# A History of Banking in the United States/Chapter 1

BANKS IN THE UNITED STATES.
PERIOD I. 1630 TO 1780.
The Colonists Experiment with Joint Stock Banks of Issue on Land Security, and with Provincial Mortgage Loan Offices Issuing Currency.
CHAPTER I.
Banks in the Colonies.
This endeavor, which we here meet with in the very earliest days of the settlement, to invent some kind of a bank on land, which could be made to work like the banks founded on money, is most interesting and important ​for the study of our subject, because we shall find that from that day to this the same train of thought, speculation, and effort has been repeated clear across this continent, whenever the same economic circumstances have existed. Circulating notes, which are put in the place of money, are more useful and convenient for many purposes than specie, provided their value can be assured. If they take the place of money, they become cash. They deteriorate, however, into negotiable instruments and not cash so soon as the slightest shade of difference arises between their value and that of specie. Notes issued on the security of anything but specie, or on specie, if not strictly held to the standard, are negotiable instruments. No matter how great and good the security behind them may be, it is always possible that for some reason, a divergence may arise between the paper instrument and cash. The persons who possess land in a new country are under an absolute necessity for some capital. The amount of capital that can be employed on the land is small, because no high culture would pay; but the amount of capital that is necessary for superficial culture is absolutely indispensable. On the advancing margin of new settlement, breaking the way into the wilderness all the way across the continent, the circumstances of the first settlers on the coast have been repeated. The want is capital. They always think that the want is money. Any community of people who had been educated on a money economy, and who meant to remain on it, would have money, because that would be one of its first and most fundamental needs. It would be forced to go without other things in order to get money, because the lack of money would arrest the operation of the industrial and commercial organization on which its members would depend for the supply of all needs. But new settlers, destitute of everything, begrudge the investment of capital in money, which is only a tool of exchange. They want to put all the capital they can get into the circulating capital which is turned over in every period of production and brings the full business rate of profit. If, therefore, they get any money, they part with it, as far as they possibly can, in the purchase of the real capital which they need. This is what the colonists of North America did. They got plenty of silver in commerce. They spent it all for products of civilized industry from England. They were able to do this because they gave up the money system of traffic and fell back upon barter. Then they could do without money, but when they had made arrangements to do without money, they had to do without it. It is not possible to do without it and keep it too. Their own interpretation of the facts, in consonance with such economic theories as then prevailed, was that "the balance of trade drew away all their specie." Then they thought it necessary to do something to "provide a medium," and we find them planning a bank for the purpose. Land was the one thing which they possessed in abundance and they wanted to make this a security for the ​notes which were to do the work of money. There was a very active speculation on banks going on in England, and many of the speculators were working at schemes for banks founded on land values, which were a very different thing in an old country from what they were in a new. It was very natural that these ideas should be taken up eagerly by the colonists.
It must be added, however, that there were circumstances of difficulty connected with the supply of money. In any such primitive agricultural community the circulation of money is extremely sluggish, because the organization is low and the households largely supply their wants from their own direct efforts. It is only at particular seasons of the year that money is more needed and that its circulation is more active. Money should therefore be drawn from commercial centers at those times and then returned to them. Otherwise the expense of maintaining money enough all the time to suffice at the times of need is really great. The distance of the colonies from England, the difficulty of communication, and the obstructive legislation which was in fashion, made it impossible that money should go to and fro with facility as wanted. Gallatin, who was a competent observer, and who lived in the midst of these primitive facts in western Pennsylvania, said of the people there: "The principle almost universally true that each country will be naturally supplied with the precious metals according to its wants did not apply to their situation."
The American colonists gave up the struggle to maintain themselves on a money system. They fell back upon barter and established a system of barter currency as their money of account. This fact is of the first importance for understanding the financial and monetary phenomena of the period.
In 1667 a pamphlet was published in Massachusetts in which the ideas which have been described were very fully set forth. The writer had perceived that, if exchanges could only be brought into coincidence, there was need of little or no money. He inferred that money itself need have no value. He wanted to provide some ultimate security in land, and in a pledge of merchandise, and he aimed to carry out the transactions by book debts, or bills of exchange, or change bills, according to the nature and size of the transactions. He also lays great stress on the advantages which would come from a more abundant supply of money. The project is like those which were put forth in England a little later by Chamberlain and Briscoe for land banks. An institution on this plan appears to have been actually started in Massachusetts, in 1671, "and was carried on in private for many months," although without issuing notes. Another similar bank was set up in 1681 which did issue notes. Nothing is known of its history.
John Blackwell and others made a proposition to the authorities of the colony, in 1686, to set up a bank to issue notes and make loans on the security of land and imperishable merchandise. The scheme was approved and authorized. "All that is known of the history of this Association, the ​first chartered bank in Massachusetts, is found in a brief reference to it made by the anonymous author of a pamphlet printed in 1714." "Our fathers, about twenty-eight years ago, entered into a partnership to circulate their notes founded on land security, stamped on paper, as our Province bills, which gave no offence to the government then, etc."
The first bills of credit, as they were called by a seventeenth century expression, which is said to have been applied to the goldsmiths' notes in London, were issued in 1690 by the government of Massachusetts Bay, to pay the expenses of an unsuccessful expedition to Canada. Of these bills of credit, Cotton Mather said, in a pamphlet, that they were disposed of by the first receivers at 14 or 15 shillings in the pound. He urged the impossibility of collecting them in corn "at overvalue," whereby he bears testimony to the error and mischief of the barter currency. He has heard that some individuals in New York or Connecticut have circulated notes on their credit and is indignant that these of Massachusetts, based on all the wealth of the Province, should not be sustained. "Silver in New England is like the water of a swift running river; always coming and as fast going away," but this paper currency "is an abiding cash; for no man will carry it to another country, where it will not pass, but rather use it here, where it will, or, at least ought;" etc.
A committee of the General Court, in 1701, proposed a bank, but it was negatived by the Council. Another movement for the establishment of a private bank was started, in 1714, by several gentlemen of Boston. Hutchinson says that they were "persons in difficult or involved circumstances in trade, or such as were possessed of real estates, but had little or no ready money at command, or men of no substance at all."
The scheme was that, £300,000 should be subscribed and the same amount of notes issued. The subscribers were to mortgage their estates as an ultimate security against mismanagement, etc. Each subscriber was to take out between one quarter and one half of his stock in notes and keep them out at least two years, paying interest for them. All partners agreed to take the notes at a rate equal to the bills of credit of the colony. The tenor of the notes was that all the members of the company would take them in all payments "in lieu of" so many shillings, and that they would be so received for any pawn or mortgage in the bank.
One important allegation in favor of the bank, revealing a line of thought which we shall meet with often hereafter, was that it "would sever the connection between money and might." We also find the Land Bank seeking favor by propositions of a class often met with in the nineteenth century. They proposed to give a sum annually to the use of a hospital or charity school for the poor children of Boston, provided the inhabitants, at or before their general meeting in March, 1715, would order the Treasurer to accept their bank bills in payment of town taxes and assessments.
​As this project took more definite shape, it aroused great opposition, and in order to defeat it, a project was set in opposition to it for a further issue of colonial bills of credit—not for the expenses of government, but on a new scheme. The colonial government was to prepare and lend out on mortgage, in bills of credit, £50,000, repayable in five annual installments, with five per cent. interest. A public meeting at Boston pronounced in favor of the public bank. All the popular arguments were on its side. The Governor and Council forbade any private company to issue bills of credit for circulation without the authority of the General Court. Nevertheless the bank proceeded to make issues. In 1716 another "public bank" was made. £100,000 "was committed to the care of the county trustees; was proportioned to each county according to its tax; secured by mortgage estates of double the value of the sum borrowed; each loan not exceeding £500 nor being under £25, for ten years, at five per cent., paid annually; the profits to help pay for expenses of government, and the bills to be returned at the end of this period and burnt. Frequent litigations subsequently arose in the settlement of the mortgages for this money."
This is a specimen of the second kind of bank in the colonies, one which was adopted by all but one or two of the colonies and repeated over and over again. The sense of "bank" would be best expressed by batch, because it was applied to the mass of bills provided for and loaned out at one time, under one act of legislation. It would go beyond the limits of our subject to pursue this device as an experiment in currency. It may suffice to say that the colonists, in their issue of bills of credit, had hit upon a fact in monetary circulation which they did not understand and which is not, perhaps, fully understood yet. If they had been contented to use their bills of credit within very strict limits, to be ascertained by experiment, they might have carried on the system indefinitely, with complete success, and have conquered all their troubles from a "lack of a medium." The notion of a cheap money would, of course, have been a pure fallacy. No money can be cheap except to the issuer. If he gets it at the cost of manufacturing bits of paper, and can exchange these for commodities, in as large amounts as he could get for the coins whose names and denominations the paper bears, the currency would be cheap to him; but to those who gave the commodities for it, it would be no cheaper than the coins would have been. The paper currency in the colonies, however, might have overcome the difficulties which were due to lack of communication and transportation, and to obstructive legislation, and might have lifted the community out of barter. What actually happened was that the colonists employed this device without limitation or judgment. They pushed the bills of credit at once into their greatest abuse; which is, that any paper issued at will, unlimited by the hard facts of economic supply, can be multiplied in amount indefinitely. Then, instead of facilitating intercourse, it becomes the worst barrier to intercourse. The loan offices, also, under pretense of providing the farmers with the capital which they needed, only set ​them to juggling with the frauds of fluctuating prices and dishonest contracts.
The colonists were not worse than their time. The mysterious and powerful functions of credit were developed in northern Europe, half by accident, in the latter half of the seventeenth century. The Land Bank scheme, Mississippi scheme, South Sea scheme, etc., were aberrations due to lack of comprehension of the nature and limits of the power which had been evoked. It was a marvelous thing to discover that a corporation, or a civil body, could emit notes and so borrow, yet win interest instead of paying interest on what it borrowed. This is what the colonies attempted to do. They were "lending" to their citizens the capital which was so much needed, and were at the same time winning an interest which paid the expenses of the State, and all at no cost but that of a little engraving and printing. The notion of credit which prevailed was that it was a way of making formulas of words do the work of capital, if only the formulas were imposing enough, or were uttered by a body having competent prestige.
As the Land Bank did not receive much encouragement, in spite of its connection with education, an alliance with internal improvements, the other great make-weight with which it was always connected for the next hundred and fifty years, was brought into its support. "Fifty thousand pounds ought to be laid out for making a bridge over the Charles river, so that workmen might be employed and currency enlarged, as well as the public accommodated; and ruin will come unless more bills of credit are emitted."
Trumbull says that nearly thirty pamphlets and tracts were printed, between 1714 and 1731, for and against a private bank or a public bank, the emission of bills of credit, and paper currency in general. One of the most notable of these is entitled: "A Word of Comfort to a Melancholy Country" and is a lamentation over the defeat of the Land Bank. Trumbull attributes it to John Wise, who, he says, has been called "the first logical and clear headed American democrat." He is chiefly concerned that a sufficient medium may be provided. The medium need not have value. It will do its work better if it has not. Coin is too costly, and blew England cannot keep it. The merchants ship it off. The bills have done great things for Massachusetts. They have built the college, etc. He preferred a private bank under government inspection to a public bank.
In the meantime, the English had been going through a mania for joint stock companies, which were a new device of credit, the limits and conditions of whose utility had yet to be learned by bitter experience. After the crisis of this speculation in England, the Bubble Act was passed which recited that many companies had, since June 24, 1718, presumed to act as corporate bodies and to make assignable shares without having legal authority so to do. After June 24, 1720, all undertakings to the prejudice of trade, ​and all subscriptions or cases of acting as corporations, without legal authority so to do, were to be illegal and void. Such organizations were to be deemed public nuisances, and those who made them would incur a premunire. Brokers were forbidden to deal in such shares. There was some doubt in law whether this statute extended to the colonies, but there was sufficient fear that it might do so to create alarm in the private bank, which had circulated notes in spite of the prohibition of the provincial authorities. The Governor was strictly enjoined by the authorities in England not to consent to any further issue of bills of credit. On this account, the treasury notes having been cut off, in 1733, "a number of merchants and others of Boston, in order to supply the deficiency of such a medium of trade, had recently engaged in a project of issuing paper to the value of £110,000. Rhode Island had also ordered a large emission of their bills, which, as usual, were expected to have their chief circulation in Massachusetts. With these facts laid before them, and concluding that by such causes their own bills would proceed from bad to worse, the General Court appointed a committee to examine them and make report." "Notified of such action, Governor Wanton replies, that the Rhode Island Assembly had enacted, in July last, to issue £100,000 loan, at five per cent. on land security. He adds, 'I do assure the General Assembly of the Province, we had an especial regard for the welfare of the public in said emission, and hope' that they 'will take care that trade may not be injured by a private emission now coming out without their sanction, as I am informed.'"
"The committee raised about the paper money in circulation make their report, which is accepted by both Houses. They state that the merchants' notes emitted by Boston gentlemen should be backed with greater security; and that his Excellency be desired to send out a proclamation, warning the people to be on their guard against taking the late bills of Rhode Island. The bills of the private bank, just mentioned, amount to £110,000, and were redeemable in ten years, with silver at 19s. an ounce, then the common rate of the Province paper. Though a great and imposing effort was made to keep the Rhode Island bills out of our market, yet they soon flowed in, and became current."
"The Governor thinks it is not expedient to issue a proclamation against both of these sorts of currency, though he is decidedly opposed to them. He gives his opinion that the Merchants' Bank ought not to do business without permission from the Assembly; and that such permission should not be allowed them, because falling within the limits of his prohibitory order from the Crown, to have only £30,000 in bills circulating at the same period. Still the merchants' notes were circulated, and accounted better by 33 per cent. than Province bills."
The following year the Governor declares that "the bills of the private bank or merchants' notes, instead of preventing a further depreciation of Province bills as it was confidently said, have had a contrary effect."
Connecticut granted a charter to a society in New London, 1733, for ​trading. This society issued bills, "but their currency being soon at a stand, the government were obliged in justice to the possessors, to emit £50,000 on loan to enable those concerned in the society to pay off their society bills in colony bills. Their charter was vacated and a wholesome law was enacted that for any single person or society of persons to emit and pass bills for commerce, or in imitation of colony bills, penalty should be as in case of forgery, or of counterfeiting colony bills."
In 1735, a private bank was formed in New Hampshire, to which reference is made in the following: "Whereas sundry persons of New Hampshire have adopted measures the past year to issue promissory notes of a most uncertain and sinking value, as they are payable in New Hampshire, Massachusetts, Connecticut, and Rhode Island bills, or in silver, gold or hemp, at the unknown price they may be at in Portsmouth, in New Hampshire, Anno 1747, whereby his Majesty's good subjects will be great sufferers, should they part with their goods and substance for them or accept of them in payment, etc." "This was a banking speculation, which promised much advantage to its promoters, but very little to the public. The larger amount of its paper, like all such currency of that day in New England, reached Bostontthe great mart for the northern colonies; but placed under the ban of the law, its market was spoiled for this Province."
The tract concerning the Colonial Currencies, which is included in the Overstone collection, was published about 1740. The author shows how the depreciated paper money hurt the wages and salaried classes, because the depreciation with respect to specie never measured the loss in purchasing power. "The shopkeepers are become, as it were, bankers between the merchants and tradesmen [mechanics], and do impose upon both egregiously. Shop notes [store-pay], that great and insufferable grievance of tradesmen, were not in use until much paper money took place." The author thinks that he can prove that the specie value of the whole currency constantly declined as greater issues were made; and he shows how little cliques of persons who were possessed of political power got the loans into their hands, in the first instance, and sold them at a premium.
March 19, 1740: "In continuance of the controversy between the Representatives and the Governor, he repeats his account of the Province arrearages. He says that there are £210,000 in bills now circulating, £40,000 are on loan, and the rest, £170,000, former Assemblies have promised shall be collected into the Treasury, by a tax in the several years specified, by 1742, and that this will be a heavy burden, especially as no provision is made to supply the place of paper currency. Such being the pecuniary condition and prospect of the Province, several projects are advanced by companies to supply the deficiency of money. The petitions of these associations, being laid before the Legislature, and assigned to a Committee for consideration, are reported on. One of them was John Colman and ​others for £150,000, to be lent in notes on land security, and payable in twenty years by various articles of merchandise. Another was Edward Hutchinson and 106 partners, for £120,000, redeemable in fifteen years, with silver at 20s. an ounce, or gold pro rata. The latter was upon a plan similar to one before mentioned, and its bills were denominated merchants' notes. It was promoted in order to put down the other. Though the gentlemen appointed to consider them had less objection to the Specie Bank than to the Land, or as frequently called, Manufactory Bank, they give an opinion that both are inexpedient. In the Legislature, there is a diversity of opinion as to these companies. The Council express their wish that the Land Bank may be forthwith disannulled, but that the silver scheme, so called, be put over to the coming session. The Representatives, looking on the Land Bank as designed for people of moderate property as well as for the rich, manifest their desire that both suspend operations till the next Assembly, and then be considered as to their respective claims. This was the motion agreed on, and thus the petitioners earnestly looked for a hearing."
The Land Bank of 1741 was to be for the amount of £150,000 lawful money. Estates were to be mortgaged to the company. Three per cent. per annum was to be paid on loans in enumerated products of the Colony and the principal was to be repaid in twenty years (five per cent. per annum), in the same way. Mechanics, etc., might come in for not over £100 each, by giving two sureties for double the sum. [Evidently they meant to print and loan, in notes, at once to the stockholders the full amount of the stock subscribed. The mortgages carried no guarantee to the noteholders, except as they could be pursued through the company.] There were to be no dividends for five years, and after that none which should ever leave less than twice the principal paid in at the time. [They intended to trade with the products which were paid in.]
The notes were to read: "We promise for ourselves and partners to receive this 20 shilling bill of credit as so much lawful money, in all payments, trade, and business, and after the expiration of twenty years to pay the possessor the value thereof in manufactures of this Province." The projectors of this notable scheme had, probably, no intention of fraud, but their plan would have given them possession of the "manufactures of this province" to the amount of the notes issued by them, without any security or interest by them, for the term of twenty years. It was because they called it a "bank," and were "providing a medium" that their minds were obscured to the truth of the case.
At this time, the notes of the merchants, issued in 1733, were at thirty-three and one-third per cent. above the Province bills, being paid in gold and silver, and the notes of the Specie Bank of 1740 were equivalent to cash, the issuers being "eminent and wealthy merchants." This seems to sound as if the notes were actually convertible and converted; but it probably should not be understood that they were so in the sense of more modern times.
​Gov. Belcher took strong ground of opposition to the Land Bank which had begun operations without authorization. He published a proclamation warning the people against the notes as fraudulent, contrary to civil order, and harmful to trade. He treated the bank as rebellious, since it was unauthorized, and he tried to compel all civil and military officers to abandon it. The Specie Bank also commenced business. The government was, in fact, generally so lenient and indulgent that it was very weak when it tried to exert authority. One project led to another until there was a bank mania in a small way.
These projects led to an extension of the Bubble Act to the colonies. The act is entitled, "For restraining and preventing several unwarrantable schemes and undertakings in His Majesty's colonies and plantations in America." All clauses of the Bubble Act "did, do, and shall extend to, and are and shall be in force and carried into execution" in America.
The act went on to say that the occasion for it was the doubt whether the act of 1719 could be executed in America, because the aggrieved persons must, according to that act, bring suit in Westminster, Edinburgh, or Dublin. This act now provides that suits may be heard in any of the King's courts of record in America. Noteholders were given a right of action against each partner for the amount and interest, although by the tenor the note might not yet be due. Any person suffering harm might recover treble damages and costs; and the persons composing the company were liable to a premunire, according to 16 Richard II. These penalties were all to be arrested if the company should dissolve and go into liquidation before September 29, 1741. According to the fashion of the times, this enactment was met in a recalcitrant disposition. All the jargon about liberty and the charter was repeated. The irritation produced in the Colonies by the attempts of the mother country to restrain paper issues contributed more than perhaps any other one thing to produce that estrangement which resulted in the Revolution. Upon this occasion the first impulse of those interested in the Land Bank was to defy the law, and it appears that the bank produced no little demoralization of civil institutions for a year. As we shall see below, the States fought unceasingly against unchartered issuers of paper, from the Revolution to the Civil War; and the federal government, in its dealings with Territories, which are a complete analogon to Colonies, has reserved to itself the right to disallow any legislative acts of the Territories and has exercised that right, notably in respect to banks.
September 22, 1741, a committee of the General Court was appointed to meet at Milton "to examine the condition of the Land Bank. They find £49,250 of its notes are struck off and endorsed and that the Treasurer had issued them from his hands to the amount of £35,582, and that the directors employ £,4,067 of them in trade. This investigation is soon followed with heavy restrictions upon the funds of the company."
​March 30, 1742: "A Committee for the settlement of the Land Bank publish a pressing call on its stockholders to settle its demands upon them. This call contains the succeeding items." "It is now nine months since the company's vote at Lynn that no more bills should be issued out of the Treasury till the next meeting, and more than six months since the vote passed at Milton to bring in and consume to ashes all the outstanding bills. By the delay of those indebted to the institution, our company is thrown into the last extremity of confusion; and without the most speedy measures are pursued in bringing in the bills, the consequence will, we fear, prove ruinous to some hundreds of the partners. The possessors of our bills are more and more uneasy every day as that part of their estates lies useless by them, and so incessant in their worries, that the directors have in their late advertisement implicitly threatened to be on the possessors' side against the delaying partners."
This bank is heard of again and again during the following twenty years. The surviving or solvent stockholders and their heirs were subject to repeated demands from the noteholders, which they seem to have evaded to the best of their ability.
There is a tradition that there was a bank in Virginia before the establishment of the Bank of North America. A special loan office was proposed there in 1765, to enable the Treasurer of the colony to make good public funds which he had loaned to his friends, but it failed. The tradition may more probably be based upon an Association referred to in an act of 1777: "Whereas divers persons have presumed upon their own private security to issue bills of credit or notes payable to the bearer in the nature of paper currency," a penalty is imposed upon those who "issue or offer in payment" any such notes without the authorization of the Commonwealth, of ten times the amount of the note, half to go the informer.
* ↑ The statements in this chapter about colonial banks are taken, when no other authority is mentioned, from Trumbull; Proc. Amer. Antiq. Soc. 1884; Paine, ibid., 1866; Felt, Mass. Currency; and Hutchinson, Hist. of Mass. Bay.
* ↑ "Silver began to be generally shipped off as paper became the currancy, which gave the merchant the liberty of shipping off his silver, as merchandise, which otherways he must have kept as cash, seeing as no business can be carried on to advantage without cash." (The Overstone Tract, 1740.)
* ↑ Trumbull, 275.
* ↑ Trumbull, 284.
* ↑ George I, C. 18, § 18.
* ↑ Overstone Tracts: Colonial Currencies, 12.
* ↑ 14 George II, C. 37.
* ↑ See index: Territories, Banks In the.
* ↑ Gouge: Journal of Banking, 412.
* ↑ 1 Henry's Henry, 76.
* ↑ 9 Statues at Large 431.
This work was published before January 1, 1929, and is in the public domain worldwide because the author died at least 100 years ago.
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