830. The capital was $300,000, increasable to $600,000; the State might take $50,000 of this at any time before January 1, 1812, and if the capital was increased the State reserved the right to take one-sixth of the increase. A year later the Governor was directed to subscribe the amount reserved.

We may now gather together such meagre information as can be obtained about the history of the first Bank of the United States.

In 1804, it was authorized "to establish offices of discount and deposit in any part of the territories or dependencies of the United States." This is the act under which the branch at New Orleans was established. It was signed by Jefferson under the persuasion of Gallatin, and was afterwards held by the friends of the Bank to be a waiver, by Jefferson and his adherents, of their scruples about the constitutionality of the Bank.

In 1805, Georgia passed a law to tax the Bank. It refused to pay. The State officers entered the Bank and seized two boxes of silver worth $2,004. The bank brought an action for trespass in the Circuit Court of the United States for the District of Georgia, where the decision was for the defendant on a demurrer. On appeal to the Supreme Court of the United States the case became involved in technicalities.^[48] Georgia desisted from the attempt to tax the Bank until it should be decided whether it was to be rechartered.

The charter of the Bank was to expire March 4, 1811. As this time approached, a loud and somewhat angry discussion was raised over the question of renewing it. When the question of founding the New Orleans branch was pending, Gallatin was led to make a statement of the advantages of the Bank to the Federal Treasury. They were: safe deposit of the public money; prompt transmission of the same from one end of the Union to the other; and facility in the collection of the revenue.^[49] March 2, 1809, he made an elaborate and very favorable report on the Bank, in which he endeavored to meet the current objections. He was very much afraid of the financial effects of the multiplication of small banks. He gave a statement of the operations of the Bank in round numbers, which was intended to show what was the general magnitude and proportion of the different factors in its operations. We possess but one other statement of the affairs of this Bank. According to its charter, it was bound to report to the Secretary of the Treasury, at his demand, not oftener than weekly. Upon the question, how often it did report, history throws no light whatever. The fact that a law imposed some duty on a bank, at that period, raises but a limited presumption that it ever did it. In a communication of January 24, 1811, Gallatin said that the charter of the Bank called only for "general statements" of the leading facts in regard to its condition; that only such had been required, and only such had been furnished. In view of the prevalent notions about the mystery and secrecy proper to a bank, we may well believe that this bank was very reluctant to make statements, and we may doubt if the Secretary called for them very often. If any were made, who should have been in a position to use them, if not the man who had been Secretary of the Treasury for ten years? If they ever existed they have been burned; so that the question whether they ever existed or not is open to easy and unprofitable speculation. According to the detailed report of January, 1811, the bank held private deposits, $6 millions; public deposits, $2 millions; bank deposits, $600,000. It had $5 millions circulation; $14.5 millions discounts; had lent the United States $2.7 millions; was a creditor of other banks for $900,000 and held their notes for $400,000. It had $5 millions in specie.^[50] In looking to the future, Gallatin regarded the Bank as essential to the fiscal affairs of the federal government, especially if there should be a war. He proposed that, in renewing the charter, the Bank should be called on to pay interest on the public deposits; that itshould have some government directors; that its capital should be made $30 millions; and that the States should be allowed to subscribe a part of the capital and to appoint some of the directors.^[51]

The 5,000 shares in the Bank owned by the United States were sold as follows: 2,493 shares, in 1796-7, at 125; 187 shares, in 1797, at 120; 2,200 shares, in 1802, at 145. As the stock was paid for in ten annual installments, some of this was sold before it had been paid for. The total premium obtained was $671,860; the amount of dividends received by the United States, while it held the stock, was $1,101,720.^[52] The sale, in 1802, was to Sir Francis Baring, who re-sold in England at 150. Carey argued that it would disgrace American credit not to re-charter the bank after selling the stock at this rate. He also argued that the Bank of the United States was no longer a "national" bank, since these government shares had been sold, and therefore that all the allegations of danger on account of the connection between the government and the Bank had now fallen to the ground. He attributed the stringency in the money market, in 1810, which the "Aurora" and other opponents of the Bank charged to its wilful and malicious action, to the multiplication of branch banks in Pennsylvania, and the necessity imposed on the mother banks by an act of the Legislature to receive the branch notes in payments. He complained very much that he could not obtain the information which was necessary for the defense of the Bank, and of "the obligation of secrecy in banking transactions which precludes a writer who undertakes the defense of such an institution from the use of many of the most important documents on which the whole of his reasoning may depend." The Bank had not taken the notes of its branches in payment from its customers, which was a ground of complaint the justice of which Carey conceded. His chief argument for renewal was the terrible calamity that would occur to the business of the country if the bank should wind up, and he quoted Atwater of New Haven, with horror, because Atwater thought that it would be a good thing to have all banks, bank paper, and bank charters burned up together.^[53]

Bollmann^[54] held that the winding up of the Bank would force the winding up of all the other banks, and hence would retire $55 millions of circulation. The "Aurora" was the organ of the opposition party. November 8, 1810, it offered twenty reasons why the Bank should not be re-chartered. The one which was reiterated the most frequently and in the greatest number of different forms was that it was foreign, or was owned by foreigners. In fact about two-thirds of the stock was owned abroad. The ninth reason was "because its influence has been exercised in our local elections," and because it was a political engine to favor "such as would abandon the interests of popular representative government." There were declared to be great abuses in the Bank, above all at Charleston and New Orleans, and its patronage was declared to be hostile to American interests. The most original reason for winding it up, however, was in order to find out whether it had been useful or not.

In regard to the political influence, we find a specification, in the same paper, January 9, 1811, in which it is stated that the cashier of the Charleston branch went "upon the election ground," and threatened curtailment of discounts as a punishment for voting for those who were "hostile to English domination." "From that day [of its origin] to this, the whole force of this all-corrupting Bank has been directed with an uniformity unsurpassed to the service and use of England, to the injury and abuse of this nation." The bank was intended to create a "money interest, which was to supersede and occupy the place of those interests which were solemnly promulgated in the Declaration of Independence." The "Aurora" had a story that the branch at New York had endeavored to punish Astor, for not being a sufficiently good federalist, by refusing him discounts, and that the clique surrounding it had given information to the English cruisers so that they might catch his ships. The arguments of these newspaper disputants were full of emphatic denunciation, but we can glean from them nothing more in regard to the history. The "Aurora" often hinted that it had a project of its own in reserve, which would be far better, and it denounced Gallatin as a traitor for defending the Bank. Its ideas were those which had already begun to find expression in the great banks of the States. "To any banking institution not founded on the landed security o the United States, we are hostile."

Atwater's pamphlet^[55] echoes the same notions and prejudices, of which the strongest is the hostility to foreigners. "Think of the locusts of Egypt. These were to the people precisely what banks are to our farmers." The Bank is aristocratic and federal. "One bank like that of the United States will destroy the industrious habits of a thousand families annually." Niles, in his reminiscences of political history, says that the federalists regarded the first Bank of the United States as their "sheet-anchor," and the democrats "deprecated it as an oppression, unconstitutional in its organization, and pernicious in its operation."^[56] "The time has been that a man, who did not wear a black cockade might as well have offered up his prayers to the father of mischief for a benefit (as some savages do) as have asked an accommodation of the Bank of the United States."^[57]

The Legislature of Virginia, at the session of 1810-11, instructed their Senators and requested their Representatives to vote against the renewal, because the use of the power to pass an act of incorporation by Congress was unconstitutional and "an encroachment on the sovereignty of the States. The Pennnsylvania House of Representatives adopted resolutions against the Bank, December 13, 1810, which were based on the doctrine of the Virginia and Kentucky resolutions of 1798. In the debate on these resolutions, Nicholas Biddle took a most prominent part. All these expressions taken together show the social and political animosities which were awakened and developed in connection with this institution; but we have very little means of learning what truth there was in the assertions. In a speech in the House of Representatives, in January, 1834, Horace Binney, who had, as a young man, been a director of the Bank, in the last years of its existence, spoke with great feeling and eloquence in defense of the men who had at that time been directors, and against the old imputations against the first Bank, which had been renewed in the war against the second: "The directors of the parent Bank were a body of as honorable men, as impartial, and as faithful to their trust, as any men that ever lived. There was not a politician at their board, nor a man who gave himself up to anything but the performance of duty to his trust."

The debate in Congress on the renewal of the charter added very little to these arguments. The petition of the Bank for a renewal was presented March 26, 1808, but no action was taken upon it. December 4, 1809, Nicholas of Va. moved that "provision be made by law for a general national establishment of banks throughout the United States, and that the profits arising from the same, together with such surplusses of revenue as may accrue, be appropriated for the general welfare, in the construction of public roads and canals, and the establishment of seminaries for education throughout the United States." This outcropping of the notions which entered into all the big banks of the States schemes is worthy of notice. The plan was to have the federal state carry out the same operation with the States, as the State, in all those schemes, did with the counties, and the proposition came from the core of the State rights group who were fighting the Bank. The very men and the very school of opinion who were hostile to banks altogether on the federal arena, invented and established the big State paper money machines.

Love of Virginia reported, April 2, 1810, an elaborate plan of a national bank, to have its seat at Washington, and branches in such States as consented. The States were to subscribe shares which were allotted to them. It was something between the proposed Bank of the United States and the big banks of the States. April 7th, a bill was introduced to continue for twenty years the existing Bank of the Unit States with the modifications which Gallatin had suggested. A bonus of $1.25 millions was to be paid within the year; the Bank was to loan the government not more than $5,000,000, at not more than six per cent., and it was to pay three per cent. on the minimum annual balance of the public deposits in excess of $3 millions. April 13th, this bill was debated in Committee of the Whole, but the House never gave the Committee of the Whole permission to debate it further.

Although the Bank had presented the subject in 1808, it never was really considered in Congress until January, 1811, three months before the charter was to expire. Perhaps the most representative speech against the Bank was that of Dasha, of Kentucky. He said that the question was: "Whether we will foster a viper in the bosom of our country that will spread its deadly venom over the land, and finally affect the vitals of your republican institutions; or whether we will, as it is our duty, apply the proper antidote by a refusal to renew the charter, thereby checking the cankering poison, the importation and dissemination of foreign influence, that has already brought our government to the brink of ruin." He had no doubt that George III was a stockholder in the Bank. He viewed all banks as hostile to the principles of our government. Commerce was but little better, yet he was not hostile to it, but wanted it kept "within the pale of reason." The large foreign capital in this Bank, he said, gave the tone to elections in New York until Burr checked it with the Manhattan Company. He was sufficiently familiar with banks to be convinced that "they are systems of speculation, calculated to suit the speculatory and mercantile class at the expense of those who are the support and sheet-anchor of your government." He referred with scorn to the broken banks of New England. The information of the speculations and swindlings in the East had made the West shun "the possibility of being engulfed in a similar vortex." The Bank "will further the views of federalism by increasing their power, and assist them in overturning the present system of government, on the ruins of which they will count upon raising one more congenial to their purposes." Not only the British capital in the Bank, but the British possessions in North America were a menace to us. It was high time to find out whether this Bank was solid or a fraud. Wright of Maryland, gave specifications of the alleged political influence of the Bank. Merchants of Philadelphia had signed petitions for Jay's treaty, against their convictions, and had excused themselves by saying that, if they did not do so, they could get no more bank accommodation. In Maryland, bank directors had been thrown out of office because they voted for Smith. Evan Jones had been elected president of the branch at New Orleans to succeed a good republican, although Jones was a refugee tory and was suspected of being one of Burr's men.

In answer to the argument about the constitutionality, it was pointed out that the State Constitutions did not expressly grant to the States the power to pass acts of incorporation. Nobody noticed that banks had already been incorporated by the territorial governments of the Mississippi Valley, the strongest case of all being that of the Bank of Louisiana, which was incorporated before there was even an organized territorial government.^[58]

Nicholson, of New York, stated that the charter could have been carried a year before by a majority of nearly thirty.

The destruction of the Bank was a part of the programme of the young democrats, who wanted a war with England, in order to conquer Canada. Clay was a representative and leader amongst them. In his speech against the Bank, he complained that an act of Congress, after being passed according to the prescriptions of the Constitution, must be submitted to the president and directors of the Bank for approval. This referred to the provision that the Bank should explicitly accept the new charter if it was passed. He also said that we might be on the brink of war with England, and added, "Should such an event occur, do you apprehend that the English premier would experience any difficulty in obtaining the entire control of this institution?" The fact was often pointed out in the debate, which lay upon the face of the bill, that no foreigner could vote in the Bank. Of the 25,000 shares, 18,000 were owned abroad; the other 7,000 shares ruled the Bank. Therefore it was plain that the foreign stockholders, instead of gaining, through the Bank, any power to act upon American interests, had, by taking stock in it, put their own interests at the mercy of Americans.

Leaving aside all the subtleties about "sovereignty," the question was whether the Constitution had constituted a State, with a complete structure, adequate functions, and sufficient powers to fulfil all the duties of civil life for the welfare of the people. The opponents of the Bank argued that the State banks could perform all the services required by the government just as well as the national bank, but, as they were answered in the debate, this was admitting that some bank was "necessary," in the sense of the Constitution, for the purposes of the government. In truth, however, the gravest question in the political order of the United States was then, how much integration the Constitution had given to the Union. The conception of a federal State was passionately hated and resisted by a majority of the people. They felt the discipline, order, method and punctuality of the great empire as an irksome restriction on the loose and shiftless habits of former times which they called liberty. It was true that there was such an advancing constraint. The Bank, by its symbolism, and by its functions, was the only great institution which was helping on the work of social and political integration. That was exactly the reason why it was hated by the State rights men and anti-federalists.

Testimony to this action of the Bank was given in the debate. "I ask the question: Will a bank in North Carolina trust a bank in New Hampshire? No! but the State and every individual in it would trust the Bank of the United States. You could not establish a connection between North Carolina and New Hampshire, so that either would trust the other. The establishment of the Bank of the United States affords, in this case, a facility useful and absolutely necessary to carry on the measures of the government."^[59] It had a corresponding effect on commercial affairs. Before 1800 the collectors at the different ports kept the duty bonds in their own custody. After that time, by a new law, the bonds were deposited in the Bank for collection. They thus became bank debts, and although, as Smith of Maryland argued, trying to break the force of this fact, the coercion to pay was not in the Bank but in the custom house, nevertheless, in practice, it was the Bank usage which set the standard. Crawford said: "It is impossible to resist the conviction that the prompt and secure collection of our revenue is principally owing to the influence of the Bank." These facts, however, furnish the reasons why the Bank was hated by large classes of business men and politicians. The republicans felt sure that it never would be an ally of theirs, and therefore they thought it the simplest dictate of political policy to destroy it while they could. In vain the fact was pointed out to them that the federalists, although they had, as the opponents said, had this tremendous engine in their hands for twenty years, had been ousted by the opponents, and that the only three out and out federal States, besides Massachusetts, had no branch of the Bank, while the States in which there were branches, with the same exception, were either wholly or in large part republican.

In the House of Representatives the renewal of the charter was indefinitely postponed January 24, 1811, by a vote of 65 to 64. In the Senate it was lost by the casting vote of the Vice-President, George Clinton, February 20th.

After the re-charter was defeated, the Bank asked for an extension of the powers requisite for winding up. This was refused. In a report on it by Clay, to the Senate, it was said: "The injurious effects of a dissolution of the corporation will be found to consist in an accelerated disclosure of the actual condition of those who have been supported by the credit of others; but whose insolvent or tottering situation, known to the Bank, has been concealed from the public at large."

March 19, 1812, the receivability of the notes of the Bank for dues to the United States was repealed, the Circuit Court of Virginia having just before decided that those notes were still everywhere a good tender for duties.^[60]

As soon as the re-charter was definitely defeated, the Bank applied to the Legislature of Pennsylvania for a charter, to retain all its capital, and to be allowed to do business in such States as might permit it. The application was defeated, but renewed the next year, with an offer to subscribe $500,000 to public works, and to lend the State, at any time during the charter period, the same sum at five per cent.^[61]

Charles Biddie, who was then in the State Senate, thought that it would be a great advantage to the State. His son, Nicholas, was in the State House of Representatives, and made a speech in favor of it. The objection which weighed most was that the stock was owned by foreigners.^[62]

Between March 1st and September 1st, the Bank paid the public and private deposits, and redeemed $3.5 millions worth of bank notes—in all $9.2 millions, and its specie fell only $335,175. In the first year of liquidation it paid $11.6 millions, and the specie stock increased $1.2 millions.^[63] Gallatin said that the public deposits were removed within a week before the expiration of the charter, and no harm was done.^[64] He takes no note of the fact that the Bank was a creditor of the Treasury for a sum about equal to the government deposit. In his report on the selected banks, January 8, 1812, he stated that the public deposits were gradually withdrawn and that the account of the Treasury with the Bank was closed, September 2, 1811, except that $70,000 were still at the credit of the disbursing officers at New Orleans. The credits of the disbursing officers always cause ambiguity as to the public deposits. During the existence of this Bank the public deposits were not placed in it exclusively even on the Atlantic coast. The principal disbursing officers were directed by law, in 1809, to keep the public money in their hands, whenever possible, in some incorporated bank to be designated by the President. A treasury report of January 9, 1811, shows that one-third of the public deposits were, at that time, in eleven State banks, of which only three were west of the Alleghanies.

As soon as it was certain that the Bank would not be re-chartered, local banks were selected at the chief ports of entry, in which the collectors were ordered to place the duty bonds for collection. The only condition imposed on the selected banks was, that they should give a preference in discounts to persons who had duty bonds to pay. Within a year, the cash balance in the Treasury was divided in deposits between twenty-one banks.^[65] As to the currency receivable for dues to the Treasury, the law of 1789, modified by Hamilton's orders,^[66] came into force again, but by the Act of June 30, 1812, Treasury notes were made a good tender to the Treasury, and the first of them were issued in October.

The dividends of the Bank, down to January, 1809, inclusive, averaged eight and thirteen thirty-fourths per cent. The highest point the stock ever reached was 150. It is stated that at one time the stock of specie in the New York branch was reduced to $10,000.^[67] It is also stated that the average loss per annum by bad debts, during the twenty years of its existence, was sixty-one one-hundreths of one per cent.^[68] No financial disturbance whatever occurred upon the winding up of this bank. Carey's apprehensions proved entirely groundless.^[69]

Its stock was liquidated at one hundred and nine dollars, one and a-quarter cents for one hundred dollars paid in. The last such payment which has been found, is mentioned in Niles' Register for September 13, 1834. Raguet calculated that ifthe dividends were regarded as deferred payments, compounded semi-annually, the return was equal to 97, on the day the charter expired.^[70] The amount of its notes which had not been presented, in 1823, was $205,000. The court then released the commissioners from liability for them, $5,000 being reserved to meet any cases of special hardship. Eleven hundred dollars only were afterwards presented, most of it by an old Revolutionary soldier, in 1825.^[71]

In 1854, the city council of Philadelphia appointed a committee to inquire into the best means of closing the trust of the old Bank of the United States, in order that they might get possession of the house which had been bequeathed to the city by Girard, but which was then "in tenure" of the cashier of Girard's bank without rent. The report of this committee showed that Girard bought the banking house of the old Bank and a house in Chestnut street belonging to it, which was the one in question. The banking house had already passed to the city and was leased to the Girard Bank. It was stated that the Bank trust held at that time, $22,564 of unclaimed dividends, and had just declared a dividend of $51,250. There were some debts not collected. The city desired to take over the trust, to be administered by the Commissioners of the Girard estate. It is inferred that this was done.^[72]

It is very desirable to form, if possible, a notion of the point of departure from which the country entered on the inflation of the following period. Blodget's figures represent the amount of specie in the currency as exceeding the paper in the first years of the century. In the debate on the renewal of the charter, however, the statements made show a very different state of things. "Specie has been almost banished from circulation by paper." Only notes of the Bank of the United States are current everywhere. "You can outride in twenty-four hours the credit of any other bank in the country." The paper of some of the banks is depreciated. That of others is current but a short distance.

 

1. 1 Folio Finance, 49.
2. There is no limit to the flexibility of political arguments. The argument against the Bank of England when it was founded was that banks had never existed except in republics and were unfit for monarchies.
3. See Maclay, Senate Debates, 355; 373, and [John Taylor], Principles and Tendency of Certain Public Measures.
4. That is, as we should now say, United States bonds.
5. "The Farmer's Register" of Petersburg, Va., said of the branch bank system, in 1842, that it "alone would serve to render any bank irresponsible and therefore corrupt and dishonest."
6. 6 Works, 127. (1839)
7. 3 Writings, 369.
8. 7 Anne c. 7, (1708).
9. See p. 25.
10. 1 Gibbs; Adminstration of Washington and Adams, 68.
11. 2 Thomas; Reminiscences, 12.
12. 8 Hamilton's Works, 305; Jones; New York, 589.
13. 8 Hamilton's Works, 239.
14. 8 Hamilton's Works, 247.
15. Letters to his wife, son.
16. 2 Gibbs, 243.
17. 4 Cranch, 167.
18. 1 Gallatin's Writings, 80.
19. Ibid, 102.
20. Ibid, 129.
21. Ibid, 191.
22. Bollman; Bank Paragraphs, 56.
23. Lodge's Cabot, 268.
24. Felt, 214.
25. 11 Proc. Mass. Hist. Soc. 307.
26. N. Appleton; Banking System of Massachusetts, 13.
27. The validity of this provision was disputed by the banks but sustained in 8 Mass. 444 (1812).
28. Carey's Letters to Seybert, 68.
29. Report of the Committee on the Farmers' Exchange Bank.
30. Boston firm to Carey.
31. See page 56. Dexter went to Alabama, where he founded the town of Montgomery, and died in poverty in 1838. (1 Raguet's Register, 237.)
32. Session Laws, 1806, c. 110.
33. See p. 40.
34. G. B. Reed; Banking in Vermont.
35. Treasury Report, January 5, 1838, p. 111.
36. Woodward: Hartford Bank, 86.
37. Treasury Report, March 3, 1841.
38. 9 Wendell, 351.
39. 1 History of Political Parties in New York, 329.
40. 1 Hammond, 329.
41. 1 Hammond, 335.
42. See Calendar, American Annual Register for 1796, and, The Prospect Before Us.
43. Madison to Jefferson, April 23, 1796.
44. Cary; Letters to Seybert, 28.
45. Raguet; Currency and Banking, 112.
46. See p. 85.
47. 2 Folio Finance, 519.
48. 5 Cranch, 61, (1809).
49. 1 Gallatin's Writings, 171.
50. Seybert; Statistics, 526.
51. 2 Folio Finance, 351.
52. Seybert, 519.
53. Carey: Letters to Seybert.
54. Paragraphs on Banks.
55. Considerations on the Dissolution of the United States Bank.
56. 24 Niles, 291.
57. 17 Niles, 67.
58. See page 61.
59. Alston of North Crolina, February 12, 1811.
60. 2 Folio Finance, 517.
61. Report of the Comm. on Ways and Means, (Penn.) 1834.
62. Memoir of Charles Biddle, 331, 335.
63. Binney's Report, March 4, 1834.
64. 3 Gallatin's Writings, 391.
65. 2 Folio Finance, 516.
66. See page 22.
67. Gouge; Journal of Banking, 252.
68. H.C. Carey; The Credit system, 1838. It is there stated also that the Bank of America, New York, lost, from 1812 to 1837, less than one-tenth of one per cent. per annum on its loans, and that Girard, in twenty years, lost one-half of one per cent. per annum in the same way.
69. Seybert, 522.
70. Gouge; Journal of Banking, 240.
71. 56 Nile, 273.
72. 14 Hazard's Register, 216; 15 Ditto, 124.