# A History of Banking in the United States/Chapter 13

CHAPTER XIII.
Measures and Events Antecedent to the Crisis of 1837.
§ 1.—The United States Bank of Pennsylvania.
"When it was perceived," the Committee go on to say, "that the charter of the late Bank of the United States would not be renewed or extended by Congress, the president and directors commenced winding up its concerns, and among the first measures taken to that end was to sell or dispose of, as far and as speedily as could be effected, the assets of its several branches. This was generally done to State banks, who gave for them their obligations, payable by installments at distant periods. At the same time the policy was adopted of converting the active debt into loans upon the security of stocks, by which permanent investments might be provided for the capital of the bank during the long period of its anticipated liquidation." On the 6th of March, 1835, "the president submitted to the Board a general view of the situation of the Bank, its means and liabilities, its circulation and deposits, and the probable future demands upon it, showing its ample resources and power of expansion; whereupon" the Committee of Exchange, which was composed of three directors, appointed by the president, were authorized by the Board "to make loans on the security of the stock of this Bank, or other approved security, and if necessary at a lower rate than six, but not less than five per cent. per annum." "This delegation of power to the Exchange Committee was never expressly and formally renewed under the new charter, unless it be considered as included ​under a general resolution of the new Board adopting 'the By-Laws, Rules, and Regulations' of the former Bank. By the statement of the condition of the Bank upon the 2d of March, 1835, the whole amount of loans upon Bank stock and other than personal security, was $4,797,936.25, while by that of March 3, 1836, these loans had increased to the sum of $20,446,367.88. Under such circumstances, the active means of the Bank were comparatively small to pay the immediate demand of the State for the bonus, to settle with the government of the United States for its stock, and to meet its circulation of $20,114,227.56, which, contrary to the anticipation, expressed at the period of its recharter, soon began to be rapidly presented for redemption. The Bank was of necessity driven into the market as a borrower, and very soon the first step was taken to obtain loans abroad, by sending the cashier to Europe for that purpose. Two loans were accordingly negotiated by him; one in England of £1 million sterling; and another in France of 12,500,000 francs, on favorable terms."
"To this [foreign indebtedness] has been superadded extensive dealing in stocks, and a continuation of the policy of loaning upon stock securities, though it was evidently proper upon the recharter that such a policy should be at once and entirely abandoned. Such indeed was its avowed purpose, yet one year afterwards, in March, 1837, its loans upon stocks and other than personal security had increased $7,821,541, while the bills discounted on personal security and domestic exchange had suffered a diminution of $9,516,463.78. It seems to have been sufficient to obtain money on loan, to pledge the stock of an 'Incorporated Company,' however remote its operations or uncertain its prospects. Many large loans, originally made on a pledge of stocks, were paid for in the same kind of property, and that too at par, when in many instances they had become depreciated in value. It is very evident to the Committee that several of the officers of the Bank were themselves engaged in large operations in stocks and speculations, of a similar character, with funds obtained of the Bank, and at the same time loans were made to the companies in which they were interested, and to others engaged in the same kind of operations, in amounts greatly disproportionate to the means of the parties, or to their proper and legitimate wants and dealings."
In other words, the United States Bank of Pennsylvania became a Credit Mobilier, and engaged in promoting all sorts of enterprises all over the Union, and making financial contracts of various kinds.
"From March, 1835, the chief control and management of the affairs of the institution appears to have passed from the hands of the directors. The mode in which the Committee of Exchange transacted their business shows that there really existed no check whatever upon the officers, and that the funds of the Bank were almost entirely at their disposition. That committee met daily and were attended by the cashier and at times by the president. They exercised the power of making loans and settlements to full as great an extent as the Board itself. They kept no minutes of ​their proceedings, no book in which the loans made and the business done were entered, but their decisions and directions were verbally given to the officers, to be by them carried into execution. The established course of business seems to have been for the first teller to pay on presentation at the counter all checks, notes, or due bills, having endorsed the order or the initials of one of the cashiers, and to place these as vouchers in his drawer for so much cash, where they remained until just before the regular periodical counting of the cash by the Standing Committee of the Board on the state of the Bank. These vouchers were then taken out, and entered as 'Bills Receivable' in a small memorandum book, under the charge of one of the clerks. These bills were not discounted but bore interest payable semi-annually and were secured by a pledge of stock or some other kind of property."
In November, 1835, fifteen of the branches had been sold. Until this time, therefore, it appears that the Bank was proceeding directly and steadily with the work of winding up its affairs. In November, however, projects began to be talked about for getting a State charter from Pennsylvania. One of the controlling motives, and perhaps the most powerful of all, in this and the subsequent proceedings, was the jealousy between New York and Philadelphia. There was a proposition to establish a great fifty-million-dollar bank at New York, and it seemed that if Philadelphia lost her bank and New York got one, the financial hegemony would be permanently transferred to the latter city. On two occasions already since the fate of the Bank was sealed New York had been in trouble, and had turned to Biddle for help. In December, 1835, after the great fire in New York, the Bank opened credits for two million dollars in favor of the insurance companies. In May, 1836, in the midst of the financial stringency New York called on the Bank of the United States for aid, which it gave. In the newspaper discussion over the first proposition that Pennsylvania should charter the Bank, the probable effect of such a step on the rivalry of the two cities was openly debated.
The whigs had a majority of forty-four in the House of Representatives of Pennsylvania, in January, 1836, but the democrats had five majority in the Senate. The proposition was first broached in the shape of a letter to Biddle from two members of the Legislature, asking him what should be the main features of a charter which would be satisfactory to the Bank. Biddle afterwards referred to this as if it had been a bona fide offer from these gentlemen, and in no way inspired by the Bank.
The act for the Pennsylvania charter was passed February 18, 1836. It comprised three projects in an obviously log-rolling combination; remission of taxes, public improvements, and bank charter. It was no new thing in Pennsylvania or elsewhere to put into bank charters a requirement that the bank should subscribe to some public improvement, or charitable enterprise. Education was very commonly dragged in as a make-weight. This might ​be regarded as only an appropriation of a bonus which was exacted. In any case, the appropriation of it to some purpose which some people had very much at heart was intended to help the bill through. Remission of taxes was the most effective lever of this kind. The Bank was chartered for thirty years. It was to pay a bonus of two and a half million dollars; pay a hundred thousand dollars per year for twenty years for schools; loan the State not over a million dollars a year, in temporary loans at four per cent., and six million dollars on State bonds, payable in at four per cent., and subscribe six hundred and forty thousand dollars to railroads and turnpikes. The lowest note was to be $10, and elaborate rules which the law of the State already contained for enabling note-holders to enforce a remedy for non-redemption were here repeated. Personal taxes were repealed by other sections of the bill, and $1,368,147 were appropriated out of the Bank bonus for various canals and turnpikes. Evidently all the hobbies and local schemes in the State clustered around this big carcass and fought with one another for slices of it. The charter passed the Senate 19 to 12, and the House 57 to 30.
A loud outcry was at once raised that this bill could only have been passed by corruption, because of the democratic majority in the Senate. A member of the House who had made such a statement was, after an investigation, called to the bar of the House and reprimanded for "an attempt to mislead public sentiment at the expense of the character and reputation of the Legislature of the Commonwealth." At the next session the Legislature ordered an investigation of the method by which the United States Bank had obtained its State charter. The majority of the committee reported denying that the letter which had been written to Biddle was intended as an application to him on behalf of the State. A particular question had arisen already with regard to the continued issue of the notes of the old Bank. This the minority of the committee justified. As to the alleged corruption, nothing was discovered.
There was a mysterious item of $400,000 in the accounts at about this date which is often referred to. The only approximate explanation is in the second report of the Committee of 1841. On February 29, 1836, there were in the teller's drawer Biddle's receipts for money received on cashier's checks to the amount of that sum. They were taken out. At the same time a lot of notes of the old Bank were burned, including ten post-notes of $40,000 each, which had never been issued. One of these items was made to cover the other. The clerk, however, later discovered that the account of notes showed more burned than issued. June 27, 1840, the account was balanced by charging $400,000 to the contingent fund as losses.
It was common tea-table gossip in Philadelphia that the State charter was obtained by bribery.
Jackson's chief charge against the Bank at last was that it spent large ​sums to influence politics and legislation. This charge the Bank seemed to repel successfully, but the United States Bank of Pennsylvania began in political corruption and legislative abuse and never desisted from them while it existed.
Upon the passage of this charter the stock rose to 126. At the meeting of the stockholders Biddle said that the Bank had a surplus with which it could pay all the sums which the charter imposed upon it. The charter was accepted two days after it was passed, with great enthusiasm, and a service of plate was presented to Biddle for his services in getting it. His salary was $8,000. Bevan was made president of the old Bank for the purpose of transferring it to the new, and on the 2d of March, all the assets of the old Bank were turned over to the new one on condition that the latter should assume all the obligations of the former.
April 11, 1836, Congress repealed the act of 1817, by which the United States Bank was charged with the duties of commissioners of loans. The Bank was ordered to hand over all the books, papers, and money within three months. April 20th, its duties as agent for the payment of pensions were ended. June 23d, the Secretary of the Treasury was charged with the property rights of the United States in the Bank, and was directed to act on its behalf, by virtue of its stock. June 15th the fourteenth section of the old charter was repealed, which made the notes receivable at the Treasury. This crippled the circulation of the Bank to some extent.
In October there was a report that the Bank would surrender its State charter if it could get back its bonus. In that same month, however, Biddle wrote another letter to Adams, showing the wrong which would be done by a plan which was on foot to call a State convention for the purpose of repealing the State charter. In November the question was raised in the Legislature whether the charter could not be repealed. It was disposed of by a general resolution affirming the inviolability of charters except by the action of the courts.
June 23d Congress authorized the Secretary of the Treasury to negotiate with the Bank for the payment of the government stock. No agreement was reached, but, February 25, 1837, the Bank sent a memorial to the Speaker of the House, in which it offered to pay off the public shares at $115.58 per share, in four installments; September, 1837, 1838, 1839, 1840. This proposition was accepted and the installments were all paid. As the Bank sold new shares in England at £24 and £25, it gained on this operation. The Treasury tried, at this time, to induce the Bank to repay the damages which it had retained on the French bill.
In his message of 1836, Jackson discharged his last broadside at the Bank. He was very angry that it should have taken the State charter and prolonged ​its existence. His fears and the hopes of the Bank centered on the same point,—that it would be taken up again as a national bank. The most important complaint which he made of it was that it was re-issuing the notes of the old Bank.
When the State charter was taken, there were 3,417 stockholders, of whom there were Pennsylvanians 590; other citizens of the United States, 2,267; foreigners, 560. The distribution of the capital by ownership was, in the New England States, $3.1 millions; New York and New Jersey, $4.5 millions; Delaware, Maryland, and the District of Columbia, $2 millions; Virginia and North Carolina, $0.8 million; South Carolina and Georgia, $3 millions; other States, $99,000; Pennsylvania, $5.2 millions; foreigners, $9.1 millions.
The loans made by the Exchange Committee to the officers of the Bank and to the favored clique connected with it amounted, March 4, 1836, to $6.2 millions. On the same date, one year later, they were $8.1 millions. With regard to these loans the Committee of 1841 said: "In the list of debttors on 'Bills Receivable' of the 1st of January, 1837, twenty-one individuals, firms, and companies stand charged, each with an amount of $100,000 and upwards. One firm of this city [Philadelphia] received accommodations of this kind between August, 1835, and November, 1837, to the extent of $4,213,878.30, more than half of which was obtained in 1837. The officers of the Bank themselves received in this way loans to a large amount. In March, 1836, when the Bank went into operation under its new charter, Mr. Samuel Jaudon, then elected its principal cashier, was indebted to it $100,500. When he resigned the situation of cashier and was appointed foreign agent, he was in debt $408,389.25, and on the 1st of March, 1841, he still stood charged with an indebtedness of $117,500. Mr. John Andrews, first assistant cashier, was indebted to the Bank in March, 1836, $104,000. By subsequent loans and advances made during the next three years, he received in all the sum of $426,930.67. Mr. Joseph Cowperthwaite, then second assistant cashier, was in debt to the Bank, in March, 1836, $115,000; when he was appointed cashier in September, 1837, $326,382.50; when he resigned, and was elected a director by the Board, in June, 1840, $72,960, and he stands charged, March 3, 1841, on the books with the sum of $55,081.95. It appears on the books of the Bank that these three gentlemen were engaged in making investments on their joint account, in the Stock and Loan of the Camden & Woodbury Railroad Co., Philadelphia, Wilmington & Baltimore Railroad Co., Dauphin & Lycoming Coal Lands, and Grand Gulf Railroad and Banking Company."
Such was the internal condition of the Bank when the crisis of 1837 occurred.
§ 2.—The Multiplication of Local Banks.
Taking the whole country over, there was a lull in the activity of the bank-making legislator from 1825 to 1832.
As has been said, the local banks did not arouse themselves against the great Bank at Jackson's first attack. They were not dissatisfied with their relations to it. The best of them stood in as much fear as anybody in the community of the possibilities of a bank mania. It was only after the debt was paid and the surplus revenue began to accumulate that the attraction of this bonanza overcame prudence and good sense. The popular sentiment now swung over again to a mania for banks. Each district wanted a deposit bank so as to get a share in the stream of wealth which was expected to flow from the public treasury. If a deposit could not be obtained, then a bank was formed in order to participate in the carnival of credit and speculation; for a non-deposit bank had the advantage of being bound by no rule. The deposit banks drew together from a community of interest, in order not to share the public deposits with a larger number. For two years, however, the amount increased faster than the banks did.
In order to take the place of one bank with $35 millions capital, which, after all, did not go out of existence, there were organized, between 1832 and 1837, 340 banks with $99 millions capital. The mania for banking was such that formal riots occurred at the subscription of stock, and men of pugilistic ability were employed to enter the subscriptions. The fortunate few who could subscribe the whole sold to the rest at an advance. As the commissioners enjoyed this advantage, it was worth from $500 to $1,000 to be a commissioner. The prospect that a bank could get some government money given to it intensified the notion already entertained by those who were desperately in debt, that the best way to escape was to join together ​and make a bank. The Tammany society being in debt, a plan was proposed for paying the debt by making a bank. When the great fire occurred in New York, in 1835, a proposition was made to create a bank as a mode of relieving the sufferers. "To make a bank," said Niles, "is the great panacea for every ill that can befall the people of the United States; and yet it adds not one cent to the capital of the community."
The effect of this multiplication of banks and of the scramble between them for the public deposits was that an enormous amount of capital was arbitrarily distributed over the country, according to political favoritism and local influence, and in disregard of the industrial and commercial conditions. The banks which received this public money were expressly encouraged to loan it freely. Secretary Taney wrote to the deposit banks: "The deposits of the public money will enable you to afford increased facilities to the commercial and other classes of the community; and the Department [Treasury] anticipates from you the adoption of such a course respecting your accommodations as will prove acceptable to the people and safe to the government."
The banks used these deposits as a "basis for circulation." As soon therefore as this system began to work it produced a grand inflation, reaching out in all directions. In some cases the banks used the deposits which were given to them to put themselves in the position which they were required to occupy as a condition precedent to acceptance as deposit banks. The preliminary appearance which they presented was fraudulent, and was healed by the deposits after they got them.
The banks of Vermont were established by separate charters until 1831, the charters having, however, certain common features. The limit of issue was three times the capital; six per cent. of the profits to go to the State for a school fund. A peculiar feature was a provision that every bank director must give a bond for $8,000 to the State, to perform his duties faithfully under the charter. Any person who suffered by the bank might sue on one of these bonds. A safety fund act was passed in 1831. Each bank was to pay threequarters of one per cent. per annum for six years, thus constituting a fund of four and a-half per cent. of the capital, which was to be kept good by assessments not exceeding three-quarters of one per cent. per annum. This fund was liable for all debts of a failing bank. No bank was to begin until fifty per cent. of its capital was paid in, for which oath should be taken to the Bank Commissioners appointed in the act. In 1840 this act was amended and extended, so that the whole of the capital stock must be paid in within two years, or the bank could not go on. The directors were made liable for any losses sustained by individuals through a violation of this act, and each ​of them must execute a bond to the State Treasurer such that the aggregate for each bank should equal its capital, with sureties residing in the State and not directors, or with mortgage security to the approval of the Bank Commissioners. Every cashier must also give bonds to the State in $20,000. The Bank Commissioner or receiver might order prosecution on these bonds for the benefit of claimants against the bank. No stockholder, director, or officer might owe a bank over five per cent. of its capital, and all of them together not more than what three per cent. for each would aggregate. No loan might be made on the stock of the bank; debts were limited to twice the capital plus the deposits; the banks were offered an inducement to comply with the Suffolk system by the provision that there should be one per cent. tax on capital, which should be remitted on any bank which kept a deposit in Boston for redemption. Instead of paying to the safety fund, a bank might give bonds with sureties or security to redeem its notes. In 1844, all the banks under this law redeemed in Boston, and paid no tax, and three gave bond instead of contributing to the safety fund.
In 1839 the Essex Bank failed. Its notes were presented to the amount of $34,426, of which $28,000 became involved in litigation. In 1844 the fund was $31,000; that is, inadequate to meet this loss if the entire claim was declared valid.
Massachusetts.—"Between the years 1831 and 1833, a great increase took place in the number of banks in New England. During this period 90 new banks were chartered, of which 45 were located in Massachusetts. The Suffolk Bank became overloaded with redeemed bills; the banks were slow in making remittances; and the accounts of many of them were overdrawn. Accordingly the Suffolk Bank sent a circular to such of its correspondents as it allowed to overdraw, informing them that on account of the scarcity of money, and in order to have some control over its own funds, over-drafts must be limited to $10,000. It also adopted the rule that foreign money deposits must be made before one o'clock, otherwise they would not be. credited till the following business day. At the same time it reduced the permanent deposits required from the Boston banks to $15,000 as a minimum."
"In 1834 the redemption business had increased five-fold; from $80,000 to $400,000 daily. The officers were employed till nearly midnight, and then often obliged to lay aside a large number of bills to be counted the next morning. To reduce the business and keep it within bounds, it became necessary to modify the arrangement made with the Boston banks. Heretofore they had been allowed to send in all their foreign money at par;—now they could send in on any one day an amount equal to one-half of their permanent deposit. If they exceeded that amount they were charged onetenth of one per cent. on the excess. They were also restricted to the foreign money received by them in the regular course of their business. ​excluding deposits from banks and brokers. By these means it was hoped the business could be brought within reasonable limits. At the same time the permanent deposit of the Boston banks was reduced to $10,000; and in May, 1835, a further reduction was made to $5,000."
"During the winter of 1835-6 thirty-two new banks were chartered in Massachusetts, making a total increase of 78 new banks in this State during a period of six years, or more than double the number of banks in operation in 1830. And nearly the same ratio of increase took place in the number of banks in the New England States. In 1830 they numbered 169; in 1837, they numbered 321. Many of these banks were started with little or no real capital; specie was borrowed for one day to be counted by the Bank Commissioner, and on the next it was replaced by the notes of the stockholders. The bills of these banks, loaned in violation of the usury laws at high rates of interest, were used in the wildest speculations. The country was flooded with them, and specie was becoming scarce. The ratio of specie to deposits and circulation had fallen to one to thirteen and a-half, or less than seven and a-half per cent., the smallest then ever known. These bills poured into the Suffolk Bank for redemption; and in April, 1836, it sent a circular letter to 44 banks, whose accounts were overdrawn in the aggregate sum of $664,000, saying that it would send their bills home."
In March, 1836, the Massachusetts Legislature allowed banks to issue post-notes to an amount not exceeding fifty per cent. of the paid-up capital, provided they issued no notes less than $5. This was repealed February 1, 1838. The tenor of the post-notes was: the bank promises to pay A. B. or bearer $1,000 in 7 months, with interest at the rate of four and one-half per cent. per annum until due and no interest after. This privilege was principally used by weak banks.
This was properly a bond because it bore interest, but the term post-note was used at this time for notes which bore interest or did not, often producing serious confusion.
In 1836, a memorial was addressed to the Massachusetts Legislature for a Bank of the State, to have $10 millions capital, and the Banks of the State in Louisiana and Alabama were pointed to as models. "The wants of this community require the establishment of a bank with a capital sufficient to do the business which has heretofore been done by the Branch Bank of the United States." "It is proposed to establish a bank of $10 millions, onehalf of which is to be subscribed by the State, and borrowed in Europe on State scrip, bearing interest at four per cent. per annum, redeemable in twenty years; and the other half to be subscribed by individuals.
"This scheme is based on the supposition that money can be borrowed in Europe, on the credit of Massachusetts, at four per cent. per annum, and that the difference between the interest paid by the State, on the money borrowed, and the dividend received from the bank on $5 millions bank ​stock owned by the State, will, if reserved as a sinking fund, redeem the State scrip in twenty years, and leave the State the clear amount of $5,060,625. "To produce this result it is assumed that the bank will make semi-annual dividends of three per cent., after paying into the treasury oneseventh part of its profits, according to the experience in other banks; assuming also that the proposed sinking fund can be invested at five per cent. per annum, payable semi-annually, and that the State will add to this sinking fund the State tax on its own portion of the stock."
The memorialists think that within two years the stock of the bank would, if wisely managed, bring as high price in the New York market and on London Exchange as the average value of the stocks of the large banks in the middle and southwestern States—a premium of from ten per cent. to twenty-five per cent.
In 1838, the Committee on Banks was ordered to inquire into the expediency of this scheme; the bank to have branches in each county; the State to own part of the capital and to control the direction.
The banks of Rhode Island were organized, in 1836, around the Merchants' Bank of Providence, on the Suffolk system, the Merchants' itself being a satellite of the Suffolk. The number of banks in 1838 was sixtyfour, "being nearly one for every fifteen hundred persons. Almost every village has one, and their capitals vary from $20,000 to $500,000."
Connecticut.—The charter of the City Bank of New Haven, May 28, 1831, varied considerably from the Connecticut type. The bank was bound to subscribe $100,000 to the Hampshire and Hamden Canal, and was not to be obliged to take in the State of Connecticut or any society as a stockholder; it was to be free from taxation until the canal should pay six per cent. on its capital. Being subject to charges and investigation, in 1837, the bank replied that it had been forced to invest its funds out of the State because the additional banking Capital was not needed; that the canal men got up the bank in order to get the capital; that the canal had been sold out and the subscription of the bank lost. It claimed to be almost the only bank north of the Potomac paying its promises in "constitutional currency." The chartered banks of the State resented the appointment of Bank Commissioners, in 1837, and refused to pay their share of the expenses of the commission, as provided by law. The Legislature did not try to force them, but paid their quota from the State Treasury.
New York.—An amendment to the safety fund law was adopted May 11, 1835, which was chiefly aimed against usurious devices. The Bank Commissioners were to examine the officers on oath on these points, and obtain an injunction against any bank violating this law. In April, 1836, there were in the city seventeen safety fund banks and six others; in the country, sixty safety fund banks and four others. January 1st, the safety fund was estimated at $540,285.
​The circulation of the safety fund banks was limited, May 16, 1837, by an elaborate scale; a bank of $100,000 capital being allowed $150,000 circulation; one of $120,000 capital, $160,000 circulation, and so on, the proportion of circulation to capital diminishing with the increase of the latter, until, at $200,000 the two were equal. Then the circulation was made less than the capital, until a $1 million bank was allowed only $800,000, and one of $2 millions only $1.2 millions circulation. The Comptroller was authorized to apply a portion of the safety fund to the redemption of the notes immediately after a failure, so as to prevent them from depreciating; but a Bank Commissioner must make a certificate before this could be done "that the amount of the debts of such banking corporation over and above its property and effects, will not exceed two-thirds of the amount of the bank fund then paid in and invested, exclusive of all prior established claims thereon."
The safety fund law originally provided that the Governor and Senate should appoint one Commissioner, the banks in the city and southern part of the State a second, and the other banks the third. This was changed in 1837 to give the appointment of all three to the Governor and Senate.
"This of course brought them within the vortex of the great political whirlpool of the State, and the place was sought for and conferred upon partisan aspirants without due regard in all cases to their qualifications to discharge the delicate trust committed to them."
So much of the law of 1818 as forbade any person or association of persons to keep offices for the purpose of receiving deposits or discounting notes or bills was repealed by a law passed February 4, 1837, but any corporation, created by the laws of any other State or country, was still forbidden to keep any office for the purpose of receiving deposits, discounting notes or bills, or issuing bank notes. This shut out any branch of the United States Bank of Pennsylvania.
Pennsylvania.—The most perfect specimen we have of a deposit bank, showing the demoralization and mischief produced by that system, is the Girard Bank. It was founded in 1832; in 1834 it got a share of the public deposits. To make this share larger an act of Assembly was procured in 1836, increasing the capital from one and a-half million to five millions and extending the charter twenty years. The stockholders gave the cashier two hundred shares of the stock for his agency in procuring the passage of the act. The increase of capital was paid by stock notes and the bank was largely occupied in stock-jobbing to carry out this operation. "The maximum of government deposits having been obtained, a system of prodigality in loaning them out was commenced, which baffles the conception of sober and reflecting minds, and of which we have but few examples, even in the annals of modern banking." In fact, the paid-up capital was never over two-thirds of five millions, but the government deposits ran at times as high as four ​millions. The assets consisted very largely of unavailable loans, so that with a discount line of six or seven millions, scarcely two hundred thousand dollars was in active business paper.
In 1836 Dr. Dyott of Philadelphia established what he called a Manual Labor Bank. "His motive for this is to give to the meritorious workingman the full legal interest which he ought always to obtain for his savings." The doctor filed a mortgage for $500,000 on his own real estate, as security for his notes, which were for five cents and above. He also issued post-notes for sums from $1 to $20. He owned glass-works and houses, and had a store containing various commodities. He seems to have been another case of a man who committed crime under the influence of a mixed philanthropic and financial delusion. He was 70 years old and was sent to the penitentiary for three years, but was pardoned by the Governor.
Virginia.—The charter of the Bank of Virginia, having been extended January 24, 1814, until 1833, was further extended, February 17, 1830, for nine years and one month. As will be seen in the other renewals which follow, the plan was adopted of making all the charters expire June 1, 1842; that then all the banks might be put under a general law. A bonus of $51,306 was demanded for the State, to be obtained by reserving from the dividends of the private stockholders 30 cents per share. The State deposits were to be put in this bank. Its notes were to be receivable by the State while it paid specie; but this provision might be revoked. The charter of the Bank of the Valley was extended, February 18, 1830, for eight years and one month, to bring it to June 1, 1842; bonus, $10,000, which was not to be taken from the State stock. March 4, 1831, the charter of the Northwestern Bank was extended to the same date, with an increase of capital of $300,000; bonus, $5,000.
At this time the State of Virginia was out of debt and its finances in good order. In 1833, a reduction of taxation was proposed, but, instead, the State took up the policy of internal improvements. In 1832 the James River and Kenawha Company was incorporated; also several railroad companies. "The State took stock in most of these companies, and appropriations were made in aid of the Chesapeake and Ohio Canal, besides many other minor works. In the course of a few years large sums of money had to be raised by the State." One party insisted that the improvements, as they were made, would provide the interest and when finished would pay that and sink the principal too; another party insisted that taxes should be laid for the interest, lest the State credit should suffer. Within ten years a debt of $7,650,000 was contracted, of which the banks had taken $770,000; $1.4 millions belonging to the State and State institutions had also been absorbed; $2.3 millions were held abroad. The works in which the State held stock produced scarcely any revenue. The effects of this policy appear ​immediately in the history of the banks. February 16, 1833, the Bank of Virginia and the Farmers' Bank were authorized to subscribe to the James River and Kenawha Company not more than 5,000 shares. March 4th, they were allowed to increase their capital, in order to pay for these subscriptions.
The Merchants and Mechanics' Bank of Wheeling was incorporated March 7, 1834; capital $500,000; to last until 1854; bonus $25,000; 12 per cent. penalty for suspension; debts, exclusive of deposits, limited to twice the capital. In an explanatory act, February 17, 1835, the intention was declared to allow no notes under $5 after June 1, 1842; and the right was reserved in this charter to legislate further as to the lowest denomination of notes.
An act for the general regulation of banks was passed March 22, 1837. Banking powers were defined; three-fifths of the capital was to be paid in in coin before beginning; the lowest denomination of notes, until July 1, 1840, was to be $10; after that $20; the circulation was never to exceed five times the coin reserve; 15 per cent. penalty for failure to redeem; a bonus of a quarter of one per cent. on the capital was to be paid by creating extra stock, which should be a fund for internal improvements. The act was long and full of detail, embracing the general features of the Virginia charters with some comprehensive improvements. It stands in the history as a record of the pious intentions of the Legislature at the moment that the storm burst upon them. They proceeded, however, at once to other legislation likely to have a very different effect. The Exchange Bank of Norfolk, with three branches, $1.8 millions capital, half by the State, to last until 1852, was chartered March 25th. Additions, aggregating $3.2 millions, to the capital of the existing banks were proposed, half by the State, and the charters were extended until 1857, if the banks would come under this law and the general law; the limit of notes to $10 was postponed until October 1st. The State proposed to pay its subscriptions with its share in the distribution of the federal surplus, the remainder of which was to be loaned to the Bank of Virginia and the Farmers' Bank at 5 per cent.
North Carolina.—"An act to establish a bank in the State of North Carolina" was passed at the session 1833-4; capital $1.5 millions; until 1860; the State to have an option on two-fifths of the capital, and to pay its subscription, if it decides to use its privilege, as the other subscribers do, in specie or its equivalent; the option to be open until 1837; to have four out of ten directors if it takes all the shares reserved to it; the State Treasurer to be ex-officio a director; tax 25 cents per share; 12 per cent. penalty for nonredemption; lowest note $5; limit of circulation twice the capital. A supplementary act provided that the Treasurer might borrow of the Bank of Cape Fear and the bank at Newbern, if it should seem expedient, apparently implying that he might borrow to pay this subscription. In an account of the organization of this Bank of the State, it is stated that the commissioners at first found it difficult to decide what was "equivalent to specie." Their decision was unanimous, but the document does not tell what it was. It is ​only stated that the subscriptions have all since been "rendered available as specie." The subscriptions went on slowly. State deposits were still made in the old Bank of the State. The Treasurer wanted them put in the new one. The Cape Fear bank was rechartered at the session of 1833-4, until 1855; capital $800,0000; to have branches as might appear expedient; to lend the State not over one-tenth of its capital; twelve per cent. penalty for non-redemption; lowest note $3. Under the act of 1829 for winding up the bank, part of its capital stock had been bought in. New shares were now to be subscribed to restore it; to be paid in specie or its equivalent. At the same time the Merchants' Bank of Newbern and the Albemarle Bank of Edenton were incorporated. The only peculiar feature was that no director might owe to the bank more than the stock he owned. The charter of the Merchants' Bank of Newbern was re-enacted at the following session, with some slight changes; the lowest note was to be $5. In 1835, the State Treasurer was ordered to issue $400,000 in five per cent. certificates, payable in 1860, and to pay the proceeds on the State subscription of stock in the Bank of the State. The bank stock was pledged for these bonds.
The Southwestern Railroad Bank, being the banking side of the Louisville, Cincinnati, and Charleston Railroad, was chartered by North Carolina, January 20, 1837. Three of the States, North Carolina, South Carolina, Tennessee, and Kentucky must concur before this act would be valid. Every one who subscribed one share of the railroad stock at $100 might subscribe also one share of the bank stock at $50, until the former should be $12 millions and the latter $6 millions. The mother bank was to be in Charleston; the lowest note $5, until the railroad should be built, and after that, $10; twelve per cent. penalty for non-redemption; each share of stock in the railroad to be inseparably connected with one share of stock in the bank, and they were to be transferred together; the bank to pay no tax until the railroad was completed.
The charter of the Cape Fear Bank was extended January 23, 1837, until 1860; the capital might be increased to $1.5 millions, the State taking $300,000 and the public $400,000 of the increase. If this capital should prove too big, the bank might get permission from the Legislature to buy in shares.
South Carolina.—The charters of the Planters and Mechanics' Bank and the Union Bank were extended, December 18, 1830, for twenty-one years; each to pay a bonus of $25,000. The Bank of Columbia was chartered December 17, 1831, until 1835; capital $500,000, increasable to $800,000. On the same day it was enacted that all the officers and directors of the Bank of the State of South Carolina should take an oath not to reveal the secrets of the bank. It was prescribed what records should be kept. The officers were not allowed to buy any State stock; the stock of the State Bank owned by the State was to be sold and other safe stock bought. The charter of the Bank of South Carolina was extended for twenty-one years, December ​20, 1832; bonus $16,875; the capital might be increased to $1 million by paying a proportionate bonus. The charter of the State Bank was renewed December 19, 1833, for twenty-one years; bonus $20,000, provided the stockholders make up the deficiency in the capital. On the same day, the charter of the Bank of the State of South Carolina was extended until 1856. It was to call in all notes under $1 and issue no more. On the same day the Bank of Cheraw was incorporated. December 17, 1834, the Bank of Charleston was established; until 1856; capital $2 millions; bonus two and a-half per cent. of the paid-up capital. The Camden Bank followed, December 19, 1835, and the Bank of Hamburg the same day. The State Bank was allowed to increase its capital to $1 million, December 21, 1836, and the Southwestern Railroad Bank was incorporated the same day; also the Bank of Georgetown.
It is very doubtful whether the notes of the Bank of the State of South Carolina, under $1, were actually retired; but that bank was required, by an act of December 20, 1837, to issue notes for 50 cents and 25 cents.
The subscription of the State of South Carolina to 10,000 shares of the Southwestern Railroad Bank was enacted December 19, 1838, and that bank was authorized to set up agencies in South Carolina. It was reported in the previous October that General Hamilton had secured a loan in Europe, which he was bringing home in specie to start that bank.
In 1838 a debt was contracted by the State to rebuild the city of Charleston. The bonds were called "fire loan" bonds. These bonds were negotiated by the Bank of the State and the money realized from them was to be deposited in the bank and become a part of the capital of it, which should be loaned to persons who intended to rebuild. All the profits of this additional capital were to be set apart to pay the interest and principal of these bonds, which would fall due, half in twenty and half in thirty years. A special account was to have been kept with this fund, and the profits of the same. with the general profits of the bank, were to be applied to extinguish it. The separate account was not kept and the bonds were not retired.
Georgia.—In the years 1830 and 1831, the multiplication of banks commenced in this State also and the charter of the Bank of the State was extended until 1855. A committee of the House recommended, December 16, 1830, that the Darien Bank should be wound up, proposing either that the State should buy out the other stockholders or that it should refuse to extend the charter. The capital should be put into the Central Bank; the return would equal half the State tax, and would relieve the people of the burden of supporting the State government. Another gain would be, they said, that the Legislature would then no longer relieve debtors to the bank, because if they did, it would become necessary to lay taxes. A few days later a special report on the Darien Bank was made, which was very ​laudatory. Once it had a circulation of $1.8 millions; now it has only $200,000 out and is entitled to as much confidence as any bank in the State. A year later a legislative committee stated that the Central Bank had a circulation of $111,996; specie $80,656; United States Bank notes $50,805; notes of State banks $108,653.
All notes under $5 were forbidden, December 24, 1832, and on the same day the charter of the Bank of Macon was repealed because it was not redeeming its notes in specie. They had ceased to be current and were depreciated. Also ten per cent. damages and interest for a failure to redeem notes in specie were imposed on behalf of individuals; the law did not apply to banks which demanded specie. Also semi-annual reports were demanded from all banks, in order to keep them sound and to secure the noteholders. The notes of delinquent banks were not to be received by the State. At the same time the Central Bank was ordered to put to the credit of the treasury funds to meet the outstanding treasury warrants, not in excess of $180,000, charging the same to the capital stock of the bank. At this time a committee very pertinently raised the question whether the State intended to draw from the funds of the bank the means to pay the most ordinary expenses of government, and so to destroy its usefulness. A long report was also made on the Macon Bank, which had failed July 28, 1832, having a large outstanding circulation. The committee estimated it at $453,130, which was $127,231 in excess of the amount stated by the bank in its return. Schemers had bought up the whole capital of the bank at a premium with its funds. At last the sole owner died insolvent. False returns had been repeatedly made.
The charter of the Darien Bank was extended, December 19, 1834, until 1855.
The act against small notes was declared, December 22, 1834, to have been beneficial. For the future only five's, ten's, twenty's, etc., were to be allowed. At that time the Bank of Milledgeville was incorporated and in December, 1836, five more. It was enacted, December 22, 1836, that debts to the Central Bank might be renewed once in twelve months instead of once in six months, and the trustees of Oglethorpe University were allowed by law to subscribe the funds of the University into the capital stock of the Bank of Milledgeville at par, because all other bank stock was at a premium. At this time the Central Bank had loans outstanding $1,103,111 of which there was in suit $46,924; unpaid $211,058; bills under protest $72,400. A report on the Bank of the State showed the capital, $1.5 millions; circulation, $151,742; surplus, $110,000.
Alabama.—Inasmuch as the Constitution of Alabama provided that there should be only one Bank of the State, it was necessary, when other banks with capital obtained on the State credit were thought to be required, that they should be organized as branches of the Bank of the State. The consequence was that the Bank of the State of Alabama came to consist of branches almost entirely independent of the first one, which was considered ​the parent bank, at Tuscaloosa. The first such branch was established January 21, 1832, at a place to be set by the Legislature. It became the branch at Montgomery. The capital was to be $300,000, provided it could be obtained on a five per cent. loan at par. It was not to come from the existing Bank of the State. The Legislature were to elect the president and directors; it was to last until 1845; lowest denomination of notes $1; to report to the Bank of the State at Tuscaloosa and be subject to examination by it; debts exclusive of deposits not to exceed twice the capital; the faith of the State was pledged for the redemption of the notes and payment of its debts. November 17th, another branch was established at Decatur, for which five per cent. thirty-year State stock to the amount of $1 million was to be issued. The provision in the charter of the Bank of the State that its loans should be allotted to the counties by population was repealed January 12, 1833, and the Governor was to appoint three Commissioners to examine the Bank of the State at any time when they should see fit.
The Bank of Mobile was authorized, January 16, 1834, to increase its capital to $1.5 millions, two-fifths of which was to be reserved for the State extended to 1859; bonus $100,000, to be paid in annual installments in lieu of taxes during the charter period. January 18th, the Bank of the State and its branches were allowed to issue post-notes payable to specified persons, running not over ninety days, and bearing no interest until after payment was demanded. This was extended January 2, 1835, by allowing them to issue post-notes for one-half their paper issue, one-half of which should be payable at Boston, New York, and Philadelphia, with the same restrictions as before. Another branch of the Bank of the State was established at Huntsville, January 10, 1835. Five per cent. thirty-year bonds were to be sold to the amount of $1 million, half for the capital of this bank, and half to increase that of the branch at Decatur. The lowest denomination of notes for this branch was set at $5. On the same day the capital of the Bank of Mobile was increased to $1,850,000, and State bonds were to be sold to take up the two-fifths reserved for the State.
The Planters and Merchants' Bank of Mobile was chartered January 8, 1836, for twenty years; capital $5 millions; lowest denomination of notes $5; limit of issue, twice the capital; two-fifths of the capital reserved for the State; annual bonus, $7,500, in lieu of taxes. January 9th, all taxes were abolished except those on shows, games, etc. The sum of $100,000 was set aside from the revenue coming from the stock owned by the State in the Bank of the State to pay the State expenses. This sum was to be put to the credit of the State by the bank and branches, in the parent bank, November 1st of each year. On the same day the capital of the Huntsville branch was increased $500,000; that of the Bank of the State, $400,000; that of the Montgomery branch, $500,000; that of the Mobile branch, $1 million; and ​five per cent. thirty-year bonds were to be sold to raise the whole. At the next session, December 23d, the Governor was directed to appoint three Commissioners annually to examine the Bank of the State at Tuscaloosa as other commissioners already examined the branches. The president of the Bank of the State was to receive the dividends on the stock owned by the State in the Bank of Mobile, and pay the semi-annual interest on the bonds issued for that stock; any surplus to go to the sinking fund.
The surplus revenue distributed to the States in 1837 was deposited by this State in the Bank of the State and branches.
Thus Alabama had everything prepared for the millenium just as the judgment day dawned.
The whole amount of bonds issued by Alabama for banks was $15.4 millions. The State Treasurer reported that there was no record of some of the bonds in any department. In 1837, there were seven banks in all, in which the State owned $10.1 millions stock, of which $6.8 millions were in the Bank of the State and branches. The circulation of the State, November 1, 1836, was $7 millions; February 1, 1837, $10 millions; May 1, 1837, $5.5 millions. At the last date the Bank of the State and branches had $9 of circulation to $1 of specie; the demand liabilities were to the cash assets as 18. to 1. The circulation of the two stock banks was to their specie as 3 1-2 to 1; their immediate liabilities to their cash assets as 7 to 1. The profits of all the banks from November to May were nearly ten per cent.
The notes of the Bank of the State were decided not to be bills of credit by the Supreme Court of the State, and by the Supreme Court of the United States. The latter case, Dartington vs. the Bank of Alabama, is a reaffirmation of Briscoe's case.
LOUISIANA.—"A Bank of the State of Louisiana" was chartered April 7, 1824; capital $4 millions; half by the State; the installments of the private subscriptions extended over two years; State subscription in five per cent. bonds at $100 of bonds for $83 1-3 of stock; bonds payable to the bank and assignable by it; the bank to pay the interest on the bonds out of the State dividends and the surplus to be a sinking fund for the principal; if the dividends were less than the interest, the bank was to pay the deficiency and be repaid by the State; the Governor and Senate to appoint six out of thirteen directors; the directors to choose the president; half the capital to be loaned on land; never to suspend under twelve per cent. penalty; to have five branches, the directors of which to be appointed by the directors of the mother bank. In a supplementary act of April 10th, it was ordered that $5 should be paid in cash on each share, and $15 in a promissory note with endorsement. Nothing is said of its relation to the former Bank of the State of 1818. In a supplementary act of November 30th it is called the Bank of Louisiana. ​The State directors in the "Bank of Louisiana" were directed, April 7, 1826, to remonstrate against a reservation of surplus profits greater than the Legislature thoaght necessary.
The Bank of the State sold the State bonds to Thomas Wilson & Company, of London, October 23, 1824. The bank had resolved that if the bonds sold above 83 1-3, the surplus could not be divided as profits, except in proportion as the surplus of the State dividends above the State interest, being applicable to the redemption of the bonds, should cancel $400,000 of them (that is, the first sixth of the total issue of $2 millions at 83 1-3). The State's share of the profit on the bonds was $300,931. The Legislature by an act of March 24, 1827, ordered the bank to buy bonds with this amount and put them in the sinking fund. The bank appears to have intended to hold this sum as a further guarantee to the bond-buyers. On the same day, the number of State directors was increased to seven.
We now come to the institution which proved the germ of a new class of land banks. The Consolidated Association of the Planters of Louisiana was incorporated March 16, 1827. The capital of $2 millions was to be raised by loan, the company selling bonds and taking mortgages from its members for the loans made to them. On this plan the scheme was not workable. The bonds of the company could not be sold, probably because there was no available capital in the State, and the association could not command credit abroad. Another act was accordingly passed, February 19, 1828, by which the State lent its bonds to this company to the amount of $2.5 millions, thus putting the State credit in the place of their credit, and enabling them to bring in capital from abroad. The company was to guarantee the State by assigning to it mortgages, given by the stockholders, to the amount of $3 millions, for their stock. Ten thousand shares were given to the State as a bonus.
The New Orleans Gas Light Company, which afterwards became a bank, was chartered February 7, 1829.
The City Bank of New Orleans was incorporated March 3, 1831, until 1850; capital, $2 millions; to lend the State $100,000; lowest note $5; never to suspend redemption in "current money of the United States" under a penalty of twelve per cent. Existing banks were authorized to pay interest on deposits. Two days later the New Orleans Canal and Banking Company was incorporated until 1870; $4 millions capital; to cut a canal through the city from Lake Ponchartrain. It was to lend the State, when required to do so, not over $600,000, for not less than ten nor more than twenty-five years, on bonds of the State. It was to have three branches and two-thirds of the capital at each was to be loaned on real estate; so that it appears that its capital was to be used three times, for a canal, a loan to the State, and private loans.
​April 2, 1832, the Union Bank of Louisiana was chartered. It was an extension and perfection of the idea of the Consolidated Association, and was afterwards imitated in Florida, Arkansas, and Mississippi. The capital was $7 millions; to be subscribed by citizens and landowners of Louisiana only. The State was to issue to the bank $7 millions of assignable bonds, for which the subscribers to the stock were to give mortgage security. If mortgaged property was offered, double the previous mortgage must be deducted, and it might be taken as security only for the residue. The period of the bank was twenty-five years; the Governor and Senate to appoint six out of twelve directors; lowest note $5; commissioners in each parish were to appraise property as security for stock subscription or for loan; one-sixth of the profits to go to the State and the other profits to accumulate for the payment of the State bonds; never to suspend under ten per cent. penalty; the capital exempt from all taxes; the State entitled to a credit of $500,000 and each stockholder to a credit equal to half his shares; during the three last years of the period, the bank to be wound up; to be eight branches; two-thirds of the capital at each to be lent on mortgage; these loans to be repaid in eight years by annual renewals and curtailments; all of them to end with the twentieth year.
A year later, April 1, 1833, another of these "property banks" was founded; the Citizens' Bank, with $12 millions capital; the stock to be subscribed by mortgage notes; the bank to issue bonds bearing a statement of the mortgages of the stockholders behind them; the titles to be searched and the property valued by persons appointed by the bank; to have full banklng powers; never to suspend; the State to be entitled to a credit of $500,000; part of the capital to be allotted amongst the parishes; to last fifty-one years; lowest note $5. If this bank did not dig a canal named, within eight years, it was to pay the State $500,000. It also had permission to build a railroad. Commenting on this charter, the Supreme Court of the State said that insolvent laws and the statute of distributions did not exist for debts to it. "No legal incapacity could be pleaded by its debtor. No exceptional jurisdiction could obstruct the collection of debts due to it."
In the same year the Commercial Bank of New Orleans was organized to build water works, and the Mechanics and Traders' Bank, of whose directors five were to be mechanics.
In 1836, a number of banks, improvement schemes, and railroads were authorized. It appears that the Citizens' Bank had not been able to raise its capital. January 30, 1836, a law was passed to issue State bonds to enable it to do so; the State to take the stock mortgages, which must exceed the bonds by one-fifth; the State was to have one-sixth of the profits and the bank was to pay as a bonus annually, so long as the charter lasted. $5,000 to each of three colleges. The bonds were to be sold within two years at not less than par. Upon the subscription of its stock, 167 subscribers in ​the city got shares to the amount of $4.7 millions; 107 subscribers in the country got shares for $3.2 millions. It carried on two lines of business,—a loan office business and that of discounts and deposits, also issuing circulation. March 13, 1839, the Legislature ordered it to establish more branches.
The Commercial Bank denied the right of the State to visit it, except with respect to its water works. By resolutions of March 2, 1836, the Attorney-general was called on for his opinion on this point, and to test it in the courts if he thought there was hope of establishing such a right.
Just before the crisis occurred a legislative committee, commenting on the two classes of banks in the State, the stock banks and the mortgage loan companies, gave the preference to the latter because the former, whose stock was chiefly owned by persons out of the State, drew away not only the interest on their capital but also all the profits on it, while, in the second class of banks the outsiders were paid only the pure interest on their capital and the profits remained in the State.
Florida.—The first act passed by the Legislative Council, in 1828, over a veto, was the charter of the Bank of Florida. The charter was repealed and re-enacted in the following year. This bank was the subject of much complaint because it was managed with a view to private profit, and disappointed the hopes that it would serve the public. Hence the Central Bank was incorporated in 1832, which bought the former. The Bank of West Florida was chartered in 1829, over a veto, and the charter amended in the following years, likewise without the Governor's assent. The Committee on Banks in 1839 said of it: "The pledges made having been violated, and thousands of dollars of the notes of this bank remaining unredeemed, and the bank appearing to have no fixed or permanent abiding place, subsequent Legislatures directed proceedings to be instituted to recover its violated, lost, and fugitive charter. Obedience to these directions has been neglected, and no proceedings have been instituted. This charter is defunct from misuser as well as non-user. The bank is not to be found in the Territory; no return has been made from it for several years, although the Committee have been informed that certain persons, formerly stockholders, and still claiming to own the charter, have been endeavoring to effect a sale of it."
The Bank of Pensacola was chartered in 1831, against a veto. Many amendments followed until its capital stood at $2.5 millions. "The Governor was authorized to loan to this bank the guaranty of the Territory for $500,000 of its bonds, to be issued upon certain conditions; two-thirds of the proceeds of which are to be appropriated in the creation of a railroad to Pensacola, and the other third to be applied to banking purposes; but no dividends to be made until the bonds are paid. No bond was given, or other equivalent made, for the charter or for the aforesaid guaranty, nor any security but the ​hypothecation of the stock of the bank and railroad." The individual liability of the stockholders of this bank was repealed, February 10, 1838, but it was still affirmed on all the bonds issued for it.
"In 1832, the Central Bank of Florida was incorporated against the executive veto. Its capital was $1 million, and the duration of its charter extended till 1850. This bank is in good credit, and is judiciously managed, and there can be no doubt of its continuance in sound condition while under the same control as at present."
"In 1832 the Merchants and Planters' Bank of Magnolia was incorporated, with a capital of $600,000. It got a short time after into the hands of some speculators from an adjoining State, and in January, 1834, broke; but, notwithstanding, upon the most solemn pledges, as in the case of the Bank of West Florida, of speedy redemption of its paper, a supplementary act amending the charter was passed within a fortnight afterwards, against the veto of the Governor. These pledges have never been redeemed, and thousands of dollars of the worthless notes of this institution are unpaid, in the hands of our suffering citizens."
The Commercial Bank was incorporated in 1833; capital, $500,000. The Committee of 1839 spoke of it as "of undoubted credit and solvency."
In 1833, the Union Bank of Florida, destined to become the most famous of them all, was incorporated. The charter is not copied as to language from that of the Louisiana Union Bank, but the institution is very closely imitated. The capital—$1 million, increasable to $3 millions—was to be raised by bonds of the Territory, made payable to the order of the bank, for which the Territory was to be secured by mortgages of the lands and slaves of the stockholders. A variation in this charter was that here there was to be no distribution of profits until the bonds were paid; then only by permission of the Legislature, and one-half the profits to go to the Territory.
The Farmers' Bank was chartered in 1834; capital $75,000. The Committee of 1839 could not find out anything about it. It was reported to be operating in Georgia.
"In 1835, the Southern Life Insurance and Trust Company was chartered, with powers and privileges of the most extensive and diversified character. Its capital is $2 millions, with the privilege of increasing it to $4 millions. It is directed to report to the Court of Appeals annually, which report is to be made to Council. No such report has ever been made, or any other. The capital stock of said bank is to be taxed at the same rate as all other personal property of the Territory, but the tax is not to exceed $5,000. The Territorial guaranty is to be given on the bonds of the corporation, under certain conditions; $—— of these bonds have been thus guaranteed. This bank claims to be located at St. Augustine, but, it is said, is chiefly conducted in New York, and has an agency at Appalachicola. blo tax has ever been paid, and the Committee are totally in the dark in regard to the capital or other affairs of the bank, in consequence of the neglect to make returns according to its charter and the general law of 1833."
​At the session of the Council in 1836 the St, Joseph's Banking Company, the Florida Insurance and Banking Company at Pensacola, and the St. Joseph's Insurance Company (without banking privileges), were incorporated.
These proceedings of the Territory had attracted the attention of Congress. Webster made a report from the Committee on Finance strongly condemning the plan of most of these institutions. The result was the act of July 1, 1836, by which it was enacted that no law of a Territory incorporating a bank should be of force until approved by Congress, and all the acts of Florida of 1836, which created banks, were disallowed. On this the Committee whom we have been quoting say: "This course on the part of Congress is not such as the people of this Territory had a right to expect, relying as they have, upon the liberality and intelligence of those bodies."
Few will think that the power of the federal government to disallow the acts of a Territory had been exercised any too soon. In 1838, it was reported that the old Bank of West Florida had been re-organized.
One-fifteenth of the shares of the Union Bank were held by one man, one-sixth by three men, one-third by eleven men, one-half by twenty-five men, and five-sixths, or nearly the whole by eighty men; who in addition to the loans upon their mortgages were supposed to be otherwise indebted to the institution. Evidently a clique got the whole enterprise into their hands, substituted the stock for the bonds, sold them, divided the proceeds as loans on the mortgages of their plantations. Then the worse the bank became, the cheaper they could buy its notes with which to pay the loans; or, the more desperate the confusion and bankruptcy, the greater the chance of evading payment altogether. If interest was paid, the loans had twenty or thirty years to run, and the mortgaged property was barred against other creditors. If the lands were mortgaged for all they were worth, the insiders endorsed for each other and borrowed more. There were, therefore, several lines of exploitation on which they could operate.
Mississippi entered on her great experiment in banking February 10, 1830, with the charter of the Planters' Bank. The preamble states the purpose to be to give an impulse to labor, by an increase of the circulating medium; to relieve taxation by creating a revenue for the people; and to "enable them to realize the blessings of a correct system of internal improvements." This bank was established at Natchez; $3 millions capital, of which $2 millions by the State; until 1855; subscriptions to be in specie and notes of the Bank of the State; the Auditor to pay the State subscriptions, with five per cent. bonds, redeemable in four sections, in ten, fifteen, twenty, and twenty-five years, drawn to the bank and assignable by it; the bank to sell the bonds and provide for the interest; surplus of dividends over the interest of the bonds to be a sinking fund to redeem the bonds; if the interest was greater than the dividends, the bank was to pay it; the Governor and Senate were ​to appoint seven directors, the stockholders six; the Governor was to sell the stock of the State in the Bank of the State, except 50 shares, and apply the proceeds on the State subscriptions in this bank; the State funds invested in the bank were to be kept separate; the surplus in the treasury and the miscellaneous revenue were to go into the capital of the bank; no note to be issued under $5, and the note issue not to exceed three times the capital, plus the money on deposit; half the capital was to be loaned on mortgages of lands to be valued by five commissioners appointed by the president and directors, in each senatorial district; the loans were to be allotted between those districts; statements were to be rendered as often as the Legislature might require. The notes were receivable by the State and the State money was to be deposited in the bank. It was exempt from taxation. There were to be branches. On the same day it was provided that the Bank of the State of Mississippi might discount paper at twelve months, at not over 8 per cent.
The Bank of the State of Mississippi was authorized to wind up, December 19, 1931, taking no new business after January 1st. It might renew loans on notes of deceased persons until December 31, 1837, and might deal in exchange so long as the Planters' Bank consented. In consideration of these privileges, the bank was to release the State from all claims for damages, etc., apparently on account of the breach of the promise that no other bank should be established before 1840.
The charter of the Planters' Bank was revised February 5, 1833, to last until 1870. The private subscriptions might be increased $1 million and the State was to add $1.5 millions, in State bonds, to be negotiated by the bank. The Agricultural Bank of Mississippi was chartered February 27, 1833; $2 millions capital; until 1855; the issue limited to three times the paid-up capital; half the capital to be lent in loans at not less than one year. There was no provision about suspension or specie redemption.
At the next session, December 25, 1833, the Commercial and Railroad Bank at Vicksburg was chartered, because more banking facilities were needed; $4 millions capital; "identified and incorporated with the Clinton and Vicksburg Railroad Company," the charter to become null if the railroad was not built in six years; the bank to cease in thirty-two years; the note issue not to exceed three times the capital and money on deposit; it was to have branches; no provisions about suspension or specie redemption.
There was now a lull for two or three years. The Jackson and Brandon Railroad and Bridge Company was incorporated February 5, 1836, apparently without banking privileges, and the Mississippi and Alabama Railroad Company, February 9th. This latter company might issue notes for $5 and above, to an amount not exceeding twice the capital not expended on the railroad; one-third of the capital to be lent on loans for one year or more; the banking powers to cease in 1860. This company was known popularly as the Brandon Bank, the banking house being at Brandon. The Grand Gulf Railroad and Banking Company was chartered February 20th; one ​section provides that this corporation "together with all other banking institutions in this State, shall at all times be obliged to redeem their notes in specie." If any one of them refuses to do so, the cashier must endorse on the note the date of refusal, under a penalty of $500, recoverable by the holder; the note so endorsed was to bear interest at twelve and one-half per cent. per annum, from the date of endorsement until paid. February 26th, the Commercial Bank of Columbus was incorporated with a capital of $1 million. On the same day the Mississippi Railroad Company was incorporated. Banking was not explicitly included in its functions, but it might issue bonds secured by mortgages, given by the stockholders on their own estates, of double value. On the following day, the Tombigbee Railroad Company and the Aberdeen and Pototoc Railroad Company were incorporated, both with banking privileges; and on the same day the Commercial and Railroad Bank of Vicksburg was authorized to add $2 millions to its capital, in order to build a railroad to some undefined place on the northern boundary of Madison county. On the same day also the Commercial Bank of Natchez was founded, with $2 millions capital. On the same day also the Yazoo Railroad Company was incorporated, but banking is not discernible in its powers.
The first proposition for the Union Bank of Mississippi was made in 1835. It was imitated and borrowed with only a few petty variations from the Louisiana Union Bank. The act incorporating it was passed January 21 1837; capital, $15.5 millions; subscriptions to be taken in each county; citizens and landowners alone to subscribe; the State to issue bonds to the bank, payable in four sections, in twelve, fifteen, eighteen, and twenty years, endorsable and negotiable by the bank, principal and interest to be paid by the bank; the stockholders to give mortgages to secure their subscriptions; the land, if already mortgaged, being received as security only for the residue after subtracting twice the existing mortgage; to last forty years; the Legislature to elect five directors out of thirteen; the stockholders, on subscribing, to pay $10 on each share in cash; three commissioners in each designated district to appraise the lands mortgaged for the stock; no notes under $10; all profits of the bank to accumulate until the first section of the State bonds is paid (twelve years); then any surplus, after paying these bonds, to be divided amongst the stockholders; then the profits to accumulate again until the second section of the State bonds should be payable, with a division of any surplus amongst the stockholders, and so on, but the State to have as a bonus one-tenth of the net gains of the bank; never to suspend under fifteen per cent. penalty; the parent board to make rules for the branches; the capital to be exempt from taxation; the bank might sell lands mortgaged to it for stock or loans and was to be a preferred creditor; the Governor to deliver the bonds pro rata as the subscriptions went on. The State was entitled to a loan of $200,000, and each stockholder was ​entitled to a credit equal to one-half his shares for twenty-five years; that is, four per cent. to be paid annually on the principal, the notes being renewed annually. There were to be seven branches; two-thirds of the capital was to be lent on real estate, one-third on promissory notes; borrowers on mortgage were to pay one-eighth annually on their notes. The four last years of the charter period were to be employed in winding up the bank. After the bonds were issued by the State to the bank, and the bank was started, the $10 cash per share was to be paid back.
The Constitution of 1832 provided that no loan of money should ever be raised on the credit and faith of the State, unless the law should be passed by a majority of the members of each House, published for three months previous to the next regular election in three newspapers of the State, and re-passed by both Houses of the next following Legislature. The charter of the Union Bank was passed in the House, 47 to 7, and in the Senate, 11 to 8.
There was a called session of the Mississippi Legislature in May, 1837, at which a great number of banks, insurance companies, railroads, etc., were chartered just as the financial crisis occurred. April 28th, the Northern Bank of Mississippi was chartered until 1862; $2 millions capital; lowest note $5; if redemption refused, the cashier to endorse; twelve and onehalf per cent. penalty; half the capital on loans for one year or more; must build a specified railroad within ten years, or forfeit the charter. Then followed charters every few days for the Citizens' Bank, the banks of Vicksburg, Granada, Port Gibson, and Lexington. May 11th, it was enacted that the chartered banks might issue post-notes to bear interest receivable for taxes, having from six to thirteen months to run; the interest was not to exceed five per cent., and the notes were to be loaned at not over nine per cent. If not redeemed when due, to be endorsed and bear twelve and onehalf per cent. interest. The bank must receive them for debts to itself, whether they were matured or not; their amount not to exceed the capital; no State officer was to take the post-notes of any bank which had failed to pay any of its notes, at any time, in specie. The next day three Bank Commissioners were constituted to visit and examine the banks and moneyed corporations; they might proceed in chancery against erring corporations, and were to report annually to the Legislature, by which they were to be elected. Any three banks might call for an examination of a designated one.
The Mississippi Railroad Company was re-organized May 12th and chartered as a bank with full powers. In the case of Hayne vs. Beauchamp, we learn that the bank operated a "simultaneous transaction" on the subscriptions; ten per cent. was due upon subscription, for which a note was given and discounted by the bank, and a check given to pay the installment at the same time. It was held that this did not constitute the person in question a subscriber to the stock, nor liable as such, since specie or ​notes of specie-paying banks were alone receivable in payment of subscriptions, but the note was binding for its amount, and was treated as a note for money borrowed, with which to pay the installment.
The Benton and Manchester Railroad and Banking Company was incorporated May 12th, the subscribers to the stock to mortgage their lands, and these mortgages to be made the security for bonds to be issued. On the following day, the Vicksburg Water Works and Banking Company and the Hernando Railroad and Banking Company were incorporated.
Having finished these labors they adjourned and were ready for the panic. It does not seem, however, to have made much impression on them before the next regular session. At that time the charter of the Union Bank was duly re-enacted, but, February 5, 1838, a supplementary charter was passed which made some very important changes in the organization of the institution. The State took $5 millions of stock and so changed its relation to the bank, becoming jointly liable and not simply lending bonds to it. The bonus to the State of one-tenth of the profits was stricken out, and also the provision that the State might have a loan from the bank of $200,000. There was no clause in the charter which explicitly granted the power to issue notes. This was only inferred from a provision that it might not issue any note under five dollars. It put on its post-notes a statement that they were issued upon a pledge of the faith of the State which was not true.
The Paulding and Pontotoc Railroad Company was chartered February 16, 1838; mortgages for stock being made security for bonds, as in former cases; and it might issue notes for half its capital. On the same day an act was passed over a veto, suspending for eighteen months the penalty of twelve and one-half per cent. on post-notes, not paid on demand at maturity.
The amount of banking capital provided for in bank charters between 1833 and 1838 was $53.2 millions.
Tennessee.—The Bank of the State of Tennessee, No. III., was incorporated December 20, 1831; $2 millions capital; at Nashville, with one branch in East Tennessee and one in West Tennessee. It appears to have been intended that $500,000 should be subscribed by the State, and the Legislature was to appoint five directors out of fifteen. The public faith was pledged for the redemption of the notes and debts in proportion to the State stock. The old Bank of the State, No. II., was to pay to this one the $20,000 which had been subscribed to it by the State, and that sum was to be apportioned amongst the counties for schools in the manner provided in the act of January 11, 1830.
At a called session in 1832, the first steps taken seem to indicate trouble. The Bank of the State, No. II., was ordered to be wound up at once, and all the funds to be put in the Union Bank of Tennessee as soon as the latter ​should start. That bank was incorporated October 18th; $3 millions capital; half by the State; to be paid by five per cent. bonds, at equal steps with the private subscription; the bonds to be payable in fifteen, twenty, twenty-five and thirty years; the Governor to appoint five directors; the State dividends to go to the school fund; no loans for more than a year; ten per cent. penalty for non-redemption; lowest note $5. It might issue notes payable at any bank of "respectable standing" in the United States; to be a State depository; never to issue more than double the capital. The charter of Bank of the State, No. III., was repealed, probably because the private subscriptions could not be obtained.
The cashier of the Nashville branch of the Bank of the United States wrote to Jaudon, October 21st, that the distress for money in Tennessee had led to the charter of a new bank. "The law passed contrary to my calculation, and from the present scarcity of money is likely to become so great a favorite with the people at large as to fill the subscription for the purpose of getting it organized, and then, if subscribers cannot pay the second and other installments, the board of directors will, as I believe, follow up the former customs of this State on similar occasions, by discounting the stockholders' paper in some way or other, so as to get the bank in operation, when discounts will be granted with such a lavish hand as to fill every debtor's pockets with their notes. The sequel of the fifth year's operation of that bank, should it go into operation, will produce a state of things and of distress that none of its friends now dream of. My experience in the former local banks of this State enables me to foresee the consequences that will inevitably result from the operation of such a bank."
The Planters' Bank of Tennessee was chartered November 30, 1833, with $2 millions capital, on the same plan as the Union Bank; and the Farmers and Merchants' Bank of Memphis, November 27th; capital $600,000, on the same plan.
The Superintendent of Public Instruction was ordered, February 19, 1833, to wind up the loans, land claims, etc., of the Bank of the State, No. II., investing his balances in stock of the Planters' Bank for the interest of the school fund; but he is also ordered to redeem the notes of the Bank of the State. After the crisis came on, October 9, 1837, this order was revoked.
February 20, 1836, the Attorney-general was ordered to begin suit against the Union Bank for the bonus and dividends. The State had borrowed of the bank. Six per cent. certificates were to be given to it for this indebtedness. In a report of that bank October 3, 1837, it is said that the bank has changed the character of its notes and will no longer issue any but notes payable at its counter, because of the heavy run it had to endure in the previous spring by reason of its notes payable at New Orleans.
Kentucky.—The Louisville Bank of Kentucky was founded February 2, 1833; for twenty years; capital, $2 millions; lowest note, $5; notes ​discounted by it placed on the same footing as foreign bills of exchange; debts never to exceed twice the capital; twelve per cent. penalty for refusal or unreasonable delay to pay notes or deposits in specie, with forfeiture of charter; may begin when $200,000 paid in in specie and $300,000 in notes of the United States Bank; the State to have an option for five years, to take any part of 5,000 shares, and to have no other right than other stockholders; the bank not to lend on its own stock or on real estate.
The Bank of Kentucky was incorporated, with its seat at Louisville, February 22, 1834, for thirty years; capital, $5 millions; not more than six nor less than four branches; lowest note, $5; twelve per cent. penalty, as in the case of the Louisville Bank; the State to take 20,000 shares when 10,000 shares are privately subscribed; the State to appoint three out of eleven directors. The State scrip issued for the State subscription might be sold by the bank, which became liable, by endorsement, for the interest anywhere in the United States; but the State paid the interest into the bank. The section in all the bank charters about the obligation of the banks for the interest on the State scrip is very obscure. An act of March 3, 1842, shows that the Northern Bank of Kentucky was held bound to pay the interest on the State bonds in its capital. The bank was to redeem this scrip out of the dividends due to the State, paying over the residue to the State. The bank was to reserve the five per cent. on $1 million of scrip out of the dividend, and the surplus was to go to pay, as far as possible, for the second 10,000 shares, so that the dividends seemed to be appropriated twice.
The Northern Bank of Kentucky was incorporated February 20, 1835, for thirty years; capital, $3 millions; its seat at Lexington, with not less than three nor more than four branches; the State to take half the capital; the State dividends, over and above the charges on the scrip issued for its stock, were set apart for the interest on the internal improvement loans. Small notes were forbidden, February 28, 1835, after one year from that date. If received, they were not to discharge the debt. This was not to apply to the notes of the old Bank of Kentucky or of the Bank of the Commonwealth.
In 1838, a very earnest attempt was made to get a charter for the Southwestern Railroad Bank from Kentucky. The scheme was that North and South Carolina, Kentucky, and Tennessee should concurrently charter the Louisville, Cincinnati & Charleston Railroad, and the Southwestern Railroad Bank. Each State on State rights principles was to prescribe the action of the bank within its limits. The bank was to go into effect if three States consented to it, which they did; Kentucky alone rejected it. It passed the Senate by one majority and was lost in the House by a tie vote. Wickliffe, who was charged with the effort to carry the measure in Kentucky, explained that the Southwestern Railroad Bank was intended to negotiate the stock of the railroad in London and elsewhere. Two shares in the road go with one in the bank, so that the State or individual stockholder will receive through the bank a certain and immediate profit on one-third of the capital invested, ​and a remote profit on the two-thirds which is to be laid out in constructing the road.
The Southern Bank of Kentucky was chartered February 20, 1839, to accommodate the people south of Green River; for thirty years; capital, $2 millions; half by the State. The main features of the charter were like those above.
Governor Letcher of Kentucky, in his message of 1840, said: "The State derived great benefit from the branches of the late Bank of the United States. They furnished the people with a sound currency, good at home and good abroad, and afforded every necessary facility to the commerce, business, and enterprise of the community. When it was unfortunately decreed that the United States Bank was to expire without a renewal of its charter and without a substitute, Kentucky, being compelled by necessity, went slowly and hesitatingly into the creation of local banks."
Ohio.—In 1833 and 1834, bank charters were multiplied in Ohio. February 12, 1834, the Ohio Life and Trust Company was chartered with $2 millions capital; permission to issue notes until 1843, for not more than twice the amount of deposits allowed to remain for not less than a year, and for not more than half the paid-up capital invested in loans on real estate; the charter to be forfeited if it should suspend for more than thirty days.
At the session of 1835-6 no banks were chartered.
The Auditor was directed, March 14, 1836, to draw on the banks for 20 per cent. of their dividends as a tax; but if any bank should give notice to the Auditor, before July 4th, that it renounced the right to issue notes under $3 after that date, and those under $5 after July 4, 1837, the tax on such bank should be only five per cent. of its dividends. Most of the banks accepted this law.
A great bank was set up by the Mormons, in 1836, at Kirtland, Ohio. No property was bound for the issue, which was very large. It had no coin and nobody was responsible for the notes. Before the word "bank," in big letters was the word "anti-" in small letters, and after "bank," "ing" in small letters. A Pittsburgh banker sent some notes to the bank for redemption. Sydney Rigdon, the president, replied that he had issued those notes to circulate for the convenience of the people; to redeem them would defeat the purpose. The bank stopped payment February 11, 1837, having $40,000 outstanding. This compelled the Mormons to leave that neighborhood.
Indiana was without a bank from 1820 to 1834. January 28th of the latter year, a Bank of the State with ten branches was incorporated, to last until 1859; ten districts were to be formed with one branch in each; two more might later be added. The office of the bank was to be in Indianapolis, where the directors were to meet at least once in three months. They were ​a Board of Managers only for the affiliated institutions which constituted the Bank of the State. They had no institution doing business under their immediate management. The branch at Indianapolis was subject to them only in the same way in which other branches were. The bank was never to suspend under twelve per cent. penalty; all the branches were responsible for each other; suits were to be against the State Bank; no stay of execution on judgments against it; it might receive federal deposits; lowest denomination $5, and, the Legislature might forbid notes for $10; the Legislature to elect a president for five years, and four directors, all removable by joint resolution; each branch to elect annually one member of the Central Board; the Central Board to control the branches, examine and inspect them, and distribute the capital. If any branch becomes insolvent or disobedient or acts against the interest of the whole or of the State, the Central Board may appoint a receiver for it. All branches must make up a deficiency in liquidating any one. The Central Board to have charge of plates and paper; the stockholders of the branches to elect seven directors and the Central Board to appoint three for each branch. The capital was to be $1.6 millions, one half by the State; the first installment to be paid in specie; the other two at intervals of a year each; each resident stockholder had the right to have these installments paid for him by the State of Indiana, in specie, on giving security to pay it within nineteen years, with interest at six per cent., consisting of a mortgage on land of double the value. The dividends on the stock thus paid for by the State, on behalf of the stockholders, were to go to the State in payment of the interest; but if the dividends left a deficiency, the stockholder must pay it. No loans were to be made out of the bank to pay the subscription. A State loan of $1.3 millions was provided for to carry out this act, and the dividends of the bank and the interest on the loans to the stockholders were constituted a sinking fund. The banking powers were to cease in 1857, and the State might then found a new bank.
If a stockholder in this bank subscribed 100 shares ($5,000), he paid $1,875 money, and the State paid for him the remainder, he giving a mortgage at six per cent. The State got the money at five per cent. in London. As the dividend exceeded six per cent., the debt was extinguished in a few years.
It appears that the banks could not be established in all the districts as planned, for, in 1836, they were abolished where no bank had been established, although the thirteenth branch was then constituted.
Illinois.—February 12, 1835, a Bank of the State of Illinois was created, to last until 1860; $1.5 millions capital; the State to take $100,000. The bill passed the House by a majority of 1. On the same day the charter of the Bank of Illinois, of 1816, was extended for twenty years. State Bank was a name of ill omen in Illinois, and there was great prejudice against it, but the rising tide of land speculation and the mania for internal improvements, ​which was connected with it, led to the creation of these banks. It was easy at the time to obtain subscriptions in the East for bank stock in these distant States.
The reader may ask: What could a bank be expected to do for public improvements? It might be compelled to pay a bonus which could be appropriated to public works. That would be a mulct or loss once for all. If bonds were to be sold, it might act as financial agent to market them. If it bought them itself, it would lock up its capital and become a canal or railroad company, not a bank. It might make temporary advances before stocks were sold or taxes collected; but if the bank was to stay sound, these must run but a short time and payment must be strictly secured. If banks were used otherwise than in these limits, they and the improvements must all fail together. This is what happened. The Bank of the State engaged at once in a supply of capital for speculative operations at Alton. Ford thinks that it must have lost $1 million and was nearly insolvent before the end of the second year of its existence. It was regarded as a whig bank and could not get a share in the public deposits.
The Bank of Illinois was authorized February 28, 1837, to borrow $250,000 and lend it on mortgages, having not more than five years to run, at not more than ten per cent. March 2d, the Governor was ordered to subscribe $100,000 to the stock of that bank, on behalf of the State.
The internal improvement system had been undertaken on a most extragavant scale in 1836. March 4, 1837, an act was passed to increase the capital stock of certain banks and to provide means to pay the interest on the loan authorized by the act to establish internal improvements. The capital of the Bank of the State was to be increased $2 millions, and that of the Bank of Illinois, $1.4 millions, if they consent. The State was to contract a loan of $3 millions, at six per cent., payable in 1860, with which to take all the increase in the capital of the Bank of the State, and $1 million of the increase in the capital of the Bank of Illinois; $400,000 of the latter were to be left for private subscription; the dividends on the State stock in the banks were to be applied first to pay the interest on the loan here provided for, and the remainder to pay interest on the internal improvement loan. The money obtained on loans was to be deposited in the banks, at interest, until used.
It was believed that the State bonds would sell for 110 and that the dividends on the bank stock would pay the interest and sinking fund on them. It was not possible to sell them at 100. The banks took them.
§ 3.—The Inflation of 1835 and 1836.
After the commercial crisis of 1837 broke out, a great deal of writing and talking was done in this country in respect to banking and currency. The disputants all traced the trouble to either one or other of the acts of Jackson's administration; or of the opposition; or of the United States Bank; or to the lack of a United States Bank. Of course party spirit and the desire to win party advantages had a very large share in all these arguments. It is very doubtful, however, if any or all of these events and proceedings had more than a contributory share in producing the result. One of the most important facts, to which leading influence must be attributed, is the great and really irrational importance which was attached by Europeans to the extinguishment of the debt of the United States, and their exaggerated willingness, on that account, to lend their capital in America. There was no removal of the deposits in England, and no lack of a national bank in France. The whole civilized world shared in the convulsion. It seems to have been, when properly regarded, a revulsion in the midst of a great expansion of industrial power, which expansion produced modifications of the industrial organization which could not well take place without some greater or lesser catastrophes.
In England, after 1825, the factory system, which had been growing up for fifty years, had reached a stage of completeness. There was a definite extension in the application of power and machinery to the textile industries. After 1830 began the construction of railroads. The multiplication of joint stock banks, upon which the whole subsequent mischief was charged by a great many English writers, was incidental to this. At that time the banking system of England was carried on very much as that of America was. There were constant expansions and contractions of the circulation, and the writers on financial subjects directed their attention to these fluctuations as the controlling causes of the phenomena which were noticed. There was very general dissatisfaction with the management of the Bank of England, and ​a strong conviction was felt by the best students of finance that the rules by which it was governed were not adequate or correct. Accordingly, when the bank charter was renewed, in 1832, power was reserved to modify it after 1840. The general principle of management for the Bank, as it was stated to the Committee of 1832, by Horsley Palmer, was, when the exchange was at par, "to invest and retain in securities bearing interest a given proportion of the deposits, and the value received for the notes in circulation, the remainder being held in coin and bullion." The proportion was two-thirds securities and one-third bullion. In the flood of pamphlets which was produced in the discussion of the following years, this rule was shown to be nugatory. Many interesting and important points in the doctrines of banking and currency were developed in this discussion, and the doctrines were established upon which the Bank act of 1844 was constructed. Among the most important of these doctrines for our present purpose, we may notice the following: An inflation or contraction of the currency does not have that prompt and direct effect upon prices and enterprise which they are popularly supposed to have. We may turn, therefore, with greater confidence to the great extension of production, and the great changes in the industrial organization as real causes.
The increased power in production, with the attendant movements of commerce, stimulated enterprise, or as it is commonly called, speculation. This new impulse was felt in every direction. It constituted a great demand for capital, and it went on inevitably to produce aberrations and extravagances. It also produced a new demand for raw materials, which in the next stage took the shape of new enterprises in opening land and mines. The most important of all these effects for the United States was a new demand for cotton. Cotton was at that time the commanding article in the foreign trade of the United States. In value it constituted from 35 to 55 per cent. of the exports of the United States, and therefore might be regarded as the chief thing with which we paid for our imports. It was a natural monopoly. Its value rose steadily in spite of a very rapid increase in production. Inasmuch as the facts in this connection will demand our attention frequently as we pursue the history of this period, the following statistics of the production, in million pounds, and of the annual average price, in cents, will be found useful for reference.
| Year. | Crop. | Price. | Year. | Crop. | Price. |
| 1820 | 160 million pounds. | 17 | 1837-8 | 720 million pounds. | 14 |
| 1830-1 | 350 million„ pounds.„ | 9 | 1838-9 | 545 million„ pounds.„ | 10 |
| 1833-4 | 445 million„ pounds.„ | 11 | 1839-40 | 870 million„ pounds.„ | 14 |
| 1834-5 | 460 million„ pounds.„ | 12 | 1840-1 | 654 million„ pounds.„ | 8 |
| 1835-6 | 550 million„ pounds.„ | 16 | 1841-2 | 673 million„ pounds.„ | 10 |
| 1836-7 | 570 million„ pounds.„ | 16 | 1842-3 | 942 million„ pounds.„ | 8 |
​This rise in value of the leading staple product of the country had the most important effects politically as well as industrially and financially. It poured a stream of wealth into the cotton States. New cotton lands were opened and cultivated. Slaves, tools, machinery, and all supplies were in great demand, and for the most part, all had to be bought upon credit. Of course the rate of interest was very high, for there was no free capital in the cotton States. The next consequence was a multiplication of banks, either as institutions for drawing the capital from elsewhere, or as paper-money machines under the constant delusion which attends such circumstances. The great commercial and financial centers of the South, New Orleans, Mobile, Savannah, and Charleston, enjoyed a period of unprecedented prosperity.
The effect of the arbitrary redistributions of currency and capital which went on from 1833 to 1837 were to throw the domestic exchanges into the utmost confusion. "Even the monstrous anomaly was presented of bills being sold at a loss in Philadelphia upon New Orleans while at New Orleans bills on Philadelphia were also sold at a loss." The rates of exchange were doubled and the banks made great profits. This was what drew such large amounts of northern and eastern capital into the banks of the Southwest.
The Erie canal had proved a relative success, and had certainly been very useful in opening up access to the western country. It was imitated first in Pennsylvania, then in Maryland, and later in Ohio, Indiana, and Illinois. The southern and southwestern States also adopted plans of internal improvement. For all these things capital was necessary, and capital was just what was wanting. State bonds were issued in order to obtain this capital in the East and in Europe. They met with a sale which was amazing, considering the basis on which they rested. As long as this lasted there was great apparent prosperity in all the improvement States. Wages were raised to such an extent that labor was drawn away from the cultivation of the land. The historian of Illinois says that in 1837 nothing was exported from that State; everything from abroad was paid for by the borrowed money expended in the State.
The residents of the cities shared in this prosperity through the operations of commerce and finance, and the distribution of the new capital to the manufacturing industries. The valuation of real estate advanced in all the cities with great rapidity. The valuation of real and personal estate in New York city and county was, in 1830, $125 millions; in 1836, it was $309 millions. It did not reach $300 millions again until 1851.
The people of the western improvement States had become convinced that without any taxation or other annoyance to themselves they were about to see the land around them very greatly increased in value; and every one was eager to get possession of as much of it as he could possibly acquire. In 1836, owing to the great land and town lot speculation which ​had then reached Illinois, it was supposed that all the towns of any note would soon become cities, and that other uninhabited towns, laid out only for speculation, would immediately become thriving, populous and wealthy, and the town-lot market would be established. "Chicago had been for some time only one great market town" for town lots. The eastern people, however, were likewise led to adopt this notion of the prospective value of the new land. The sales of public land had been from $2 millions to $3 millions a year. In 1833 they rose to $4.9 millions; in 1834, $6 millions; in 1835, $15.9 millions; in 1836, $25.1 millions. They fell, in 1837, to $7 millions; in 1838, $4.3 millions; 1839, $6.4 millions; and 1840, $2.7 millions. These sales were made in 1835 and 1836 for the notes of the banks of the western States.
In the President's message of 1836 the operation was described as follows: "The banks loaned out their notes to speculators, they were paid to the receivers, and immediately returned to the banks to be lent out again and again, being mere instruments to transfer to speculators the most valuable public lands, and pay the government by a credit on the books of the banks. Those credits on the books of some of the western banks, usually called deposits, were greatly beyond their immediate means of payment, and were rapidly increasing. Indeed each speculation furnished means for another; for, no sooner had one individual or company paid in the notes, than they were immediately lent to another for a like purpose, and the banks were extending their business and their issues so largely as to alarm considerate men, and rendered it doubtful whether these bank credits, if permitted to accumulate, would ultimately be of the least value to the government."
On the 11th of July, 1836, the Secretary of the Treasury issued an order, afterwards known as the "Specie Circular," in the name of the President, ordering the receivers to accept nothing in payment of public lands but gold and silver, or, in proper cases, Virginia scrip. The chief motive was declared to be "to discourage the ruinous extension of bank issues and bank credit."
This order was denounced by all those who were interested in the prevailing inflation and by all the believers in the "credit system."
It is well worthy of notice that the whole of the great surplus which was at this time piled up in the treasury, that is, in the deposit banks, could be accounted for by the increased revenue from the sale of public lands. The outcry against the circular was so great that, in spite of the great administration majority, a bill was passed to supersede it. In form it specified what currency might be received for payments to the United States, but it included bank notes, provided that they were payable and paid in specie, and that the banks whose notes were taken issued no notes under five, later under ten, and later still under twenty dollars. These restrictions were idle because every one of the banks in question satisfied them, and they furnished no guarantee against the evils complained of. Jackson filed this bill ​unsigned, in the Secretary of State's office, at eleven and three-quarters p.m., March 3, 1837. As he had not had it ten days it was not a law. A similar circular had been issued in 1828; as there was then no active speculation, very little notice was taken of it.
In April, 1835, a treasury circular forbade the payment out of the treasury of any notes under five dollars after September 30, 1855. February 22 1836, another circular forbade the payment of any notes out of the treasury of a less denomination than ten dollars after May 1st. Congress superseded these circulars by an act of April 14, 1836, that no bank note under ten dollars should be paid out after that date, and that after March 3, 1837, no note under twenty dollars should be either given or taken by the United States Treasury or Post Office Department, and all notes given or taken must be payable in specie on the spot. This act was passed without a contest and with great unanimity. In 1835, the following States allowed no notes under five dollars: Pennsylvania, Maryland, Virginia, Georgia, Tennessee, Louisiana, North Carolina, Indiana, Kentucky, Maine, New York, New Jersey, and Alabama. Connecticut had none under three dollars. In Mississippi and Illinois, "it is understood that bills under five dollars have not recently been issued." Missouri had no bank of issue. The specie in the country was estimated at sixty-four millions.
From the time that the State banks began to be used as the depositories of the public money, the amount which they held went on steadily increasing. On the 1st of June, 1836, there were about eighty of these banks, with a capital of $46.4 millions. They held public money to the amount of $41 millions. Their loans were $71.2 millions, and domestic exchange, $37.1 millions. Their circulation was $27.9 millions, their private deposits $16 millions, and their specie $10.4 millions.
Jackson had himself proposed in his first message that, after the public debt was paid, the surplus revenue of the federal government should be distributed to the States. Clay and Calhoun, however, took up this project, the former especially aiming to distribute the proceeds of the public lands as such, or to regard the surplus revenue as due to the sales of lands. At the session of 1835-36, Clay introduced a bill to distribute the net proceeds of the lands after taking out ten per cent. for the ten new States. Calhoun had constitutional scruples about distribution, and proposed an amendment to the Constitution to authorize it. He also introduced a bill to regulate the public deposits, and there was another bill for distributing the surplus revenue. The land bill passed the Senate but was tabled in the House. The distribution bill and the deposit bill were consolidated into one, and passed by the Senate, June 17th, 38 to 6. On the 20th of June, in the House, an effort was made to divide the bill so as to separate the regulation of the deposits from the distribution, but the effort failed. As the bill then stood, the surplus was to be divided as a gift to the States. This could not pass the House. It was ​changed into a plan for "depositing" it with them, subject to recall. In this shape the bill passed, 155 to 38. It provided, at the same time, for the regulation of the deposit banks, for which up to this time there had been no law, in respect to the reception and use of the public money in the future, and also for the distribution of the great treasury surplus then in their hands. There was to be in each State a deposit bank, if a bank could be found which would fulfill the prescribed conditions. Each of these banks was to redeem all its notes in specie and to issue no notes for less than five dollars after July 4, 1836. The other provisions of law as to the bank notes receivable and payable, which already existed, were repeated. If the public deposits in any bank should ever exceed one-fourth of the capital in the bank, it was to pay two per cent. on the excess; and it was to give collateral security for the deposit, if the Secretary called for it. No transfers were to be made from bank to bank by the Secretary, except as the convenience of the treasury should require, and then he was to transfer from one deposit bank to the next nearest, and so on. This was intended to prevent him from redistributing the deposits arbitrarily or by favoritism, and it revoked entirely that power to arbitrate between banks which the Secretaries had gradually assumed by advancing precedents from Hamilton down.
All the surplus money in the treasury, January 1, 1837, over $5 millions was to be deposited with the States, in the proportion of their membership in the electoral college, in four installments,—January, April, July, and October, 1837. The States were to give for these deposits negotiable certificates of deposit, payable to the Secretary or his assigns, on demand. If the Secretary should negotiate any certificate, it was to bear five per cent. interest from the date of assignment; while not assigned, the certificates bore no interest. This large sum of money must therefore be withdrawn from the loans in which the banks had invested it, within a year, and be paid over to the States, most of which were eager to get and use it in their internal improvements.
One of the earIiest forms of speculative mania was that in lumber lands in Maine. This culminated in 1834. The center of it was at Bangor, and the town was so crowded with operators that scarcely a shed could be found for shelter.
Some warning voices were raised early in the progress of the system of inflation. For instance, in the spring of 1835: "A crisis is approaching and is near at hand, to which the panic and pressure of last year will be trifling in comparison. There is a larger sum of money, or rather a larger amount of credit, loaned out in this community, at the present time, than there ever was before. Notwithstanding this extraordinary inflation of the currency the banks continue to discount every note which bears the semblance of responsibility, and as the 'Journal of Commerce' observes, 'everything is dear but money.'" In December, 1835, the money market at Philadelphia ​was very stringent; some political anxiety with reference to relations with France being added to the commercial difficulties. In January Bicknell quoted the rate for capital two per cent. per month and advancing. In the spring of 1836, there was a very great stringency in the money market of the North and East, but there were everywhere great signs of prosperity and business enthusiasm. Sterling exchange was at 105, par 109.6. At the same time all prices were greatly inflated. The imports were extraordinarily large and included even wheat and flour, as they had in the previous year. The crops had, indeed, not been good, but the whole anomalous condition of things rested upon the fact that a great debt was being contracted in Europe, which depressed the exchange and protected the whole system of inflation here. Everywhere there was a scarcity of money, and a demand for more banks to furnish a supply. One per cent. a month was not considered a high rate in any of the great cities. In April the best commercial paper was quoted at New York at 30 per cent. to 40 per cent. per annum; second rate, at a-half of one per cent. per day. "There is an awful pressure for money in most of the cities."
In May, the "Globe" called on the deposit banks to contract loans, demand bank balances, and "check the raging mania for wild speculation and over-trading." Governor Marcy, of New York, devoted a large part of his message to this subject. "The passion for speculation prevails to an extent heretofore unknown, not only among capitalists, but among merchants and traders. The funds of these capitalists have been withdrawn to some extent from situations in which they afforded accommodation to business men, and they have consequently been obliged to press upon the banks to supply this deficiency in their means. Merchants and others have abstracted from their business a portion of their capitals, and devoted it to speculations in stocks and lands; and have then resorted to the banks for increased accommodations. To these causes I ascribe most of the embarrassment now felt for the want of sufficient bank facilities to conduct successfully our ordinary business concerns. The proposed remedy, judging from the applications, is to double the present number of banks and nearly to treble the amount of banking capital. Before you apply this remedy, in whole or in part, you ought to be well satisfied that it will remove the difficulty, and that the use of it will not leave us in a worse condition than we are at present."
In June, after the distribution law was passed, the money market became still more stringent, because the better banks were preparing to pay the deposits which they held. The Secretary of the Treasury had been directed to "equalize" the distribution of the deposits between the States, and he tried to carry out this delicate and difficult task, connecting it at the same time with an anticipation of the distribution which was to be made in the following year. The law was extremely crude, and seemed to proceed from ​a notion that the "redistribution" was as simple an operation as carrying bags of money from one room to another. A supplementary act was necessary to put the enterprise in any practicable shape. In the report of the Secretary for 1836 he showed how the undertaking had caused him to be importuned by Congressmen seeking favors for their States or their banks. He had redistributed about $40 millions, withdrawing $18 millions from the States in which the banks had more than their proportionate share. In the last six months of 1836, $22 millions more had been paid in, chiefly where there was an excess before, and this also had been redistributed. Biddle, in a public letter to Adams, November 11, criticized mercilessly these proceedings. Indeed we find it very difficult to understand what was done. The surpluses were in the great cities of the East. The deficiencies (according to the way of looking at the matter) were west of the Alleghanies. But, if it was proposed to transfer any money from the former to the latter, the latter would at once say: We do not want money sent to us from there. If we had any money to spare we would send it there. Give us rather eastern exchange.—This was the point of Biddle's criticism, and no one was in a better position than he to understand the ignorant blundering of the process which was going on. His mind at once ran over those refined and skillful operations by which he would have made such a redistribution if he had been called on to do it. Even in September, 1836, the local currency at New Orleans was depreciated and the banks had to unite to import specie.
In the six months before the suspension of 1837, although the amount of the currency was greater than it had ever been before in the United States, yet the scarcity of money was so great that it commanded from one per cent. to three per cent. per month.
* ↑ 45 Niles, 307.
* ↑ See Page 264.
* ↑ 49 Niles, 162.
* ↑ Letter to Adams, 1 Raguet's Register, 404.
* ↑ 49 Niles, 434.
* ↑ 50 Niles, 111.
* ↑ Handy's Testimony. (1842.)
* ↑ 49 Niles, 441.
* ↑ The commissioners to adjust the accounts of the Bank with the government assumed that $600,000 of its circulation were lost and would never be presented for redemption. It was the estimate, in 1841, that five-dollar notes would be one-fourth of the circulation, and notes under five dollars another fourth. The lost notes were often estimated at ten per cent. of those below five dollars. (Treasury Report February 12, 1841.)
* ↑ 42 Niles, 257; 44 Niles, 371.
* ↑ 46 Niles, 188.
* ↑ Mackeinzie, 70.
* ↑ 49 Niles, 298.
* ↑ It will readily be understood that, in presenting the history of the several States, various considerations of expediency, which it is not necessary to explain, determine the point of time at which the history is taken up or broken off in each case, and also the order in which the States are put in the series.
* ↑ Treasury Report, August 10, 1846.
* ↑ Whitney, 23.
* ↑ Martin; Boston Stock Market, 9.
* ↑ Raguet's Register, 281.
* ↑ Treasury Report, January 4, 1837.
* ↑ Raguet's Register, 348.
* ↑ 50 Niles, 136.
* ↑ Comptroller Fillmore, 1848.
* ↑ Report of the Stockholders' Investigating Committtee, 1842.
* ↑ 2 Raguet's Register, 248, 352; 2 Watts & Sargent, 463; 56 Niles, 36.
* ↑ Gouge; Journal of Banking, 7.
* ↑ Governor's Message, 1842.
* ↑ Session Laws of 1834-5. Appendix.
* ↑ Treasury Report, January 4, 1837; ditto August 10, 1846.
* ↑ 2 Raguet's Register, 271.
* ↑ The make-up of the volume of session laws seems to be defective, and the law estblishing the branch at Mobile is wanting. It is afterwards referred to as having been established December 4, 1832.
* ↑ Johnson's Report on Assumption.
* ↑ 1 Raguet's Register, 56.
* ↑ 3 Alabama, 258. (1842.)
* ↑ 13 Howard 12 (1851.)
* ↑ The usage came to be that the one chartered in 1818 was called the Louisiana State Bank, and that of 1824, the Bank of Louisiana.
* ↑ 12 Louisiana, 229. (1857.)
* ↑ Treasury Report, January 8, 1838.
* ↑ The citations which ollow are from its report.
* ↑ 24 Cong., 1 Sess., 6 Sen., 409.
* ↑ Raguet's Register, 366.
* ↑ Committee on Banks, February 25, 1840.
* ↑ 25 Mississippi, 625.
* ↑ 5 Smedes and Marshall, 515.
* ↑ 21 Wendall, 211. (1839.)
* ↑ 6 Howard, Miss., 627.
* ↑ Documents Appended to Polk's Report, 1833, p.151.
* ↑ See page 239.
* ↑ See page 187.
* ↑ Stenhouse; Rock Mountain Saints; Boston "Courier," February 6, 1837; Ford; Illinois, 259.
* ↑ McCulloch; Men and Measures, 114.
* ↑ Ford, 190.
* ↑ McHenry; The Cotton Trade, 107.
* ↑ Raguet's Register, 66.
* ↑ Ford's Illinois, 196.
* ↑ Ford, 181.
* ↑ 7 Adams's Diary, 427.
* ↑ Treasury Report, 1835.
* ↑ See pages 33, 35, 102.
* ↑ Martin; Boston Stock Market, 59.
* ↑ New York "Evening Post" in 43 Niles, 168.
* ↑ 50 Niles, 113.
* ↑ 50 Niles, 185, 134.
* ↑ 2 Hammond, 450.
* ↑ Treasury Report, January 8, 1838, page 651.
* ↑ Raguet; Currency and Banking, 139.