By guarding against inflations of the currency, it will have a tendency to check periodical excesses of foreign importations purchased in fact upon credit; while loans from banks, or dangerous enlargements of their business, and excessive issues of their paper, will be greatly diminished.

IV. SYSTEMS OF BANKING IN THE UNITED STATES BEFORE 1860

A. Early State Banking in the West, 1821-18311

In some of the states, particularly in the west, banking was a state monopoly. Many of these enterprises failed, and the one projected by Illinois is typical of its class.

To remedy these evils [lack of money] the legislature of 1821 created a State Bank. It was founded without money, and wholly on the credit of the State. It was authorized to issue one, two, three, five, ten, and twenty dollar notes, in the likeness of bank bills, bearing two per cent. annual interest, and payable by the State in ten years. A principal bank was established at Vandalia, and four or five branches in other places; the legislature elected all the directors and officers; a large number of whom were members of the legislature, and all of them professional politicians. The bank was directed by law to lend its bills to the people, to the amount of one hundred dollars, on personal security; and upon the security of mortgages upon land for a greater sum. These bills were to be receivable in payment of all State and county taxes, and for all costs and fees, and salaries of public officers; and if a creditor refused to endorse on his execution his willingness to receive them in payment of debt, the debtor could replevy or stay its collection for three years, by giving personal security. So infatuated were this legislature with this absurd bank project, that the members firmly believed that the notes of this bank would remain at par with gold and silver; and they could readily prove their belief to be well-founded; for the most difficult argument to answer is one founded partly upon fact, but mostly upon guess work and conjecture. . . .

In the summer of 1821, the new bank went into operation. Every man who could get an endorser borrowed his hundred dollars. The directors, it is believed, were all politicians; and either were then, or expected to be, candidates for office. Lending to everybody, and refusing none, was the surest road to popularity. Accordingly, three 1 History of Illinois. By Thomas Ford (Chicago, 1854), 45-7.

hundred thousand dollars of the new money was soon lent without much attention to security or care for eventual payment. It first fell twenty-five cents, then fifty, and then seventy cents below par. And as the bills of the Ohio and Kentucky banks had driven all other money out of the State, so this new issue effectually kept it out. Such a total absence was there of the silver coins, that it became utterly impossible, in the course of trade, to make small change. The people, from necessity, were compelled to cut the new bills into two pieces, so as to make two halves of a dollar. This again further aided to keep out even the smallest silver coins, for the people must know that good money is a very proud thing, and will not circulate, stay, or go where bad money is treated with as much respect as the good. For about four years there was no other kind of money but this uncurrent State bank paper. In the meantime, very few persons pretended to pay their debts to the bank. More than half of those who had borrowed, considered what they had gotten from it as so much clear gain, and never intended to pay it from the first.

B. Banking in New York and Massachusetts, 1813–18601

During the period before the Civil War several systems of banking developed in the United States. Three of these systems deserve notice. They are as follows:

[The Suffolk Bank System]

Two measures combined to raise the value of bank-notes: one was forcing the banks to redeem on presentation at their own counter, and the other was the initiation of a system by which other banks co-operated to secure such redemption. In the present day, when government-notes and national-bank notes are current everywhere at par, it is hard to realize how quickly a note depreciated at any distance from the bank which issued it. This was especially the case with notes from the banks of other States. There were no facilities for the holder visiting the bank to demand payment, and there was a doubt whether he would get the money if he did so visit it. In 1813 a movement toward a reform in the bank-currency began. Bills of banks in other States were then at a discount in Boston from three to five per cent, and the notes of Boston banks had nearly disappeared. The New-England Bank, organized in that year with a capital of $1,000,000, instituted the system of sending foreign bills for redemp

1 Industrial History of the United States. By Albert S. Bolles (Norwich, Conn., 1879), 797-8, 802.

tion to the banks which issued them, and charging the bill-holders only the actual expense of transmitting the notes and returning the proceeds. This was the beginning of the system of redemption afterward known as the Suffolk-Bank system. This system was more fully developed at a later period (1825), when five of the Boston banks -the Suffolk, Eagle, Manufacturers' and Mechanics' (now the Tremont), the Globe, and State - undertook its management. For a long time the system was bitterly opposed by those banks interested in preventing a return of their circulation; but it was eventually successful. Its exclusive management was finally assumed by the Suffolk Bank; which bank compelled the redemption at par in Boston of the notes of the New-England banks by a system of assorting and returning the notes to the place of issue, and its operations were continued down to the establishment of the national-bank system. The amount of New-England bank-notes redeemed at the Suffolk Bank from 1841 to 1857 was as follows, in millions of dollars:

From 1791, when the Bank of New York was incorporated, until the declaration of war with Great Britain in 1812, nineteen banks were chartered, with an aggregate capital of $18,215,000. Ten of them still exist, and are institutions of high rank. Between 1812 and 1829 twenty-four more were chartered, with a capital of $25,105,000, of which $13,770,000 was for banks in New-York City.

As yet there has been no legislation looking to the security of bank circulation, so little had the science of banking developed. But in

1829, when the charters of some forty banks were about to expire, Gov. Van Buren recommended the passage of a law, which was enacted in April of that year, providing a system of insurance of bank-notes based upon a custom prevalent among Chinese merchants. The law provided that all new or rechartered banks should pay an annual tax of one-half of one per cent on their capital stock until three per cent had been paid in, and the fund should be used by the State treasurer to redeem the notes and pay the debts of insolvent banks. If the fund became impaired at any time, new contributions were to be made to bring it up to a normal size. The law allowed the issue of notes to twice the amount of the capital, and loans to two and a half times the amount of capital. This safety-fund law did not accomplish its purpose. In 1841-42 eleven banks failed, whose capital was $3,150,000: their liabilities, which the State had to meet, amounted to $2,558,933. These eleven banks had contributed but $86,274 to the safety fund; and even down to Sept. 30, 1848, all of the safety-fund banks had contributed but $1,876,063. The State issued six-per-cent stock to make up the deficiency, and was partly reimbursed by new contributions from the banks. The law was amended, however, in 1842, so that the safety-fund became a security for circulating-notes only, and no other debts.

The law of 1829 also provided that there should be three commissioners to examine the banks, and report annually to the legislature on the condition of those institutions. The law provided that one commissioner should be appointed by the Governor and Senate, one by the banks of the southern part of the State, and one by the remaining banks. But in 1837 the Governor and Senate were authorized to select them all; and, this power being abused for political ends, the work of examination was in 1843 taken from the commissioners, whose office was abolished, and given to the comptroller. In 1851 the present office of bank superintendent was created instead. . . .

[Free Banking System]

The free banking system of New York was authorized in 1838. Its two great features were, that it opened the privileges of banking, on certain conditions, to all persons alike; and it provided much better security for the redemption of notes than had yet been provided. The system of deposits with the comptroller for security was the one on which the national banks of a later date were based. It was originally that all banking associations, on depositing stock of the

State of New York or of the United States, or any State stock which should be, or be made, equal to a five-per-cent stock, or bonds and mortgages on improved and productive real estate, worth, exclusive of the buildings thereon, double the amount secured by the mortgage, and bearing interest at not less than six per cent per annum, should receive from the comptroller of the State an equal amount of circulating-notes. Previous to the year 1843 twenty-nine of these banks, with an aggregate circulation of $1,233,374, had failed; and their securities, consisting of stocks and bonds and mortgages amounting to $1,555,338, were sold for $953,371, entailing a loss of $601,966. The avails of the securities were sufficient to pay but seventy-four per cent of the circulation alone. The losses to the bill-holders occurred only in the case of those banks which had deposited State stocks other than those of New York. The law was thereupon so amended as to exclude all stocks, except those issued by the State of New York, and to require those to be made equal to a five-per-cent stock. An amendment in 1848 required that the stocks deposited should bear six per cent interest instead of five; and that the bonds and mortgages should bear interest at seven per cent, and should be on productive property, and for an amount not exceeding two-fifths of the value of the land covered by them. Subsequently, on April 10, 1849, the law was again so amended as to require that at least one-half of the securities so deposited should consist of New-YorkState stocks, and that not more than one-half should be in the stocks of the United States; the securities in all cases to be, or to be made, equal to a stock producing an interest of six per cent per annum, and to be taken at a rate not above their par value, and at not more than their market-value.

Two other interesting features of the later State-bank legislation in New York were the requirement that the banks redeem their notes at some agency in New York, Albany, or Troy, and that stockholders should be individually liable for the obligations of the bank to the extent of their shares. The latter provision was incorporated into the Constitution of 1846. The former was a law of 1840, which allowed a discount of one-half of one per cent on redemption: in 1851 the discount was reduced to one-fourth of one per cent. The NewYork-City banks, however, soon inaugurated the Suffolk-Bank system already described, and divided the discount between themselves and the redemption agency. Such banks as did not provide for redemption were forced to close up.