# A History of Banking in the United States/Chapter 17

PERIOD VI.— FROM 1863.
CHAPTER XVII.
The National Bank System.
The President, in a message of January 17, 1863, expressed his anxiety about the increasing depreciation, and suggested a taxation of bank circulation to prevent it, and also proposed to make the banks bear their just share of public burdens; but the point of the communication was that a uniform currency was necessary for public credit and for contracting loans. "Such a currency can be furnished by bank associations organized under a general act of Congress, as suggested in my message at the beginning of the present session. The securing of this circulation by the pledge of United States ​bonds, as therein suggested, would still further facilitate loans, by increasing the present and causing a future demand for such bonds." In short, the motives of the legislation which established the national bank system were political. It was desired to change the currency in a way to make it more useful in the financial exigencies of the government, and to borrow all the banking capital of the country as a further financial resource. There was no consideration of favoritism to the banks and they, almost without exception, opposed the change. The arrangement might also be regarded as a compromise by which the government, instead of depriving the banks of the privilege of circulation, shared it with them. The first national bank act was passed February 25, 1863, but it was superseded by the act of June 3, 1864. The associations were to be organized for twenty years, with a minimum capital of $50,000; the smallest deposit for circulation, $30,000; on such deposits of United States bonds, 90 cents on $1 of market value, not exceeding par, were to be furnished in circulating notes by an officer of the Treasury Department. The lowest denomination of notes was to be $1 until after resumption; then $5. The notes were to be a legal tender to and from the government and to be received at par by all the banks in the system. The banks in the sixteen leading cities were required to maintain a reserve of lawful money equal to twenty-five per cent. of their circulation and deposits, and all others fifteen per cent.; three-fifths of the fifteen per cent. in the latter case might be kept on deposit as a redemption fund in one of the sixteen large cities, and one-half of the reserve of the large cities might be kept in New York. Quarterly reports were required to be published in the newspapers, but this was changed in 1869 to the requirement that five reports should be made annually, at any time when the Comptroller of the Currency might call for them. A tax of one per cent. per annum was laid on the average amount of the circulation, and one-half of one per cent. on the deposits, and the same rate on the capital stock not invested in United States bonds. The two last were repealed March 3, 1883. The act of March 3, 1865, allowed only a smaller proportion of circulation to capital for large banks, so that a bank with more than $3 millions capital could have only sixty per cent. The total amount of national bank circulation was fixed at $300 millions, of which half was to be apportioned amongst the States and Territories, according to population, and half according to existing banking capital and business. This apportionment proved impracticable, and after the close of the war there was complaint that national banks could not be formed in the Southern States. The limit was therefore increased by $54 millions, July 12, 1870; this amount to be apportioned to the States and Territories which had less than their quota. The act contemplated a withdrawal and redistribution of the surpluses; but this also proved impracticable.
Power was expressly reserved to Congress "at any time to alter, amend, or repeal" the national bank act. We have the testimony of Amasa Walker that the bill was passed against great opposition, without discussion, by the ​efforts of the Secretary of the Treasury, and by party tactics, and that it would not have been passed without the last-mentioned provision.
In 1874 the New England States had $70.3 millions and the Middle States $8.7 millions of circulation in excess of their quotas in a distribution of $354 millions. The only other surpluses were small ones in the District of Columbia, Colorado, and Montana.
The number of national banks established before November 28, 1863, was 135. A year later the number was 584. It was in 1865 that the banks went over almost in a body to the new system. Amongst the reasons of the Philadelphia banks for changing, it was said that "the city banks, which are considered the fat goose at Harrisburg, to be plucked at pleasure, will be removed from that body forever."
The national bank system had no sooner gone into operation than a necessity was experienced for some system of assorting, redeeming, and exchanging the issues. An Assorting House was planned by bank officers, at New York, in July, 1865.
An act of March 3, 1865, levied a tax of ten per cent. upon any bank notes paid out by any bank, not being national bank notes, after July 1, 1866. This measure was carried in the House by only one majority.
The Secretary of the Treasury desired, in 1864, that the national banks should be reserved for federal taxation only. The loan bill of June 30, 1864, contained a provision that the interest-bearing notes of the government should not be legal tender for the redemption of bank notes. Gold banks were provided for by the act of July 13, 1870. They were to deposit bonds of the United States, bearing interest, payable in gold, and to obtain notes for not less than $5 to the amount of eighty per cent. of the par value of the bonds. The notes were to bear a promise to pay, on presentation, in gold coin of the United States.
It is evident that the national bank system is a product of the history of American banking. Every important point in it stands out as the result of some long and important line of experience during the previous seventy or eighty years. It was built upon the model of the New York free banking law, but it contained the mature judgment of the leading public men of the time in regard to the good and bad features of that system, and the guarantees that were necessary under it. Its first great feature was that it was national and federal,—a thing which in the days of misery under the local bank system people had sighed for again and again as an unattainable hope. It is a great point which must be put to the credit of the civil war that it brought about what was otherwise a political impossibility. The federal laws and the federal administration of justice had not always stood up unflinchingly in defense of sound doctrine and the integrity of institutions; but they had proved on many occasions the safeguards of these things against State laws and State courts. It was a tremendous gain,—one which people ​now-a-days do not realize or appreciate, unless they know what the previous history had been; that currency banking, and with it, to a large extent, the whole system of banking, were brought under federal control.
The "national currency," to call it by its technical and proper name, was a uniform currency, such as the people had dreamed of and hoped for for fifty years, and such as never has existed anywhere else over a territory even a fraction as great. If it has not produced an equalization of the exchanges, it has reduced the internal exchanges of the country to an insignificant minimum. It would be a disaster, if it were possible, to do away with the rate of exchange which distributes capital and currency as they are wanted; but it is a marvellous thing that that re-distribution should be brought about at such slight expense over a whole continent, as is now the case amongst us.
This banking system incorporated and employed the Suffolk system, around local centers, throughout the country, embodying another of the most successful experiments of the previous time.
Various attempts have been made to construe and explain the system of the national currency, because it may, in fact, be turned into very different lights. The government guarantees the note-holder, because it is itself a debtor of the bank; and it promises to pay the note-holder, who is a creditor of the bank, instead of paying the bank; and in order to be in a position to do this, it takes back the evidence of its debt from the bank, holds it in its own control, and when the exigency arises, sells it to somebody else,—that is, contracts a loan elsewhere, in order to pay the note-holder. It has been objected, and on theoretical grounds with complete good reason, that this system guarantees only ultimate re-payment, not cash redemption or true convertibility; but in practice the note is as good after the bank has failed as before, and continues on its course, the holder probably never knowing that it was issued by a bankrupt institution, until it finds its way to the redemption bureau. It must be noticed that, in this respect, the national currency differs essentially from its prototype in New York. In that State, when a bank belonging to the free bank system failed, its notes became uncurrent.
It seems a much more useful and correct construction of this currency system, however, to regard it as reaching substantially the same result which is reached in the Bank of England, under the act of 1844, constituting the Issue Department as an independent thing, entirely separated from all the vicissitudes of the banking business. The Bank of England loaned on a book debt to the government, and the notes of the Issue Department are based, as respects what might be called their permanent amount, on this debt, and the fluctuating margin (which, it is true, in that case is very large), rests upon an equal amount of specie. In our national bank system bonds, as circulating evidences of a government loan, are bought and deposited, and the notes issued upon them may properly be regarded as constituting an internal core or permanent part of the total circulating medium of the country, with a provision for cash redemption upon the variable margin.
​This system of currency has put an end at once and forever to the old banker's trick of expansion and contraction. The present generation knows of that trick hardly by tradition. It is now complained that the national bank note currency is not elastic. That is very true. The old local bank note currency had the highest conceivable elasticity, and instead of varying with the requirements of the market, the banker was forever operating on its elasticity by his arbitrary will, and imparting fluctuations to the market. In order to stop him from doing that, a stringent system has been made, which has taken away the elasticity altogether; but if there was no other currency than a national bank note currency, limited far within the requirement, and combined with a large component of specie, the specie margin would give all the elasticity which would be required.
It is not possible that any government issue, whether direct like the greenbacks, or indirect like the national currency, should ever be elastic. It cannot be conducted on the banking principle, but only on the currency principle. We have attempted to maintain the government issue on a reserve of specie, which was planned at first to be one-third of the paper, in reliance on an old-fashioned empirical rule of banking; but a government issue can never be made to imitate the ebb and flow of the operations of the market. If the issues are put out in the payment of expenditures and are recovered in taxes, the two movements take place within some limit of time which is a tax period; but this does not resemble the movements of the market any more than a petty and arbitrary mechanism resembles an organism. What sustains a bank note circulation, as we have had repeated opportunity to observe, is the pulsation of borrowing and lending, or buying and paying, which, within a limit of time, or successful transactions, must equal each other. At every pulsation the bank notes are called into existence, and are canceled. A permanent government issue cannot be made to operate in a way in the remotest degree resembling this.
Under the operation of the paper-money system which existed for fifteen years after the war, prices and credits expanded to absorb the paper. Every autumn a stringency was experienced in the money market when the demand came for moving the crop. Under the pressure of the demand created by this stringency, the Secretary of the Treasury re-issued, in 1869, $1.5 millions of the treasury notes which had been retired by Secretary McCulloch. They were afterwards withdrawn. In 1871 a like sum was issued and withdrawn. During these years the effect of the central redemption system was to draw more and more of the free capital of the country into New York; but the expansion absorbed it all and renewed the stringency. In 1872 the amount issued was about $5 millions, and there was great difficulty to get it back. These phenomena all pointed to the fact that the system was working to a crisis. The cycle of phenomena of a paper money inflation was regularly repeated up to the point where the next thing to be expected was a crisis. The stage of investment in fixed capital had already been reached for a year or two. In this case it consisted ​of railroad building, by means of bonds floated in the eastern market. The rate of interest had also been rising year by year. In the summer of 1873, a Granger agitation at the West frightened investors from the railway securities, and brought distress upon the new railroad enterprises, and upon the bankers who were negotiating railroad securities. September 8th, the New York Warehouse and Security Company failed, followed by two or three banking firms with railroad enterprises on their hands. A run for legal tenders began at New York, where a certain arbitrary and artificial preference had been established for them. September 18th, Jay Cooke & Co. failed on account of a crisis which had occurred in the affairs of the Northern Pacific Railroad, for which they were negotiating bonds, and to which they had made advances. The run for deposits now began in the country towns, although without excitement or panic. The country banks called home their deposits from the redemption cities, and the latter from New York. The New York banks called for it from Wall Street, where it was in use. Rates for money rapidly advanced and prices fell. On the 20th the Union Trust Company and two or three other banks and trust companies suspended. The stock exchange became a scene of panic and prices fell with great rapidity twenty per cent. or thirty per cent. The stock exchange was closed, as the only means to arrest the panic, and it remained closed for ten days. On the following Monday, the 22d, the gold exchange also closed; gold at 112. On the 20th the Associated Banks had pooled their stock of greenbacks and issued certificates at seven per cent., good at the clearing house, which were to be loaned for seventy-five per cent. of the value of the securities deposited. The amount of these issued between that date and January 14, 1874, at New York, was $26.5 millions; at Philadelphia, $6.7 millions. The President and Secretary of the Treasury were in New York on Sunday, the 21st, and refused to use any part of the $44 millions of the withdrawn greenbacks, but they ordered bonds to be bought by the Assistant Treasurer, with his cash on hand. This produced the same result, for before January 1st, over $26 millions of the withdrawn greenbacks were issued. The amount of bonds purchased was $12 millions. The situation was one really of a suspension of paper payments in New York City. There had been no panic amongst the merchants, nor outside of New York, except among some savings bank depositors. Nevertheless the shock to credit was very deep; speculation was completely arrested; industry was checked; hours of labor and wages were reduced; and a liquidation was commenced, which lasted five or six years. The number of bankruptcies in 1873 was 5,183; liabilities $228.1 millions. The failures in 1874 were 5,830; liabilities, $155.2 millions.
The session of 1873-4 was full of currency schemes, which at last issued in an act to increase the note issue of the national banks, distributing the increase amongst the States; and the banks were to keep, as a part of their reserve, one-fourth part of the coin which they received for the interest on the bonds deposited for circulation. The President vetoed this as an ​inflation measure. It would have carried the bank note circulation up to $400 millions. Another section in it provided that the limit of the greenbacks should be $400 millions,—that is, it put back into circulation all which McCulloch had retired.
Another bill was immediately introduced, which became a law June 20, 1874. The reserve required in the law for the national banks was restricted to the deposits, and a redemption bureau was provided for the circulation, supplying the want for which the Assorting House had been planned. Each bank was required to deposit in this bureau, in greenbacks, five per cent. of its circulation, which might be counted into its lawful reserve; whenever bank notes were presented to the Treasurer of the United States in multiples of $1,000, they were to be redeemed from this fund and charged to the banks which issued them. When $500 were so withdrawn from the deposit of any bank, it was to be notified to make it good. If this was done, new notes were to be issued. The redemption at the redemption cities was done away with. This device was intended really to keep the national currency clean and in good order. The banks were also allowed by this act to deposit legal tender notes and take up their bonds, thus reducing or entirely withdrawing their circulation. The limit of the greenbacks was set at the point where it then stood, with the $26 millions out,—that is, at $382 millions.
The veto by President Grant of the inflation bill in the spring of 1874 was really the turning point in the struggle between inflation and resumption. At the next session, the resumption act of January 14, 1875, was passed. Fractional silver was re-introduced. The appreciation of the greenback and the depreciation of silver had gone so far that the fractional coins could be maintained in circulation. All charges for converting standard bullion into coin were repealed. All limit on the amount of national bank circulation was removed. This was in concession to a demand for free banking. After this, therefore, it was free to anybody under the conditions of the law to organize national banks, or to dissolve and wind up the same at will; but whenever any new banks were formed, increasing the national currency, the Secretary of the Treasury was required to redeem greenbacks for eighty per cent. of that increase, until the greenbacks should be reduced to $300 millions. This was construed to apply to the increase of national bank notes, without any reference to the reduction of the same, which might be going on at the same time. After January 1, 1879, the Secretary of the Treasury was to redeem, in coin, any legal tender notes presented at the office of the Assistant Treasurer in New York, in sums of not less than $50. In order to do this, he might sell bonds to provide the redemption fund. During the years 1878 and 1879, the gold premium was steadily reduced,—that is, the whole paper currency advanced towards par.
In May, 1884, during a temporary stringency in the money market at New York, it again became necessary to issue clearing house certificates. Between May 15th and October 3d, they were issued to the amount of $24.9 millions.
​The charters of the national banks begn to run out in 1883 and 1884. In anticipation of this, the act of July 12, 1882, provided for their extension for another twenty years. The minimum amount of bonds requisite to remain in the national bank system, to be on deposit for circulation, was reduced to one-quarter of the capital, for banks with less than $150,000 capital, the minimum capital remaining at $50,000. The reduction of circulation under this law was limited to $3 millions per month, and a bank which had reduced could not increase again within six months.
As the United States bonds increased in value, the profits of the circulation of a national bank declined. When the charters were renewed, the question of continuing the system was raised, and there was no little hostility to it manifested. One of the chief subjects of complaint was that the national banks get double interest on their capital. Every bank of issue gets double interest on its capital, minus such deductions as must be taken into account for taxes, specie reserve, and so on. If the bonds must be bought at a premium, and only 90 cents on $1 of their par value can be obtained in circulation, the deductions are so important that the special advantages of being in the national system are very slight.
The greatest amount of national bank notes outstanding at the end of any fiscal year was, in 1882, $358.7 millions. In spite of the formation of new banks, the voluntary withdrawals reduced the national currency, in 1891, to $167.5 millions. This is in a total net circulation, in the hands of the people, as current cash, of $800 or $900 millions. As these banks went out of existence; or out of the system, or reduced their circulation, the amount of greenbacks deposited by them in the Treasury to retire their circulation, as it should appear at the redemption bureau, increased until, in 1887, at its maximum, it amounted to $97.9 millions. According to the current view, this was so much money withdrawn from circulation, and by the act of July 14, 1890, it was turned into the available funds of the Treasury, and the Treasury became liable for the redemption of a corresponding amount of notes.
Clearing house certificates were again issued at the time of the Baring failure in 1890. Between November 11th of that year and February 7th following, the amount issued at New York was $15.2 millions; at Philadelphia, $8.8 millions; at Boston, $5 millions.
The democratic platform of 1892 favored a repeal of the ten per cent. tax on the State bank circulation. In June, 1894, a bill was introduced into the House of Representatives to remit the ten per cent. tax on State bank notes which had been used between August 1st and October 15th in the commercial crisis of 1893. An amendment was proposed repealing the ten per cent. tax altogether. It was lost, 172 to 102, and the bill was defeated.
The financial storm of 1893 is properly called a panic. By various steps taken in the way of concession to silver the currency had once more been made excessive, independent in amount of the demands of trade, and ​complicated. The doubt had so far been quelled, not without difficulty, that the different kinds of currency might not be maintained on an equality with each other, and that one portion might fall below gold value. The constant apprehension was, so long as then-existing legislation remained in force, that the unit of existing monetary relations would be changed. Such an apprehension is the surest ground for panic which can be offered. The panic which resulted when this fear became more specific was not a bank panic, nor a crisis in which the banks had any responsibility. When it broke out, important weakness was developed in the banks south and west of the Potomac. National and State banks to the number of 360 suspended, of which 343 were in that section. In a number of cases these failing banks were connected with each other in a way to remind us of the old combinations of weak or rotten institutions linked together for mutual support, resulting in common collapse. The fact was also developed by the temporary and very short suspension of a number of the banks that the attempt to use their reserve funds in the redemption cities had been carried too far, and that they were at the mercy of any financial storm which might arise from causes far outside of their responsibility, and which might precipitate demands on them so suddenly that the agencies of steam and telegraph would not avail to call home their funds in time. Such a fear as existed lest some part of the currency would lose value produced the most sudden and intense contraction which could possibly be operated, and the banks contributed to intensify this, so far as they suspended cash payments upon a weak and unfounded assumption of necessity, instead of meeting it with courage. This occasion enforced once more the most positive and direct lesson which we have learned in regard to panics, that the one way to quell them is to meet them fearlessly and in face.
The clearing house certificates issued at New York between June 21 and November 1, 1893, amounted to $41,490,000. The largest amount outstanding at any one time was, from August 29th to September 6th, $38,280,000. The issue at Philadelphia was $10,965,000; at Boston, $11,445,000. The deposits, which had been increasing at New York City, amounted, February 4, 1893, to $495.4 millions. From that point they steadily decreased until August 19th, when they were $370.3 millions. After the crisis was over they immediately began to increase again, and on December 22d they were $498 millions.
From 1883 to 1893 the annual number of failures was about 11,000, the average liabilities per failure about $12,000, the assets about fifty-two per cent. of the liabilities. In 1893, the number of failures was 15,508, the average liabilities per failure, $24,632, the percentage of assets to liabilities, sixty. In 1894 and 1895 the failures continued numerous (12,721 and 13,013), but the average liabilities per failure were nearly at the former rate; still the percentage of assets to liabilities remained high, 53.7 and 55.7 per ​cent. These figures show: 1—that the failures in 1893 were in the large enterprises, and that, in the following years, they reached the smaller ones; and 2—that, in all these years, they were not due to a bad state of trade, but to bad conditions which brought down men who were fairly strong. Those bad conditions must be sought in mistaken legislation.
The last noteworthy incident in the history of the banks is their attempt to assist the Treasury, in 1894, in the maintenance of the "gold reserve."
The most which it could be hoped to accomplish was to win time for public opinion, or political combinations, to reach a point at which some radical and effective reform of the currency could be made.
The total number of national banks organized, down to October 31, 1895, was 5,023, of which there were 3,715 in existence at that date, with $664 millions capital and $336 millions surplus, owned by 285,190 shareholders. The total circulation was then $213 millions. Against this $23.7 millions had been deposited in lawful money with the Treasurer, although treated by him as available means. There were east of the Mississippi, 2,611 banks with $527 millions capital; west of it, 1,104 with $135 millions capital. The average annual dividend for twenty-six years was 8.4 per cent.; in 1894, it was 6.8 per cent.
Since the national banking system was adopted the local banks have had no "history." It has been almost impossible to obtain statistical information in regard to them. In the year 1895, the Comptroller of the Currency obtained a sufficient number of returns about State banks, private banks, and trust companies to approximate to the desired information.
There were seventeen States and Territories from which the information was incomplete. Reports from 3,774 State banks were received, showing that they had capital, $250 millions; surplus, $101 millions; deposits, $712 millions; loans, $697 millions. Reports of dividends earned by 928 of them, in twenty-four States, showed an average of 7.2 per cent. per annum. Reports from 242 trust companies were received; capital, $108 millions; surplus, $84 millions; loans, $433 millions; deposits, $546 millions. One thousand and seventy private banks had $33.2 millions capital; $10 millions surplus; $81.8 millions deposits; $85.4 millions loans. The total banking capital, including surplus, of banks of all classes, was nearly $1,600 millions, of which the national banks had five-eighths.
Four States and one Territory require no reports from banks organized under their laws; six others require only one report in a year. Thirty States require that the reports be published in the local newspapers; twenty give reports about banks in annual or biennial reports; six make no provision for publishing information about them. Fourteen States allow banks to issue circulation; nineteen prohibit circulation; several have no law on the subject. Twelve States have no provision for the examination of banks by State officers. Seven States have no restrictions on bank loans; nine prohibit loans to officers or employees; most of them prohibit loans on the ​bank's own stock; twenty-four have no requirement for a cash reserve. Three States own investments in bank stock.
These facts show that the local bank systems are now still as heterogeneous and crude as they ever were, that it is as vain to hope for concord and co-operation between the States, in reference to banks of issue, as it ever was, and that State legislation is far behind national legislation in respect to sound and intelligent treatment of this subject.
On the first page of this history we found the public preoccupied with the question: How shall we get a currency? Throughout the history we have seen them struggling with the question: How shall we get enough money to do our business with? They have believed that somebody must provide a currency, that there would not be any, or would not be enough, if banks did not provide it. They have also believed that there was some great economy possible in the use of paper for money. Hence they have wanted money, plenty of money, and they have wanted it cheap. Scheme after scheme has been proposed and tried for realizing the gain which it was believed that cheap money could produce for the public; that is, for those who buy and use currency. This gain has been pursued as the alchemists pursued the philosopher's stone, by trial and failure. Whether there be any such gain or not, our attempts to win it have all failed, and they have cost us, in each generation, more than a purely specie currency would have cost, if each generation had had to buy it anew. The privilege of selling to the public the cheap money on which they had set their hearts, either in the form of paper or base metal, has been fought for with rapacity, and with social and political abuses of the gravest character. States which provide coinage of the most perfect kind win no profit from it; on the contrary, it comes under the head of a useful and necessary public expenditure. The State can win only by treason to the high function which it has assumed, for no other reason than to guarantee to the public absolute integrity in its money; it must debase the coinage and set its seal on a lie. Banks which furnish a bank-note circulation of the best kind can win nothing from it but payment for furnishing a convenience to such an extent as the public may want it. To win more they must perpetrate some fraud on the currency, such as those which banks did perpetrate throughout this history. The history shows that they did not win by it. The revulsions to which the system was subject overwhelmed them in every decade. The notions on which the system was based, and which are mentioned at the beginning of this paragraph, are proved to have been delusions, disastrous to everybody concerned, including those who tried to profit by them.
At the moment of this writing, the turmoil and confusion, the conflict of opinions and projects, the clash of political schemes, in and around the currency, are as great and mischievous as they ever were. The banks have ​but a very subordinate share in it, and are not to blame for any part of it. Eight or nine hundred millions of paper rest on a specie reserve which was originally planned for three hundred and forty-six millions, and that upon a fallacious plan. The stability of this currency has been maintained for two years by arbitrary purchases of gold, involving a manipulation of the foreign exchanges. Such manipulation may be excusable under great stress of other dangers, but it is perilous to some of the greatest and most delicate interests of the country. Theoreticial and practical financiers must agree that this manipulation is a subject of grave apprehension, all the more because it is beyond the power of any man to foreesee or estimate the consequences in their remoter reactions and more extended complications. The operation only wins time. It is no remedy. When the respite expires, if no sound measures have been adopted, the problem is still there, greater and more oppressive than ever, and complicated with the consequences of arbitrary interference with one of the most important and most delicate parts of the financial system. In the meantime, the factions produced by various dogmas about the currency, by interests engaged in it, and by party intrigues to profit by it, have grown fierce and stubborn. They exhaust their strength in making a deadlock. We are in a financial crisis which is becoming chronic, and which will be solved by a great disaster, unless we can rally knowledge and statesmanship to deal with it.
the end.
* ↑ 22 Banker's Magazine, 174.
* ↑ 19 Banker's Magazine, 410.
* ↑ 20 Banker's Magazine, 198.
* ↑ Noyes, The Banks and the Panic of 1893.