all. The mischief is, that it is least available when most wanted. The very causes which prevent the banks from redeeming their issues promptly, cause a fall in the value of the stocks and mortgages on the ultimate security of which their notes have been issued. The ultimate security may avail something to the broker who buys them at a discount, and can hold them for months or years ; but the labouring man who has notes of these State security banks in his possession, finds, when they stop payment, that the ultimate security for their redemption does not prevent his losing twenty-five cents, fifty cents, or even
seventy-five cents in the dollar." In a circulating medium we want something more than ultimate security. We want also immediate security ; we want security that is good to-day, and will be good to morrow, and the next day, and for ever thereafter. This security is found in gold and silver, and in these only."[1]
The Report of the Superintendent of Banking for the State of New York for 1856 showed that the securities he then held in trust amounted to 39,359,071, which were almost wholly lodged by banking associations and individual bankers.
During the year the securities held in trust for the under mentioned banks that had become insolvent in 1855 were disposed of. But the sums realized by their sale did not in any case suffice to pay the notes at par ; while a period, varying from two to four years, would have to elapse before the affairs of the insolvent banks were finally settled.
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Names of Banks that failed. Notes redeemed. Rates of Redemp tion. Expiration of Time for Redemption. Eighth Avenue Bank All.., 94 cents. May 21, 1861 Farmers Bank, Onondaga.. All 85 cents. Nov. 12, 1859 James Bank All 91 cents June 17 1858 Merchants and Mechanics Bank, Oswego New Rochelle, Bank of. .... New Rochelle, Bank of All Stock notes . Stock and. estate notes 77 cents. Par 81 cents. Sept. 28, 1860 June 17, 1858 June 17, 1858
This statement set the defective nature of the security system, as administered in New York, in the clearest point of view. It might, no doubt, have been improved by increasing the proportion of securities to notes. But, owing to the variety of securities that were taken (viz., all manner of bonds and mortgages, state, canal, and railway stocks, <fec., &c.), and the uncertainty of their value, a great deal of risk was always incurred in accepting them, and they could never form a proper foundation on which to issue notes.
In 1857 another crash took place, and all the banks in the Union, from the Gulf of Mexico to the frontiers of Canada, again stopped payments.
There had been a rapid increase of discounts since 1851, and that increase was especially great in 1856, and went on augmenting down to August 1857. On the 8th of that month the discounts and advances by the New York banks amounted to $122,077,252, the deposits in their possession being, at the same time, $94,436,417. This was the maximum of both. On the 24th of August the Ohio Life and Trust Company, which carried on an extensive banking business in New York, stopped payments, and by so doing gave a severe shock to credit and confidence, which the suspension of two or three more banks turned into a panic. Notes being in a certain degree secured, the run upon the banks was principally for deposits. And to meet it they so reduced their discounts and advances, that, on the 17th October, they amounted to only $97,245,826. This sudden and violent contraction necessarily occasioned the suspension of many of those mercantile houses that had depended on the banks for discounts. And it did this without stopping the drain for deposits, which had sunk, on the 17th October, to $52,894,623, being a decrease of $41,546,784 in about two months. The universal stoppage of the banks was a consequence of these proceedings.
The Civil War had as one of its consequences the introduction of a general banking law in the United States, conformable in many respects to the principles of what wa have described as the free banking law of New York. At the beginning of the war in 1861, the amount of paper money in circulation was about $200,000,000, of which $150,000,000 had been issued in the loyal States; and the coin in circulation was estimated at $275,000,000. The necessities of the Treasury very soon compelled the Government to borrow from the associated banks of New York, Philadelphia, and Boston, and to issue demand-notes to the extent of $50,000,000, which, however, were not at first made legal tender. In February 1862 an Act was passed by Congress authorizing the issue of $150,000,000, in Treasury notes of not less than $5 each, out of which, however, $50,000,000 were in lieu of the notes already issued; and this issue was declared to be legal tender except in discharge of customs duties, and of the payment of interest by the United States on the national debt. It will be easily understood that coin went out of circulation, and a premium on gold was established, which increased aa the amount of the Treasury notes was increased by successive legislation, and as national bank-notes came to be issued in pursuance of the law we must proceed to describe. This is the Banking Law of the 25th February 1863, which, as amended by the Act of the 3d June 1864, now continues in force. By this law a Currency Bureau- and Comptroller of Currency were appointed in the Treasury Department, with the power to authorize banking associations of not less than five persons subscribing, ex cept in very small towns, a minimum capital of $100,000, 50 per cent, to be paid up at ones, and the remainder within, six months. It was enacted that any such association, before commencing business, must transfer to the Treasurer of the United States any United States interest-bearing bonds not less than one-third of the capital stock, and should thereupon receive from the Comptroller of the Currency circulating notes of different denominations in blank, registered and countersigned, equal in amount to 90 per cent, of the current market value of the bonds so transferred, but not exceeding their par value. The whole amountof notes thus issued was not to exceed $300,000,000, one-half to be apportioned among the States according to their representative population, and the other half to be apportioned with regard to the existing banking capital, resources, and business of the States.
rapidly transformed into national banks under the operation of this law, and their previous notes withdrawn in exchange for the new national bank issue. The currency of the Union thus came to consist of the demand-notes of the Treasury, which rose in 1865 to about $450,000,000, and of the notes of the national banks, which rapidly approached the limit of $300,000,000, the latter notes passing throughout the Union, whatever the bank through which they were issued, as freely as the former, since the ultimate payment of them was secured by the deposit under the law we have stated, of an adequate amount in United States bonds at the Treasury. It is not our purpose to trace the subsequent financial history of the States, but the experience of 1873 must be referred to for the instruction it affords. As no sufficient steps were taken after the
termination of the war to reduce the swollen value of the- ↑ The above statements are taken from a paper read by Lord Overetone to the Committee on Banks.
