# A History of Banking in the United States/Chapter 6

CHAPTER VI.
Inflation in the Mississippi Valley.
Kentucky.—The popular party had now fallen under the dominion of a mania for banks, as the institutions which could make everybody rich. Clamorous demands were made for a share in the blessings which the Bank of the United States was expected to shower upon the country, and two branches were established as soon as the Bank was organized—one at Lexington and one at Louisville. Prices immediately began to rise, specie was exported, and contracts were entered into, in the expectation of further advance. All hastened to get into debt, especially for the purchase of land, which, in a country of new settlement, always offers a tempting chance for those who have already settled to make profits out of the new comers. "Deeds in old books of record show the to us astonishing fact that town lots on the back streets of the suburbs of Shepherdsville brought prices on time that would now [1882] be esteemed great for the best property in Louisville. * * * Every salt lick and sulphur well was marked as a fountain of prospective wealth, and eagerly bargained for at astonishing values. * * * The most active speculators were those whose means were small."
February 4, 1815, the capital of the Bank of Kentucky was increased to $2 millions, half the increase to be taken by the State. The bank and branches might deal in exchange, United States treasury notes and bonds, and might lend to non-residents and to the United States not more than $500,000 for not more than two years. There were two significant features ​in this law. First, it tried to construe more strictly the limit set by the original charter on the amount of loans which a director might have; and second, it enacted that the notes of the bank and its branches should be current at all branches and receivable for debts to them all. This bank suspended in 1815, as we learn from resolutions of the Legislature, approving of that action. A committee of the Legislature examined the bank, and its report was printed, with a letter of the president, giving the reasons for suspension. We have a statement of the condition of this bank in February, 1817, according to which it had a capital of $2 millions, loans $4 millions, cash deposits $1.3 millions, circulation $1.9 millions, cash $1.2 millions.
The circulation of notes by persons or associations not authorized by law was forbidden January 28, 1817, under a penalty of ten times the amount. Every one who passed such a note was required to endorse it, and was liable to the same penalty. The law was not applicable to notes over $2, and was limited to February 1, 1818.
The State was not able to take the shares in the Bank of Kentucky which had been reserved for it. It was ordered, February 3, 1817, that the same should be sold for not less than 102, in order to increase the active capital. By the same act, the limitation on loans to directors was relaxed in respect to bills of exchange created by the exportation of products of the State; but this was not to be construed to warrant dealing in bills "founded on a speculative system of acceptances." The obligation to receive all notes at all branches was also limited to the payment of debts to the bank.
January 26, 1818, the act was passed which stood first amongst the great and fateful acts of legislation of this period of infatuation. At first twentyfour banks were established at the more important points up and down the State, with an aggregate capital of $5,870,000; then the act starts off again and provides for four more with a total capital of $400,000; then twelve more are provided for, with a total capital of $1,650,000, so that there were forty in all with $8 millions of capital. The capital was to be paid in in current money, notes of the Bank of the United States, or of the Bank of Kentucky, in five installments. The president and directors might extend the time for the three last installments as they should see fit. The banks were incorporated until 1837; were to begin when one-fifth of the capital was paid in; were never to owe, exclusive of deposits, more than three times the capital; to pay the State one-half of one per cent. on each share annually; and any one of them was to cease to exist if it did not redeem its issues in specie, United States Bank notes, or Bank of Kentucky notes. Any bank whose stock was not sold within eighteen months was not to be organized. February 3d, a supplementary act was passed, providing for six more banks which seem to have been forgotten, with a capital of $9 millions. On the same day with the last act, the corporate powers of the old Kentucky Insurance Company were extended for two years in order to wind up. It was forbidden to issue notes after January 1, 1818.
​Tennessee.—The neighboring States were also now well started on the road of inflation. The State Bank of Tennessee was authorized to issue notes down to $1, by an act of October 3, 1815. November 17th three banks were incorporated, each with a capital of $200,000, of which $15,000 was subscribed by the State. November 26th, the Bank of the State and Nashville Bank were authorized to unite and to absorb either of the others. The Bank of Nashville had suspended in July or August, in'connection with the suspensions in the East.
In 1815, Ohio commenced a war which she carried on longer and more vigorously, because apparently with less success, than any other State, against unauthorized bank notes. She also tried to impose taxation on her banks, and her first steps in this direction are especially noteworthy because they show that her attempt to tax the Bank of the United States, a few years later, was not an isolated act against that Bank. February 10, 1815, it was enacted that every banking company in the State should pay annually four per cent. on its dividends. If any bank failed to report, the Auditor was to levy one per cent. on the nominal capital of the bank. The Sheriff was to present the bill of the Auditor to the bank and if it was not paid at once, with four per cent. additional for the Sheriff's fees, he was to levy on the specie and notes. If he could not obtain enough of these, he was to seize any other property of the bank, advertise, and sell it. All contracts with persons or firms issuing notes, without being authorized by law so to do, were to be void. Signing or issuing such notes was made punishable by imprisonment for one year and a fine not exceeding $5,000. The act was not to affect unincorporated banks which began before January 1, 1815, until after January 1, 1818.
February 14th, the Governor was authorized to borrow of the banks $155,000 for one year, at six per cent., in order to make up the State's quota of the direct tax.
At the next session another war was begun against persons acting as agents of any bank of issue chartered by the laws of another State. A law of January 27, 1816, imposed a fine of $1,000 for each offense. The use of the Courts and of the processes of justice were forbidden to all such agencies. Any one interested in such a bank was made personally liable to any noteholder. Such banks or agencies were allowed until January 1, 1817, to wind up, and a half dozen banks which were named were allowed to go on one year longer. February 23d, six banks were incorporated in one act, each to have a capital of $100,000, and to last until 1843. Seven of the unincorporated companies with which the State had been at war were also incorporated by the same act. Each bank was to "set off" to the State one share in twenty-five before beginning, and so afterwards for any increase. The certificates for these shares were to go to the Auditor, and they were to draw dividends like tho others. Each bank was to save from its profits a ​sum which at the expiration of the charter would pay to the State the capital value of shares so set off to it. The State was to re-invest the dividends from each bank in shares of that bank, until it should own one-sixth of the capital. The bank, if necessary, was to make new shares to meet this provision. All former charters were extended to 1843, if the banks should respectively accept this act. When the State should own one-sixth of a bank, the dividends were to go into the available revenue of the treasury. Banks which came into this scheme were not to be taxed. Any bank which violated it was to forfeit its charter. The act was to be construed "benignly and favorably." For some years afterwards this act was treated as a general banking law.
In 1816 and 1817 bank charters were rapidly multiplied. In that of the Bank of Hamilton it is first provided that the capital shall be paid up in "money of the United States;" in that of Galipolis it is first provided that the Governor shall send a commissioner to see that $20,000 is actually in hand, half in specie and half in United States Bank notes, before it may begin.
The Farmers' and Mechanics' Bank of Indiana was incorporated September 6, 1814, and the Bank of Vincennes, September 10th. The following mysterious paragraph from a law of December 26, 1815, seems to show that the Territory was infested by persons who were issuing notes without authority. "If any person or persons in this Territory shall sign, issue, pass, exchange, or circulate any due bill, promissory note, bank note, or instrument of writing for the payment of any money or property, or performance of any covenant or contract, purporting to be the act of any bank, company, secret society, or set of men in this Territory other than is or are expressed by name, upon the face of such due bill, promissory note, bank note, or instrument of writing, so as to gain a credit and trust in some unknown person, company, or set of men, to the holder of such note, due bill, or instrument of writing, besides the signer or signers thereof," he shall be fined three times the sum in the note and be liable to the noteholder for the amount. This is not to affect any bank chartered by this Territory, and any one may recover what he can in payment of "bank notes of any secret company or set of men" or of any other paper; but it applies to the bank notes of the Indiana Manufacturing Company at Lexington, Indiana. Passing any counterfeit bank note knowingly was to be punished by a fine of three times the value, and twenty-five to fifty lashes on his or her bare back.
The Bank of Vincennes was adopted as the State Bank of Indiana, until October 1, 1835, by a law of January 1, 1817. An additional capital of $1 million was to be raised, of which $375,000 was reserved for the State. Arrangements were made for receiving subscriptions all over the State. Branches were to be established. The Farmers' and Mechanics' Bank might become a branch. Three State directors were to be elected by the Legislature, and a greater number when the State should subscribe more, but never more than five out of fifteen. The greatest amount which it might be called upon to lend the State was $50,000 for five years. No director might borrow more ​than $5,000 at one time, or have endorsements in the bank for more than $10,000. December 31st, the State renounced its right to subscribe 2,500 shares in the Farmers' and Mechanics' Bank.
Before the war of 1812 money was scarcely ever seen in Illinois, the skins of animals supplying its place. The money which was brought in after the war turned the heads of the people so that by the whole country was in a rage for speculation. At that period "the country was flooded with bank notes, good, bad, and indifferent. Many counterfeit notes were in circulation.
The custom was to make contracts in "trade at trade rates," which was a system of barter, and displaced money just as it had done in the colonies. Factory goods from New England and Kentucky reached that region about 1818, and the domestic textile industry ceased. Until 1833 there was no legal limit to the rate of interest. The common rate by contract was about 50 per cent. A law of the Territory, January 11, 1816, imposed very heavy penalties on counterfeiting, a peculiar feature being that the law applied whether the bank whose notes were counterfeited was in existence or not. December 28, 1816, the Bank of Illinois at Shawneetown was incorporated, with a capital of $300,000, of which the State might take one-third; to last until 1837. It was never to suspend under a penalty of 12 per cent. It is said of it in its earlier period that it was "so well managed that neither the government nor any one else lost by it. The Bank of Kaskaskia was incorporated by the Legislative Council of the Territory January 9, 1818. Its capital was $300,000. It was to begin when $50,000 were subscribed and $10,000 paid in, and to last until 1838. On the same day the Bank of Edwardsville was incorporated with a capital of $300,000, of which one-third might be taken by the State. It was to begin when $10,000 were paid in. Upon subscription, $5 were to be paid in in specie or "bank bills which will command the same." It was to last until 1838. In the charters which were framed on the model of that of the Bank of the United States, the provision that the debts, exclusive of deposits, should never exceed a certain amount, presents a great number of variations. Apparently it was often not understood. In this charter the clause reads that the debts "shall not exceed twice the amount of their capital stock actually paid over, and above the moneys then actually deposited in the bank for safe keeping." It was never to suspend under a 12 per cent. penalty.
On the same day the city and Bank of Cairo were also incorporated. The owners of the point of land at the junction of the rivers are named, and their opinion is recorded that "no position in the whole extent of these western States is better calculated as respects commercial advantages, and local supplies, for a great and important city;" but the inundations are a drawback and dykes are needed. The proprietors desire to devote one-third of the proceeds of land sales to dykes, etc., and two-thirds to banking. They ​are incorporated by this act, as the president, directors, and company of the Bank of Cairo, for thirty years. Streets and lots are to be laid out and the price of the latter is limited to $150 each. Of this sum, one-third is set apart for a fund for the improvement of the city, and the other two-thirds goes into the capital of the bank, half of it belonging to the purchaser and half to the company. The bank is to be organized when 500 lots are sold, payment being due in three installments within six months. The bank is to be at Kaskaskia and the lots are to be distributed "by lottery." The debts over the specie paid into the bank are never to exceed twice the paid up capital. The capital of the bank is never to exceed $500,000, and it is never to suspend under a penalty of 12 per cent.
A Bank of the State of Illinois was incorporated March 22, 1819, but the charter was immediately repealed and no action was taken under it.
The public lands were sold at this time at $2 per acre, $80 to be paid on a quarter section at the time of purchase, with a credit of five years for the remainder. It was expected that the rapid settlement of the country would enable sales to be made at an advance before the expiration of the credit. The system therefore stimulated speculation, and everybody in the Territory was jobbing in land. From 1814 to 1818 we have the testimony of a man who was engaged in it that the most profitable business was the commerce in land. The country was rapidly improving; immigration was flowing in; "bank paper was circulating in great abundance." In the next two years the tide of immigration declined and an act of Congress of April 24, 1820, abolished credit for land after July 1st. Before any purchaser could enter land, he must produce to the register of the land office a receipt from the receiver of public moneys of the district for the amount of the purchase money. At that time $22 millions were due the Treasurer of the United States for land bought on credit. The transactions in the land office, during the speculation, stimulated the issues of the banks, and the government was parting with the lands in return for a credit in these banks which was almost entirely unavailable. We find the president of the Shawneetown Bank writing to Ninian Edwards, May 25, 1819, that the receiver at Kaskaskia takes his notes one day and refuses them the next. The Bank of Missouri is as bad or worse. It lately took $12,000 in specie from his bank. The public deposits give the Bank of Missouri great strength, which it abuses. He expresses sympathy with the Bank of Edwardsville. These banks being all engaged in the same operations, and all equally frail, never dared press upon each other; but whenever the Treasury, or a deposit bank, or the Bank of the United States, drew upon them for their debt to the United States, the whole combination must fall like a card house.
* ↑ J. M. Brown in the report of the first annual meeting of the Kentucky Bar Association.
* ↑ Session Laws of 1814-15, 447.
* ↑ 11 Niles 432.
* ↑ 8 Niles, 436.
* ↑ Ford; Illinois, 43.
* ↑ Reynolds; Illinois, 113.
* ↑ Reynolds, 44.
* ↑ Ford, 232.
* ↑ Edward's Edwards, 165.
* ↑ Reynolds, 110.
* ↑ Edwards Papers, 156.