two to five per cent.[1] 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.[2] 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.[3] 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."[4]
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
