Chapter IV: , VII (181)

"In the reign of William old men were still living who could
remember the days when there was not a single banking house in
the city of London. So late as the time of the Restoration
every trader had his own strong box in his own house, and,
when an acceptance was presented to him, told down the crowns
and Caroluses on his own counter. But the increase of wealth
had produced its natural effect, the subdivision of labour.
Before the end of the reign of Charles II. a new mode of
paying and receiving money had come into fashion among the
merchants of the capital. A class of agents arose, whose
office was to keep the cash of the commercial houses. This new
branch of business naturally fell into the hands of the
goldsmiths, who were accustomed to traffic largely in the
precious metals, and who had vaults in which great masses of
bullion could lie secure from fire and from robbers. It was at
the shops of the goldsmiths of Lombard Street that all the
payments in coin were made. Other traders gave and received
nothing but paper. This great change did not take place
without much opposition and clamour. … No sooner had banking
become a separate and important trade, than men began to
discuss with earnestness the question whether it would be
expedient to erect a national bank. … Two public banks had
long been renowned throughout Europe, the Bank of Saint George
at Genoa, and the Bank of Amsterdam. … Why should not the
Bank of London be as great and as durable as the Banks of
Genoa and Amsterdam? Before the end of the reign of Charles
II. several plans were proposed, examined, attacked and
defended. Some pamphleteers maintained that a national bank
ought to be under the direction of the King. Others thought
that the management ought to be entrusted to the Lord Mayor,
Alderman and Common Council of the capital. After the
Revolution the subject was discussed with an animation before
unknown. … A crowd of plans, some of which resemble the
fancies of a child or the dreams of a man in a fever, were
pressed on the government. Pre-eminently conspicuous among the
political mountebanks, whose busy faces were seen every day in
the lobby of the House of Commons, were John Briscoe and Hugh
Chamberlayne, two projectors worthy to have been members of
that Academy which Gulliver found at Lagado. These men
affirmed that the one cure for every distemper of the State
was a Land Bank. A Land Bank would work for England miracles
such as had never been wrought for Israel. … These blessed
effects the Land Bank was to produce simply by issuing
enormous quantities of notes on landed security. The doctrine
of the projectors was that every person who had real property
ought to have, besides that property, paper money to the full
value of that property. Thus, if his estate was worth two
thousand pounds, he ought to have his estate and two thousand
pounds in paper money. Both Briscoe and Chamberlayne
treated with the greatest contempt the notion that there could
be an over-issue of paper as long as there was, for every ten
pound note, a piece of land in the country worth ten pounds.
… All the projectors of this busy time, however, were not so
absurd as Chamberlayne. One among them, William Paterson, was
an ingenious, though not always a judicious speculator. Of his
early life little is known except that he was a native of
Scotland, and that he had been in the West Indies. … This
man submitted to the government, in 1691, a plan of a national
bank; and his plan was favourably received both by statesmen
and by merchants.
{2210}
But years passed away; and nothing was done, till, in the
spring of 1694, it became absolutely necessary to find some
new mode of defraying the charges of the war. Then at length
the scheme devised by the poor and obscure Scottish adventurer
was taken up in earnest by Montague [Charles Montague, then
one of the lords of the treasury and subsequently Chancellor
of the Exchequer]. With Montague was closely allied Michael
Godfrey. … Michael was one of the ablest, most upright and
most opulent of the merchant princes of London. … By these
two distinguished men Paterson's scheme was fathered. Montague
undertook to manage the House of Commons, Godfrey to manage
the City. An approving vote was obtained from the Committee of
Ways and Means; and a bill, the title of which gave occasion
to many sarcasms, was laid on the table. It was indeed not
easy to guess that a bill, which purported only to impose a
new duty on tonnage for the benefit of such persons as should
advance money towards carrying on the war, was really a bill
creating the greatest commercial institution that the world
had ever seen. The plan was that £1,200,000 should be borrowed
by the government on what was then considered as the moderate
interest of eight per cent. In order to induce capitalists to
advance the money promptly on terms so favourable to the
public, the subscribers were to be incorporated by the name of
the Governor and Company of the Bank of England. The
corporation was to have no exclusive privilege, and was to be
restricted from trading in any thing but bills of exchange,
bullion and forfeited pledges. As soon as the plan became
generally known, a paper war broke out. … All the goldsmiths
and pawnbrokers set up a howl of rage. Some discontented
Tories predicted ruin to the monarchy. … Some discontented
Whigs, on the other hand, predicted ruin to our liberties. …
The power of the purse, the one great security for all the
rights of Englishmen, will be transferred from the House of
Commons to the Governor and Directors of the new Company. This
last consideration was really of some weight, and was allowed
to be so by the authors of the bill. A clause was therefore
most properly inserted which inhibited the Bank from advancing
money to the Crown without authority from Parliament. Every
infraction of this salutary rule was to be punished by
forfeiture of three times the sum advanced; and it was
provided that the King should not have power to remit any part
of the penalty. The plan, thus amended, received the sanction
of the Commons more easily than might have been expected from
the violence of the adverse clamour. In truth, the Parliament
was under duress. Money must be had, and could in no other way
be had so easily. … The bill, however, was not safe when it
had reached the Upper House," but it was passed, and received
the royal assent. "In the City the success of Montague's plan
was complete. It was then at least as difficult to raise a
million at eight per cent. as it would now be to raise forty
millions at four per cent. It had been supposed that
contributions would drop in very slowly: and a considerable
time had therefore been allowed by the Act. This indulgence
was not needed. So popular was the new investment that on the
day on which the books were opened £300,000 were subscribed;
300,000 more were subscribed during the next 48 hours; and, in
ten days, to the delight of all the friends of the government,
it was announced that the list was full. The whole sum which
the Corporation was bound to lend to the State was paid into
the Exchequer before the first instalment was due. Somers
gladly put the Great Seal to a charter framed in conformity
with the terms prescribed by Parliament; and the Bank of
England commenced its operations in the house of the Company
of Grocers. … It soon appeared that Montague had, by
skilfully availing himself of the financial difficulties of
the country, rendered an inestimable service to his party.
During several generations the Bank of England was
emphatically a Whig body. It was Whig, not accidentally, but
necessarily. It must have instantly stopped payment if it had
ceased to receive the interest on the sum which it had
advanced to the government; and of that, interest James would
not have paid one farthing."

_Lord Macaulay,
History of England,
chapter 20._

"For a long time the Bank of England was the focus of London
Liberalism, and in that capacity rendered to the State
inestimable services. In return for these substantial benefits
the Bank of England received from the Government, either at
first or afterwards, three most important privileges. First.
The Bank of England had the exclusive possession of the
Government balances. In its first period … the Bank gave
credit to the Government, but afterwards it derived credit
from the Government. There is a natural tendency in men to
follow the example of the Government under which they live.
The Government is the largest, most important, and most
conspicuous entity with which the mass of any people are
acquainted; its range of knowledge must always lie infinitely
greater than the average of their knowledge, and therefore,
unless there is a conspicuous warning to the contrary, most
men are inclined to think their Government right, and, when
they can, to do what it does. Especially in money matters a
man might fairly reason—'If the Government is right in
trusting the Bank of England with the great balance of the
nation, I cannot be wrong in trusting it with my little
balance.' Second, The Bank of England had, till lately, the
monopoly of limited liability in England. The common law of
England knows nothing of any such principle. It is only
possible by Royal Charter or Statute Law. And by neither of
these was any real bank … permitted with limited liability
in England till within these few years. … Thirdly. The Bank
of England had the privilege of being the sole joint stock
company permitted to issue bank notes in England. Private
London bankers did indeed issue notes down to the middle of
the last century, but no joint stock company could do so. The
explanatory clause of the Act of 1742 sounds most curiously to
our modern ears. … 'It is the true intent and meaning of the
said Act that no other bank shall be created, established, or
allowed by Parliament, and that it shall not be lawful for any
body politic or corporate whatsoever created or to be created,
or for any other persons whatsoever united or to be united in
covenants or partnership exceeding the number of six persons
in that part of Great Britain called England, to borrow, owe,
or take up any sum or sums of money on their bills or notes
payable on demand or at any less time than six months from the
borrowing thereof during the continuance of such said
privilege to the said governor and company, who are hereby
declared to be and remain a corporation with the privilege of
exclusive banking, as before recited.'
{2211}
To our modern ears these words seem to mean more than they
did. The term banking was then applied only to the issue of
notes and the taking up of money on bills on demand. Our
present system of deposit banking, in which no bills or
promissory notes are issued, was not then known on a great
scale, and was not called banking. But its effect was very
important. It in time gave the Bank of England the monopoly of
the note issue of the Metropolis. It had at that time no
branches, and so it did not compete for the country
circulation. But in the Metropolis, where it did compete, it
was completely victorious. No company but the Bank of England
could issue notes, and unincorporated individuals gradually
gave way, and ceased to do so. Up to 1844 London private
bankers might have issued notes if they pleased, but almost a
hundred years ago they were forced out of the field. The Bank
of England had so long had a practical monopoly of the
circulation, that it is commonly believed always to have had a
legal monopoly. And the practical effect of the clause went
further: it was believed to make the Bank of England the only
joint stock company that could receive deposits, as well as
the only company that could issue notes. The gift of
'exclusive banking' to the Bank of England was read in its
most natural modern sense: it was thought to prohibit any
other banking company from carrying on our present system of
banking. After joint stock banking was permitted in the
country, people began to inquire why it should not exist in
the Metropolis too? And then it was seen that the words I have
quoted only forbid the issue of negotiable instruments, and
not the receiving of money when no such instrument is given.
Upon this construction, the London and Westminster Bank and
all our older joint stock banks were founded. But till they
began, the Bank of England had among companies not only the
exclusive privilege of note issue, but that of deposit banking
too. It was in every sense the only banking company in London.
With so many advantages over all competitors, it is quite
natural that the Bank of England should have far outstripped
them all. … All the other bankers grouped themselves round
it, and lodged their reserve with it. Thus our one-reserve
system of banking was not deliberately founded upon definite
reasons; it was the gradual consequence of many singular
events, and of an accumulation of legal privileges on a single
bank which has now been altered, and which no one would now
defend. … For more than a century after its creation
(notwithstanding occasional errors) the Bank of England, in
the main, acted with judgment and with caution. Its business
was but small as we should now reckon, but for the most part
it conducted that business with prudence and discretion. In
1696, it had been involved in the most serious difficulties,
and had been obliged to refuse to pay some of its notes. For a
long period it was in wholesome dread of public opinion, and
the necessity of retaining public confidence made it cautious.
But the English Government removed that necessity. In 1797,
Mr. Pitt feared that he might not be able to obtain sufficient
specie for foreign payments, in consequence of the low state
of the Bank reserve, and he therefore required the Bank not to
pay in cash. He removed the preservative apprehension which is
the best security of all Banks. For this reason the period
under which the Bank of England did not pay gold for its
notes—the period from 1797 to 1819—is always called the
period of the Bank 'restriction.' As the Bank during that
period did not perform, and was not compelled by law to
perform, its contract of paying its notes in cash, it might
apparently have been well called the period of Bank license.
But the word 'restriction' was quite right, and was the only
proper word as a description of the policy of 1797. Mr. Pitt
did not say that the Bank of England need not pay its notes in
specie; he 'restricted' them from doing so; he said that they
must not. In consequence, from 1797 to 1844 (when a new era
begins), there never was a proper caution on the part of the
Bank directors. At heart they considered that the Bank of
England had a kind of charmed life, and that it was above the
ordinary banking anxiety to pay its way. And this feeling was
very natural."

_W. Bagehot,
Lombard Street,
chapters 3-4._

ALSO IN:
_J. W. Gilbart,
History and Principles of Banking._

_H. May,
The Bank of England
(Fortnightly Review, March, 1885)._

MONEY AND BANKING: 17-18th Centuries.
Early Paper issues and Banks in the American Colonies.

"Previous to the Revolutionary War paper money was issued to a
greater or less extent by each one of the thirteen colonies.
The first issue was by Massachusetts in 1690, to aid in
fitting out the expedition against Canada. Similar issues had
been made by New Hampshire, Rhode Island, Connecticut, New
York, and New Jersey, previous to the year 1711. South
Carolina began to emit bills in 1712, Pennsylvania in 1723,
Maryland in 1734, Delaware in 1739, Virginia in 1755, and
Georgia in 1760. Originally the issues were authorized to meet
the necessities of the colonial treasuries. In Massachusetts,
in 1715, as a remedy for the prevailing embarrassment of
trade, a land bank was proposed with the right to issue
circulating notes secured by land. … The plan for the land
bank was defeated, but the issue of paper money by the
treasury was authorized to the extent of £50,000, to be loaned
on good mortgages in sums of not more than £500, nor less than
£50, to one person. The rate of interest was five per cent.,
payable with one-fifth of the principal annually. … In 1733
an issue of bills to the amount of £110,000 was made by the
merchants of Boston, which were to be redeemed at the end of
ten years, in silver, at the rate of 19 shillings per ounce.
In 1739, the commercial and financial embarrassment still
continuing, another land bank was started in Massachusetts.
… A specie bank was also formed in 1739, by Edward
Hutchinson and others, which issued bills to the amount of
£120,000, redeemable in fifteen years in silver, at 20
shillings per ounce, or gold pro rata. The payment of these
notes was guaranteed by wealthy and responsible merchants.
These notes, and those of a similar issue in 1733, were
largely hoarded and did not pass generally into circulation.
In 1740 Parliament passed a bill to extend the act of 1720,
known as the bubble act, to the American colonies, with the
intention of breaking up all companies formed for the purpose
of issuing paper money.
{2212}
Under this act both the land bank and the specie bank were
forced to liquidate their affairs, though not without some
resistance on the part of the former. … The paper money of
the colonies, whether issued by them or by the loan banks,
depreciated almost without exception as the amounts in
circulation increased. … The emission of bills by the
colonies and the banks was not regarded with favor by the
mother country, and the provincial governors were as a general
thing opposed to these issues. They were consequently
frequently embroiled with their legislatures."

_J. J. Knox,
United States Notes,
pages 1-5._

MONEY AND BANKING: 17-19th Centuries.
Creation of the principal European Banks.

"The Bank of Vienna was founded as a bank of deposit in 1703,
and as a bank of issue in 1793; the Banks of Berlin and
Breslau in 1765 with state sanction; the Austrian National
Bank in 1816. In St. Petersburg three banks were set up; the
Loan Bank in 1772, advancing loans on deposits of bullion and
jewels; the Assignation Bank in 1768 (and in Moscow, 1770),
issuing government paper money; the Aid Bank in 1797, to
relieve estates from mortgage and advance money for
improvements. The Commercial Bank of Russia was founded in
1818. The Bank of Stockholm was founded in 1688. The Bank of
France was founded first in 1803 and reorganised in 1806, when
its capital was raised to 90,000,000 francs, held in 90,000
shares of 1,000 francs. It is the only authorised source of
paper money in France, and is intimately associated with the
government."

_H. de B. Gibbins,
History of Commerce in Europe,
book 3, chapter 4._

MONEY AND BANKING: A. D. 1775-1780.
The Continental Currency of the American Revolution.

"The colonies … went into the Revolutionary War, many of
them with paper already in circulation, all of them making
issues for the expenses of military preparations. The
Continental Congress, having no power to tax, and its members
being accustomed to paper issues as the ordinary form of
public finance, began to issue bills on the faith of the
'Continent,' Franklin earnestly approving. The first issue was
for 300,000 Spanish dollars, redeemable in gold or silver, in
three years, ordered in May and issued in August, 1775. Paper
for nine million dollars was issued before any depreciation
began. The issues of the separate colonies must have affected
it, but the popular enthusiasm went for something. Pelatiah
Webster, almost alone as it seems, insisted on taxation, but a
member of Congress indignantly asked if he was to help tax the
people when they could go to the printing-office and get a
cartload of money. In 1776, when the depreciation began,
Congress took harsh measures to try to sustain the bills.
Committees of safety also took measures to punish those who
'forestalled' or 'engrossed,' these being the terms for
speculators who bought up for a rise."

_W. G. Sumner,
History of American Currency,
pages 43-44._

"During the summer of 1780 this wretched 'Continental'
currency fell into contempt. As Washington said, it took a
wagon-load of money to buy a wagon-load of provisions. At the
end of the year 1778, the paper dollar was worth sixteen cents
in the northern states and twelve cents in the south. Early in
1780 its value had fallen to two cents, and before the end of
the year it took ten paper dollars to make a cent. In October,
Indian corn sold wholesale in Boston for $150 a bushel, butter
was $12 a pound, tea $90, sugar $10, beef $8, coffee $12, and
a barrel of flour cost $1,575. Samuel Adams paid $2,000 for a
hat and suit of clothes. The money soon ceased to circulate,
debts could not be collected, and there was a general
prostration of credit. To say that a thing was 'worth a
Continental' became the strongest possible expression of
contempt."

_J. Fiske,
The American Revolution,
chapter 13 (volume 2)._

Before the close of the year 1780, the Continental Currency
had ceased to circulate. Attempts were subsequently made to
have it funded or redeemed, but without success.

See UNITED STATES OF AMERICA:
A. D. 1780 (JANUARY-APRIL).

ALSO IN:
_H. Phillips, Jr.,
Historical Sketches of American Paper Currency,
2d Series._

MONEY AND BANKING: A. D. 1780-1784.
The Pennsylvania Bank and the Bank of North America.

"The Pennsylvania Bank, which was organized in Philadelphia
during the Revolutionary War, was founded for the purpose of
facilitating the operations of the Government in transporting
supplies for the army. It began its useful work in 1780, and
continued in existence until after the close of the war;
finally closing its affairs toward the end of the year 1784.
But the need was felt of a national bank which should not only
aid the Government on a large scale by its money and credit,
but should extend facilities to individuals, and thereby
benefit the community as well as the state. Through the
influence and exertion of Robert Morris, then Superintendent
of Finance for the United States, the Bank of North America,
at Philadelphia, was organized with a capital of $400,000. It
was incorporated by Congress in December, 1781, and by the
State of Pennsylvania a few months afterward. Its success was
immediate and complete. It not only rendered valuable and
timely aid to the United States Government and to the State of
Pennsylvania, but it greatly assisted in restoring confidence
and credit to the commercial community, and afforded
facilities to private enterprise that were especially welcome.
… The success of the Bank of North America, and the
advantages which the citizens of Philadelphia enjoyed from the
facilities it offered them, naturally suggested the founding
of a similar enterprise in the city of New York." The Bank of
New York was accordingly founded in 1784.

_H. W. Domett,
History of the Bank of New York,
chapter 1._

ALSO IN:
_W. G. Sumner,
The Financier and the Finances of
the American Revolution,
chapter 17 (volume 2)._

MONEY AND BANKING: A. D. 1789-1796.
The Assignats of the French Revolution.

"The financial embarrassments of the government in 1789 were
extreme. Many taxes had ceased to be productive; the
confiscated estates not only yielded no revenue but caused a
large expense, and, as a measure of resource, the finance
committee of the Assembly reported in favor of issues based
upon the confiscated lands. But the bitter experience of
France through the Mississippi schemes of John Law, 1719-21,
made the Assembly and the nation hesitate. … Necker, the
Minister, stood firm in his opposition to the issue of paper
money, even as a measure of resource; but the steady pressure
of fiscal exigencies, together with the influence of the
fervid orators of the Assembly, gained a continually
increasing support to the proposition of the committee. …
{2213}
The leaders of the Assembly were secretly actuated by a
political purpose, viz., by widely distributing the titles to
the confiscated lands (for such the paper money in effect was)
to commit the thrifty middle class of France to the principles
and measures of the revolution. … Oratory, the force of
fiscal necessities, the half-confessed political design,
prevailed at last over the warnings of experience; and a
decree passed the Assembly authorizing an issue of notes to
the value of four hundred million francs, on the security of
the public lands. To emphasize this security the title of
'assignats' was applied to the paper. … The issue was made;
the assignats went into circulation; and soon came the
inevitable demand for more. … The decree for a further issue
of eight hundred millions passed, September, 1790. Though the
opponents of the issue had lost heart and voice, they still
polled 423 votes against 508. To conciliate a minority still
so large, contraction was provided for by requiring that the
paper when paid into the Treasury should be burned, and the
decree contained a solemn declaration that in no case should
the amount exceed twelve hundred millions. June 19, 1791, the
Assembly, against feeble resistance, violated this pledge and
authorized a further issue of six hundred millions. Under the
operation of Gresham's Law, specie now began to disappear from
circulation. … And now came the collapse of French industry.
… 'Everything that tariffs and custom-houses could do was
done. Still the great manufactories of Normandy were closed;
those of the rest of the kingdom speedily followed, and vast
numbers of workmen, in all parts of the country, were thrown
out of employment. … In the spring of 1791 no one knew
whether a piece of paper money, representing 100 francs,
would, a month later, have a purchasing power of 100 francs,
or 90 francs, or 80, or 60. The result was that capitalists
declined to embark their means in business. Enterprise
received a mortal blow. Demand for labor was still further
diminished. The business of France dwindled into a mere living
from hand to mouth.' … Towards the end of 1794 there had
been issued 7,000 millions in assignats; by May, 1795, 10,000
millions; by the end of July, 16,000 millions; by the
beginning of 1796, 45,000 millions, of which 36,000 millions
were in actual circulation. M. Bresson gives the following
table of depreciation: 24 livres in coin were worth in
assignats
April 1, 1795, 238;
May 1, 299;
June 1, 439;
July 1, 808;
Aug. 1, 807;
Sept. 1, 1,101;
Oct. 1, 1,205;
Nov. 1, 2,588;
Dec. 1, 3,575;
Jan. 1, 1796, 4,658;
Feb. 1, 5,337.

At the last 'an assignat professing to be worth 100 francs was
commonly exchanged for 5 sous 6 deniers: in other words, a
paper note professing to be worth £4 sterling passed current
for less than 3d. in money.' The downward course of the
assignats had unquestionably been accelerated by the extensive
counterfeiting of the paper in Belgium, Switzerland, and
England. … Now appears that last resort of finance under a
depreciating paper: an issue under new names and new devices.
… Territorial Mandates were ordered to be issued for
assignats at 30:1, the mandates to be directly exchangeable
for land, at the will of the holder, on demand. … For a
brief time after the first limited emission, the mandates rose
as high as 80 per cent. of their nominal value; but soon
additional issues sent them down even more rapidly than the
assignats had fallen."

_F. A. Walker,
Money,
part 2, chapter 16._

ALSO IN:
_Andrew D. White,
Paper-money Inflation in France._

MONEY AND BANKING: A. D. 1791-1816.
The First Bank of the United States.

On the organization of the government of the United States,
under its federal constitution, in 1789 and 1790, the lead in
constructive statesmanship was taken, as is well known, by
Alexander Hamilton. His plan "included a financial institution
to develop the national resources, strengthen the public
credit, aid the Treasury Department in its administration, and
provide a secure and sound circulating medium for the people.
On December 13, 1790, he sent into Congress a report on the
subject of a national bank. The Republican party, then in the
minority, opposed the plan as unconstitutional, on the ground
that the power of creating banks or any corporate body had not
been expressly delegated to Congress, and was therefore not
possessed by it. Washington's cabinet was divided; Jefferson
opposing the measure as not within the implied powers, because
it was an expediency and not a paramount necessity. Later he
used stronger language, and denounced the institution as 'one
of the most deadly hostility existing against the principles
and form of our Constitution,' nor did he ever abandon these
views. There is the authority of Mr. Gallatin for saying that
Jefferson 'died a decided enemy to our banking system
generally, and specially to a bank of the United States.' But
Hamilton's views prevailed. Washington, who in the weary years
of war had seen the imperative necessity of some national
organization of the finances, after mature deliberation
approved the plan, and on February 25, 1791, the Bank of the
United States was incorporated. The capital stock was limited
to twenty-five thousand shares of four hundred dollars each,
or ten millions of dollars, payable one fourth in gold and
silver, and three fourths in public securities bearing an
interest of six and three per cent. The stock was immediately
subscribed for, the government taking five thousand shares,
two millions of dollars, under the right reserved in the
charter. The subscription of the United States was paid in ten
equal annual instalments. A large proportion of the stock was
held abroad, and the shares soon rose above par. … Authority
was given the bank to establish offices of discount and
deposit within the United States. The chief bank was placed in
Philadelphia and branches were established in eight cities,
with capitals in proportion to their commercial importance. In
1809 the stockholders of the Bank of the United States
memorialized the government for a renewal of their charter,
which would expire on March 4, 1811; and on March 9, 1809, Mr.
Gallatin sent in a report in which he reviewed the operations
of the bank from its organization. Of the government shares,
five million dollars at par, two thousand four hundred and
ninety-three shares were sold in 1796 and 1797 at an advance
of 25 per cent., two hundred and eighty-seven in 1797 at an
advance of twenty per cent., and the remaining 2,220 shares in
1802, at an advance of 45 per cent., making together,
exclusive of the dividends, a profit of $671,680 to the United
States. Eighteen thousand shares of the bank stock were held
abroad, and seven thousand shares, or a little more than one
fourth part of the capital, in the United States.
{2214}
A table of all the dividends made by the bank showed that they
had on the average been at the rate of 8 3/8 (precisely 8
13/34) per cent. a year, which proved that the bank had not in
any considerable degree used the public deposits for the
purpose of extending its discounts. From a general view of the
debits and credits, as presented, it appeared that the affairs
of the Bank of the United States, considered as a moneyed
institution, had been wisely and skilfully managed. The
advantages derived by the government Mr. Gallatin stated to
be,
1, safe-keeping of the public moneys;
2, transmission of the public moneys;
3, collection of the revenue;
4, loans.
The strongest objection to the renewal of the charter lay in
the great portion of the bank stock held by foreigners. Not on
account of any influence over the institution, since they had
no vote; but because of the high rate of interest payable by
America to foreign countries. … Congress refused to prolong
its existence and the institution was dissolved. Fortunately
for the country, it wound up its affairs with such
deliberation and prudence as to allow of the interposition of
other bank credits in lieu of those withdrawn, and thus
prevented a serious shock to the interests of the community.
In the twenty years of its existence from 1791 to 1811 its
management was irreproachable. The immediate effect of the
refusal of Congress to recharter the Bank of the United States
was to bring the Treasury to the verge of bankruptcy. The
interference of Parish, Girard, and Astor alone saved the
credit of the government. … Another immediate effect of the
dissolution of the bank was the withdrawal from the country of
the foreign capital invested in the bank, more than seven
millions of dollars. This amount was remitted, in the twelve
months preceding the war, in specie. Specie was at that time a
product foreign to the United States, and by no means easy to
obtain. … The notes of the Bank of the United States,
payable on demand in gold and silver at the counters of the
bank, or any of its branches, were, by its charter, receivable
in all payments to the United States; but this quality was
also stripped from them on March 19, 1812, by a repeal of the
act according it. To these disturbances of the financial
equilibrium of the country was added the necessary withdrawal
of fifteen millions of bank credit and its transfer to other
institutions. This gave an extraordinary impulse to the
establishment of local banks, each eager for a share of the
profits. The capital of the country, instead of being
concentrated, was dissipated. Between January 1, 1811, and
1815, one hundred and twenty new banks were chartered, and
forty millions of dollars were added to the banking capital.
To realize profits, the issues of paper were pushed to the
extreme of possible circulation. Meanwhile New England kept
aloof from the nation. The specie in the vaults of the banks
of Massachusetts rose from $1,706,000 on June 1, 1811, to
$7,326,000 on June 1, 1814. … The suspension of the banks
was precipitated by the capture of Washington. It began in
Baltimore, which was threatened by the British, and was at
once followed in Philadelphia and New York. Before the end of
September all the banks south and west of New England had
suspended specie payment. … The depression of the local
currencies ranged from seven to twenty-five per cent. … In
November the Treasury Department found itself involved in the
common disaster. The refusal of the banks, in which the public
moneys were deposited, to pay their notes or the drafts upon
them in specie deprived the government of its gold and silver;
and their refusal, likewise, of credit and circulation to the
issues of banks in other States deprived the government also
of the only means it possessed for transferring its funds to
pay the dividends on the debt and discharge the treasury
notes. … On October 14, 1814, Alexander J. Dallas, Mr.
Gallatin's old friend, who had been appointed Secretary of the
Treasury on the 6th of the same month, in a report of a plan
to support the public credit, proposed the incorporation of a
national bank. A bill was passed by Congress, but returned to
it by Madison with his veto on January 15, 1815. … Mr.
Dallas again, as a last resort, insisted on a bank as the only
means by which the currency of the country could be restored
to a sound condition. In December, 1815, Dallas reported to
the Committee of the House of Representatives on the national
currency, of which John C. Calhoun was chairman, a plan for a
national bank, and on March 3, 1816, the second Bank of the
United States was chartered by Congress. The capital was
thirty-five millions, of which the government held seven
millions in seventy thousand shares of one hundred dollars
each. Mr. Madison approved the bill. … The second national
bank of the United States was located at Philadelphia, and
chartered for twenty years."

_J. A. Stevens,
Albert Gallatin,
chapter 6._

MONEY AND BANKING: A. D. 1817-1833.
The Second Bank of the United States
and the war upon it.

"On the 1st of January, 1817, the bank opened for business,
with the country on the brink of a great monetary crisis, but
'too late to prevent the crash which followed.' The management
of the bank during the first two years of its existence was
far from satisfactory. It aggravated the troubles of the
financial situation instead of relieving them. Specie payments
were nominally resumed in 1817, but the insidious canker of
inflation had eaten its way into the arteries of business, and
in the crisis of 1819 came another suspension that lasted for
two years. … It was only by a desperate effort that the bank
finally weathered the storm brought on by its own
mismanagement and that of the State Banks. After the recovery,
a period of several years of prosperity followed, and the
management of the bank was thoroughly reorganized and sound.
From this time on until the great 'Bank War' its affairs seem
to have been conducted with a view to performing its duty to
the government as well as to its individual stockholders, and
it rendered such aid to the public, directly, and indirectly,
as entitled it to respect and fair treatment on the part of
the servants of the people. … But the bank controversy was
not yet over. It was about to be revived, and to become a
prominent issue in a period of our national politics more
distinguished for the bitterness of its personal animosities
than perhaps any other in our annals. … As already said, the
ten years following the revulsion of 1819-25 were years of
almost unbroken prosperity. … The question of the
continuance of the bank was not under discussion. In fact,
scarcely any mention of the subject was made until President
Jackson referred to it in his message of December, 1829.
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In this message he reopened the question of the
constitutionality of the bank, but the committee to which this
portion of the message was referred in the House of
Representatives made a report favorable to the institution.
There seems no reason to doubt the honesty of Jackson's
opinion that the bank was unconstitutional, and at first he
probably had no feeling in the matter except that which sprang
from his convictions on this point. Certain events, however,
increased his hostility to the bank, and strengthened his
resolution to destroy it. … When President Jackson first
attacked the bank, the weapon he chiefly relied on was the
alleged unconstitutionality of the charter."

_D. Kinley,
The Independent Treasury of the United States,
chapter 1._

The question of the rechartering of the Bank was made an issue
in the presidential campaign of 1832, by Henry Clay. "Its
disinterested friends in both parties strongly dissuaded
Biddle [president of the Bank] from allowing the question of
recharter to be brought into the campaign. Clay's advisers
tried to dissuade him. The bank, however, could not oppose the
public man on whom it depended most, and the party leaders
deferred at last to their chief. Jackson never was more
dictatorial and obstinate than Clay was at this juncture."
Pending the election, a bill to renew the charter of the Bank
was passed through both houses of Congress. The President
promptly vetoed it. "The national republican convention met at
Baltimore, December 12, 1831. It … issued an address, in
which the bank question was put forward. It was declared that
the President 'is fully and three times over pledged to the
people to negative any bill that may be passed for
rechartering the bank, and there is little doubt that the
additional influence which he would acquire by a reelection
would be employed to carry through Congress the extraordinary
substitute which he has repeatedly proposed.' The appeal,
therefore, was to defeat Jackson in order to save the bank.
… Such a challenge as that could have but one effect on
Jackson. It called every faculty he possessed into activity to
compass the destruction of the bank. Instead of retiring from
the position he had taken, the moment there was a fight to be
fought, he did what he did at New Orleans. He moved his lines
up to the last point he could command on the side towards the
enemy. … The proceedings seemed to prove just what the
anti-bank men had asserted: that the bank was a great monster,
which aimed to control elections, and to set up and put down
Presidents. The campaign of 1832 was a struggle between the
popularity of the bank and the popularity of Jackson."

_W. G. Sumner,
Andrew Jackson,
chapter 11._

Jackson was overwhelmingly elected, and feeling convinced that
his war upon the Bank had received the approval of the people,
he determined to remove the public deposits from its keeping
on his own responsibility. "With this view he removed (in the
spring of 1833) the Secretary of the Treasury, who would not
consent to remove the deposits, and appointed William J.
Duane, of Pennsylvania, in his place. He proved to be no more
compliant than his predecessor. After many attempts to
persuade him, the President announced to the Cabinet his final
decision that the deposits must be removed. The Reasons given
were that the law gave the Secretary, not Congress, control of
the deposits, that it was improper to leave them longer in a
bank whose charter would so soon expire, that the Bank's funds
had been largely used for political purposes, that its
inability to pay all its depositors had been shown by its
efforts to procure an extension of time from its creditors in
Europe, and that its four government directors had been
systematically kept from knowledge of its management.
Secretary Duane refused either to remove the deposits or to
resign his office, and pronounced the proposed removal
unnecessary, unwise, vindictive, arbitrary, and unjust. He was
at once removed from office, and Roger B. Taney, of Maryland,
appointed in his place. The necessary Orders for Removal were
given by Secretary Taney. It was not strictly a removal, for
all previous deposits were left in the Bank, to be drawn upon
until exhausted. It was rather a cessation. The deposits were
afterwards made in various State banks, and the Bank of the
United States was compelled to call in its loans. The
commercial distress which followed in consequence probably
strengthened the President in the end by giving a convincing
proof of the Bank's power as an antagonist to the Government."

_A. Johnston,
History of American Politics,
chapter 13._

MONEY AND BANKING: A. D. 1837-1841.
The Wild Cat Banks of Michigan.

"Michigan became a State in January, 1837. Almost the first
act of her State legislature was the passage of a general
banking law under which any ten or more freeholders of any
county might organize themselves into a corporation for the
transaction of banking business. Of the nominal capital of a
bank only ten per cent. in specie was required to be paid when
subscriptions to the stock were made, and twenty per cent.
additional in specie when the bank began business. For the
further security of the notes which were to be issued as
currency, the stockholders were to give first mortgages upon
real estate, to be estimated at its cash value by at least
three county officers, the mortgages to be filed with the
auditor-general of the State. A bank commissioner was
appointed to superintend the organization of the banks, and to
attest the legality of their proceedings to the
auditor-general, who, upon receiving such attestation, was to
deliver to the banks circulating notes amounting to two and a
half times the capital certified to as having been paid in.
This law was passed in obedience to a popular cry that the
banking business had become an 'odious monopoly' that ought to
be broken up. Its design was to 'introduce free competition
into what was considered a profitable branch of business
heretofore monopolized by a few favored corporations.' Anybody
was to be given fair opportunities for entering the business
on equal terms with everybody else. The act was passed in
March, 1837, and the legislature adjourned till November 9
following. Before the latter date arrived, in fact before any
banks had been organized under the law, a financial panic
seized the whole country. An era of wild speculation reached a
climax, the banks in all the principal cities of the country
suspended specie payments, and State legislatures were called
together to devise remedies to meet the situation. That of
Michigan was convened in special session in June, and its
remedy for the case of Michigan was to leave the general
banking law in force, and to add to it full authority for
banks organized under it to begin the business of issuing
bills in a state of suspension—that is, to flood the State
with an irredeemable currency, based upon thirty per cent. of
specie and seventy per cent. of land mortgage bonds."

_Cheap-Money Experiments
(from the Century Magazine),
pages 75-77._

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"Wild lands that had been recently bought of the government at
one dollar and twenty-five cents an acre were now valued at
ten or twenty times that amount, and lots in villages that
still existed only on paper had a worth for banking purposes
only limited by the conscience of the officer who was to take
the securities. Any ten freeholders of a county must be poor
indeed if they could not give sufficient security to answer
the purpose of the general banking law. The requirement of the
payment of thirty per cent. of the capital stock in specie was
more difficult to be complied with. But as the payment was to
be made to the bank itself, the difficulty was gotten over in
various ingenious ways, which the author of the general
banking law could hardly have anticipated. In some cases,
stock notes in terms payable in specie, or the certificates of
individuals which stated—untruly—that the maker held a
specified sum of specie for the bank, were counted as specie
itself; in others, a small sum of specie was paid in and taken
out, and the process repeated over and over until the
aggregate of payments equaled the sum required; in still
others, the specie with which one bank was organized was
passed from town to town and made to answer the purposes of
several. By the first day of January, 1838, articles of
association for twenty-one banks had been filed, making, with
the banks before in existence, an average of one to less than
five thousand people. Some of them were absolutely without
capital, and some were organized by scheming men in New York
and elsewhere, who took the bills away with them to circulate
abroad, putting out none at home. For some, locations as
inaccessible as possible were selected, that the bills might
not come back to plague the managers. The bank commissioners
say in their report for 1838, of their journey for inspection:
'The singular spectacle was presented of the officers of the
State seeking for banks in situations the most inaccessible
and remote from trade, and finding at every step an increase
of labor by the discovery of new and unknown organizations.
Before they could be arrested the mischief was done: large
issues were in circulation and no adequate remedy for the
evil.' One bank was found housed in a saw-mill, and it was
said with pardonable exaggeration in one of the public papers.
'Every village plat with a house, or even without a house, if
it had a hollow stump to serve as a vault, was the site of a
bank.' … The governor, when he delivered his annual message
in January, 1838, still had confidence in the general banking
law, which he said 'offered to all persons the privilege of
banking under certain guards and restrictions,' and he
declared that 'the principles upon which this law is based are
certainly correct, destroying as they do the odious feature of
a banking monopoly, and giving equal rights to all classes of
the community.' … The aggregate amount of private
indebtedness had by this time become enormous, and the
pressure for payment was serious and disquieting. … The
people must have relief; and what relief could be so certain
or so speedy as more banks and more money? More banks
therefore continued to be organized, and the paper current
flowed out among the people in increasing volume. … At the
beginning of 1839 the bank commissioners estimated that there
were a million dollars of bills of insolvent banks in the
hands of individuals and unavailable. Yet the governor, in his
annual message delivered in January, found it a 'source of
unfeigned gratification to be able to congratulate [the
legislature] on the prosperous condition to which our rising
commonwealth has attained.' … Then came stay laws, and laws
to compel creditors to take lands at a valuation. They were
doubtful in point of utility, and more than doubtful in point
of morality and constitutionality. The federal bankrupt act of
1841 first brought substantial relief: it brought almost no
dividends to creditors, but it relieved debtors from their
crushing burdens and permitted them, sobered and in their
right minds, to enter once more the fields of industry and
activity. The extraordinary history of the attempt to break up
an 'odious monopoly' in banking by making everybody a banker,
and to create prosperity by unlimited issues of paper
currency, was brought at length to a fit conclusion."

_T. M. Cooley,
Michigan,
chapter 13._

See WILD CAT BANKS.

MONEY AND BANKING: A. D. 1838.
Free Banking Law of New York.

"On April 18th, 1838, the monopoly of banking under special
charters, was brought to a close in the State of New York, by
the passage of the act 'to authorize the business of Banking.'
Under this law Associations for Banking purposes and
Individual Bankers, were authorized to carry on the business
of Banking, by establishing offices of deposit, discount and
circulation. Subsequently a separate Department was organized
at Albany, called 'The Bank Department,' with a
Superintendent, who was charged with the supervision of all
the banks in the State. Under this law institutions could be
organized simply as banks of 'discount and deposit,' and might
also add the issuing of a paper currency to circulate as
money. At first the law provided that State and United States
stocks for one-half, and bonds and mortgages for the other
half, might be deposited as security for the circulating notes
to be issued by Banks and individual Bankers. Upon a fair
trial, however, it was found that when a bank failed, and the
Bank Department was called upon to redeem the circulating
notes of such bank, the mortgages could not be made available
in time to meet the demand. … By an amendment of the law the
receiving of mortgages as security for circulating notes was
discontinued."

_E. G. Spaulding,
One Hundred Years of Progress
in the Business of Banking,
page 48._

MONEY AND BANKING: A. D. 1844.
The English Bank Charter Act.

"By an act of parliament passed in 1838, conferring certain
privileges on the Bank of England, it was provided that the
charter granted to that body should expire in 1855, but the
power was reserved to the legislature, on giving six months'
notice, to revise the charter ten years earlier. Availing
themselves of this option, the government proposed a measure
for regulating the entire monetary system of the country."

_W. C. Taylor,
Life and Times of Sir Robert Peel,
volume 3, chapter 7._

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