wholly to the discretion of the banker. In the first place, the issue of such notes is not universally permitted, but is restricted, as a rule, to chartered institutions. In these again, the issue is frequently subject to legal restrictions, affecting, for instance, the amount of the reserve. Two general types of banknotes may be said to exist: (1) those issued upon the general assets of the banks being those contemplated in the foregoing discussion, and (2) those issued upon the deposit of certain securities. In principle, the latter class, of which, perhaps, the most conspicuous instance is the issue of bank-notes under the National Bank Act of the United States, departs widely from the theoretical ideal of a bank-note. In the second ease, the value of the note depends upon the securities behind it, and not upon its frequent redemption. Indeed, it may be said that the object of the law is to make the bank-note so safe that it will not be presented for redemption, but continue to circulate as money, and this end is fully attained.
Banking in the United States. The earliest use of the term ‘bank’ in the American Colonies was to designate an issue of paper money, and it may be said that, in the history of banking in the United States, banks of issue play a more important part than elsewhere. All the banks mentioned in Colonial history were loan banks, and not deposit banks. The funds they loaned were issues of notes. Between the issues thus loaned by banks under authority of the Government, and the issues of the Colonial governments, no clear distinction was drawn, and all such issues were frequently designated as banks. (See Money.) This is not to be wondered at when we recall the fact that the issues of the Colonial governments, notably in Pennsylvania, were loaned to individuals, on mortgages, plate, and other securities. The collapse of the Continental paper currency in 1781, led to the chartering by Congress on the last day of the year of the Bank of North America. In addition to the usual business of a bank, this institution was designed to furnish through its notes a circulating medium for the country. The Bank of New York, and that of Massachusetts, at Boston, were chartered in the year 1784. But the erection of these institutions did not check the issue of paper money by the several States, which, however, ceased with the adoption of the Federal Constitution, which expressly forbade such issues.
Among the earliest acts of the new Congress was one chartering the first Bank of the United States, February 25, 1791. The charter was for twenty years. The authorized capital was $10,000,000, of which Congress took $2,000,000. The capital was subscribed partly in coin and partly in Government securities. The notes issued by the bank were receivable by the Government for all debts due to it. The charter of this bank did not prevent the rise of a considerable number of banks in the States, which also issued notes. But by reason of its larger capital, and its several branches in different parts of the country, the Bank of the United States dominated the entire banking system and regulated the issues of the State banks. It could and did refuse to receive as deposits, or in payments, the notes of banks which were not sound, and by sending the notes received from one branch to another would insure the presentation of the notes of other banks for redemption. In the early part of the century the Government sold its stock in the bank, and when, in 1811, the charter expired, the Government had no direct interest in its renewal. The renewal of the charter was opposed by the State banks, and the effort to secure it failed. The bank, thereupon, wound up its affairs. The absence of the restraining influence of the Bank of the United States soon made itself felt. State banks multiplied; from 90 in 1810, they grew to 150 in 1814, with note issues of $62,000,000. The war with England brought about a general suspension of specie payments, and a very disordered state of the bank-note circulation, the only currency of the country. The ‘old regulator’ was seriously missed, and, on April 3, 1816, Congress chartered the second United States Bank at Philadelphia, with power to establish branches. Its capital was $35,000,000, of which the Federal Government took $7,000,000; the bank, with its branches, was made the official depository of Government money; its bills were legal tender, and it was the agent for negotiating Federal and State loans. This compelled the State banks to resume specie payments, and business again moved forward steadily. State banks, however, grew in number rapidly. In 1816 there were 246, with $90,000,000 capital. In 1830, when the rechartering of the United States Bank was proposed, there were 330 State banks, with $145,000,000 capital. President Jackson, in his message, December, 1829, expressed his opposition to the United States Bank, and his expected veto of the bill to renew the charter came in July, 1832. The next step was to remove the deposits of public money from the bank. This took the form of an order to cease deposits in the United States Bank and to draw out the balance in payments. This could be done only by order of the Secretary of the Treasury, and as that officer refused to conform to the President's wishes, he was summarily removed, and a more tractable man was appointed in his place. The old bank, which had more than once saved the credit of the nation, was crippled and went down. In the wind-up it was found that its whole capital was lost, though it managed to pay its debts. Its last operations were under a charter from the State of Pennsylvania.
The refusal to continue the National Bank gave full scope to State institutions, and they grew with mushroom rapidity. In 1837 there were 634 of them, with a capital of $291,000,000, of which $149,000,000 were in circulating notes, and $127,000,000 in deposits. The loans and discounts amounted to $525,000,000. The inevitable crash was hastened by an enormous crop of cotton in 1836, a consequent decline in prices, and the depreciation of the credit of cotton-dealers and their backers. The tumble began in 1837, and by the first of June there was an entire suspension of specie payments; values fell from dollars to shillings, all business was deranged, millions of people were reduced from comparative ease to sharp poverty, and a period of wretchedness began which continued nearly five years. However, Congress passed a general bankruptcy law, the States assisted, by limitation and other laws, and by 1843-44 the country had nearly recovered. The banks had many trials; some resumed only to suspend again, and many went into liquidation. Congress passed
