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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXII

Commerce and Finance - Chapter XXII

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII



Prior to the achievement of their independence the banking
facilities of the colonies were not only very limited, but crude
and unsettled. No well defined system of finance or banking had
been worked out, even in the older countries of Europe. The
Bank of England came the nearest to a settled plan, but it was in
the experimental stage, constantly changing its policy or methods
during the first hundred years of its existence. Men did not
understand finance. They were groping about, experimenting,
trying all manner of schemes and hoping to find the successful
one. The first banking experiment in this country of which
we have any reliable account was started in Boston in 1714,
and was to be a land bank, patterned no doubt on ideas borrowed
from John Law of France. This scheme was entitled "A Pro-
jection for Erecting a Bank of Credit in Boston, New England,
Founded on Land Security." The capital was fixed at 300,000,
and each subscriber to the stock was required to "settle and make
over real estate to the value of his respective subscription to
the trustees of the partnership or bank, to remain as a fund
or security for such bills as shall be emitted therefrom." At
meetings of the stockholders, each person should
n t nave more tnan five votes, irrespective of the
number of shares which he held. Loans were to
be made on "ratable estates" to the amount of two-thirds their
value; on wooden houses, not exceeding the value of the land
included with the house; on brick houses, to the extent of one
and a half times the value of the land belonging to them; "on
iron or other imperishable commodities as a pledge, for a half or
two-thirds, according to the market." The scheme was very
popular, especially with the irresponsible class and those pos-
sessed of real estate but no ready cash, who wanted to borrow
money on easy terms. The project was vigorously attacked in
a pamphlet by Paul Dudley, attorney general, who showed that
the pretended land security for the bills was in reality no
security at all, since the holder of them could do nothing with
a mortgage if it were turned over to him. He gave it as his
legal opinion that the mortgage loan were without consideration
and would not be enforced by the courts. When a charter was
applied for, the scheme was vetoed by the Colonial Legislature.
Next came the Land Bank of 1741, a "pernicious grand bubble,"
a scheme which convulsed society in its day and came near pro-
ducing a revolution. This bank began to issue circulating notes
without a charter. The governor issued a proclamation against
it and a general quarrel ensued. New banks now began to be
organized, in imitation of this one, in all towns of importance
and a regular banking mania broke out. The financial schemes
were projected by "a vast multitude of necessitous, idle and
extravagant persons, (who) contrived to obtain what they call
money, at an easy rate and to pay their debts in a precarious,
fallacious kind of bills, very illy or not at all secured, of no de-
termined value, bearing no interest," and payable at some in-
definite time. The situation resembled somewhat that which
had existed in England during the South Sea speculative mania,
and to bring the colonists to their senses and put a. stop to these
wild schemes, Parliament extended the prohibitions and penal-
ties of the Anti-Bubble Act to the colonies. This stirred up
much antagonism and resentment in the minds of the people,
but resulted in killing the Land Bank. The liquidation of the
bank's affairs extended over a period of almost a quarter of a
century, and nearly every one who had any connection with the
institution was ruined.
During the Revolutionary War, one of the most difficult
and embarrassing problems which confronted the Continental
Congress was the money question. How to provide the means
for keeping the armies in the field was a knotty question. The
treasury was bankrupt, and Congress possessed no power to com-
pel the several states comprising the confederacy to pay their
just portion of the taxes. Congress undertook to tide over the
emergency by issuing bills of credit, which were to pass as
currency, but as millions upon millions of these were printed,
and as the prospects of a successful termination of the war be-
came doubtful, these bills sank in value until in 1778 a dollar
During the was wop th DU t sixteen cents in gold. In 1780 it
Revolutionary had fallen to two cents, and in 1782 it required
$1,000 in notes to equal $1 in gold. Different
states issued paper money at the same time which circulated at
various values. The people were poor, in debt, and discon-
tented, and general grumbling prevailed. In order to remedy this
state of affairs and bring some degree of financial order out of
the general confusion, Robert Morris, then superintendent of
finance, in 1782 obtained a charter from the Continental Con-
gress for the Bank of North America, at Philadelphia. The
continental money was then almost worthless, having caused, as
Mr. Morris said, "Infinite private mischief, numberless frauds,
and the greatest distress," and he rightly believed that a large
bank, properly conducted, and under control of the government
would be of great service to both the government and the people.
The capital of the bank was $400,000, and its affairs were con-
ducted by a board of twelve directors, under the inspection of
the superintendent of finance, who was to receive daily reports
of the business of the bank. By the fortunate arrival of $470,-
000 in specie from France about this time, which was deposited
in the bank, thereby greatly strengthening its standing and

*Bills of credit were Issues of pure fiat money, based upon no assets and
having only the faith of the people in the issuing government to support
credit, the bank was enabled to make large loans to the govern-
ment for the purchase of army supplies. Mr. Morris afterwards
said, "Without the establishment of a national bank, the business
of the department of finance could not have been performed/'
and the war could not have been successfully prosecuted.

As some doubt existed as to the validity of a charter from
Congress., the bank applied to and received one from the state
of Pennsylvania. After the close of the war the bank did a pros-
perous business, earning dividends as high as 14 per cent. These
tempting gains prompted the starting of another bank, but the
Bank of North America prevented competition by absorbing the
new institution, thereby increasing its capital stock to $830,000.
Some dissatisfaction arose among the "debtor class" of the bank's
customers on account of the bank's practice of requiring its
paper to be promptly met at maturity, and the legislature was
petitioned to annul its charter, urging "usury, ex-
tortion, favoritism, harshness to debtors and the
possession of undue political and commercial in-
fluence." Strange as it may seem, the petition was granted and
the charter annulled in 1785. The bank continued to do busi-
ness under its governmental authority, and in 1787 the legis-
lature of Pennsylvania repented of its former ill considered
action and renewed the charter. When Alexander Hamilton
took charge of the government finances in 1790 he was opposed
to continuing the Bank of North America as a government
agent, claiming that its state charter virtually annulled its
national one, and made the bank a state institution. Washing-
ton and Congress seemed to accept this view, and abandoned all
government connection with the bank. It continued to do
business as a state bank until the organization of our national
banking system, when it entered the list as a national bank. By
a special dispensation, in view of its illustrious origin, it was
permitted to qualify under the national banking law, without
changing its name, and so continues to the present time a vener-


able and useful institution, the oldest bank in the United States.

Between 1782 and 1790, the Bank of North America had
been the depository of the government funds, had collected and
disbursed the revenues, and performed most of the functions
which are now performed by the government treasury, but in his
report of December 13, 1790, Hamilton strongly recommended
the organization of a United States Bank large enough and
strong enough to furnish a uniform and stable currency as well
as to properly perform the duties of financial agent. In ttiis he
took the ground that the government should not issue paper
money directly, but that a great bank, strong
Report, ";^ enough for the purpose, should make such issue
subject to governmental restrictions. Hamilton
understood the functions of a bank and saw how it served as
a manufactory of credit. He said:

"Every loan which a bank makes is, in its first shape a
credit given to the borrower on its books, the amount of which
it stands ready to pay, either in its own notes, or gold or silver
at his option. But, in a great number of cases, no actual payment
is made in either. The borrower, frequently, by check or order,
transfers his credit to some other person, to whom he has a
payment to make, who in his turn is as often content with a simi-
lar credit because he is satisfied that he can, whenever he pleases,
either convert it into cash or pass it to some other hand, as an
equivalent for it, and in this manner the credit keeps circulating,
performing in every stage the office of money, till it is extin-
guished by a discount with some person who has a payment to
make to the bank, to an equal or greater amount. Thus large
sums are lent and paid, frequently through a variety of hands,
without the intervention of a single piece of coin."

A bill was introduced, in accordance with Hamilton's sug-
gestions, for the creation of the first United States Bank, to be
located in the city of Philadelphia. This bill met with strenu-
ous opposition from the "strict constructionists." Madison


was the leader of the opposition in the House, his main objection
to the measure being "That the power of establishing an incor-
porated bank was not among the powers vested in Congress by
The First ^ e constitution." But in answer to this, Hamil-

united states ton expounded the doctrine of implied powers,
claiming that the power to create a bank was
clearly implied from the express power given Congress by the
constitution. The bill became a law on February 25, 1791. Its
chief provisions were:

1. The bank was to have a capital of $10,000,000, divided
into 25,000 shares of $400 each. Eight millions of the capital
stock were open to subscriptions by the people, one-fourth to be
paid in specie and three-fourth in government bonds. The
remaining two millions were to be subscribed by the government,
payable in ten annual installments.

2. Each stockholder could cast one vote for one share of
stock, one for the next ten shares, etc., but no shareholder could
cast more than thirty votes. Foreign stockholders could not
vote by proxy, and thus were practically prohibited from voting,
the object being to prevent the bank from being controlled by
a few individuals or by foreigners.

3. The bank was to be managed by twenty-five directors, all
of whom must be citizens of the United States.

4. The bank could lend money on real estate security
but could not hold title to real estate except temporarily, until
it could be properly disposed of.

5. The bank could issue circulating notes to the amount
of its capital stock. These notes were receivable for public dues
as long as they were payable in gold coins and silver coins.

6. The head of the treasury should have the right to inspect
all accounts of the bank except depositors' accounts, and could
call for reports weekly if he desired.

7. The directors could establish branches as they chose
for the purpose of deposit and discount.


8. The bank's charter was to run twenty years, and the
government pledged itself to grant no other charter for a like
institution during that period.

Branches were organized in New York, Boston, Baltimore,
Norfolk, Charleston, Savannah, Washington and New Orleans,
Branches, and the bank at once became a successful and pros-

pTnanciai perous institution. After the abandonment of the

success Bank of North America by the government as a

place of deposit for public funds, the customs receipts of 1790
and 1791 had been deposited in state banks. These were drawn
against for current outlays, and the cash receipts were placed in
the Bank of the United State?, thus gradually the accounts of the
government in the state banks were depleted and extinguished
and the national funds passed into the hands of the Bank of
the United States. The great bank thus became the custodian
of the government funds. It sold bonds, transferred funds from
place to place as needed, and disbursed public money on warrants
as directed by the treasurer. It also made loans to the govern-
ment, and by 1795 these amounted to nearly $6,000,000. The
bank was a great financial success. By its policy of satisfactory
dealings with the public and the government it maintained an
excellent reputation. Its paper currency had the effect of giving
stability and uniformity to the money of the country, and in
many ways it contributed to the national prosperity and welfare,
besides earning dividends at an average rate of 8f per cent,
for its stockholders.

The government was very slow with the payment of its
installments to the capital stock of the bank and in 1796 the
first, second, third, fourth and fifth installments were due and
almost wholly unpaid. The government then began selling its
stock to private individuals and by 1802 its entire interest had
been disposed of. In 1809 Secretary Gallatin reported that
the government had made a profit of $671,860 on the sale of its
stock in the bank. A large portion of the stock had passed into


the hands of foreigners, so that only 7,000 shares were owned
by American citizens, while 18,000 were held abroad. The cir-
culating notes outstanding at that time were $4,500,000; specie

on hand, $5,000,000; loans and discounts, $15,-
thTB^k 7 f 000,000. Thus the bank was in excellent condition,

and the stockholders in 1810 applied for a renewal
of its charter, enumerating in their petition to Congress the
advantages which the bank had afforded the government, as a
depository of the public funds; the transfer and disbursement
of public money free of cost; loans to the government; a stable
paper currency; profit from the sale of stock, etc.

A contest of extreme bitterness ensued. Secretary Gallatin
strongly recommended the renewal of the charter, with an in-
crease of the capital of the bank to $30,000,000. Of this amount
$15,000,000 should be subscribed by such states as desired it,
and branches should be organized in all states thus subscribing.
In anticipation of the prospective war with England, Mr. Gallatin
inserted a clause in the proposed charter obligating the bank
to lend three-fifths of its capital to the government whenever re-
quired to do so. Just at this time the feeling against England
ran high, and the fact that 18,000 shares of the bank were held
abroad, mostly in England, aroused a strong feeling of resentment
and opposition towards the bank. Mr. Gallatin reminded the
opposition to people that foreigners had no voice in the con-
Renewai of duct of the bank, and that in case the renewal of

the charter was denied, it would be necessary to
remit about $7,200,000 abroad at once in settlement for the
stock held there, that being its market value, and that the country
could illy afford to spare that amount of specie on the eve of war,
when every dollar would be needed at home, whereas if the
charter was renewed it would only be necessary to remit to
England the annual dividend of about 8J per cent., equivalent
in effect to having an English loan of $7,200,000 at 8J per
cent, to aid us in the war. But such arguments only seemed
to inflame the opposition. Henry Clay, then just coming into
popularity, threw his influence on the side against renewal, on
the grounds that "the Constitution did not originally authorize
Congress to grant the charter/' hence a renewal of it would
be unconstitutional for the same reason. Five years later Mr.
Clay was a strong advocate of the establishment of the Second
Bank of the United States, having reversed his former opinion
on the question of constitutionality.

The decisive vote for renewal was taken in the House on
January 24, 1811, and failed by a majority of 165 to 64. The
Senate voted on a similar bill on February 20, resulting in a
tie 17 to 17, whereupon George Clinton, the Vice President,
cast the deciding vote against the bank. The bank went into
liquidation and paid the shareholders $434 for each share of
$400. Irresponsible state banks now sprang into existence
everywhere, hoping to reap the profits heretofore enjoyed by the
Bank of the United States. The country was flooded with
paper money, secured" by insignificant reserves. In this state
of affairs, with its financial machinery disorganized, the country
in the following year entered upon a war with
Great Britain. A more reckless and unfortunate
condition of affairs could scarcely exist. Bank
charters were very loosely granted by the various states, and in
some instances banks were allowed to begin business before
their capital stock had been actually subscribed, and they traded
on the money received from depositors. At the time of the
closing of the Bank of the United States in 1811 there were in
existence eighty-eight state banks with a combined paper circu-
lation equal in value to the notes of the United States Bank,
and hence equal to gold, amounting to $28,000,000. This num-
ber increased until in 1815 there were 208 banks with $110,000,-
000 notes outstanding. This unwarranted increase in banks and
paper money was fast placing the country in a condition where
disaster was inevitable. In 1814, the British captured the city


of Washington and burned the White House. The news spread
consternation throughout the country and caused a bank panic,
resulting in the suspension of specie payments throughout the
country, with the exception of portions of New England. There
the laws had been more stringent and imposed a penalty upon
any bank which should fail to redeem its notes in coin. This
had the effect of restraining the over issue of circulating notes,
and hence the New England banks were able to weather the
storm, and kept their notes at par with specie throughout the
crisis. Wherever specie payment was suspended, there deprecia-
suspension tion ^ ^ ne currency at once set in, and since the
of specie paper money was issued by banks in different

states, under a variety of laws and conditions, the
depreciation was not uniform. In New York it was 20 per cent.,
in Philadelphia 24 per cent, and in Baltimore 30 per cent.
The citizens of New England paid their taxes and other obliga-
tions in money as good as gold, while those of New York, Penn-
sylvania or Maryland paid in depreciated paper. The injustice
of this was apparent, but the government could not remedy the
evil, since the depreciated paper was the only money to be had
in a large portion of the country. Government bonds were sell-
ing at 85 cents on the dollar, although paid for in currency
worth only 70 to 80 cents. To prosecute a war successfully
under these conditions would seem a very difficult undertaking.
Its success must have been due in a very large measure to the
patriotism of the people. Many of the state banks scattered
throughout the various states were government depositories, and
held large amounts of government funds, but as the depreciated
currency of one state would not circulate in another the gov-
ernment was unable to transfer the surplus it might have in one
locality to places where it was needed to meet public demands.
To overcome this evil, it became necessary to issue treasury notes.
The friends of the United States Bank ascribed all of the
existing evils to the failure to renew the charter of the bank


and its resulting consequences, and this view was generally
acquiesced in. If the bank's charter had been renewed $7,200,-
000 in specie need not have been shipped to Europe to pay the
stockholders, thus draining the country of a large part of its
gold and furnishing England with money to prosecute a war
against us. The increase in the number of state banks would
have been prevented and their issues of paper money in excess
of their power to redeem would have been avoided. Secretary
Gallatin said: "Suspension (of specie payments) might have
been prevented at the time when it took place had

the former Bank f the United States been still

in existence." During its life-time the bank had
regulated the currency by means of its example, its strength,
and the fact that it was the fiscal agent of the government. Its
own notes were always equal to specie and the state banks were
required to keep theirs up to the same standard, or otherwise they
would be "thrown out" by the great bank, and no longer re-
ceived for taxes and government dues. With a bank's notes
thus discredited its customers would desert it for other and mare
responsible banks or for the branches of the United States
Bank, located throughout the country. Thus the term "Regu-
lator of the Currency" was not a misnomer when applied to
the great Bank of the United States.

Notwithstanding the war was over a few months after the
suspension of specie payments, and commerce resumed its cus-
tomary channels, no effort was made by the state banks to re-
sume specie payments. It was not to their pecuniary advantage
to do so, as long as they could float a large volume of irredeem-
able paper money. A year passed and yet the banks showed
The second no s ^S n ^ attempting to resume. The welfare of
united states the country demanded that something should be

done, and yet Congress had not power to compel
the state banks to change their policy. Naturally public opinion
turned in favor of a new bank modeled on the plan of the
former one. President Madison, although opposed to the first
bank on constitutional grounds, now in his message of December
5, 1815, suggested a national bank as a suitable instrumentality
for bringing about the resumption of specie payments. Secre-
tary Dallas urged the organization of such a bank, and on
April 10, 1816, Congress passed a law creating the Second Bank
of the United States, on lines similar to the first, with a capital
of $35,000,000. Later on Mr. Webster introduced a bill to
the effect that after February 20, 1817, the secretary of the
treasury should receive for public dues only treasury notes, the
notes of the United States Bank and of those state banks
which were paying specie on demand. This virtually compelled
the resumption of specie payments on the date mentioned, after
a suspension otf two and a half years.

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