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A C H A P T E R I N T H E H I S TO RY O F C E N T R A L B A N K I N G THE LIBRARY COMPANY OF PHILADELPHIA ACKNOWLEDGMENTS The Federal Reserve Bank of Philadelphia thanks John Van Horne, former director of the Library Company of Philadelphia, and Library Company staff members Nicole Joniec and Sarah Weatherwax for their help in providing several of the images that appear in this publication. Thanks also to Professor Hugh Rockoff, Rutgers University, for clarification of some currency terminology. THE STATE AND NATIONAL BANKING ERAS A Chapter in the History of Central Banking A fter the second Bank 1907, U.S. banks weathered—or not—a storm of runs of the United States and panics, and the nation’s economy underwent closed its doors in 1836, several periods of recession and depression. (See the United States went Panics, Recessions, and Banking Crises, pages 4–5.) through a period of approximately 76 years during which it had no central bank.1 Instead, the U.S. No central bank. No uniform currency. An economic depression. How would the country’s economy continue to function? banking system during this time is generally divided into two periods: the state, or free, banking era, which ran approximately from 1837 to 1863, and the national banking era, which lasted roughly from 1863 to 1913. Also, the United States still had no uniform Background Second Bank’s Role Although the Second Bank did not officially national currency. State-chartered banks issued their set monetary policy or regulate other banks, its own banknotes, and some nonfinancial companies prominence and broad geographic reach through issued notes that also circulated as currency. For its many branches allowed it to exert a stabilizing example, railroads issued notes to fund construction influence on the economy.3 The bank’s notes, backed projects, and other companies such as the New Hope by substantial gold reserves, gave the country a more Delaware Bridge Company were allowed to issue stable national currency. In the course of business, the notes as well. Both the railroad and bridge company Second Bank would accumulate the notes of the state notes were used as currency.2 banks and hold them in its vault. When it wanted Yet another problem facing the United States to slow the growth of money and credit, it would was a market crash in 1837 that resulted in a severe present the notes for collection in gold or silver, depression. In fact, during the period from 1837 to thereby reducing state banks’ reserves and putting The State and National Banking Eras 1 $1 note from an Illinois bank exchanged for just 50 cents. The amount of the discount sometimes depended on the distance between the issuing bank and the paying bank and sometimes on perceptions of how sound the issuing bank was. In fact, discounts In addition to state-chartered banks, some companies issued notes that circulated as currency, such as this $1 note from the New Hope Delaware Bridge Company in Lambertville, New Jersey. were so common that printers started publishing Federal Reserve Bank of Philadelphia merchants, and consumers would know how much lists, called banknote reporters, so that bankers, they could expect a particular note to be worth in the brakes on state banks’ ability to circulate new a particular location. This situation made it hard banknotes. To speed up the growth of money and to judge the relative value of goods and services in credit, the Second Bank would hold on to the state terms of state banks’ notes. banks’ notes, thereby increasing state banks’ reserves and allowing them to issue more banknotes through their loan-making process. But with the closing of the Second Bank, this restraining hand disappeared. Panic of 1837 Although the U.S. economy was expanding in the early 1830s, a fall in the price of cotton middecade, demand for payment in specie by foreign No Uniform Currency Allowing each state bank to issue its own banks, and other factors caused financial stress in banknotes created its own set of problems. For one the United States.4 As a result, banks had to suspend thing, such a profusion of currency—with different redeeming their notes for specie because of a lack sizes and different designs—could be confusing. of gold and silver. Consequently, many banks were For another thing—and perhaps more important— illiquid, and many failed. This crisis was fueled in banknotes exchanged at a discount, meaning that part by a lack of confidence in the nation’s paper they did not necessarily trade at face value. For currency. It would take the country six years to example, in 1842, a $1 note from a Tennessee bank recover from this economic downturn. exchanged for 80 cents in Philadelphia; likewise, a 2 creditors that drained the specie reserves of U.S. The State and National Banking Eras many states enacted free banking laws. The term State, or Free, Banking Era generally means that almost anyone could open a bank provided that person (or group of persons) In the period between the closing of met certain criteria, such as complying with the Second Bank and the start of the Civil War, minimum capital requirements and depositing the regulation of banks was in the hands of the bonds or other types of securities with the state individual states. Without the Second Bank and government to back the notes issued by the bank. its branch system, which, among other things, helped to finance the country’s western expansion, states wanted to create more banks in order to help farmers, settlers on the frontier, and others who needed credit.5 Therefore, demand for bank charters increased, as did the number of banks, and state Michigan passed the first free banking law in 1837, followed by New York in 1838.7 Some state banks had great success under free banking laws, and others encountered problems. For example, although these laws worked well in New York, Michigan did not fare banks issued more and more notes. Generally, commercial banks in the United so well under them. States had to obtain charters from state governments, usually through a special act of the legislature. However, the increase in the demand for banks and, hence, bank charters led to concerns about corruption. On one side of the process, petitioners This $5 state bank note was issued by the Central Bank of Pennsylvania in Hollidaysburg. who wanted to open a bank would Federal Reserve Bank of Philadelphia bribe state legislators in order to get a charter. On the other side, owners of existing banks pressured legislators to not issue charters, since the banks already in operation feared competition from the new banks.6 To try to lessen the potential for corruption and to make the process of opening a bank easier, The New York law centralized the issuance of notes in Albany. Someone who wanted to start a bank would deposit bonds with the comptroller in the state capital.8 Once the comptroller’s office accepted the bonds, the bank received an equivalent The State and National Banking Eras 3 complaint. If the bank still didn’t redeem the notes, the comptroller would sell the bank’s bonds and use the proceeds to pay off the note holders. Meanwhile, in Michigan, free banking ran into trouble. Unlike New This $1 state bank note was issued in 1861 by the Beverly Bank, in Beverly, New Jersey. Federal Reserve Bank of Philadelphia York, Michigan was a state that was still developing, its growth facilitated by the opening of the Erie Canal in 1825. Under free amount of notes. These notes were redeemable in banking laws in Michigan, prospective bankers specie on demand at the issuing bank. If, for some had to pay 30 percent of banks’ capital into a safety reason, the bank couldn’t redeem the notes, the bank fund. But banks were allowed to operate even before had to pay the note holder interest on the face value the full 30 percent had been paid and could issue of the note. Ultimately, the note holder could file a notes against the full amount of their capital. Panics, Recessions, Banking Crises 1837 See text, page 2. bonds to investors to cover its obligations, the stock 1857 The collapse of the Ohio Life Insurance and large financial institutions led to their failure. The Trust Company and a bank panic in the fall of 1857 led to an economic crisis. More than 5,000 businesses failed during the first year of the panic. 1873 The collapse of Jay Cooke and Co., the largest bank in the U.S. at that time, in September 1873 triggered a panic on the stock exchange. Cooke’s bank was the exclusive agent for the sale of Northern Pacific Railroad bonds. When the firm could not sell a sufficient number of railroad 4 AND The State and National Banking Eras market reacted negatively, and runs on several other Coinage Act of 1873 depressed the price of silver, hurting the interests of U.S. silver mines and further contributing to the country’s economic problems. This economic crisis led to a recession that lasted until 1879. 1882-85 The recession of these years was mostly due to the end of the railroad construction boom. The end of the boom affected other industries, particularly iron and steel. So the safety fund’s growth couldn’t keep pace under the free banking laws, only to dupe the with the number of banknotes issued. Furthermore, public by issuing notes and then running off with banknotes were often backed by mortgages, a risky the gold and silver. security in a place where land speculation was rampant and land often greatly overvalued.9 Another explanation stems from the time when Missouri placed a bounty on the killing of certain animals, and the going rate for wildcats was Wildcat Banks Free banking laws sometimes gave rise to wildcat banks. Basically, these were banks that issued more notes than they could reasonably hope to redeem. Reasons for the name wildcat vary.10 One explanation is that these banks were set up in very rural areas—places where only wildcats would go. These places were so remote that note holders couldn’t find them in order to redeem their notes. Hence, many unscrupulous people set up banks 50 cents for each one killed. When a hunter brought his catch to the county office, the county treasurer would issue a certificate in the amount of the bounty. Recipients of these certificates, which came to be known as “wildcat certificates,” could not trade them for specie but could use them to pay county taxes. So the certificates often circulated as currency, and the term wildcat was soon applied to other currencies—particularly the paper notes issued by wildcat banks—that could not be redeemed for gold or silver. 1884 Coming in the midst of the 1882–85 1907 The failure of the Knickerbocker Trust recession, this panic occurred when European gold Company in New York led to runs on other trust reserves were depleted and banks called in loans. companies. A general panic ensued. The panic 1893 The Sherman Silver Purchase Act, which was triggered hundreds of bank failures, a significant decrease in the money supply, and a deep recession. passed in 1890, increased the amount of silver the Financier J.P. Morgan formed a syndicate with his federal government had to purchase each month. The fellow bankers, who were able to put sufficient act was intended to lessen the fears of many farmers liquidity into the economy to quell the panic. This who were in debt and couldn’t pay off those debts panic led to the creation of a federal commission because of deflation. They wanted the government to study the economy and ways to quell its many to, in effect, cause inflation so that they could pay crises and panics. The findings of this commission off their debts with cheaper dollars. The act also eventually led to the creation of the Federal Reserve responded to mining interests; mining companies had System in 1913. extracted a large quantity of silver from mines in the West. Furthermore, the failure of a major railroad and Sources: Kindleberger and Aliber; Glasner; Bordo and Haubrich the withdrawal of European investment led to a stock market crash, a banking collapse, and a run on the U.S. gold supply. The State and National Banking Eras 5 Several states—even some more established eastern states—had instances of wildcat banking. But for the most part, when it came to wildcat banking, local banks “took advantage of lax state National Banking Era Paying for the Civil War By April 1861, the nation found itself with laws” and issued an excessive amount of banknotes, a new set of troubles. Several southern states had “particularly in the rural Middle West.” Michigan, seceded from the Union, and, shortly thereafter, in particular, seemed prone to the formation of war broke out between the North and the South. wildcat banks. As at other times in the nation’s history, the federal 11 government in Washington had to figure out how Concerns About Federal Money in State Banks In 1833, President Andrew Jackson had ordered that federal money be pulled from the second Bank of the United States and deposited in state banks. Given the general banking conditions during the free banking era, some lawmakers and other government officials expressed concern to pay for a war. First, Congress passed an act in July 1861 that authorized Secretary of the Treasury Salmon P. Chase to borrow money on behalf of the federal government and to issue Treasury notes as collateral for any such loans. So Chase arranged for an initial loan of $50,000,000 from several different banks in Boston, New York, and Philadelphia.12 about the safety of holding government money in state banks. Congress responded to these concerns by establishing the Independent Treasury System (see next page). Summary By 1860, 18 states had enacted free banking laws. Note that free banking does not necessarily imply failure or that all banks created under free banking laws were wildcat banks. Some state banks flourished and others foundered under free banking laws. But by 1860 other problems loomed on the horizon, and state banks soon had competition from an entirely new source. Secretary of the Treasury Salmon P. Chase helped to establish the U.S. national bank system. The Library Company of Philadelphia 6 The State and National Banking Eras That same month, Congress authorized the to issue another type of paper currency called legal Treasury to issue non-interest-bearing notes called tender, or U.S., notes.13 These notes were not backed demand notes, which could be redeemed in specie by gold or silver but were acceptable for all debts, “on demand.” They were also called greenbacks public and private (although they could not be used because the reverse side of the notes was printed in to pay tariffs). They too were called greenbacks. green ink. The following year, Congress passed the Legal Tender Act, which authorized the Treasury In another attempt to raise money for the war, Chase proposed the creation of a national The Independent Treasury System After Andrew Jackson pulled federal deposits from the second Bank of the United States banks until 1846, when the Democrats returned to power and a new ITS was created. in 1833, he ordered that government money be kept The sub-Treasury system continued in in state-chartered banks. However, several of these existence until the early 20th century. However, with banks ultimately failed, causing some concern in the creation of the national banking system in 1863, Washington about the safety of public money. the ITS became less important. One reason is that To offset these concerns, Congress established the new national banks also became depositories the Independent Treasury System (ITS) in 1846. for federal government funds. Although the These depositories, also called sub-Treasury decision seems to go against the idea of separating offices, collected, transferred, and disbursed public government funds from the banking system, many revenues. The idea was to protect government people felt that federally regulated banks were a money from the risks of the banking system. Offices safer place for federal funds than state-regulated were initially set up in Washington, Philadelphia, banks. New Orleans, New York, Boston, Charleston, and St. Passage of the Federal Reserve Act in 1913 Louis; eventually, Baltimore, Chicago, Cincinnati, provided the final blow to the sub-Treasury system. and San Francisco were added to the list. The new legislation said that the money held in This was not the nation’s first attempt the Treasury accounts should be deposited in the to make the government’s money more secure. Reserve Banks and that the Reserve Banks would act President Martin Van Buren had suggested an ITS as fiscal agents for the government. in 1837. He kept his idea before Congress for several To ensure an orderly transition, the removal years, and Congress finally passed a bill establishing of money from the ITS to the Federal Reserve was an ITS in 1840. However, this first system lasted carried out gradually. Sub-Treasury offices started only until 1841 when the Whigs, who had gained closing in October 1920, and the last office—in power in Washington, repealed the law. So the Cincinnati—closed in 1921. government’s funds remained on deposit in state The State and National Banking Eras 7 TIMELINE FOR THE STATE AND NATIONAL BANKING ERAS The second Bank of the United States closes its door when its charter expires. The Civil War begins. 1846 RY CO AN MP Y OF The Independent Treasury System is established. PHILADELPHIA 1861 1836 RA 1860 1857 1837 Several banks experience runs, and a general panic and severe economic depression ensue. 1850 1837–38 Michigan and New York pass the first free banking laws. banking system. After a failed attempt to get a national banking law passed in 1861, Chase was more successful in 1863 when Congress passed the National Bank Act. Under the provisions of this law, banks could apply for a national charter. Once a bank was approved, it had to buy interest-bearing Another financial panic hits the country. LIB 1840 THE 1830 1870 1862 The Treasury issues the first national paper currency since the Revolutionary War. Moving Toward a More Uniform Currency The law also called for the creation of national bank notes. These notes bore the name of the issuing bank and the signatures of the bank’s U.S. government bonds in the amount of one-third of its paid-in capital.14 In this way, the Treasury raised money to help finance the Civil War. Many banks switched from a state to a national charter. In fact, soon after the law was passed, national banks far outnumbered state banks. By 1865, there were 349 state and 1,294 national banks in the United States. Twenty years later, the numbers were 1,015 state and 2,689 national banks. By 1892, the 8 numbers started to even out: 3,733 state U.S. notes issued by Congress to finance the Civil War were called greenbacks. Shown is a $5 greenback issued in 1861. and 3,759 national banks.15 Federal Reserve Bank of Philadelphia The State and National Banking Eras 1873 1863 Congress passes the National Bank Act. The collapse of a large bank leads to a recession; the country undergoes repeated financial crises through the rest of the century. 1890 1880 1908 Congress sets up the National Monetary Commission to look into the country’s financial system. 1900 1920 1910 1913 1865 The Civil War ends, and the nation has a dual banking system. 1907 A run on several New York City banks and turmoil on the stock exchange bring yet another panic and financial crisis. The Federal Reserve Act establishes a new central bank for the nation—the Federal Reserve System. officers, but they were otherwise identical in design, size, and color. In addition, the holder could redeem the notes for silver or gold at the issuing bank. If the issuing bank couldn’t redeem the notes, the government could sell the bank’s bonds and pay off the note holders. Therefore, national notes were seen as having very low risk, which led to national bank notes could be used to pay all This $50 note was issued by the Metropolitan National Bank of New York and was backed by U.S. Treasury bonds. The words National Currency appear at the top. Also, beginning in 1877, all national banks’ notes were printed by the Treasury’s Bureau of Engraving and Printing, which still prints our currency today. federal taxes except customs duties, a fact Federal Reserve Bank of Philadelphia greater public confidence in these notes and in a national currency system.16 Furthermore, that also fostered wide acceptance of these notes.17 However, although the introduction of notes and certificates were used as currency. And, of course, at the same time, the Confederate States national bank notes pushed the U.S. toward a more of America—the South—was also trying to come up uniform and stable currency, many other forms of with ways to pay for the war and was also issuing its currency still circulated at the time of the Civil War. own currency. (See A Brief History of the Confederate For example, gold certificates and company-issued Financial System, pages 10–11.) The State and National Banking Eras 9 A Brief History of the CONFEDERATE FINANCIAL SYSTEM ConfederateTreasury Secretaries Christopher Memminger was the first Confederate Secretary of the Treasury. Memminger was a lawyer from Charleston who had no solid understanding of economic theory or financial practice. His lack of ability is evident in the number of desperate steps that he took. In his defense, it can be said that, given the nature of the Confederacy, he was presented with a truly hopeless task.a He resigned in 1864 and was replaced by George Trenholm, who was replaced toward the end of the war by John Reagan. Two Classic Causes of Inflation in the Confederacy Prices soared in the Confederacy because of (1) an oversupply of various forms of money and (2) a scarcity of goods. Oversupply and Lack of Uniformity in Money At the beginning of the war, Virginia was issuing its own currency, as were other southern states. To deal with this, the Confederate Congress issued bonds at 8 percent, hoping that these bonds would soak up the excess currency.b The Confederate Congress also authorized huge amounts of unsecured bills (Confederate money). To protect against counterfeiting, Congress ruled that each bill must be signed and numbered by a Treasury clerk, thus keeping battalions of women Treasury employees busy.c Donald, Baker, Holt, p. 255; also Reinfeld Furgurson, p. 190 c Furgurson, p. 190 10 Although the Confederacy took possession of the U.S. mints at New Orleans, Charlotte, and Dahlonega, Georgia, these mints had only small stockpiles of bullion that were soon exhausted. Thus, the Confederacy was unable to mint coins, so making change was difficult.d Although the Confederate post office took to selling stamps as currency, it couldn’t keep up with the demand. Therefore, states, cities, railroads, merchants, taverns, and even some individuals began issuing their own paper bills in small denominations of from 2 to 50 cents. (These bills were called shinplasters.e ) As a result, more “money” flooded into the Confederate economy. Memminger made no attempts to outlaw these shinplasters, and so the Confederacy was initially plagued by a lack of uniform currency.f Scarcity of Goods The other cause of inflation, scarcity of goods, was exacerbated by the Union blockade of Confederate ports, which also prevented the South from shipping its chief export, cotton, to overseas markets. So the inflation caused by too much money (and too many forms of money) was worsened by that money chasing too few goods. The Confederacy responded by simply printing more currency. However, the more paper money the Confederacy printed, the more prices rose. And the more prices rose, the more paper money the Confederacy printed. By the end of the Civil War, the Confederacy experienced an inflation rate of about 9,000 percent! g Even obtaining the paper needed to print paper money was a challenge. A large amount of paper had to be shipped from England.h Reinfeld Furgurson, p. 190 f Donald, Baker, Holt, p. 259 g Markham, p. 238 a d b e The State and National Banking Eras Financing the War The Confederacy attempted to finance a costly war without much gold and silver, without a strong financial plan, without a popular commitment to taxation, and with a Treasury Secretary who did not understand economic theory or financial practice.i The long southern opposition to taxes, combined with the U.S. naval blockade that limited southern imports and exports, resulted in the Confederacy raising only $17,500,000 in 1861–62, at a time when its annual budget was over $160 million. j In fact, the Confederacy raised only about 1 percent of its revenue in taxes.k Memminger also attempted to finance the war through loans. Although the Confederacy did raise some revenue this way, there was not enough gold or silver in the South to serve as collateral. With little success in raising revenue through taxes or loans, the Confederate treasury turned to the printing press and printed nearly $1.5 billion in paper money backed only by the promise of postwar redemption in gold and silver. The Confederacy became a money factory that fueled a rate of inflation that undermined its economy and demoralized its citizens. As inflation rose and Confederate money continued to lose value, the government in Richmond promised to pay a specified amount to the bearer two years after a peace treaty was signed. Jefferson Davis, president of the Confederacy, and Memminger resisted the arguments of several Confederate congressmen to make Confederate currency legal tender.l Markham, p. 226 Donald, Baker, Holt, p. 255 j Donald, Baker, Holt, p. 256 k This figure of 1 percent is from Donald, Baker, Holt, p. 257, citing E. Merton Coulter, The Confederate States of America, 1861– 1865. Baton Rouge: Louisiana State University Press, 1950, p. 182; however, Markham, p. 226, puts this figure at 5 percent, still a small amount. By the war’s end, the Confederacy had issued $1.554 billion in paper money.m By early 1865, Confederate currency was worth only 1.7 cents on the dollar. By the end of the war, flour sold for $1,000 a barrel in Richmond.n The Confederacy had only $85,000 in gold, $36,000 in silver coin, and $700,000 in Confederate paper money, which people often used as fuel.o Writing in 1875 and recalling the privations of December 1864 in Richmond, Cornelia Peake McDonald recorded: “I generally went all day with a cup of coffee and a roll.” She records spending $100 in Confederate money for “a pound of fat bacon, three candles…and a pound of bad butter.” p In Richmond, Davis recommended that people consider eating rats.q Like its counterpart in Washington, D.C., the Confederate government in Richmond was issuing currency, such as this $100 note from 1864, to help pay for war materials for the South. Federal Reserve Bank of Philadelphia Donald, Baker, Holt, pp. 258–59 Donald, Baker, Holt, p. 259 n Donald, Baker, Holt, p. 260 o Reinfeld p McDonald, p. 222 q Furgurson, p. 260 h l i m The State and National Banking Eras 11 Summary Ultimately, the establishment of a national bank system, and the revenue it produced, helped pay for the Civil War in the short term. However, the government hoped that, in the long run, national banks would eliminate state and private banks. In an effort to accomplish this goal, in 1865, the government imposed a 10 percent tax on the issuance of all state bank notes. Having to pay this tax made it unprofitable for state-chartered Fractional currency notes such as these were used to make change during the Civil War. These notes were necessary because coins were being hoarded. Sometimes even postage stamps were used to make change (lower right). Federal Reserve Bank of Philadelphia banks to issue notes. Although this tax did not drive state banks out of business, it did put a halt to their issuance of banknotes. Thus, national bank notes gained ground as the nation’s primary currency. In light of the heavy tax imposed on the issuance of banknotes, state banks turned to other types of Hoarding, Shortages, and Fractional Currency Wars also make people more fearful, and the Civil War was no exception. Fears of what types of economic woes (and other problems) the war might bring led people to hoard gold and silver coins because of their value. Furthermore, gold and silver were in short supply because of the war. This combination of hoarding and a general shortage 12 banking business — accepting deposits and making loans. (Initially, national banks were prohibited from making loans.) This dual banking system of both state-chartered and nationally chartered banks continues today. Moving Toward a New Central Bank By the end of the Civil War in spring 1865, of metal for minting coins made it harder to make both state and national banks existed side-by-side. change for financial transactions. To deal with After the war, the nation’s economy and its dual this problem, the government issued “fractional banking system lurched along, experiencing a series currency,” that is, paper currency whose face value of bank panics and runs and several recessions and was denominated in cents. For example, the U.S. depressions. Finally, in 1907, turmoil in the stock Treasury issued paper notes worth 3, 5, 10, 15, 25, market and runs on several New York City banks led and 50 cents. Even postage stamps were pressed into to an episode in October and November known as service for making change. the Panic of 1907. The State and National Banking Eras Shortly thereafter, in 1908, Congress set up the National Monetary Commission to look into ways of stabilizing the monetary system. The commission’s report noted that U.S. currency was “inelastic”—the supply of money could not quickly adjust to changes in the demand for money. In an attempt to deal with this issue, the commission came up with a plan for a National Reserve Association of the United States. Although this plan was never enacted, the debate it generated led ultimately to the creation of a bill that proposed a new decentralized central bank for the United States—the Federal Reserve System. The Federal Reserve Act was passed in December 1913. Today, the Fed remains the central bank of the United States.18 EN DNOT E S Explanations of terms in bold italics can be found in the Glossary on page 14. Also, brief biographies of people mentioned in the text can be found starting on page 15. 2 See Wright, p. 371. 3 For more information, see the booklet about the Second Bank published by the Federal Reserve Bank of Philadelphia. The Philadelphia Fed has also published a book on the first Bank of the United States. 4 See pages 1–10 of Leonard Helderman’s book for more on the causes of the Panic of 1837. 5 See the thesis by Patricia McShane, pp. 54–55. 6 See Hendrickson, pp. 24–25. 7 Some new states, for example, California, Arkansas, and Texas, banned banking in their original constitutions. Ultimately, of course, these states changed their constitutions to allow banking. 8 The discussion about New York and Michigan in the next two paragraphs draws heavily on the discussion in Helderman, pp. 21–24. 9 See Helderman, pp. 26–27. 10 See Patricia McShane, pp. 3–4, for a discussion of the origin of the term wildcat as it relates to banking. Note that wildcat banking and free banking are not synonymous terms. 1 Federal Reserve building in Washington, D.C. See McShane, p. 3. See the book by Wesley Clair Mitchell. 13 See the website of the Bureau of Engraving and Printing (BEP) for more information on the history of currency. In July 1862, Congress authorized the Treasury Department to engrave and print notes, which was the origin of the BEP. In 1877, the BEP became the exclusive producer of all U.S. currency and still prints our money today. 14 The National Bank Act also created the Office of the Comptroller of the Currency (OCC). The OCC was charged with overseeing nationally chartered banks and establishing a more uniform currency. The OCC still regulates nationally chartered banks today. 15 Numbers are from the Federal Deposit Insurance Corporation’s Learning Bank website. 16 These were eventually replaced by Federal Reserve notes, which are obligations of the government, not obligations of the individual banks. Federal Reserve notes are the paper currency we use today. 17 See Helderman, p. 143. 18 The essay by Verle Johnston offers more detail on the National Monetary Commission and the founding of the Federal Reserve System. 11 12 The State and National Banking Eras 13 REF ERENC E S Beckhart, B.H. “Outline of Banking History: From the First Bank of the United States Through the Panic of 1907,” Annals of the American Academy of Political and Social Science 99 (January 1922), pp. 1–16. Bordo, Michael D., and Joseph G. Haubrich. “Credit Crises, Money, and Contractions: An Historical View,” Journal of Monetary Economics 57:1 (January 2010), pp. 1–18. Donald, David Herbert, Jean Harvey Baker, and Michael F. Holt. The Civil War and Reconstruction. New York: W.W. Norton, 2001. Johnston, Verle B. “The Aldrich Plan,” Federal Reserve Bank of San Francisco Weekly Letter (January 6, 1984). Kindleberger, Charles P., and Robert Aliber. Manias, Panics, and Crashes: A History of Financial Crises, 5th ed. New York: John Wiley & Sons, 2005. Markham, Jerry W. A Financial History of the United States. Harmony, New York: M.E. Sharpe, 2002, pp. 223 ff. McDonald, Cornelia Peake. A Woman’s Civil War: A Diary with Reminiscences of the War from March 1862. New York: Gramercy Books, 2005. Federal Reserve Bank of Philadelphia. The First Bank of the United States: A Chapter in the History of Central Banking. Federal Reserve Bank of Philadelphia, June 2009. McShane, M. Patricia. “Wildcat Banking Practices and the Development of State Bank Supervision,” master’s thesis, Stonier Graduate School of Banking, Rutgers University, New Brunswick, NJ, June 1970. Federal Reserve Bank of Philadelphia. The Second Bank of the United States: A Chapter in the History of Central Banking. Federal Reserve Bank of Philadelphia, December 2010. Meacham, Jon. American Lion: Andrew Jackson in the White House. New York: Random House, 2008. Furgurson, Ernest B. Ashes of Glory: Richmond at War. New York: Knopf, 1996. Glasner, David, ed. Business Cycles and Depressions: An Encyclopedia. New York: Garland Publishing, Inc., 1997. Hammond, Bray. Banks and Politics in America from the Revolution to the Civil War. Princeton, NJ: Princeton University Press, 1957. Helderman, Leonard C. National and State Banks: A Study of Their Origins. Boston: Houghton Mifflin Company, 1931. Mitchell, Wesley Clair. A History of the Greenbacks. Chicago: University of Chicago Press, 1903. Reinfeld, Fred. The Story of Paper Money. New York: Sterling Publishing Company, 1957. Rockoff, Hugh. The Free Banking Era: A Re-Examination. New York: Arno Press, 1975. Wright, Chester Whitney. Economic History of the United States. New York: McGraw-Hill Book Company, 1949. Hendrickson, Jill M. Regulation and Instability in U.S. Commercial Banking: A History of Crises. New York: Palgrave/Macmillan, 2011. GL O S SARY BANKNOTE A negotiable instrument; a promissory note (promise to pay) that is used as money. CENTRAL BANK A governmental institution responsible for issuing currency and establishing monetary policy, which involves the overall growth of money and credit and the level of short-term interest rates. The Federal Reserve is now the central bank of the United States. CUSTOMS DUTIES A form of tax levied on goods traded internationally. LEGAL TENDER NOTE Legally valid currency that may be offered in payment of a debt and that a creditor must accept. PAID-IN CAPITAL The funds raised by a corporation from issuing stock in the primary market. 14 The State and National Banking Eras SECURITY(IES) A financial instrument, such as a stock or a bond, which, among other things, can be used as collateral for loans. In the early banking history of the United States, securities were often held as collateral against the issuance of banknotes. SPECIE Money in the form of gold or silver. In the colonial period and in the early years of the United States, specie usually referred to gold or silver coins. TARIFF Similar to customs duties, except tariff more commonly refers to a tax on goods imported into a nation. WHIG PARTY A political party that existed in the United States roughly from the 1830s to the 1850s. Party members generally opposed the policies of Andrew Jackson and the Democratic Party. Unlike Jackson and the Democrats, Whigs believed that Congress should be a stronger force in the government than the president. Salmon P. Chase (1808-1873) Born in New Hampshire, Salmon P. Chase, after the death of his father, was sent to live with an uncle in Andrew Jackson THE LIBRARY COMPANY OF PHILADELPHIA THE LIBRARY COMPANY OF PHILADELPHIA Biographical Sketches (1767-1845) Andrew Jackson was born in 1767 on the border between North and South Carolina, the third son of Irish Ohio. He graduated from Dartmouth immigrants. Although his family College in 1826 and studied law in Washington under was not wealthy, Jackson eventually became a licensed the guidance of the U.S. attorney general. Chase set attorney and, at age 21, made his way to the territory up a law practice in Cincinnati, defending runaway that would become Tennessee. In 1828, Jackson was slaves and those who helped them. He served in the elected to the presidency. Often portrayed as “King U.S. Senate from 1849 to 1855, was elected governor of Andrew” in political cartoons of the day, Jackson freely Ohio in 1855, and then returned to the Senate from his used his veto power and often would not concede to adopted home state in 1861. However, his second term Congress on matters of policy. Re-elected to a second in the Senate was short; he resigned from his office to term in 1832, Jackson began a battle to defeat the accept the post of Secretary of the Treasury in President second Bank of the United States. Through a series Abraham Lincoln’s cabinet. Chase resigned from his of maneuvers designed to destroy the bank, Jackson Treasury office in 1864 and at the end of that year was ultimately won the fight. Jackson died at his Tennessee appointed Chief Justice of the United States. He died in mansion, the Hermitage, in June 1845. LIBRARY OF CONGRESS New York City in 1873. Jefferson Davis Cornelia Peake McDonald (1822-1909) (1803-1889) The diarist Cornelia Peake McDonald was born in Jefferson Davis was born in Alexandria, Virginia, to Dr. Humphrey Peake and his Kentucky, graduated from West wife, Annie. The family moved around a lot during Point in 1828, and eventually moved McDonald’s childhood, eventually ending up in to Mississippi. Although he left the Hannibal, Missouri. There, she met and married military in 1835, he had a second brief military career Angus McDonald, and the couple moved back to when he led a volunteer regiment in the Mexican- Virginia. After the outbreak of war, her husband American War. In 1847, the governor of Mississippi became a colonel in the Confederate army and died appointed Davis to the U.S. Senate to complete the term during the war. She recorded her experiences during of a senator who had died; he was subsequently re- the war in her diary, which was later published under elected to a full term. He then served as Secretary of the title A Diary with Reminiscences of the War and Refugee War under President Franklin Pierce, leaving that Life in the Shenandoah Valley, 1860–1865. The diary offers position in 1857 and returning to the Senate. When a first-hand look at a Southerner’s daily circumstances southern states started to secede from the Union, Davis in the upheaval of the Civil War, especially the scarcity resigned his Senate seat and returned to Mississippi of goods and the declining value of Confederate in January 1861. Just one month later, he was elected currency. McDonald died in 1909 and is buried in president of the Confederate States of America. He Richmond, Virginia. died in New Orleans in 1889. The State and National Banking Eras 15 Christopher Memminger George Trenholm (1803-1888) (1807-1876) Born in Germany, Christopher Memminger was George Trenholm was born in Charleston, South brought to Charleston, South Carolina, by his Carolina. Although he had to leave school when his widowed mother as a very young child. Shortly after father died, he eventually became head of a cotton arriving in the U.S., his mother died of yellow fever brokerage and by the time of the Civil War was one of and Memminger was sent to an orphanage. A future the wealthiest men in the country. His financial interests governor of South Carolina took an interest in the boy encompassed hotels, banks, railroads, and steamships, and sent him to South Carolina College, from which among others. When war between the North and South Memminger graduated at age 16. He then studied law broke out, Trenholm’s cotton company made major and set up a successful practice in Charleston. After contributions to the Confederacy’s war effort. In 1864, southern secession, he helped to draft the constitution he succeeded Christopher Memminger as Secretary of the Confederate States of America. He was of the Treasury for the Confederate states. He served appointed Secretary of the Confederate Treasury and in that post until 1865. After the war he returned to served in that post from 1861 to 1864. After the war, he Charleston, where he died in 1876. Many people believe served in the South Carolina state legislature. He died that Margaret Mitchell used Trenholm as her model for in Charleston in 1888. the character of Rhett Butler in Gone with the Wind. John Reagan (1818-1905) John Reagan was born in Tennessee but left the state at age 19 to work as a surveyor and then a farmer in Texas. Reagan taught himself law, Martin Van Buren (1782-1862) Born in the village of Kinderhook, New York, near Albany, Martin Van Buren became involved in politics as a young lawyer. He was obtained a license to practice, and opened an office in elected to the U.S. Senate in 1821. An organizer of the the towns of Buffalo and Palestine, Texas. He served in Democratic Party and a supporter of Andrew Jackson, the state House of Representatives for two years and Van Buren was appointed Jackson’s Secretary of State, was elected to the U.S. House, where he served from was elected vice president on Jackson’s ticket in 1832, 1857 to 1861. He resigned his Senate seat and returned and succeeded Jackson in the White House in 1836. He to Texas as the possibility of war between North was inaugurated in March 1837, and it was his bad luck and South became more and more likely. He served that the Panic of 1837 occurred soon after. As president, as Postmaster General of the Confederate States of he managed to get Congress to create an Independent America from 1861 to 1865. Jefferson Davis Treasury System (see page 7), but the system lasted appointed him Secretary of the Treasury, a post in only a year. A more successful system was established which he served for two weeks until he and Davis several years later during the administration of were captured by Union troops in Georgia. Imprisoned President James Polk. A one-term president, Van in Boston for almost six months after the war, Reagan Buren died in 1862. returned to Texas and to public life, serving again in Congress for 12 years. He died at his home in Palestine, Texas, in 1905. 16 THE LIBRARY COMPANY OF PHILADELPHIA THE LIBRARY COMPANY OF PHILADELPHIA Biographical Sketches The State and National Banking Eras Pictured on the cover is the second U.S. Mint building in Philadelphia. This structure, which stood on the corner of Chestnut and Juniper streets, was the home of the Mint from 1833 to 1901. (Image from the Library Company of Philadelphia) www.philadelphiafed.org DECEMBER 2016