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

Commerce and Finance - Chapter XXIII

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





The charter of the Second Bank of the United States was for
twenty years. Its capital was $35,000,000, of which amount the
government subscribed $7,000,000, and in consideration of this
five of the twenty-five directors were to be appointed by the
President. The main bank was located in Philadelphia and
branches were established in different states wherever two thou-
sand shares or more of the bank's capital had been subscribed.
The bank and its branches were to have the deposits of the
national treasury, transact exchanges, negotiate loans and perform
other similar duties for the treasury free of charge. The bank
Charter of the was a U we( l to issue notes in denominations of not
second united less than $5 on the same terms as the first bank,
that is to say, its aggregate note circulation must
not exceed its capital stock. Its notes were given preference
over all others by being receivable for all dues to the United
States. These notes were payable on demand, and in the event
of the bank failing to redeem its notes or suspending specie
payment, it was required to pay interest at 12 per cent, on its
notes. Congress pledged itself not to grant a charter to any
other bank during the life of the charter to this. Thus it will
be seen that the Second Bank of the United States was similar
in its main features to the first. It was larger, its note issues
would be greater, and to prevent the bane of irredeemable paper
money, a penalty in the form of interest was imposed upon it.
It began business on January 7, 1817, and on the 20th of the fol-
lowing February specie payments were resumed and the country
was once more upon a sound financial basis.

In 1819 the question of the constitutionality of the bank's
charter was definitely decided by the Supreme Court of the
United States in the case of the State of Maryland vs. McCul-
loch. The United States Bank had established a branch in
Baltimore. The state of Maryland had enacted a law that all
bank notes circulating within the state must be printed upon
stamped paper for which a tax must be paid to the state. The
branch did not use this paper and declined to pay the tax,
whereupon the state brought suit for violation of the laws of
constitutional- Maryland against Cashier McCulloch as the officer
unitedstatea of the bank - The contention was made that the
Bank Settled branch bank was without warrant of authority
under the laws of the United States, and that Congress had no
power under the Constitution to create a bank. In passing
upon this question the doctrine of implied powers was fully
established. Since Congress has the power to lay and collect
taxes, borrow money and regulate trade, it was decided that it
had the power "to make all laws which shall be necessary and
proper for carrying into execution the foregoing powers." In
rendering the decision of the court in this important case Chief
Justice Marshall said, "It is the unanimous and decided opinion
of this court that the act to incorporate the Bank of the United
States is a law made in pursuance of the Constitution. The
branches, proceeding from the same stock, and being conducive
to the complete accomplishment of the object, are equally con-
stitutional," and hence the court declared that they were not
subject to any state taxes or restrictions, since their usefulness
might thereby be impaired or their existence even destroyed.

In 1819 a financial panic overspread the country. Banks
and business houses failed in large numbers and general com-
mercial distress and depression prevailed. It leaked out that
irregularities had been practiced in the management of the
Bank of Canada, and Congress ordered an investiga-
tion. A shameful state of affairs was unearthed and the bank
was found to be on the verge of ruin. The officials seemed to
have been imbued with state banking fallacies and had paid little

attention to the restrictions of their charter. They
Bank Scandals had discounted the notes of stockholders on the

pledge of their stock as security to the amount
of over $8,000,000. They had also allowed stock to be sold
and transferred before it was fully paid for. They even ad-
vanced more than the par value of the stock in some instances.
Among the requirements of the charter was one that there
should be no dividends paid on shares that were not fully paid.
This provision had been repeatedly violated. The president
and cashier of the Baltimore branch had helped themselves to
large amounts of money on scant security, and withal the bank
was well nigh insolvent. It was saved from complete failure
by its new president, who borrowed $2,500,000 in Europe,
and took heroic measures to make stockholders pay up. From
this experience in our banking history we learned the lesson
that a bank should not loan money on its own shares, much less
those which are not even paid up, for in order to realize on the
security it must impair its own capital. Such loans when in
default become equivalent to the purchase of a bank's own
stock and that is the same as partial liquidation. In a time of
stringency such a practice will almost surely put a bank in
jeopardy. The Bank of the United States got itself into this
predicament in the panic of 1819, and had it not been for the
loan secured in Europe and the treasury balance on deposit
there, it would have been forced to close its doors.

Under proper management the bank gradually regained its
wonted strength, and thereafter controlled the financial system
of the country, rendering valuable service in its capacity as
"Regulator of the Currency," and as the fiscal agent of the gov-
ernment. The people as a whole regarded the institution as their


deliverer from the evils of a debased money system, and, with the
exception of a few disgruntled borrowers, together with stock-
holders whom the bank compelled to pay up, and the state banks
who had been forced to redeem their notes, it appeared to be
solid in the confidence and good will of the people. Imagine,
then, the general surprise when in 1829, General Jackson in
his message attacked the bank, and declared that it had "failed
in the great end of establishing a uniform and sound currency."
Jackson's People who knew anything about the matter must

Hostility to have known that this statement was false, and
yet so great was the popularity of the old hero
that many were willing to accept anything he said. General
Jackson's opposition to the bank could not have been caused
by financial reasons. He was no doubt led to believe that the
bank had been hostile to his election and he proposed to destroy
the "monster." President Biddle of the bank declined to allow
political affairs to influence or in any way meddle with the
management of the concern, and intimated that he needed no ad-
vice from the White House. All of this aroused President
Jackson's ire and he became convinced that the bank was a
giant monopoly dangerous to the welfare of the government
and people, and that it was his duty to destroy it.

On the other hand, the National Republican party, headed
by Clay and Webster, immediately took sides as defenders of the
bank against President Jackson. Although the bank's charter
would not expire until 1836, a bill was introduced into Congress
in the Spring of 1832 and passed for a renewal of the charter.
It went to President Jackson in July and he vetoed it with a
ringing document. President Biddle of the bank was reported as
having said that he would defeat President Jackson for re-
election on account of his veto of the bank bill. This threat
aroused the General, and he declared "By the Eternal that is too
much power for any one man to have in this country," and was
then more than ever determined to destroy the bank. The


presidential campaign was then on, Henry Clay being the op-
ponent of General Jackson, and the leader of the friends of the
bank. The bank charter was the chief issue of the campaign, but
Jackson's popularity was so great that he won re-election by an
overwhelming majority. Taking his re-election as
an endorsement of his position on the bank ques-
tion, President Jackson proceeded to deal the
death blow to what he considered his enemy. On the pre-
text that the bank was unsafe he ordered the secretary of the
treasury to remove from it the government deposits, and place
them in certain state banks. Secretary Duane refused to do
this, and Jackson removed him and appointed Eoger B. Taney
in his stead. Taney carried out the wishes of his superior. No
more deposits were made in the United States Bank and war-
rants for current expenses soon exhausted the government bal-
ance there.

The government funds were then deposited with state banks
carefully selected with reference to party loyalty. This raised
a storm of protest from Jackson's political op-
ponents, who branded the proceeding as unlawful,

being a violation of the contract under which the
bank came into existence. The bank had paid $1,500,000 as a
bonus for the government deposits during a period of twenty
years and now it was deprived of the benefits of these deposits
three years before the expiration of the time. Party feeling
ran high, and in the ensuing Congress a resolution of censure
was passed by both houses as follows: Resolved, that the presi-
dent, in the late proceeding in relation to the public revenue,
has assumed upon himself authority and power -not conferred by
the constitution and laws but in derogation of both." The
president protested against the proceeding, but the resolution
stood upon the records until 1837, when it was expunged in an
all-night session of the Senate, after a fierce party struggle.
The withdrawal of the deposits was a serious blow to the


Bank of the United States, but it continued on until the expira-
tion of its charter in 1836. It then took out a charter as a state
bank, and continued business until 1841, when it failed. Nicho-
las Biddle was reduced from wealth to pauperism. Thus ended
the great bank war, in a triumph for President Jackson. Specie
payments were suspended again in 1837, the only retaliation
against Jackson's victory, and the country was again to struggle
for a time with state banks and wildcat currency.

The state banks in existence in 1833, when Andrew Jackson
transferred the deposits to them, were of all kinds, based upon
every conceivable system and form of legislation. It seemed as
though the period of nearly thirty years just prior to the enact-
ment of our National Banking Act was to be used for testing
every theory and making every experiment that could be neces-
sary in order to culminate finally in the national banking system.
The banks in Massachusetts were the best managed. Being
under severe restrictions, and a penalty in case of failure to pay
specie on demand, they were the most stable. The "Suffolk
Bank System" of Boston also acted as a powerful check against
improvident management. This system arose from the deter-
mination of the solvent banks of Boston to compel the smaller
ibanks located in the remote corners of the state to redeem their
notes by keeping on deposit in Boston a fund for this purpose.
The notes were presented daily through a clear-
i n & nouse > in very much the same way as checks
are cleared. Any bank refusing to keep a fund
for this purpose was liable to have its notes thrown out or re-
fused, and thus be discredited. This system, which at one time
included over five hundred banks, served to restrict note issues
and proved a valuable expedient for the time being.

In New York the "Safety Fund System" was established, by
which each bank was required to deposit with the state treasurer
three per cent, of its capital as a fund for the security of note
holders and depositors, In case the fund became exhausted


all the solvent banks were to be taxed to replete it. The fund
was afterwards set aside for the protection of note holders only,
it having been found wholly insufficient to protect
both note holders and depositors. The "Safety
Fund System" resembled in many respects the
present Canadian banking system, which has a safety fund of
five per cent, as a protection for note holders. Other expedients
were tried in various states. In some of them the state had a
voice in the management of the banks and in others it was a
sharer in the profits. Thus the country went, feeling its way,
until the panic in 1837 caused hundreds of banks to fail, no
doubt covering up many an instance of defalcation and dis-
honesty. That panic proved that the safety fund system of
New York was wholly inadequate, and that state then adopted
the "Free Banking System," which permitted any-
one * f rm a hank and issue notes without a
charter from the legislature, as had been the
custom in the past. The notes must be based, however, upon
either United States bonds or bonds of the State of New York,
or approved real estate security, deposited with the state treas-
urer. In case of the failure of a bank the state treasurer was
authorized to sell the securities and apply the proceeds to the
redemption of the outstanding notes of the bank. Other states
copied after the free banking system of New York, and it
became very popular. The merits of the system depended chiefly
upon the quality of the securities and the convertibility of them
in a time of stringency. Real estate mortgages were subject to
great depreciation and at forced sale bonds often brought much
less than their face value.

In some other states no adequate attempt was made to pro-
tect the note circulation or supervise the banking system, and
the result was a large number of banks of the most irresponsible
character, many of them permeated with dishonesty, so bad as to
win the title of Wild Cat Banks. Senator Sherman, in his "Rec-


ollections," referring to wild cat banking in the 40's and 50s,
says: "We had every diversity of the bank system devised by the
wit of man, and all these banks had the power to
issue paper money. There was no check or con-
trol over them." Manifold evils resulted from
this want of uniformity and of public regulation. Coun-
terfeiters plied their dishonest practices to an alarming extent,
and there were 5,400 spurious notes catalogued as being in
circulation at one time. "Counterfeit Detectors" and "Bank
Note Keporters" were important publications to which bankers
and merchants subscribed, in order to be posted on the spurious
bills in circulation. Disputes between buyer and seller as to the
goodness of the bank notes were of almost constant occurrence,
and if there was a bank in the town the cashier was constantly
appealed to for his opinion on the genuineness of ' notes in

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