# A History of Banking in the United States/Chapter 2

PERIOD II.—1780 TO 1812.
CHAPTER II.
The Earliest Banks of Discount, Deposit, and Convertible Circulation.
In a speech in the Pennsylvania Assembly, in, in the debate about the Bank of North America, Robert Morris said that although the proprietary government "had no idea of a bank, the commercial men of the Province had, and I, as a merchant, laid the foundation of one, and established a credit in Europe for the purpose. From the execution of this design, I was prevented only by the Revolution. Silas Dean submitted to Congress a plan for a bank with a capital of a million and a-half pounds sterling. It was suggested in the scheme of reconciliation, which the Carlisle commission brought to America, that a bank might be formed to provide for the retirement of the Continental paper currency. Alexander Hamilton was forming bank projects as early as 1779, although the plan which he then formed may never have left his own hands. April 30, 1781, he sent a paper to Robert Morris, containing a complete discussion of the financial situation, and the measures required. He wanted a national bank, the chief reason being "we have not a sufficient medium." The capital was to be £3 millions, lawful money, to be paid in landed security, specie, plate, bills of exchange, or ​European securities. About one-third was to be in specie. The United States and the States might subscribe not more than half of the capital. The notes under £20 were to bear no interest, the larger ones, four per cent. The bank was to buy land, from which Hamilton thought that great gains might be made because the tories would put much land on the market, and sell it cheaply. Depositors were to pay a fee for the safe keeping of their money. The bank was to lend Congress £1.2 millions at eight per cent. Taxes were to be levied, the revenue from which should be specially appropriated to pay the interest on this loan. Other revenues were also to be raised sufficient to pay the bank two per cent. on all the Continental paper outstanding, at 40 for 1; for which provision the bank was to guarantee the paper and retire it in thirty years. There were to be three auxiliary banks in Massachusetts, Pennsylvania, and Virginia. Morris replied that he was afraid to "interweave a security with the capital of this [his] bank, lest the notes should seem to be circulated on that credit, and the bank would fall if there should be a run on it."
The next step in the development of banking was independent of these projects. On the 4th of June, 1780, Thomas Paine wrote to Joseph Reed, urging that a subscription should be raised to obtain recruits and supplies for the army, which was in a very sad condition. It was expected every day that news would come of the loss of Charleston. The public were very despondent. Many members of the Pennsylvania Assembly had brought up petitions against taxation. Paine was then clerk of that body. He says that he subscribed $500, and that the next day M'Clenahan and Morris subscribed each £200 in hard money. On the 14th came the news of the loss of Charleston. On the 17th a meeting was held, at which a syndicate was formed to raise £300,000 of Pennsylvania currency, but in real money, the subscribers to execute bonds for the subscriptions and form a bank. The Board of War informed Congress of this project, and asked that a committee be appointed to confer with the subscribers. The offer of the persons who formed the so-called bank was to provide, on their own credit and by their own exertions, three million rations and three hundred hogsheads of rum, without profit to themselves; but they desired that security should be given them for their payment. The faith of the United States was pledged to them and the Board of Treasury was directed to deliver to them bills of exchange, drawn in their favor, on the Envoys in Europe, for a sum not exceeding £150,000 sterling, as a guarantee of payment within six months. Morris described this bank, some years later, as "in fact nothing more than a patriotic subscription of Continental money, * * * for the purpose of purchasing provisions for a starving army." Hamilton criticised it because its purchases were made with its "stock," that is, its capital, and not with its notes; so that it was only a subscription for a single occasion, and not an institution capable of continued action.
​From these statements we may infer what the plan of this bank was. Continental or State paper was brought into it as a subscription, for which the subscriber obtained the interest-bearing notes of the bank, payable in six months. The supplies were bought with the currency which the subscriber had brought in. The bills drawn on the Envoys were held as collateral security until Congress should pay for the supplies. Those bills might be negotiated, but it was the understanding that they should not be; for it was well understood that they were not drawn for value, legitimately at the disposal of the drawer, but would impose an obligation on the Envoy on whom they were drawn to borrow or beg funds to meet them, so that they would be honored or not according as he succeeded.
This institution was called the Bank of Pennsylvania, and began operations July 17, 1780, in Front street, two doors above Walnut. The last installment of the subscription was called in November 15th. The last payment in discharge of the debt of the Confederation to it was made in 1784. Some attempt seems to have been made to repeat its operations, for, November 29th, the Pennsylvania Assembly appointed a committee to confer with the directors on the practicability of an immediate supply of corn and forage for the army, on three or six months' credit, to be paid for in current money of the State, equal in value to gold and silver. In May, 1781, Reed, who was of the anti-bank party, wrote to Washington that the notes of the bank would no longer circulate; that they soon lost credit, but that the bank ruined the paper money of the State.
In May, 1781, before he had assumed the office of Financier, Robert Morris submitted to Congress a plan of a bank, which had been prepared by Gouverneur Morris. "Anticipation of taxes and funds," he wrote, "is all that ought to be expected from any system of paper credit." By this he meant that paper could only be used to anticipate the return from taxes by which the paper would be canceled. He proposed that Congress should apply to the States for power to incorporate the bank, and he hoped that the States would make its notes receivable for taxes.
May 26, 1781, Congress approved of the plan of the Bank of North America as follows: There were to be one hundred shares of $400 each, with liberty to increase the capital. The state of the cash account and circulation was to be made known to the Superintendent of Finance every evening except Sunday. The States were to make the notes, if payable on demand, receivable for duties and taxes. The Superintendent of Finance was to have access to all books and papers. The States were to make laws to punish embezzlement in the bank as felony. No director was to be paid for his services. On the question of incorporating the bank, Massachusetts voted no; Pennsylvania was divided; Madison voted no. Congress asked the States not to charter any other bank during the war, and to pass the other votes called for by the plan.
​Great efforts were necessary to recommend this plan to the public. Morris was enthusiastically zealous in favor of it. "I mean to render this a principal pillar of American credit, so as to obtain the money of individuals for the benefit of the Union, and thereby bind those individuals more strongly to the general cause by the ties of private interest." In this passage he uttered one of the favorite notions of the group of public men to which he belonged; that it was wise and necessary, by various devices and institutions, to enlist the interest of capitalists in the political system which had been founded. "When once by punctual payment the notes of the bank obtain full credit, the sum in specie which will be deposited will be such that the bank will have the interest of a stock two or three times larger than that which it really possesses." A reason for establishing the bank is "that the small sums advanced by the holders of bank stock may be multiplied in the usual manner by means of their credit, so as to increase the resource which government can draw from it, and at the same time, by placing the collective mass of private credit between the lenders and borrowers, supply at once the want of ability in the one and of credit in the other." In these passages he uttered the doctrines of bank inflation, which led Gouge to call him the "father of paper money banking in the United States."
In making some historical statements about this bank, in the debates of 1786, he said that, up to September 1st, the subscriptions had not exceeded $70,000. In that month, the French man-of-war "Magicienne" arrived at Boston with $462,862 in silver, which John Laurens had obtained from the French government. This was carted overland to Philadelphia and put in the bank, but half of it was drawn out and spent before the bank commenced operations.
In June, 1781, he reported to Congress that the chief hindrance to the organization of the new bank was that the amount due to the Bank of Pennsylvania had not been paid. He thought that if it could be paid, the persons entitled to it could be persuaded to subscribe it into a new bank. Congress was not willing to sell the bills lodged as security because of the annoyance that would be occasioned to the Envoys who were the drawees. Morris asked that the bills be put at his disposal, and proposed to arrange the transfer, and use the bills, so that they would not be presented for a long time, or not at all. In this he succeeded.
A meeting was held, November 1st, to organize the new bank. It consisted of the members of the Bank of Pennsylvania and nine others. The act of incorporation was passed by Congress, December 31st, and the bank commenced business January 7, 1782, on the north side of Chestnut street, a short distance west of Third. There was a clause in the charter that "This ordinance shall be construed and taken most favorably and beneficially for said corporation." This clause was copied into State charters and became a ​standing feature of them in some States. Robert Morris was one of the largest stockholders, but was never a director or other officer of the bank. Thomas Willing was president. The day that the bank went into operation, Morris noted in his diary that he had paid into it $200,000 for the subscription of the United States. Gouge doubts whether there ever was any subscription to this bank except that of the government, believing that even the $70,000 above mentioned consisted of bonds transferred from the Bank of Pennsylvania. He claims to have undoubted private authority for the statement that people who were interested in the Bank of North America sent farmers and laboring men to the bank to get silver for notes. "When they went on this errand of neighborly kindness, as they thought it, they found a display of silver on the counter and men employed in raising boxes containing silver, or supposed to contain silver, from the cellar into the banking room, or lowering them from the banking room into the cellar. By contrivances like these, the bank obtained the reputation of possessing immense wealth; but its hollowness was several times nearly made apparent, especially on one occasion when one of the co-partners withdrew a deposit of some $5,000 or $6,000 when the whole specie stock of the bank did not probably exceed $20,000." It is possible that this story arose from a confusion between the Bank of North America and "an appendage of the finance office;" for Robert Morris had a bureau in his office, in which borrowed silver was laid out, in order to establish a fictitious credit for the Treasury.
In his report of his management of the Treasury Department, submitted in 1785, Morris said of the government subscription: "It was principally upon this fund that the operations of that institution were commenced, and the accounts which end on the last day of March [1782] will show that the public obtained, before that day, a loan of $300,000, being the total amount of their then capital. This loan was shortly after increased to $400,000, * * * but the direct loans of the bank were not the only aid which it afforded. Considerable facilities were obtained by discounting the notes of individuals, and thereby anticipating the receipt of public money; * * * and in addition to all this, it must be acknowledged that the credit and confidence which were received by means of this institution formed the basis of that system, through which the anticipations made within the bounds of the United States, had, upon the st day of July, 1783, exceeded $820,000. There was due also, upon that day, to the bank directly, near $130,000. If, therefore, the sum due indirectly for notes for individuals discounted and the like be taken into consideration, the total will exceed $1 million. It may then be not only asserted but demonstrated that without the establishment of the national bank, the business of the department of finance could not have been performed." He borrowed of the bank during his administration $1,247,975. He repaid this in cash, except $253,394, which was paid by surrendering the stock owned by the United States. The United States paid ​for interest on loans $29,719, and obtained in dividends $22,867. The date, July a 25, 1783, is given as that upon which private individuals had taken up all the shares originally subscribed by the government. It is safe to say that this, the first "specie paying, convertible bank note bank" in this country, never could have started but for the silver borrowed by the government from France and placed in its vaults.
There was much doubt about the power of Congress to pass an act of incorporation. The Virginia delegates reported to the Governor of that State that they had consented to the act on account of the utility of the bank, but that the States ought to ratify the act of Congress. The bank determined to seek a charter from Pennsylvania. Objections were made in the Assembly that the charter was perpetual; that the bank had power to hold real estate; and that the president of it had encouraged negotiations with General Howe during the war. Nevertheless the act was passed April 1, 1782. An act had been passed a fortnight earlier, in that State, making it felony to counterfeit the notes of the bank.
In 1782 a proposition was made to Robert Morris to found a bank in New Hampshire. He declined and nothing came of it.
In 1784 and 1785, the Bank of North America earned 14 per cent. In the former year it enlarged its capital by issuing 1,000 more shares at $500 each. This led to the foundation of a rival institution which was on the point of being chartered, when the new subscription was extended to 4,000 shares at $400 a share, and those who had already paid in $500 received $100 back with interest. At the same time the affairs of the bank became disordered on account of over-extension of its business in the attempt to defeat the new bank. For the safety of the community "it became absolutely necessary to drop the idea of a new bank, and to join hand in hand to relieve the old bank from the shock it had received. Gold and silver had been extracted in such amounts that discounting was stopped, and for this fortnight past not any business has been done at the bank in this way. The distress it has occasioned to those dependent on circulation and engaged in large speculations is severe; and as if their crop of misery must overflow, by the last arrival from Europe, intelligence is received that no less a sum than £60,000 sterling of Mr. Morris's bills, drawn for the Dutch loan, are under protest. It is well known that the bank, by some means or other, must provide for this sum. The child must not desert its parent in distress; and such is their connection that whatever is fatal to the one must be so to the other. * * * I have had several interviews with our friend, Gouverneur Morris. He is for making the Bank of New York a branch of the Bank of North America; but we differ widely in our ideas of the benefit that would result from the connection." Disquieting rumors about the bank had been current in Holland in the previous January, where it had been reported that the ​bank had stopped payment on account of a great number of counterfeits in circulation.
The bank had been born of necessity, real or supposed. At the time that it was chartered many public men had felt themselves in a dilemma between the political danger and the financial exigency. As soon as the war had ended and the financial exigency seemed less obvious, their minds turned with greater submission to the fear of political danger. The mass of the people, so far as they thought of the matter at all, feared the bank as an engine of the money power, and anticipated great social and political dangers from it. This view of the matter was put forward with great energy by the class of public men who sought to be popular leaders, and also by those who were working in the interests of rival enterprises.
Petitions were presented to the Legislature, March, 1785, for the repeal of the act incorporating the bank, on account of the financial, social, and political dangers connected with it. A committee was raised "to inquire whether the bank established at Philadelphia was compatible with the public safety and that equality which ought ever to prevail between the individuals of a republic." The committee reported that the bank, as then managed, was in every way inconsistent with the public safety, and recommended that its charter be repealed. The bill for the repeal went over the session, but was taken up on the first day of the Autumn session of the same Assembly. Counsel of the bank were allowed to argue before the House, but, on the 13th of September, 1785, the charter was repealed.
The bank now fell back on its federal charter, but there were so many doubts of its validity that the attempt was made to get another State charter. February 2, 1786, Delaware gave one, which was accepted, and it was dedermined, if necessary, to move to some city in Delaware.
A bank war was now opened in Pennsylvania, which contained in miniature all the elements of the war that raged around banks for the next fifty years.
March 3, 1786, a memorial from 624 citizens of Philadelphia in favor of the bank was presented, in order to bring the matter up again. In the debate there were two lines of thought and argument; one in respect to the social effect of a bank on classes, and the other in respect to the political effects of a bank on democratic and republican institutions. Morris took a very prominent part in these debates and caused them to be published. We learn from his statement that, in this bank, loans upon its own stock were regarded as its most regular kind of business, and the stockholders were thought to be warranted in borrowing to the extent of their stock. The proposed re-charter of the bank was defeated in April.
At the opening of the November session it was evident that a great deal of work had been done and that a great change had been brought about. A committee reported that some amendments in the charter would make it ​free from objection. The bank was re-chartered March 17, 1787, for fourteen years. Its capital was limited to two million dollars.
It is stated that the Bank of North America issued penny notes about 1790.
The first and one of the most important services rendered by banks in the United States was inculcating punctuality. At the end of the Revolutionary war, Philadelphia was the only place in the country where commercial punctuality was general. Banks introduced it elsewhere. The great fault of the banks, however, was that they did not impose punctuality on themselves or each other.
The first bank chartered, after the peace, was the Bank of Massachusetts, February 7, 1784. The charter was originally perpetual, but was limited, in 1812, with the consent of the bank. Amongst the rules of this bank were: the full names of all delinquents to be posted in the bank, in order to avoid useless applications for credit; absolutely no renewals.
A scheme was published in the New York "Packet," February 12, 1784, for a Bank of the State of New York. Subscribers to the stock were to pay one-third in cash and the other two-thirds in mortgages on land in New York and New Jersey, appraised at not more than two-thirds of its value. If necessary, the directors were to borrow one-third of the value of the land. A fortnight later a meeting was called to found a bank, but on specie only. Alexander Hamilton attributed the land bank scheme to Chancellor Livingston, who, he said, had carried on a zealous propaganda in its favor. In order to defeat it, Hamilton started another scheme, and he also endeavored (as it appears, successfully, ) to show the fallacies in the notion of a land bank. A constitution for the bank was drawn up, undoubtedly by Hamilton. One of the rules was that the bank should not deal in foreign exchange. There was so much eagerness to start the bank, that it began in June without a charter. The rule was adopted: "No discount will be made for longer than thirty days, nor will any note or bill be discounted to pay a former one. Payment must be made in bank notes or specie."
Loud complaints were raised against this bank as soon as it went into operation. It was charged with working in the interest of British capitalists and traders, but it is plain that the chief ground of complaint against it was the punctuality which it enforced. It will be seen, in the course of this history, that the real occasion of the unpopularity of banks, in their early history, was that they were having this effect, which produced irritation and resistance. This opposition prevented the bank from obtaining a charter. It also stimulated a paper money party which wanted a State issue, and obtained it in . The directors of the Bank of New York thereupon decided to keep two sets of accounts, and in fact they organized two banks—a "specie bank" and a "paper bank"—the latter doing business on the State paper; the former using the denomination dollars and the latter pounds. A ​charter was at length obtained in 1791. One clause of it was that the bank should not emit any notes or contract debts payable in the State paper.
In point of time the charter of the Bank of Maryland was earlier than that of the Bank of New York, being dated 1790. The Bank of Providence, Rhode Island, was founded in 1791; the Bank of Albany, the Bank of South Carolina, unchartered, and the Union Bank of Boston in 1792. In the last year also the Hartford Bank was founded, the State reserving the right to take forty shares within twelve months. The historian of this bank thinks that its assets, at its outset, "consisted mainly of the promissory notes of stockholders endorsed by each other, with a moderate sum of silver, a light sprinkling of gold drawn from old hoards, and possibly a few notes of the Bank of North America." One of the rules of this bank was: "What passes in the bank not to be spoke on at any other place." This expresses the mystery with which banking at this time was surrounded. Every bank was a secret society.
The Bank of Alexandria, Virginia, was founded November 23, 1792, with a capital of $150,000, increased in 1795, to $350,000. The lowest denomination of notes was five dollars. Its debts were never to exceed four times its capital. Its charter was to last ten years. It was given power for the summary collection of debts, which were not liable to the stay laws existing in the State at the time. It appears that this bank was not founded without occasioning alarm. Pope, of Kentucky, in the debate of 1811, said that the Virginians were known to be poor financiers, for they "were, a few years since, frightened at the very name of a bank. * * * * It required all the eloquence of [Brent of Virginia] to persuade the Legislature that the little Bank of Alexandria would not sweep away their liberties." A month later the Bank of Richmond was founded, with $400,000 capital, to last until 1804, with similar provisions. A statement is met with that from 1787 to 1804 there were no banks in Virginia, except the branch of the United States Bank at Norfolk, founded in 1799, and that the circulation was metallic.
It should be noticed that when banks began to be founded, the notion of a national bank for each State was the conception on which they were constructed. The Bank of Massachusetts was expected and intended by its founders to be the only bank in Massachusetts, and the Bank of New York was founded on that plan; whether it should be called a hope or an intention is difficult to decide. In the Southern or Southwestern States, this notion of a Bank of the State became the source of a great number of institutions which will deserve our particular attention. Such a Bank of the State might exist, like the Bank of England, or the Bank of France, although there might be any number of other banks by the side of it in the same State. One consequence, which causes very great perplexity in the case of the great Banks of the States, is that the nomenclature becomes confused. We find a Bank of South Carolina, a State Bank in South Carolina, and a Bank of ​the State of South Carolina; in other cases the same name was given successively to two or three institutions which succeeded one another in time, and were all called the Bank of the State of ———.
Inasmuch as the term State Banks is used for local banks, it seems desirable to speak always of Banks of the States when that particular group is intended, for they deserve a separate name.
Leaving out of account those Banks of the States in which the participation of the State was limited to the possession of some stock in the bank, and which may be better thrown out of this group altogether, we may distinguish three grades of Banks of the States. 1.—Those which had no capital at all, being "based upon the faith and credit of the State." These were paper money machines. 2.—Those in which funds belonging to the State were deposited as a capital. It was argued that the State might better "bank on" its own funds, for schools, improvements, income from lands, etc., than invest them in loans to private banks or otherwise. 3.—Those which combined with the latter arrangement, capital subscribed by private individuals.
* ↑ See page 18.
* ↑ Carey's Debates, 37.
* ↑ 1 Diplomatic Correspondence of the Revolution, 160.
* ↑ 3 Works, 61, 86.
* ↑ 1 Paine's Works, 372.
* ↑ 6 Journal of Congress, 66.
* ↑ 1 Pennsylvania Journals, 542.
* ↑ 2 Reed's Reed, 300.
* ↑ 1 Morris's Morris, 15.
* ↑ 11 Dip. Corr. Rev. 364.
* ↑ 7 Journal of Congress, 107. 11 Dip. Corr. Rev. 376.
* ↑ Lewis; Bank of North America, 33.
* ↑ Dip. Corr. Rev. 26.
* ↑ Journal of Banking, 237.
* ↑ Nourse's Report, 1790.
* ↑ Lewis, 135.
* ↑ Lewis, 45.
* ↑ Seton to Hamilton, from Philadelphia, March 27, 1784.
* ↑ 8 Life and Works of John Adams, 174.
* ↑ Gouge; Journal of Banking, 408.
* ↑ Blodgett; Economica, 161; 3 Gallatin's Writings, 370.
* ↑ 7 Bankers' Magazine, 4.
* ↑ Domett; Bank of New York, 10, 19.
* ↑ Woodward; Hartford Bank, 60.
* ↑ Gouge; Journal of Banking, 253.