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61ST CONGRESS

2d Session

SENATE

\

DOCUMENT

\

N o . 581

NATIONAL M O N E T A R Y COMMISSION

State Banking Before the
Civil War
BY

DAVIS R: D E W E Y , PH. D.
Massachusetts Institute of Technology
AND

The Safety Fund Banking
System in New York
1829-1866
BY

ROBERT E. CHADDOCK, PH. D.
University of Pennsylvania

Washington : Government Printing Office : 1910




NATIONAL MONETARY COMMISSION.

NELSON W. ALDRICH, Rhode Island, Chairman-.
New York, Vice-Chairman.

EDWARD B . VREELAND,
JULIUS C. BURROWS, Michigan.
E U G E N E H A L E , Maine.
PHILANDER C. K N O X , Pennsylvania.
THEODORE E . BURTON, Ohio.
H E N R Y M. T E L L E R , Colorado.
HERNANDO D. MONEY, Mississippi.
JOSEPH W . BAILEY, Texas.




J O H N W . W E E K S , Massachusetts.
ROBERT W . BONYNGE, Colorado.
SYLVESTER C. SMITH, California.
LEMUEL P . PADGETT, Tennessee.
GEORGE F . BURGESS, Texas.
A R S E N E P . P U J O , Louisiana.
ARTHUR B . SHELTON, Secretary.

A. PIATT ANDREW, Special Assistant to Commission.

State Banking Before the Civil War




BY

DAVIS R. DEWEY, PH. D.
Massachusetts Institute of Technology




STATE BANKING BEFORE THE CIVIL WAR.
CONTENTS.
Page.

I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
XIII.
XIV.
XV.
XVI.
XVII.
XVIII.
XIX.
XX.
XXI.
XXII.
XXIII.

XXIV.
XXV.
XXVI.
XXVII.
XXVIII.

Paying in of capital
Distribution of stock
State ownership of stock
Subscriptions by religious and educational societies
Length of charter
Scope of business
Volume of notes
Denominations of notes
Redemption of bills; legal penalties
Redemption by voluntary systems
Suffolk system
Redemption in New York
Methods of evading redemption
Post notes
Note brokerage
System of voting
Liability of directors
Liability of stockholders
Qualifications of directors
Reports from banks; supervision
Branches
Right to carry on a banking business
Loans and discounts
a. Procedure in applications
b. Character of security
(1) Loans on pledge of bank stock
(2) Accommodation paper
(3) Loans on real estate
(4) Loans on merchandise
(5) Loans on stocks
(6) Exchange
c. Length of loans
d. Renewal of loans
e. Amount of loan to any one person
/. Loans to directors
g. Partiality in making loans
h. Restrictions on loans to residents and nonresidents
Loans to States
Loans to special interests
Deposits
Specie reserve
Surplus...
-




5
22
33
40
41
43
53
63
73
79
82
96
100
104
107
112
115
117
120
126
136
143
151
151
153
153
155
159
162
165
167
182
185
187
192
198
200
207
212
214
217
225




STATE BANKING BEFORE THE
CIVIL WAR.
I . PAYING I N OF CAPITAL.

Beginning with the period of national independence the
earliest banking experiments were founded on specie. The
Bank of North America, 1781, was based on specie obtained by the Government from France; and the Bank of
Massachusetts had collected in specie $253,500, out of its
total capital of $300,000, before it began operation. There
was, however, no great supply of precious metals in the
country, and when banks began to increase in number it
was found impossible to adhere to this conservative rule.
Hamilton recognized that it would be impossible to found
a great national bank on specie, and so, following the example of the Bank of Kngland, in 1790 recommended the
use of government securities. The charter of the First
Bank of the United States accordingly provided that only
$2,000,000, or one-fourth of the capital subscribed by
individuals, should be paid in gold and silver, and the
remainder in government stock. Even for this comparatively small amount payment by installments was permitted, and the bank was authorized to begin operations
when $400,000 was paid in. This method was repeated
in the capitalization of the Second United States Bank in
1816. In nearly all local charters provision was made that
the State should subscribe for a portion of the capital, but




5

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Monetary

Commission

this subscription did not necessarily mean that money
was actually to be paid in, but rather stock or bonds.
The United States Government, which subscribed for
$2,000,000 of the stock of the First Bank, borrowed its
subscription from the bank. But the bank, having no
money to lend, passed a credit of $2,000,000 on its books
to the Government, on which it paid 6 per cent. 0 In the
case of the Bank of Pennsylvania, 1793, the State subscribed for its third, or $1,000,000, of the capital in United
States stock, and again, in 1803, took advantage of this
privilege when such securities were selling at a discount.
The charter of the Bank of America in New York, 1811,
with a capital of $6,000,000, allowed $5,000,000 to be
subscribed in stock of the Bank of the United States and
called for only $1,000,000 in cash.
The instability of bank capital was rendered even more
insecure by abuses of a flagrant character. As a rule,
subscriptions were made in installments extending from
one to four years, and it became a common practice for
subscribers, after the first installment was paid, to pledge
their stock, then only partially purchased, back to the
bank for a loan with which to settle for subsequent obligations. " Speculators in shares were not slow to perceive
that if they could put their own stock notes into the bank
instead of cash, they might get something for nothing. If
the bank survived the dividends would probably exceed
the interest on the stock notes, the difference being a clear
gain to the shareholders, without any investment of their
a

Gouge: Inquiry into the Principles of the American Banking System,

p. 72.




6

State

Banking

Before

Civil

War

own money." 0 Many banks, therefore, were established
on an inadequate specie basis, represented by a first installment of from 5 to 15 per cent of the capital. In 1820
Secretary Crawford reported that although the banking
capital was nominally over $125,000,000, including that
of the Second United States Bank, the actual capital paid
in was only $94,000,000. The active capital, however, in
his opinion, did not even reach this, as stockholders were
allowed permanent accommodations at the bank or were
permitted to pay portions of their stock subscriptions with
their own notes. In this way most of the banks established after 1812 had been organized: " Not because there
was capital seeking investment, not because the places
where they were established had commerce and manufactures which required their fostering aid, but because men
without active capital wanted the means of obtaining
loans which their standing in the community would not
command from banks or individuals having real capital
and established credit. "& The active capital was consequently estimated as not over $75,000,000.
Gouge vividly describes the method: "The first installment, which we shall suppose to be $5 on a share, enables the banks to purchase desks and the counter and to
pay for engraving and printing its notes. It has, then, the
necessary apparatus for commencing its operations, and
it has, perhaps, a specie fund in reserve, of three or four
dollars for each share of stock, to meet contingencies.
It then begins to discount notes and circulate paper. As
a White: Money and Banking, p. 291.
b Report of the Secretary of the Treasury, February 24, 1820.




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Monetary

Commission

the bank notes will serve the purposes of trade in the
neighborhood, the specie is sent to distant places to procure commodities. Then comes the time for paying the
second, third, or fourth installment. The bank makes a
call on the stockholders. Some of them hypothecate their
stock; that is, pledge it to the bank and with the means
obtained from the bank itself pay in their proportion.
Others have obtained the means by discounts of accommodation notes without any hypothecation of stock.
Some few pay in real money, but they generally pay in the
notes of the bank itself, or of similar institutions. Thus,
bank capitals are formed by exchanging one kind of
promises to pay for another kind of promises to pay.
This mode of forming bank capitals with the stock notes
of the subscribers is not peculiar to banks of the second
and third order. The banks of the most approved standing have formed their capitals in the same way." a Under
the conditions of the charter of the First United States
Bank it is not probable that more than $500,000 of a total
of $10,000,000 was ever paid in specie. This method
was repeated in the establishment of the Second Bank,
for the third installment was not paid in specie, but in
bank notes or stock notes. Lowndes, of South Carolina,
in a congressional debate in 1818, declared that everyone
anticipated the payment of the capital of this bank by
notes discounted for that purpose; as the bank was in
full operation it could not be expected to exclude its own
stockholders from discounts; and it*was probable that a
a

Gouge: Inquiry into the Principles of the American Banking System,

pp. 71-72.




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State

Banking

Before

Civil

War

b a n k had never gone into operation in which t h e same
thing had not occurred. a
I n Massachusetts t h e policy was variable, " showing
t h a t some people could get inserted in b a n k charters
privileges which others could not g e t . " 6 The charter of
t h e Nantucket Bank, 1795, provided t h a t no stockholder
could borrow a t t h e b a n k until he should have paid his
full proportion of each installment as it became due. This
did not, as White points out, prevent the subscriber from
borrowing t h e money after it h a d been paid in. " I n t h e
following year t h e Merrimac Bank of Newburyport was
chartered with a capital stock of not less t h a n $70,000
nor more t h a n $150,000. Here we find an a t t e m p t t o
evade t h e principle affirmed in t h e charter of t h e Nantucket Bank. No loans were to be made t o shareholders
until they had paid their proportion of $70,000. If they
should choose t o have a capital of $150,000, they might
borrow from t h e b a n k itself all except t h e first $70,000.
There was mttch contrariety of legislation until 1804,
when several charters contained an express provision t h a t
no money should be loaned to anybody until satisfactory
evidence was presented to the governor and council ' t h a t
t h e whole capital stock aforesaid is actually paid in and
existing in gold, silver, or other metals in their v a u l t s /
Even this provision was not sufficient, for it was proved
in more t h a n one case t h a t banks borrowed t h e entire
amount of their capital in gold and silver coin from other
banks and, having exhibited it to t h e b a n k officials, rea

Annals of Congress, 15th Cong., 2d sess., 1:329.
& White: Money and Banking, p. 291.




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Monetary

Commission

turned it to the rightful owners on the same day. Accordingly, in 1811, a clause was inserted in bank charters requiring the directors to take an oath that the money paid
in was intended to remain there as the capital of the
bank," a and by the charter of the State Bank, 1811, the
bank was not to begin operations until one-fifth of the
capital had been paid in gold and silver and examinations had been made by the commissioners. Later the
proportion was raised to one-fourth. h In 1813 it was
enacted that three commissioners should be appointed
by the governor to count the gold and silver and to take
the oaths of the directors that it had been paid in bona
fide by the stockholders as the bank's capital and for no
other purpose, and that it was intended to remain there,
and in 1822 it was enacted that no dividends should be
declared until the whole capital was paid in. As evidence of the criticism which was aroused at an early date,
the following resolutions, which were laid before the
house of representatives in Massachusetts in 1804, may
be cited:
"Resolved as the opinion of this house, That in future
the incorporation of any bank ought to be granted, but
with the following restrictions:
"First. No bank to commence discounts until one
year after an act shall have been passed for that purpose.
"Second. No bank to commence discounts until evidence shall have been given that the whole of the capital
shall have been paid in and is actually existing in specie
in the vaults.




<* White: Money and Banking, pp. 291-292.
6 Commonwealth Bank, 1824.
10

State

Banking

Before

Civil

War

" Third. That evidence shall be produced that the entire
capital in specie in any bank has been imported from foreign countries after its incorporation and before its operation.''
Although Massachusetts through its legislation sought
to attain a high standard, there are abundant illustrations of the loose practices which prevailed. In 1819, a
legislative committee of Massachusetts reported that at
the organization of the Agricultural Bank in Pittsfield,
the first installment, $45,000, was placed in the vaults,
with the expectation that it would be repaid by a loan to
stockholders. The next day $32,000 was taken back as
a loan for which notes without indorsers were given and
on shares pledged as security. 0 During the speculative
period which culminated in 1837, the law was openly
evaded. The City Bank in Lowell under its charter was
to receive one-half of its capital, or $75,000, in specie;
$43,000 of this, however, was obtained from Boston
banks on agreement that it should be returned, and
$20,000 was obtained from Lowell banks on the same
condition. The balance of the capital was paid in checks,
but no one could tell on what bank the checks were
drawn and not one of them was ever paid or presented
for payment. b Again in 1838 the Bank Commissioners reported that the North Bank of Boston had for many years
been in the habit of buying up its own stock at auction
and selling it in advance, and it was held an idle ceremony
to require a full amount of stock to be paid in within a
given period, if, on the next day, it might rightfully be
a

Resolves, 1819, ch. 245.
& Report of Bank Commissioners, Massachusetts, 1837.




11

National

Monetary Commission

purchased back again from the stockholders and yet the
institution go on as a legal banking corporation, without
stockholders and without stock. I t was also noted that,
notwithstanding the explicit provisions of law, some
argued that the giving of a note of hand or a memorandum check secured by pledge of shares, was a substantial
compliance with the law. To such violations and evasions
were attributed most of the bank failures which occurred
in Massachusetts.0
In Rhode Island the charter of the Providence Bank,
1791, provided for the payment of two-fifths in specie
and the balance in United States stock.6 Before many
years, however, the requirement that stock be partly or
wholly paid in specie was frequently omitted and the
payment of a later installment was deferred. For the
period, 1800-1860, it has been estimated that not more
than one-third and possibly not more than one-fifth of
the nominal capital of all the banks in that state was
paid for in any other way than stock notes. In the case
of the Farmers' Exchange Bank of Gloucester, 1804, a
cash deposit of only one dollar per annum was required
with the subscription, and remaining payments were
extended over three years. c In 1826 a legislative committee opposed the grant of new charters chiefly on the
ground that banks were founded on an artificial basis.
Although the charters usually provided that capital should
be paid in specie, evasions were the rule. The specie
paid in one day, frequently borrowed for the purpose,
was withdrawn the next day, and the notes of stockholders
a

Report of Bank Commissioners, Massachusetts, 1838.
& Stokes: Chartered Banking in Rhode Island, p. 9.
elbid., p. 17.




12

State

Banking

Before

Civil

War

were substituted. At the payment of each successive
installment, t h e process was repeated. Said t h e chairm a n of t h e committee: " T h e notes given for t h e stock
and the stock pledged for t h e notes, cancel and annul
each other; or rather they are both nullities from t h e
beginning. * * * T h a t by far too great a portion of
t h e capital of t h e banks already granted consists of
nothing better t h a n such notes is to be inferred from their
reports, b y which it appears t h a t nearly $1,500,000 is due
them from their stockholders." 0 Although there was a
temporary check given t o organization, abuses continued.
I n the charter of t h e Arcade Bank in Rhode Island, 1831,
more t h a n a year was given t o pay b y installments. In
1836 the Massachusetts method was adopted: no bank
could go into operation until one-half of the capital was
paid in, to t h e satisfaction of the bank commissioners,
certified to under o a t h ; and the remainder was to be
paid in within one year under penalty of forfeiture of the
charter. 6
The same laxness existed in Connecticut. T h e charter
of t h e Hartford Bank, 1792, called for initial p a y m e n t s of
only 35 per cent, and the historian of t h a t institution
writes t h a t it was reasonable to conjecture t h a t at t h e
outset the assets of the bank consisted of the promissory
notes of t h e stockholders, indorsed by each other, with a
sprinkling of gold drawn from old hoards and possibly a
few notes from t h e Bank of North America. c The charter
of the Farmers' and Mechanics' Bank, Hartford, 1833,
a

Stokes: Chartered Banking in Rhode Island, pp. 33-34.
& Report of Bank Commissioners, Rhode Island, 1836.
c Woodward: The Hartford Bank, p. 6.




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Monetary

Commission

provided for payment in specie, or notes of Connecticut
banks or the Bank of the United States or of the City of
New York, provided the notes were at par in Connecticut,
in installments up to 30 per cent, and the residue at such
times as the directors should determine. In 1852 the
general banking law required that one-half of the capital
be paid in before beginning operations, and the remainder
within a year.
In the formation of the Bank of Maine in 1812, after
the payment of one-fourth of the capital ($37,500 out of
$150,000), large loans were made to stockholders. It was
afterwards shown that within a year discounts to stockholders on pledge of stock amounted to $137,750.® Bank
returns for the whole State in 1814 showed that four-ninths
of the capital was made up of stockholders' promises secured by real estate and bank stock.6 Gradually there was
improvement. In 1831 the general banking law forbade
the use of stock notes. In 1837 the bank commissioners
reported that in some instances loans had been made to
stockholders before capital had been paid in, but this
departure from sound methods was attributed to inadvertence rather than to deliberate intention. c
In New Hampshire it was common to require the payment of capital in specie, but the stockholders determined
the amounts of payment and the times when they should
be made. In 1838 the bank commissioners complained
that stock notes were frequently received. In Vermont
the earlier charters, as in that of the Bank of Burlington,
o Report of Committee, p. 5.
&Knox: History of Banking in the United States, p. 330.
c Report of Bank Commissioners, Maine, 1837.




H

State

Banking

Before

Civil

War

1818, permitted the directors to determine how much
should be paid in. In 1831 the payment of one-half, to
be certified to on oath, was required; and in 1840 it was
enacted that one-half was to be paid in specie and the
remainder within two years.
In New York, the charter provisions dealing with the
paying in of capital were very lax. For example, the
charter of the Mechanics Bank, 1810, permitted directors
to call for payments from the stockholders in such proportions as they saw fit. No transfer of stock, however,
could be made until one-half had been paid in. In 1818
a committee of the New York legislature reported that the
major portion of the circulation of the State had been
issued by banks whose nominal capitals were small and
composed largely of notes of stockholders, called stock
notes. a In many cases but a small proportion of the authorized capital was paid in, even through stock notes.
For example, the Greene County Bank in 1820 had only
$44,000 of a subscribed capital of $90,000 paid in; the
Washington and Warren Company, with subscribed capital of $400,000, had $176,218 paid in; the Bank of Geneva,
with a subscribed capital of $400,000, had $100,000 paid
in; in 1824 the Central Bank, with a subscribed capital of
$200,000, had but $45,000 paid in; and the Bank of P i t t s burgh, with a subscribed capital of $300,000, had but
$60,000 paid in. In two charters granted in 1825 a step
toward conservatism was taken in a requirement that 50
per cent of the capital be paid in. 5 Payment in specie,
however, was not enforced; and a legislative committee
°Niles, 14:39; New York Assembly Journal, 1818, p. 309.
6
Session Laws, New York, 1825, ch. 117.
24635—10




2

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Monetary

Commission

in 1826 reported that it was well known that the capital
of banks chartered for several years had been paid in with
the bills of institutions previously chartered (Jan. 16,
1826). In the Safety Fund Act of 1829 the payment of
the whole capital was required. In 1835 it was reported
that more than usual of the bank capital during the previous year had been paid in only to be borrowed by the
stockholders under pledge of stock. The bank commissioners, therefore, suggested that the hypothecation of
stocks should for a certain length of time be prohibited.
In New Jersey, a general law of 1812 provided that the
several installments should be paid as the directors might
designate, 0 and this easy method was continued throughout the period of state banking until 1863. Occasionally,
there was a requirement that one-fifth, one-fourth, or even
one-third of the capital should be paid in at the beginning
of operations.6 Charters also provided, as in 1815, for
payments in gold, silver, or bank notes of equal value; in
1816, for payment, one-fifth in government stock, and the
balance in specie or bank notes; 0 and in 1828, in specie,
notes of the Bank of the United States, or notes of specie
paying banks in New Jersey and New York City. d
Pennsylvania by its act of March 21, 1814, chartering
41 banks, provided that when one-half of the shares were
subscribed for and 20 per cent of the par value paid in,
the banks would receive full corporate powers. By the
general banking act of 1824, it was provided that $5 on a
par value of $50 should be paid in at the time of subscripa

Laws, New Jersey, 36 Assembly, 2 sess., pt. 5, sec. 4.
& Private acts, New Jersey, 1815, 39 Assembly, 2 sess., 32.
c
Private acts, New Jersey, 1816, 40 Assembly, 2 sess., 48.
& Acts, New Jersey, 52 Assembly, 2 sess., 131, sec. ,6.
16




State

Banking

Before

Civil

War

tion, and the remainder as soon as the bank was organized
and the officers chosen. The bank was to receive a certificate, however, from the commissioners when one-fifth
of the capital had been paid in. Here again, there was
no absolute assurance that the capital was in money. Investigation in 1842, of the Girard Bank, showed that the
increased capital obtained in 1836 was received by accepting notes, which in some cases were renewed indefinitely.
In Maryland, up to 1810, there is no evidence of the use
of stock notes a but the requirements of payment in specie
varied. The Bank of Maryland, 1790, with a capital of
$300,000, had $200,000 paid in foreign gold coin before
it commenced business, 6 but subsequent charters generally required only one-fourth of the capital to be thus met.
By the charter of the Union Bank, Maryland, 1805, no
dividend was to be distributed until $50 on $100 of stock
had been paid in, and installments were extended over
five years. Between 1810 and 1818, the use of stock
notes became common. A part of the capital, usually
about one-third, was required to be paid in gold or silver,
or the notes of specie paying banks, but no provision
through state supervision provided for obedience to the
law. c The country banks thus established were consequently weak, particularly in periods of monetary pressure. Moreover, the use of installments and stock notes
tended to attract an unsubstantial and Speculative class
of stockholders; "if the bank fared well, the stockholder enjoyed dividends on the whole amount of the
o Bryan, History of State Banking in Maryland, pp. 32, 34.
6 Ibid., p. 20.
clbid., p. 65.




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Commission

stock; if it failed, he could absolve his indebtedness to it
by paying in his certificates of stock. Thus he had all to
gain and was irresponsible for losses."0 In 1840, a legislative committee reported that several of the banks incorporated since 1834 received their capital through
loans to stockholders.
In Virginia the installments were called for more promptly; the final payments of the capital of the bank of Alexandria, 1792, being due in six months. 6 Only one-tenth
was required in specie at the initial subscription. The
charter of the Farmers' Bank of Virginia, 1812, however,
required that all installments be paid in gold or silver coin; c
while the Bank of Northwestern Virginia, 1817, had to
have three-fifths of its capital paid in current coin before
it began operation, d and this was restated in the general
act of 1837. In 1850, the proportion was reduced from
three-fifths to one-half.c
In North Carolina the charters of the first two banks,
organized in 1804, directed that the capital be paid in
gold or silver, but each of them could begin business after
one-tenth of the capital was paid in. In 1810 the charter
of the State Bank provided that three-fourths only of
each share should be paid in specie, and the remaining
fourth in paper currency, if desired. It was afterward
stated that the first two installments were paid in gold
and silver and the remainder in bank notes. In the
extension of the first two charters in 1814, all reference
0 Bryan, History of State Banking in Maryland, p. 66.
&Hening, Statutes at Large, ch. 77, sec. 2.
c Acts of Virginia, 1812, Pt. vii, sec. 3.
d Laws, Virginia, 1817, ch. 39, sec. 5.
«Laws, Virginia, 1849-50, ch. 57.




18

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Banking

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War

to subscription in specie is omitted, and the capital was
largely paid in stock notes. a
By the charter of the Planters' and Mechanics, Bank at
Huntsville, Ala., 1816, permission was given to begin
business when one-tenth of the capital was subscribed;
one-eighth was to be paid in at the time of subscription,
three-eighths as soon as the bank began operations, and
the remaining one-half in two equal installments at periods
of sixty and one hundred and twenty days. The constitution of 1819 provided that no bank could begin
operations until half the capital stock was actually paid
in, in gold or silver, and that this amount in no case
could be less than $100,000. In Mississippi, the bank
commissioners in 1838 reported that the stock of practically every bank in Mississippi had been paid in notes of
individuals and mortgages on property. Charters gave
an opportunity for this, in using the words, " secured to
be paid/' The issues of a bank were consequently not
based upon what the stockholders had paid into the
bank, but on what they owed to the bank, thus making
their indebtedness and not their actual capital, the basis
of their circulation.
The charter of the Bank of Florida, 1828, which did not,
however, go into operation, gave the bank the privilege
to begin business when $40,000 out of a capital of $500,000,
had been paid in, in gold or silver or notes of the United
States Bank. The charter of the Bank of Pensacola,
1831, providing for a capital of $200,000 authorized the
a See Report of Legislative Committee of Investigation, North Carolina,
1828-29; Sumner, History of Banking, 1:45.




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Commission

institution to open when $15,000 had been paid in, threefourths in gold, silver, or United States bank notes, and
one-fourth in current money. Within a few months the
charter was amended so as to permit it to begin operations when $7,000 had been paid in. a The constitution
adopted in 1845 required that capitals should be paid in
specie. The borrowing of money to create or to add to
capital and the making of loans on pledge of stock were
forbidden.
The charter of the Bank of Orleans, Louisiana, 1811,
admitted subscriptions payable in money or "notes payable to the directors.'' According to Sumner b this charter and that of the Louisiana State Bank, 1818, are the
only two acts of incorporation he found which contained
explicit provision for what appeared to be stock notes.
In 1833, a term of three years was allowed to the stockholders of the Commercial Bank of New Orleans for the
payment of capital.
In Ohio, the charter of the Bank of Muskingum, 1812,
prohibited the payment of dividends to stockholders until
they had paid in all their stock; the charter of the Bank of
Hamilton in 1818, provided that the capital should be
paid up in "money of the United States;" the charter of
the Bank of Gallipolis provided that the Government
ghould send a commissioner to see that $20,000 of its
authorized capital of $300,000 was actually in hand, onehalf in specie and one-half in United States bank notes,
before the bank should open. c Later in 1833, the Frank-




fl Act of February 6, 1832.
& History of Banking, 1: 61.
c Sumner, History of Banking, 1:92.
20

State

Banking

Before

Civil

War

lin Bank of Cincinnati was authorized to begin business
when one-fourth of the capital had been paid in specie,
and after examination by the commissioner appointed by
the governor, who had power to take the oaths of the
officers. The capital was to be paid in installments, $10
down and the remainder in varying sums within periods
not extending over six months.
A Kentucky act, January 26, 1818, which authorized
the incorporation of a large number of new banks, provided that capital could be paid in current money, notes
of the Bank of the United States or of the Bank of Kentucky. The payment of the last three installments could
be deferred and the bank could open when one-fifth of
the capital had been paid in. The requirements of the
Louisville Bank charter, 1833, were practically identical
with those of the Franklin Bank in Ohio. Promptness
in securing the payment of installments was not enforced;
the Northern Bank of Kentucky in Lexington, organized
in 1835, reported two and a half years later, that but 80
per cent of its capital had been paid in and that its calls
for stock had been as rapid as was usual in other banking
institutions. In Tennessee, it was impossible from the
books of the Union Bank, 1837, to show the kinds of funds
in which the stockholder paid for stock. It was believed,
however, that it consisted of specie, notes on speciepaying banks, and checks on the bank.
In the charter of the State Bank of Indiana, 1834, it
was provided that before commencement of business,
one-half, or $80,000 of the capital of each bank, must be
paid in specie, $30,000 by individuals, and $50,000 by the




21

National

Monetary

Commission

State. The balance was to be paid in two equal installments, in specie. Individual subscribers could borrow
from the State for paying their second and third installments upon mortgages of real estate, and for this purpose,
the State was to sell bonds to the amount of $1,300,000.°
The charter of the Bank of the State of Indiana, 1855,
called for $2 down on each share of $50, and the balance
by such installments as the directors might require. b
In Illinois, the early charters required but little solid
capital. The Bank of Illinois at Shawneetown prescribed but $10 in specie on each share and the remainder
at the call of the directors; for the Bank of Edwardsville,
1818, but $5 in specie or bank bills "which will command
the same," was demanded. The charter of the Bank of
St. Louis, 1813, provided that the installments should be
paid in gold or silver or in good approved paper of the
banks of Kentucky, the State Bank of Tennessee, the
banks of Cincinnati, Vincennes, and Richmond, or such
other bank paper as is received by the United States in
payment for lands and taxes. c
I I . DISTRIBUTION OF STOCK.

Influenced by a fear that banks might concentrate the
money power in the hands of a few, some of the States
inserted elaborate provisions in the charters providing
that the initial subscription be opened in different parts of
the State, and limiting the number of shares which could
be taken by any one, person. This restriction, however,




a Laws, Indiana, 1834, ch. 7, sec. 90.
& Laws, Indiana, 1855, ch. i n , sec. 81.
c Missouri Gazette, October 5, 1816.
22

State

Banking

Before

Civil

War

was of little service, as shares were taken out by attorney.
Congress in chartering the first United States Bank expressly required that the subscription books should not be
opened for several months (until July i) in order to allow
citizens in different parts of the country to prepare to subscribe, and thus, if possible, lessen the control which might
otherwise have fallen into the hands of citizens of Philadelphia and near-by cities.a Moreover, for three months
after July 4 no one could subscribe on any one day for
more than 30 shares. Notwithstanding these restrictions,
there was severe criticism of the commissioners on the
ground that they were partial in the distribution, and
thus aided the speculation in shares, which immediately
took place.
In Connecticut the charter of the Hartford Bank, 1792,
forbade anyone save the State to own more than 30 of
the 250 shares, but in 1796 this restriction was removed
so as to provide for an increase of capital. b Much regret
was later expressed that ownership of stock too frequently
drifted into the hands of non-residents, and bank officials
were called upon to report in regard to ownership, as:
How much was owned in the town where the bank was
located, how much in other towns in the county, in other
counties in the State, and out of the State. 0 From such
a return, it was shown that out of 5,000 shares of the City
Bank of New Haven 2,470 were taken by residents, and
2,530, or more than a majority, outside. In 1836, Rhode
a

Supplementary bill, March 20, 1791.
Woodward: The Hartford Bank, pp. 17, 75.
c Report of Bank Commissioners, Connecticut, 1837, p. 7.

&




23

Rational

Monetary

Commission

Island, in a general banking act, enacted that commissioners should take charge of subscriptions and that in the
allotment of stock the inhabitants of the town in which
the bank was located should have preference, to be followed by those residing in towns of the same county.
In 1850 it was provided that the commissioners appointed
by the governor should apportion the stock "as near
as may be to the amount subscribed by each person who
shall in their opinion have the ability and disposition to
make a bona fide investment. " Most subsequent charters
had a like provision. By the charter of the Commonwealth Bank of Massachusetts, 1824, original subscribers
were prohibited from selling or transferring their stock for
one year after organization, and in 1831 the legislature
prohibited any individual or corporation from holding
more than 50 per cent of the capital of any bank, except
such as might be held as collateral security.
Beginning with about 1840 bank commissioners in
New England States frequently complained of the efforts
made by outsiders, particularly residents of New York, to
obtain control of banks for the purpose of securing accommodation and circulating the bank bills in other States.
These speculators then sought to buy up these bills at a
discount for the purpose of again loaning them. a A
special advantage was gained if these notes could be sent
to a distance in the West. 6 In 1841 the bank commissioners of Maine stated as a cause for criticism that more
a The Roxbury Bank, Massachusetts, failed in 1838, due, it was stated,
to the speculative operations of New Yorkers who owned the stock
Financial Register, 2:142.
& Reports of Bank Commissioners of Vermont and Maine, 1841.




24

State

Banking

Before

Civil

War

than $500,000 of bank stock was owned outside the State,
in part due to the desire to evade taxation ; a and in the
same year the governor of New Hampshire recommended
legislation to prevent the control of a bank passing into
the hands of non-residents. As late as 1859 complaint
was made of the extraordinary efforts of outside speculators, principally of New York, to obtain control of some
of the smaller banks. The commissioners of Massachusetts joined in these criticisms and declared that nonresident control had proved ruinous in nearly every case. b
In New York there were few, if any, limitations on the
residence of stockholders. In the organization of the
Mechanics' Bank in New York City, 1810, the General
Society of Mechanics and Tradesmen was permitted to
subscribe for one-tenth of the capital, while four-tenths
was reserved for mechanics and tradesmen of the State.
Charters in 1811 provided for the appointment of special
commissioners who should supervise the distribution of
the stock, and this method was subsequently continued. c
This, in turn, gave rise to a new form of corruption, as in
the organization of the Commercial Bank of Albany,
1825, when the commissioners appointed by the legislature appropriated to themselves and a few favorites the
majority of the shares. ^ Another notable illustration of
political intrigue is found in the assignment of the stock
of the Seventh Ward Bank of New York City, 1832; for
a capital of $500,000 more than the $6,000,000 was
a

See also Report of 1859.
& Report of Bank Commissioners, Massachusetts, February, 1841.
c Session Laws, New York, 1811, ch. 68; 1824, ch. 46.
^ Albany Argus, June 14, 1825.




25

National

Monetary

Commission

subscribed; of the 3,710 shares assigned, 1,135 were distributed to family connections of the commissioners and
the remaining 2,535 were apportioned among public
officials, leaving only 40 to outside subscribers." In
1829 it was complained that a large part of the bank
capital in the State had been furnished by non-residents
and foreigners.6 Much criticism was aroused because of
the foreign ownership of the Manhattan Bank in New
York City, whose stock was largely owned by the Marquis
Camaerthaen. In 1832 the bank commissioners reported
that too many banks were organized, particularly in the
country, because of the demand for such investments by
non-residents rather than because of any redundancy of
capital in the immediate neighborhood. "When men of
capital abroad were found willing to make such investments at a trifling premium, competition became animated and enormous subscriptions were made for the
purpose of realizing a premium upon the sale of bank
stock.'' c Many applications originated with individuals
who desired to realize the first profits upon the stock
which was to be created; the same persons were found
petitioning for a number of institutions in different parts
of the State; and there were many contests as to who
should be the commissioners to distribute the stock. d
The governor of the State suggested that bank stock be
sold at public sale so that the premium should go to the
«Niles, 44:371; Senate Document, New York, No. 47, February 4, 1834;
Senate Documents, Nos. 64, 73, 89, 94.
& Senate Report, New York, January 19, 1829.
c
Report of the Bank Commissioners, New York, 1832.
d See also, Senate Document, New York, No. 108, March 25, 1834; Senate
Document, No. 58, April 1, 1837.




26

State

Banking

Before

Civil

War

State instead of to speculative subscribers. On the other
hand, it was claimed that this would facilitate the concentration of the stock in the hands of a few wealthy
persons and throw the bank into the hands of individuals
at a distance from its location who would use its facilities
for private purposes rather than for the accommodation
of local customers. a Again, in 1837, the bank commissioners stated that the method of distribution of bank
stocks was very unsatisfactory. There were violent contentions and bitter personal animosities; funds were frequently advanced by other banks to those who wished
to buy stock in a new bank, thus substantially repeating
the old stock-note system. Although it was difficult to
devise a satisfactory plan for parceling out a franchise
possessing a pecuniary value, the commissioners suggested
that an individual should be limited as to the number of
shares; that shares should not be transferable for thirty
days; that subscribers should take oath that they had paid
in with their own money and had not pledged or hypothecated the stock in any way, or held it in trust in secret.
In the same year a law was passed providing for the sale
of bank stocks at auction whenever new capital was
created. In 1854 the superintendent of the bank department reported that the only failures of banks in the previous eight years by which bill holders had suffered a loss
had been those located in remote parts of the State owned
by brokers and speculators residing in other sections. b
In New Jersey, by a charter of 1824, citizens of the State
were to have a prior right to subscribe for at least one-half
a Assembly Report, New York, No. 136, February 7, 1834.
b Report, p. 62.
27




National

Monetary

Commission

the stock; a in three charters, 1828-1830, stock was to be
subscribed by citizens of New Jersey exclusively; in 1832,
citizens of Pennsylvania were given the privilege of subscription; 6 in 1848, all outsiders were again excluded,
and in a charter of 1855 it was provided that a majority
of stockholders must always be residents of the State. c
In Pennsylvania the charter of the Bank of Pennsylvania, 1793, required for the purpose of distributing ownership that books should be opened in Philadelphia for
2,000 shares, in Lancaster for 300, and in Reading for 200,
and that no subscriptions should be received in Philadelphia for the two latter places until after ten days had
elapsed. The omnibus act of March 21, 1814, which at
one stroke created 41 new banks in different parts of the
State, is evidence of the fear of concentrated banking
power. There was a widespread jealousy and fear of
foreign ownership. This was seen in the debate over the
renewal of the charter of the First United State Bank;
and Pennsylvania, in 1825, in rechartering the Bank of
North America, prohibited any foreigner, save a citizen of
Holland, to hold stock unless he had declared his intention of becoming a citizen. The general law of 1824 also
debarred foreigners by prohibiting the transfer of stock
to non-citizens of the United States, but as this was easily
evaded the law was repealed in 1836. Again, the act of
1824, which divided the State into 27 banking districts,
provided that on the first day of subscription only 2 shares
could be taken by one person; on the second day not more




a

Acts, New Jersey, 49 Ass., p. 100, sec. 2.
Acts, New Jersey, 56 Ass., p. 58.
« Acts, New Jersey, 79 Leg., p. 657, sec. 2.

b

28

State

Banking

Before

Civil

War

than 4, on the third day not more than 6, on the fourth
day not more than 8, on the fifth day not more than io,
and on the sixth day and those subsequent, additional
shares, provided the grand total was not more than ioo.
The charter of the Girard Bank, 1832, provided that no
one should take more than 5 shares the first day, 10 shares
the second, and 50 shares the third day; but notwithstanding these provisions there was great scandal in the awarding of stock; the privilege of acting as commissioner for the
distribution of shares was valued at from $500 to $700, and
the allotment occasioned a riot.°
In Maryland, in chartering the Bank of Baltimore, 1795,
the legislature demanded that books be opened in each of
the counties, and limited the subscriptions by any one
person to 20 in a single day. 6 This became the usual
practice in the organization of the early banks in that
State; a committee was appointed to receive subscriptions at each county seat; persons non-resident in the
county could not subscribe until after the lapse of a
stated time; shares then remaining could be subscribed for
by anyone, and if still un taken were advertised in the
Baltimore papers. c
Virginia restricted subscription in the Bank of Alexandria, 1792/ to 50 shares, and not more than 25 in any one
month. This State also, in 1812, required that all shares
subscribed for must be held solely for the beneficial interest of the subscribers, any contract notwithstanding. 6
aNiles, 42: 257.
& Bryan, History of State Banking in Maryland, p. 26.
c
Ibid., p. 30.
d
L a w s of Virginia, 1792, ch. 76, sec. 18.
« Farmers' Bank of Virginia, acts of 1812, pt. 1, ch. 7.




29

National

Monetary

Commission

Subscriptions were also apportioned among the leading
cities of the State. In the general law of 1837, it enacted
that if any bank outside the State purchased stock in a
Virginia bank, such stock should be forfeited to Virginia
for the benefit of internal improvements.® Apparently
this restrictive policy was successful, for in 1837, out of
1,892 stockholders in all the banks, only about 100 were
non-residents.
In Ohio, by the charter of the Bank of Chillicothe, 1808,
no one could hold over 40 shares or subscribe for more
than 5 shares in one day. 6 Efforts, however, to secure
ownership to residents only were unavailing. In 1833
the capital of local banks held by non-residents was
$1,650,000, as against $1,380,000 held by residents.
In the establishment of the State Bank of Indiana, 1817,
subscriptions were opened in each county, c and in 1834
it was provided that if there was an oversubscription deduction should be made from subscriptions over $500
until all were reduced to that amount. By the general
law of 1855 the majority of the stock of any bank must
be owned by resident citizens of the Stated
In Illinois the charter of the Bank of Illinois at Shawneetown, 1816, the first bank in that State, provided that no
one person could take more than 10 shares on each of the
first ten days of subscription; in a charter of 1818, however, shares could be purchased without limit. In the
charter of the State Bank of Illinois, 1819, purchasers




a

Laws
&Laws
c
Laws
d
Laws

Virginia, 1836-37, ch. 82^ sec. 81.
of Ohio, 7:68.
Indiana, 1817, ch. 41, sec. 3.
Indiana, 1855, ch. 7, sec. 29.
30

State

Banking

Before

Civil

War

were limited to 500 shares at $100 each. The bank commissioners in 1839 called attention to non-resident ownership of the State Bank of Illinois; in a total capital of
$3,645,000 the State held $2,100,000, but of the remainder
in private hands, outsiders controlled all but $63,000.
Missouri, in the charter of the Bank of St. Louis, 1813, provided that three-fourths of the capital should always be
held by citizens either of Missouri or Illinois. In the
charter of the Bank of Missouri, 1817, no restriction of this
character, however, was imposed.
Kentucky bank returns carefully distinguished between
home and non-resident ownership. For example, in 1838
the State owned 10,000 shares in the Northern Bank of
Kentucky; residents, 6,419, and individuals registered at
the Philadelphia and New York agencies, 13,581 shares."
Foreign capital, also, was largely invested in Tennessee
banks. In 1837 the State owned 5,984 shares in the
Union Bank; residents, 3,236; and non-residents, principally in the East, 16,764 shares. In the Bank of Nashville there were 2,917 shares owned in the State, 10,050
on the books of the New York agency, 7,043 at the Philadelphia agency, of which 2,038 were held in England. 6
Alabama, in chartering two banks in 1818, required
that not more than 5 shares be taken at a time, during the
first six days of sale, and that no one be allowed to own
more than 20 shares. 0 In 1820, in the act of incorporation of the Bank of the State of Alabama, the capital was
carefully apportioned among 10 towns. The stock of
< Report of Bank Commissioners, Kentucky, 1838.
*
& Report of Legislative Committee, Tennessee, 1J837.
c Territorial Acts, Alabama, 2d session, November 21, 1818.
24635—10




3

31

National

Monetary

Commission

t h e Planters' Bank in Mississippi, 1830, apportioned t h e
capital to different parts of t h e State, and provided t h a t
no one could subscribe for more t h a n 30 shares on a n y one
day during the first twenty-five days. Later, however,
it appeared t h a t these provisions were not enforced, a n d
t h a t t h e bank, instead of distributing its capital among
t h e senatorial districts, had sought to engross t h e whole
of it for the benefit of t h e management. 0 By its original
charter, foreigners were excluded from ownership, b u t in
1831 this restriction was removed. I n Florida t h e charter
of t h e Bank of Florida, 1828, also reserved certain blocks
of stock for towns in which offices of discount were t o be
established, b u t it was easy t o evade requirements as t o
citizenship within t h e State. Although Florida h a d such a
restriction, a Walter Gregory, of Boston, became a nominal
resident of Pensacola and subscribed for 1,705 shares of
the 2,000 shares of t h e b a n k of t h a t city. Eleven other
residents took 45 shares and 250 shares were reserved for
the Territory. Gregory actually owned only 621 shares,
and the remainder of his subscription was owned in
Boston, New York, and Philadelphia. As a m a t t e r of
fact, a very large p a r t of the capital of Florida b a n k s was
owned in the North. I n 1851 t h e charter of t h e S t a t e
Bank of Florida forbade any one to t a k e more t h a n 100
shares, until books of subscription had been open sixty
days.
States, however, like Louisiana, which founded b a n k s
on loans through the sale of bonds, openly sought for outside capital. I t was regarded as a profitable investment
a




Message of the Governor of Mississippi, 1838.
32

State

Banking

Before

Civil

War

to borrow at 5 or 6 per cent in order to earn dividends
of from 7 to 10 per cent. In Louisiana in 1837, of the
actual bank capital paid in there was due to Europe
on State bonds $13,854,000, and of bank stock there
was held $4,828,000. There was held in the United
States outside of Louisiana $7,965,000, and in Louisiana
$10,123,000.®
I I I . STATE OWNERSHIP OF STOCK.

In nearly all States, even when they did not engage
directly in banking on their own financial responsibility,
provision was made in the charters requiring or permitting
the State to subscribe for a portion of the stock of banks
when organized. There were several reasons for this:
First, the desire that the Government should share in the
large profits which it was expected a bank would earn;
second, that the State through ownership might have
some voice in the management of banks, and thus possibly
check policies which would be antagonistic to public
interest; third, because ownership would place the State
in the light of a favored customer when it desired to
borrow; and fourth, because of the lack of private capital,
which led organizers of banks to welcome financial support and cooperation on the part of the State.
The United States Government subscribed for $2,000,000
or one-fifth of the capital of the first United States Bank.
It was not, however, given the right to appoint any of the
directors. The Federal Government likewise subscribed
for one-fifth of the $35,000,000 of capital of the second




a See also Niles, 48:145.
33

National

Monetary

Commission

bank in 1816, and in this instance the charter provided
for the appointment of five directors by the President.
The subject of state ownership in banks has been made
the topic of a special investigation by Prof. G. S. Callender, and from his study the following paragraphs are
summarized or quoted at length:
All of the older States, with the exception of New
Jersey and two or three of the smaller New England
States, owned more or less bank stock by 1812; Massachusetts had $1,000,000; Pennsylvania, $2,108,000; Maryland, $540,000; and New York, Connecticut, and Delaware
a small amount each. The Northern States ceased to
make further investments of this kind at that time, though
some of them continued to own their stock until a much
later date. Pennsylvania did not dispose of hers until
1843; and the Southern, Southwestern, and Western
States, which established governmental banks, held a
much larger amount for a much longer time. " T h e
Southern States, however, continued to accumulate holdings in bank stock until the civil war; Georgia had
between three and four million dollars in 1839; South
Carolina owned all the stock of the Bank of the State
of South Carolina, which amounted to $1,156,318; and a
large part of Virginia's internal improvement fund, which
amounted to $1,185,000, was made up of bank stock. The
same policy was taken up in the Western States about
1820. In these States, however, the funds invested in
bank stock were not, as in the East, derived from revenue;
but the States sold their bonds to secure the necessary
funds. The first State to do this on a considerable scale




34

State

Banking

Before

Civil

War

was Louisiana in 1824; and between that date and 1840
the Western and Southwestern States, including the
Territory of Florida, issued over $65,000,000 of bonds to
provide banking capital to corporations. Thirteen of
the States invested more or less of their shares of the
surplus revenue of 1837 in banking. Ten of these were
Southern States. * * * The motive which caused
this wide-spread connection of the States with the banks
was not, however, the same in all sections of the country.
In the older States, both North and South, it was not
primarily, if at all, due to the desire to encourage the
growth of banking. Banks needed no such encouragement in those States. On the contrary, they were regarded as very profitable enterprises and the investment
of capital in them as a distinct privilege. * * * In
the newer States, where capital was more scarce, other
motives played a considerable part. The people were
anxious to furnish a circulating medium, and also to provide banking accommodations to the commercial classes,
as well as loans to farmers. But in all, except the cotton
States of the Gulf region, the desire to secure for the benefit of the public the large profits to be earned in the banking business was an important, if not the most important,
motive which led the States to invest in these industries.
Thus, when Indiana and Illinois began their system of
internal improvements, they both increased the capital of
certain banks and authorized the States to subscribe
for the new capital. * * * These States could borrow
money at 5 or 6 per cent interest, and the banks earned
from 7 to 9 per cent dividends. They found it profitable,




35

National

Monetary

Commission

therefore, to provide for the p a y m e n t of a p a r t of t h e
interest on their internal improvement debts b y selling
bonds and investing t h e proceeds in b a n k stock. A
similar motive influenced t h e action of K e n t u c k y and
Tennessee. * * * I n t h e Southwest t h e situation
was different. The demand for capital here and t h e
difficulty of obtaining it were, perhaps, greater t h a n in
any other p a r t of t h e country. * * * The planters
of this region h a d to a t t r a c t capital from t h e N o r t h and
from Europe; and for this purpose t h e credit of individual
planters or of such corporations as could be formed in a
new country was as inadequate as it was in Northern
States to secure funds for canals and railways. Nothing
was left b u t t o m a k e use of public credit t o supply this
deficiency, and every new slave S t a t e in t h e South from
Florida to Arkansas established one or more b a n k s a n d
supplied all or nearly all of their capital by a sale of state
bonds. Many of t h e banks were known as ' p r o p e r t y
b a n k s , ' and were designed especially t o furnish loans t o
planters."®
I n addition to this instructive summary b y Professor
Callender, t h e following details of S t a t e practice m a y be
given. Beginning with the charter of t h e Union B a n k of
Boston in 1793, Massachusetts retained t h e right t o S t a t e
stock in most of t h e banks established, up t o one-third of
their capital. In 1812 t h e S t a t e owned $1,000,000 o u t of
a total of $8,000,000 of b a n k stock, and this right of S t a t e
ownership was continued for m a n y years. As a rule, t h e
a G. S. Callender: The Early Transportation and Banking Enterprises
of the States in Relation to the Growth of Corporations. Quart. Jour.
Econ., 17:111-162.




36

State

Banking

Before

Civil

War

charter gave the State the additional privilege of subscribing for not more than 50 per cent of the capital besides that named in the act of incorporation. This was
confirmed in the general law of 1829. The State was also
given representation on the Board of Directors in proportion to the capital. The State of Rhode Island never subscribed for bank stock, but like some other New England
States, bought such stock for school funds. In Connecticut, the charter of the Hartford Bank, 1792, gave the
State the right to subscribe for 40 out of the 250 shares,
with power to appoint two directors. a
The same option was reserved in New York charters; as,
for example, in that of the Mechanics' Bank in New York
City, 1810, where the State had the privilege of subscribing for one-sixth of the capital. Down to 1833 the State
owned $85,000 of stock in institutions which had become
insolvent. 5 By the charter of the Trenton Banking Company of New Jersey, 1810, the State was authorized to subscribe for $20,000,c and in 1812 one-half the capital in
five banks was reserved for the Stated
Pennsylvania followed a consistent policy of subscribing
to the capital of local banks. In 1793 it subscribed for
one-third of the capital of the Bank of Pennsylvania 6 and
within a few years it obtained as dividends on shares
which it held nearly enough to pay all its expenses.-^
a

Woodward: The Hartford Bank, p. 19; for similar action in 1803, see pp.
82-84.
& Assembly Report, New York, No. 283, April, 1833.
cl^aws of New Jersey., 35 Ass., 1 sess., 249.
^Laws of New Jersey, 36 Ass., 2 sess., p. 5, sec. 3.
«Smith, Laws of Pennsylvania, 3:97.
/Sumner, History of Banking, 144.




37

National

Monetary

Commission

The Philadelphia Bank, 1803, permitted the State to subscribe for $300,000 of stock out of a total of $2,000,000 and
gave it the privilege of subscribing $200,000 more at the
end of four years and a similar amount at the end of eight
years. The State could appoint 6 of the 22 directors.
An act of March 10, 1810, provided that when the funds
in the State Treasury rose above $30,000, the surplus
should be invested in the stock of the Bank of Pennsylvania, and in that year the State owned $1,600,000 of bank
stock. In 1813 the State received $200,000 in dividends,
equivalent to two-fifths of the entire revenue.
State ownership of stock, while it frequently brought a
welcome addition of capital, had its disadvantages; particularly was this so when the State was given a voice in
the appointment of a certain number of directors. In
1829, when complaint was made that the Bank of Pennsylvania did not loan as much as was desired to the State,
it was admitted that State directors introduced a division
of interest; there was a "pertinacious, persevering, and
indiscriminating opposition to almost any prominent
measure which is proposed by directors elected by stockholders." 0
In Maryland, with the exception of the Bank of Maryland, the State reserved the right to subscribe a specified
amount in each bank, and it took advantage of this in the
case of the Bank of Baltimore in 1803. By 1811 it owned
stock in each of the Baltimore banks and in three country
banks, but after that year it ceased to make subscriptions. 5
« Address to Stockholders of the Bank of Pennsylvania, December 22,
1829, p. 17.
& Bryan: History of State Banking in Maryland, p. 30.




38

State

Banking

Before

Civil

War

This policy was adopted to give the banks a public character. In the Mechanics' Bank, for example, 1806, it was
provided that when the State had subscribed $40,000 of
the total capital of $1,000,000, she should be entitled to
two directors, and when $100,000, to three directors.
The directors were to be elected by the General Assembly
by ballot. In Virginia, the charter of the Bank of Virginia, 1804, provided that the State should subscribe
$300,000, or one-fifth of the capital issued, borrowing that
amount from the bank at 4 per cent. In 1837 the
State was authorized to subscribe for one-half the capital
of several new banks then organized.a
In the charters of North Carolina, the State, as a rule,
was allowed to own a certain percentage of stock. In the
Bank of the State, the Government took one-third; in the
Bank of North Carolina, it took $2,000,000 of the $3,500,000
capital, and the charter provided that the State should
have a vote proportional to its stock, whereas individual
stockholders voted in a decreasing scale. Alabama, which
began her banking legislation as a territory, in 1816 authorized the Government, in the first three charters, to
subscribe for one-tenth, two-fifths, and one-fifth of the
stock, respectively. The State, however, did not take advantage of this; but the constitution of 1819 required that
two-fifths of the capital of every bank should be reserved
to the State. In the Planters' Bank of Mississippi, 1830,
the State took two-thirds of the capital, paying in bonds
which the bank was authorized to sell. It was provided
that the Government should appoint seven directors and




a

Laws of Virginia, 1836-37, ch. 83.
39

National

Monetary

Commission

the stockholders six. The Commercial Bank of New Orleans, 1813, which was organized to construct waterworks, as well as to do a banking business, reserved onesixth of its capital to the State.
I n Ohio, t h e charter of t h e Bank of Marietta, 1808, reserved t h e right to the State to subscribe for one-fifth of
t h e capital. I n Kentucky, t h e State subscription t o t h e
capital of the B a n k of Kentucky, 1806, was placed a t onehalf. In Indiana, the charter of the State Bank of Indiana, 1817, gave the State t h e right to subscribe for $375,000
out of a total capital of $i,ooo,ooo. a
IV. SUBSCRIPTIONS BY RELIGIOUS AND EDUCATIONAL
SOCIETIES.

I n a few States, banks were utilized to aid t h e cause of
religion and education. For example, in Connecticut in
1806, it was enacted t h a t subscriptions for an increase in
t h e capital of the Hartford Bank be received at par from
t h e funds of schools and ecclesiastical societies or other
incorporations for charitable purposes. T h e shares t h u s
taken were not transferable, b u t the institutions could
surrender their certificates at any time at par. This
arrangement, originally devised to a t t r a c t capital when
t h e b a n k was seeking to extend its operations, proved t o
be an embarrassment to t h e bank. The societies were
protected in case the stock fell below par, and until t h e
m a x i m u m limit of authorized capital was reached could
obtain stock on much more favorable terms t h a n private
individuals who had to m a k e their purchases a t a pre-




0

Laws, Indiana, 1817, ch. 41, sec. 2.
40

State

Banking

Before

Civil

War

mium.° Efforts to repeal this privilege were unsuccessful
and the plan continued until the establishment of a
national banking system. New York imitated this plan,
and by an act passed in 1813 allowed certain colleges to
subscribe for stock in a number of banks at par. The
charter of the Bank of Florida, 1829, provided that
$100,000 of the maximum capital of $600,000 should be
reserved to be taken by the governor for the benefit of a
seminary of learning. 6 The act of incorporation of the
Merchants' and Planters' Bank of Augusta, Ga., 1827, gave
any religious, charitable, or literary institution, incorporated by the State, the right to deposit not more than
$50,00 and receive State scrip for it at par, and entitled
it to dividends. 0
V. LENGTH OF CHARTER.

With few exceptions, the grant of a banking privilege
under a corporate charter was limited as to time. Corporations were a new form of business organization, and
legislatures were disposed to view them with caution, if
not with jealousy and suspicion.
The charter of the Massachusetts Bank, granted in
1784, the first in that State, was perpetual, but later, in
1812, with the consent of the bank, it was limited to a
definite term of years. Subsequent charters ran for ten
years, and were then extended, so that all would expire
o Woodward, The Hartford Bank, pp. 86-88; Sumner, History of Banking, 1:42.
& For similar subscriptions to stock of Bank of Kentucky, see Duke,
History of the Bank of Kentucky, 16.
c
Sumner, History of Banking, 1: 179.




41

National

Monetary

Commission

in 1812. 1831 was next set as the date of termination of
grants, and then 1851 was established as the beginning
of a new period. Twenty years, indeed, became a favorite
term, no doubt due to the fact that this was the period
provided for in the charters of both the First and Second
United States Banks. In Rhode Island 0 all charters
were unlimited, and, as a rule, no time limit was set in
Connecticut, but in that State the legislature could
amend or repeal at any time. The New Hampshire
Bank obtained a charter for fifty years.
New York, in 1791, adopted the twenty-year period
for the Bank of New York. New Jersey, in 1804,6
followed the example set by New York in regard to time,
and continued it in subsequent charters. 6 In Pennsylvania, the Bank of North America, 1787, received a grant
for fourteen years; the Bank of Pennsylvania, 1793, for
twenty years; the Philadelphia Bank, 1804, for ten years,
later extended to twenty; and the 41 new banks created
in 1814, for eleven years. In issuing the charter of the
Bank of North America in the same year, the legislature
reserved the right to amend the charter at any time, on
condition of refunding a proportionate part of the bonus
which the bank was called upon to pay. d
The Bank of Maryland, 1790, secured a perpetual
charter; in 1795, however, when the Bank of Baltimore
was established, its term was restricted to twenty years.
o Stokes, Chartered Banking in Rhode Island, p. 10.
& Newark Banking and Insurance Company; same period adopted in the
banking law of Jan. 28, 1812; Laws of New Jersey, 36 Ass., 2 sess., pt. 4,
sec. 2.
c Acts, N. J., 53 Ass., p. 65; Acts, 74 Ass., Legis., 147, sec. 16.
d Lewis, The Bank of North America, p. 89.




42

State

Banking

Before

Civil

War

Virginia, in its earliest experience with banks, fixed ten
years as a limit,a but in 1814, the legislature gave to the
Bank of Virginia a charter for fifteen years; and in 1817,
fixed upon seventeen years for two other institutions. In
1851, twenty years became the established rule. 6 In
1845, banks in Florida were limited to twenty years, with
no renewal or extension. Louisiana, in 1811, selected
fifteen years; Kentucky, in 1806, made the same limit.0
Ohio, in the charter of the first bank incorporated, limited
the period to ten.
In Indiana, the State Bank of Indiana, in 1817, was
given eighteen years, and on its extension in 1834, twentyfive years. The general law of 1855 provided that the
certificate of incorporation should specify the period of
existence.d In 1855, twenty years was adopted for the
Bank of the State of Indiana.
VI. SCOPE OF BUSINESS.

As a rule, the scope of business which a bank could
carry on was during the earlier period defined in but
general terms. It was the custom to justify the organization of a bank by the facilities which it could render to
the public and to mercantile interests. For example, the
preamble of the act of incorporation of the First United
States Bank, 1791, justifies the organization of the bank
on the ground that it will be conducive to the successful
conducting of the national finances; will give facility to
a
Bank of Alexandria, 1792; Bank of Richmond, 1792; Bank of Alexandria, 1801, extension.
6 Laws, Va., 1850-51, ch. 58, sec. 11; ch. 59, 61, 62.
c
Bank of Kentucky at Frankfort.
< Laws, Ind., 1855, ch. 7, sec. 18.
*




43

National

Monetary

Commission

the obtaining of loans by the Government in sudden
emergencies, and will be productive of considerable
advantage to trade and industry in general. The reason
for the granting of a charter to the Mechanics' Bank of
Baltimore in 1806 was stated in the charter to be for the
promotion of the mechanical and manufacturing interests
of the State. Many charters designated the scope of
operations which banks could engage in by intrusting to
them " usual banking powers." As banking powers wrere
not clearly defined, there was opportunity for banks to
enlarge their business in almost any direction desired.
Only gradually, as banks sought to enlarge their financial
operations, did charters specify with precision the acts
which they could perform. In 1839 a specific definition of
the powers of banks of New York was to be found in the
charters of only 66 out of 97 banks. The other 31 charters were granted previously to 1825 and either conferred
bank powers in general terms or limited the operations of
these institutions to the ordinary business of banking.
This change is evidence of the growing caution of the
legislature. It was customary to restrict operations to
dealings in notes, bills of exchange, and bullion. Transactions in goods or commodities were generally excluded
unless they were received for loans which were not
redeemed at maturity. 0
The holding of real estate, except what was necessary
for the conduct of business or obtained in satisfaction of
debts, was generally prohibited. The Portland Bank of
Maine, 1809, was permitted to hold any amount of land in
a Sen. Doc. New York, No. 87, April 11, 1839.




44

State

Banking

Before

Civil

Pf^ar

payment of debts, provided t h a t not more t h a n one-third
of the capital thus invested was in "fee simple."® The
Commonwealth Bank of Boston, 1824, could invest
$50,000, or one-tenth of its capital, in lands and real
estate, and by t h e general banking law of Massachusetts
in 1829, banks could hold real estate not exceeding 12
per cent of t h e capital. In Pennsylvania the amount
which could be expended for a banking house was also
expressly limited. b
There was less agreement in regard to dealings in public
stocks. Some feared t h a t banks might speculate in such
securities, lower t h e price of government stock when
loans were sought, and raise the price when purchases
were required for sinking funds. The charter of the
First United States Bank permitted the sale, b u t not the
purchase, of government stock. The articles of association
of t h e Bank of New York, 1784, forbade the bank to
negotiate any foreign bill of exchange or to advance a
loan to any foreign power. c The charter of 1791 omitted
t h e restriction in regard to foreign bills, b u t forbade the
bank from dealing in the stock of any S t a t e or of the
United States. d By special act in 1797 the bank, however, was authorized to purchase certain United States
stock held b y t h e State. 6 The Hartford Bank, in its
early charter of 1792, was permitted to invest in United
States stock without limitation./ By act of Congress,
a

Stackpole, Sound Currency, 7:58.
&See act of March 25, 1824, where the sum for a Philadelphia bank was
set at $50,000 and for one outside at $30,000.
c Domett, Bank of New York, p. 13.
^Ibid., p. 54.
e
Ibid., pp. 132-133.
/ Woodward, The Hartford Bank, p. 19.




45

National

Monetary

Commission

1817, banks in the District of Columbia could not deal
in stocks of the Federal Government or of the several
States. As late as 1862 the bank commissioners of
Massachusetts thought that it was clearly against the
law and public policy for banks to buy and sell without
restriction public securities of remoter States or of
municipal and corporate bodies, as this led them into
dangerous paths of speculation.
As indicated above, there was quite a difference in the
variety of powers granted to various banks in New York.
Not until 1825 did a charter contain the restrictive
clause: " B u t the said company shall have and possess no
other powers whatever, except such as are expressly
granted by this act." And at this date the Commercial
Bank of Albany was prohibited from receiving the transfer or pledge, not only of its own stock, but of the stock
of any other incorporated company. In 1839 a legislative committee made an analysis of the several charters
with the following results: Ninety-two banks out of 97
were prohibited from purchasing, holding, or conveying
any real estate, except such as was required for the convenient transaction of business, or such as was mortgaged
to them by way of security for loans previously contracted, or conveyed to them in satisfaction of debts, etc.;
4 of the other 5 banks were originally incorporated for
other than banking purposes; 88 of the 97 banks were
prohibited from dealing or trading directly or indirectly,
in buying or selling any merchandise, or in buying or
selling any United States or state stock except in selling
the same when pledged by way of security. Of the remain-




State

Banking

Before

Civil

War

ing 8, 3 were prohibited from dealing in United States and
New York stocks, 2 from dealing in United States stock,
3 were authorized to hold stocks, and 1 was unrestricted.
The three institutions authorized to hold stocks were
incorporated for other purposes than banking. In four
instances, during the ten years beginning with 1812, the
prohibition to deal in stocks was superseded for special
purposes, so as to permit subscription for national and
state loans and for aid in behalf of canals. For eighteen
years, however, the authority to subscribe for state
stocks was not renewed, except in 1837 to permit the
banks to subscribe for certain canal loans, the object of
which was to save the banks from suspension of specie
payments. a
The charter of the Bank of Pennsylvania, 1793, forbade
the purchase of any public stock, save in 1802, when an
exception was made in favor of United States securities.
In the charter of the Farmers and Mechanics' Bank of
Philadelphia, 1809, exception was also made in favor of
the stock of companies incorporated in the State for the
improvement of roads or internal navigation. The act
of 1814 gave to the new banks the right to hold stock of
other banks, but this, together with the holdings of other
public securities, could not exceed 20 per cent of the total
stock. This provision was repeated in the banking act of
March 25, 1824.6
Virginia, in 1812, permitted the Farmers' Bank of
Virginia to purchase its own stock up to 1,500 shares, on
condition that it sell the same as soon as possible at par.
« Sen. D o c , New York, No. 87, April 11, 1839.
&
Article xiv.
24635—10




4

47

National

Monetary

Commission

In a charter of 1817 a bank was forbidden to purchase
any negotiable securities except its own stock; a but in
1837 a general act prohibited the purchase of a bank's
own stock under penalty of forfeiture. Florida, in 1828,
forbade the Bank of Florida to purchase any public stock
except its own, which was to be sold again as soon as convenient. For engaging in the sale of merchandise there
was a penalty of treble the value of the goods.
Some of the southern banks which were organized
expressly to aid the agricultural interests were naturally
given powers as to investment and loans which were
denied to commercial banks. The Union Bank of Louisiana, 1812, was the model of several institutions which
were established to make loans to owners of slaves and
real estate. The Planters' Bank in Mississippi, 1830, like
most of the banks in that State could hold lands, rents,
tenements, goods, chattels, effects, etc., up to $6,000,000,
or double the capital. Though not intended, this grant
was later, in the speculations of 1837, construed to justify
extensive operations in cotton, including even the purchase of the stapled Georgia found it necessary in 1840
to forbid explicitly banks from dealing in cotton or other
commodity as security for loans. In 1855 the general
banking law of Indiana forbade loans on real estate. 0
Frequently banks were organized to further the fortunes of an internal-improvement company, and were
authorized to invest in some particular stock. For example, Rhode Island in 1831 chartered the Blackstone
a Laws of Virginia, ch. 39, sec. 11.
& Message of the Governor of Mississippi, 1839.
c Laws, Ind., 1855, ch. 7, sec. 20.




48

State

Banking

Before

Civil

VFar

Canal Bank and empowered it to invest $150,000 in the
stock of the canal company.a In 1832 the Quinebaug
Bank of Connecticut was required to subscribe $100,000,
or one-fifth of its capital, to the stock of the Boston,
Norwich and New London Railroad Company. The
Commercial Bank of New Jersey, 1822, was authorized to
set apart a portion of its capital for carrying on seal
fisheries.5 The extension of charters in Maryland in 1813,
was conditioned on investments in the stock of a turnpike company, and later this method of securing financial
support was frequently resorted to. c Virginia, in 1833,
authorized two of her banks to subscribe for stock in an
internal-improvement company. <
*
During the first part of the last century banking
privileges were frequently granted to transportation
companies. This has been described by Cleveland
and Powell/ from whose study the following condensed
account is taken:
"As early as 1814 Maryland chartered the Susquehanna
Bank and Bridge Company, with power to employ half
its funds in the banking business. In an amendment to
the charter of the Delaware and Hudson Canal granted
by New York in 1824 the company was given the right
to exercise banking powers during a period of twenty
years. New Jersey the same year granted a charter to
the 'Morris Canal and Banking Company' which gave
a Stokes, Chartered Banking in Rhode Island, p. 37.
& Repealed in 1825.
c Bryan, History of State Banking in Maryland, pp. 45-47.
^Laws, Va., 1832-33, ch. 89; see also laws 1850-51, ch. 89, sec. 4.
« Railroad Promotion and Capitalization, pp. 167-173.




49

National

Monetary

Commission

the enjoyment of banking functions through a term of
thirty-one years. Maine chartered the * Canal Bank' in
1825, with authority to invest one-fourth of its paid subscriptions in the stock of the canal company. Connecticut in 1832 chartered the Quinebaug Bank as an adjunct
to the Boston, Norwich and New London Railroad.
" At a single session of the territorial legislature in 1835
Michigan conferred banking powers upon four railroad
companies. Stockholders of the River Raisin and Grand
River Railroad were constituted a corporation under the
title ' Bank of Tecumseh,' with a capital stock of $100,000,
or two-thirds that of the railroad. This bank was to be
managed by the directors of the railroad, who were to
convey to it the whole of the railroad stock, and to give
security for the redemption of notes and debts before
banking operations could be commenced. The Ohio Railroad charter of 1835 contained a provision ' that the funds
of said company shall be paid out in orders drawn on the
treasurer, in such manner as shall be pointed out by the
by-laws of the company; and that all such orders for the
payment of money so drawn shall, when presented to the
treasurer, be by him paid and redeemed.' Without collecting a dollar from the stockholders, and with an empty
treasury, the company, under authority of this clause,
began banking operations, and successfully maintained
a large circulation. Laborers and contractors were paid
in notes, and from the proceeds of the bonds of the
State received as a subsidy some of these notes were
redeemed. When the company suspended there had been
no work of permanent character done on the road, and




50

State

Banking

Before

Civil

W^ar

there were outstanding several hundred thousand dollars
in worthless currency.
"The first railroad corporation authorized in Texas was
the 'Texas Railroad, Navigation and Banking Company/ which was chartered by the first congress of the
republic to connect by railroad and canal the waters of
the Sabine and the Rio Grande, but the charter was forfeited. Both Louisiana and Mississippi were liberal in
their grants of the banking power, not only to railroads,
but to industrial corporations as well. Louisiana in 1834
conferred banking powers upon the Clinton and Port
Hudson Railroad, and provided for a note issue which
might reach double the amount of its banking capital.
The following year this State authorized the New Orleans
and Carrollton Railroad to establish 'five offices of discount and deposit' in different towns, and chartered a
new corporation, the ' Atchafalaya Railroad and Banking
Company,' with power to open a bank in the parish of
West Feliciana. In 1836 the Pontchartrain Railroad
received a grant of the banking power. In Mississippi we
have this picture of the results of using banks as agencies
of railroad financing: 'From December 20, 1831, when
banking privileges were conferred on the West Feliciana
and Woodville Railroad, until the crash came in 1837,
Mississippi was gridironed with imaginary railroads and
beridden with railroad banks. In these enterprises there
was more watered stock sold than there were cross-ties
laid; reckless speculation brooked nothing as prosaic as
the actual construction of railroads, on the successful




51

National

Monetary

Commission

operations of which it was supposed fabulous dividends
would be declared/
"When the lines from Savannah to Macon and from
Augusta to Athens were first projected, capital requirements were so great that appeals for state aid were made
by both the Central and the Georgia railroads. Failing
to receive the desired aid, they applied for banking privileges, which were granted. The names were therefore
changed to the 'Central Railroad and Banking Company/
and the 'Georgia Railroad and Banking Company.' Onehalf of the capital of these companies could now be
devoted to banking, and notes could be issued to three
times the banking capital.
1
' As an adjunct to the Louisville, Cincinnati and Charleston Railroad by which it was planned to connect Charleston with the Ohio, the 'South Western Railroad Bank 7
was chartered in South Carolina, North Carolina, and Tennessee in 1836 and 1837. Kentucky granted a charter to
the railroad, but in express terms prohibited banking, and
the bill to incorporate the South Western Railroad Bank
in that State failed by six votes. This bank was capitalized at $6,000,000. A unique feature of the enterprise
was the issue of the shares in the bank inseparably connected with the shares of the railroad, so that everyone
who held $100 of stock in the railroad was required to
subscribe $50 toward the capital of the bank. Forfeiture
of either share therefore worked forfeiture of both.
The bank went into operation in 1839, and to its stock
South Carolina subscribed $500,000."




52

State

Banking

Before

Civil

War

VII. VOIyUME OF NOTES.

The restrictions laid down by early charters in regard
to the amount of notes which could be issued were exceedingly vague and lax, and little protection was given to the
currency. Many of the acts of incorporation did not make
specific requirements, but covered the point indirectly
through limitations in the amount of indebtedness, including deposits. The charter of the First United States
Bank provided that " the total amount of the debts which
the said corporation shall at any time owe, whether by
bond, bill, note, or other contract, shall not exceed the
sum of $10,000,000 (i. e., the capital) over and above the
moneys actually deposited in the bank for safe-keeping.''
In the charter of the Bank of England, which served in
many respects as a model for the First Bank, indebtedness
could not exceed the capital, irrespective of deposits. In
the English joint-stock banks there was no limitation during the earlier part of the nineteenth century. a
The States were generous in their grants of indebtedness. At the outset this limitation was generally set at
two or three times the capital. This amounted to practically no limitation at all, at least upon banks with a
large capital, and admitted an issue of notes out of all
proportion to the specie fund. Naturally, it afforded an
opportunity for a wide range and violent fluctuations
in the amount of outstanding currency, depending upon
applications for discount. Twice the capital actually
paid in, exclusive of deposits, was the rule followed by
< Gilbart, History of Banking in America, p. 73.
*




53

National

Monetary

Commission

Massachusetts banks down to 1811, when for many institutions the note issue was reduced to 50 per cent in excess
of the capital, exclusive of deposits. a Between 1825 and
1828 nearly 30 banks were limited to 100 percent, and in
the latter, year the general rule was made 125 per cent.
This continued until 1858, when circulation was restricted
to the amount of capital. Connecticut, in the charter of
the Hartford Bank, 1792, adopted a more conservative
ratio of 50 per cent of the capital and deposits combined,
and this proportion was continued in subsequent charters. 6
Circulation based on deposits obviously opened the way
for abuses. In 1837 the bank commissioners reported
that the Stamford Bank had created fictitious deposits in
order to increase its note issues, and later, in' 1853, they
recommended that this rule of measuring circulation be
abandoned; only three banks in the State at that time
resorted to this method, but the opportunity should be
denied. One bank was cited where the circulation had
been carried to $300,000; recourse was had to sight checks
drawn on individuals in New York by the president of
the bank and deposited in the hands of the cashier, payable
to his order; none of these, however, had ever been out
of the bank or presented for acceptance; deposit was indebtedness and circulation was indebtedness; to maintain
a circulation on deposits was to build up one species of
indebtedness on the basis of another. In 1855 circulation
was restricted to 125 per cent of the capital and in 1858
to 75 per cent.
o For statistics see Root in Sound Currency, 2:4.
& Woodward, The Hartford Bank, p. 19.




54

State

Banking

Before

Civil

War

In Rhode Island the charter of the Providence Bank,
1791, placed no limitation of any sort upon circulation,
and in harmony with the principles of freedom which
governed legislation in that State for many years, several
subsequent charters were silent on this point. In 1805
indebtedness was limited to capital plus the deposits.a
In 1820 issues were limited to the paid-in capital, and in
1837 a more elaborate set of percentages on capital was
adopted as follows:
Banks with a capital of—
$50,000
_

Per cent.
75

$50,000 to $120,000
$120,000 to $200,000
$200,000 to $300,000
$300,000 to $400,000
$400,000 to $500,000

65
40
30
25
20

In 1859 the limit was made 65 per cent for all banks.
In New Hampshire circulation was based on capital,
and in 1825 in the charter of the Commercial Bank of
Portsmouth the issue could not exceed the capital under
penalty of $10,000. In 1838 a law was passed providing
that loans made on a pledge of bank stock should be
construed as a diminution of capital in determining the
volume of notes. In Vermont, after 1840, circulation
was limited to double the capital.
Maine, in 1831, made 150 per cent of the capital the
rule of maximum issue, but in 1838 classified the banks
according to capital and reduced circulation to ratios
ranging from 6 6 ^ to 100 per cent. In 1846 the circulation
in excess of 50 per cent of the capital was limited to three
times the specie held, and the total circulation to capital
a Stokes, Chartered Banking in Rhode Island, p. 21.




55

National

Monetary

Commission

plus the specie. As a penalty for overissue, a bank
forfeited 10 per cent.
In New York the Bank of New York, 1791, was given
a more generous privilege and indebtedness ran to three
times the capital, exclusive of deposits. In 1829, under
the safety fund act, this proportion was reduced to twice
the capital. In 1834 a legislative committee suggested
the advisability of still further restricting the issues to
not exceeding capital; and in that year several charters
were granted in which the limitation was fixed at one
and a half times the capital. Under the law authorizing
suspension of specie payments in 1837, circulation was
restricted so that the volume of notes possible under
previous laws was reduced from $69,000,000 to $30,000,000.
In the same year, by the new banking act, provision was
made for note issues according to capital, as follows:
Capital.

Notes.

$100,000
120,000
150,000
200,000
250,000

$150,000
160,000
175,000
200,000
225,000
250,000
3oo,000

3oo,ooo
400,000
500,000

350,000

600,000
700,000

450,000
500,000

1,000,000
1,490,000

800,000
1,000,000

2,000,000

1,200,000

New Jersey as well as Pennsylvania, in the general
banking act of 1824, established twice the capital as a
ratio, and this proportion was to be found also in Mary-




56

State

Banking

Before

Civil

War

land. 0 For one year, 1818-19, New Jersey tried a stricter
rule by limiting note issues to double the specie and notes
of banks on hand which commanded specie.5 Maryland,
in 1837, enacted that after resumption circulation should
be limited to paid-in capital. 0
Virginia, in the charter of the Bank of Alexandria, 1792,
allowed four times the capital;d in a charter of 1812 this
was reduced to three, and in 1817 to double. This latter
ratio continued in that State and was reenacted in a general law of March 22, 1837. The latter act also limited
the volume of notes not to exceed five times the specie.e
The prevailing ratio in the Southern States was three
times./ Georgia, however, in the charter of the Central
Bank, 1828, proportioned the volume to the amount of
specie, notes of other banks in the State, and notes of the
United States Bank which were held in its possession.
In a bank convention held in 1837 the banks agreed voluntarily to limit their circulation to paid-in capital and
specie in hand. In 1840 an act was passed in Mississippi
(February 21), providing that no bank should issue more
than three times the specie in its vaults. In Louisiana
the banks of New Orleans in a convention of 1838 resolved
by agreement that the circulation of each bank should be
based on the amount of capital paid in and the accumua Bryan, History of State Banking in Maryland, p. 32.
& Priv. Acts, N. J., 42 Ass., 1 sess., p. 60; Priv. Acts, 43 Ass., 2 sess.,
p. 16.
c Acts, Md., 1837, ch. 315.
d Laws, 1792, ch. 76, sec. 13.
e Laws, 1836-37, ch. 82, sec. 2.
/ Sumner, History of Banking, 1145.




57

National

Monetary

Commission

lated profits. The rates assigned to each bank varied
from 25 to 50 per cent of this amount.
Ohio did not make any restriction upon note issues
until 1812, when three times was the ratio adopted. 0 In
1839 circulation was limited to three times the specie.
Michigan, in 1837, adopted a scale like that of Rhode
Island, basing circulation upon capital according to the
following ratios:
Capital.

Circulation.

$20,000
50,000

$3o,ooo
75,000

65,000
100,000
150,000
200,000

80,000
i3o,000
175,000
200,000

and for banks with capital above this amount, circulation
to be the same as capital. Kentucky in 1858 limited circulation to paid-in.capital. Missouri, in the charter of the
Bank of St. Louis, 1813, also limited indebtedness to twice
the capital stock.
There was a marked variation in the exercise of the note
issue function between banks in the country and those in
cities. The latter had larger deposits and capital in order
to make loans, and thus made less use of notes. This
difference between banks in thinly settled districts and
districts covered with towns and cities is seen in a comparison prepared by Stokes between the three northern
and the three southern States of New England: 6
a Charter of the Bank of Muskingum.
& Stokes, Chartered Banking in Rhode Island, p. 23.




58

State

Banking

Before

Civil

War

[Thousands omitted.]
Year.

Capital.

1820

$1,600

i83i
1834

2, 000

Maine
New Hampshire
Vermont

920

Circulation.
$1,400
1, 100
1, 460

Average

Percentage.
88
55
159
88

Massachusetts
Rhode Island
Connecticut

1820

10,600
3 , 200

2, 600

1821

1834

6,800

2, 400

25

675

Average

35
3a

Maine
New Hampshire

1855
1855
1855

7, 3oo
4, 400
3, 600

5, 100
3 , 600
3 , 700

Average _ _ 1

70
82
io3
80

Massachusetts
Rhode Island
Connecticut

i8S5
185S
1855

Average
j

58, 600
18,700
17,100

23,IOO

39

5. 400
6,800

29

37

In 1834, the banks in Maine, New Hampshire, Connecticut, and Massachusetts, outside of Boston, had a
circulation of about one-half of their capital, while that of
the Boston banks was about one-sixth. In the analysis
of these figures it is to be noted that the restrictive laws
relating to circulation, while different in point of time,
were very similar; that the Suffolk system of redemption
extended over the entire section, and that the methods
of paying in capital through stock notes did not vary
greatly.
The same difference between city and country banks
in the exercise of note issues is to be observed in other




59

National

Monetary

Commission

sections. In New York, for example, in 1820, the Washington and Warren Company, a country bank which had
a paid-in capital of $176,000 and only $201 in deposits
had $186,000 in notes. The Bank of Geneva, with $100,000
capital and deposits of $21,500, had $187,600 in notes. a
In 1829, eleven city banks with a paid-in capital of $11,252,000 had a circulation of $3,529,000, while eleven
country banks with a capital of $2,906,000 put out
$3,138,000 in notes. In Wisconsin, to use a western illustration, fourteen country banks at a later date had note
issues equal to 90 per cent of their capital, as compared
with the Milwaukee banks, which had a little over 50 per
cent of their capital in notes.
During the earlier years of the century, there was a
common notion that the volume of currency should bear
a certain proportion to the annual product of industry;
as to the exact ratio, however, there were wide-spread
differences of opinion, writers varying from one-fifth to
one-thirtieth. In a report made by Mr. Benjamin Hazard,
chairman of a legislative committee in Rhode Island, 1826,
the average of these extremes, or one-eighteenth, was
accepted as a possible criterion. It was then estimated
that the annual product was probably not over 7 per cent
of the gross national capital. As ratable property in
Rhode Island amounted to $32,640,000, 7 per cent of this
would be $2,284,000. This was about one-fifth of the
authorized banking capital, and it was consequently
concluded that the note circulation of that State, instead
of one-eighteenth, amounted to nearly two-thirds of the
< Report of Committee on Currency, Assembly Journal, 1820, pp. 468-469.
*




60

State

Banking

Before

Civil

War

annual product, a volume far in excess of what was
desirable.
This same idea was accepted in a report of a select committee of the Maryland legislature, to which was referred,
in 1830, memorials of a large number of citizens praying
for the establishment of a state bank.® It was argued
that the welfare of the people depended on maintaining
a proper equilibrium between the total amount of property
and the medium by which that property was exchanged.
Whenever the volume of money was suffered to fall below
its due proportion to the whole property of the people
so in the same degree was their industry checked, their
enterprise abated, their public works embarrassed, and
their prosperity withered.6
The following table shows the actual circulation compared with circulation permitted in the New England
States:
[Sound Currency, Vol. 8:215; No. 4, December, 1901.]

1840.
Banks.

State.
Massachusetts
Rhode Island
Connecticut
Maine
New Hampshire
Vermont
Total

us

Actual
circulation.

Circulation
permitted.

17

$33,750,000
9,880,500
8,806,204
4, 6 7 1 , 500
2 , 8 3 7 , 508
1,196,770

$9, 112,882
1,719,23o
2,325,589
I , 224, 658
I,088,750
1 , 0 9 9 , 784

$ 4 2 , 187, 000
5,000,000
i3,209,000
3,500,000
2,837,000
3,590,000

3oi

61,142,482

16,570,893

70,323,000

62
3i
49
27

__

Capital.

«Teackle's Report.
&See also veto message of governor of Mississippi, Feb. 15, 1838.




61

National

Monetary

Commission

1850.
State.

Massachusetts
Rhode Island
Connecticut
Maine
New Hampshire
Vermont
Total

Banks.

126
63
37
32
22

27
3o7

Capital.

Actual
circulation.

$36,925,050 $17,005,826
11,716,337
2,553.865
9, 152, 801
4,888,029
3,248,000
2, 654, 208
2,2o3,950
if 7 5 i , 096
2, 197, 240
2, 856, 027
65,443,378

Circulation
permitted.

$46,156,000
i 3 , 729, 000
3,050,000
4,395,000

3i,709,051

1860.
Massachusetts
Rhode Island
Connecticut

178
91
74
68

New Hampshire
Vermont
Total.

5i
44
506

$ 6 6 , 4 8 2 , 0 5 0 $ 2 5 , 0 1 2 , 745
2 0 , 8 6 5 , 569
3,588,295
21,606,997
7, 702, 436
7,506,890
4,149,7i8
4,981,000
3,332,010
3,872,642
3, 784,673
125,315,148

$83,102,000
i3,562,000
16,205,000
5, 7 6 5 , 0 0 0
4, 9 3 1 , 000
7, 7 4 5 , o o o

47,539,877

Notwithstanding the liberal provisions which charters
granted for circulation, banks in the Northern States,
either through policy or compulsion, rarely issued the
legal maximum. Restriction by statute was operative
upon the smaller banks, but was of little need in controlling the larger institutions which had the legal capacity
to supply by far the greater part of the circulating medium. These latter were effectually restricted by the
rapidity with which the notes were turned back for redemption. For example, in Rhode Island note circulation never exceeded one-third, and on an average not more
than one-fifth of the nominal capital stock, which was far
below what the law permitted.




62

State

Banking

Before

Civil

War

In New York, in 1832, the banks could issue nearly
four times the amount which they actually put in circulation. 0 According to Gallatin, writing in 1831, the average amount of notes issued by all the State banks in the
country did not exceed 81 per cent of the capital.
Sudden or wide fluctuations in the volume of currency
were generally regarded with concern, for the relation of
note issue to the elastic demands of commerce and industry was but little recognized. Note issues were rather
regarded as a medium of exchange, convenient and cheap,
and therefore serviceable to the public; notes economized
capital and facilitated the operations of business, and any
marked change in the volume was held responsible for
changes in prices. It was held, therefore, that the control of ^the currency ought never to be intrusted to individuals who could change the volume according to their
own private interests; as well might individuals claim
to be chartered for military purposes or for laying out
turnpike roads.6
VIII. DENOMINATIONS OF NOTES.

Limitations or restrictions directed against the issue
of bank notes of small denominations were enacted in
some of the States at an early date. Although a consistent
policy was not adhered to, the agitation for the suppression of such notes continued to spread and occupied no
small part in banking controversies as long as state bank
issues prevailed. Arguments for their issue were obvious.
a

Report of Bank Commissioners, New York, 1832.
& Report of Benjamin Hazard's Committee, Rhode Island, 1826.

24635—10




5

63

National

Monetary

Commission

There was scarcity of specie, and it was urged that there
was frequent need for the remission of sums under $5.
Moreover much of the country produce was purchased
by dealers who traveled through the country and paid out
small sums, and for these, it would be inconvenient to
carry a large bulk of specie. Banks also found it for
their interest to circulate the smaller notes which wTere
less likely to come back for redemption. The disadvantages were not so apparent, but objection to their issue
was found in the ease with which notes could be counterfeited, and the consequent hardship if circulated among the
more ignorant and poorer classes. Again, they gave speculative banks a greater opportunity to inflate their issues.
The history of small - note issues conveniently divides
itself into two periods before and after 1830.
The charter of the Massachusetts Bank, 1784, contained no express power to issue bills and consequently is
silent as to the denominations of notes, but the validity
of its notes was recognized by subsequent statutes. The
issues of the Union Bank in 1792 were restricted to notes
of $5 and upward; those of the Nantucket and Merrimac banks, next incorporated in 1795, to bills of $2
and upward; and those of the Rutland and Essex banks,
incorporated in 1799, to bills of $5 and upward. In
the same year the issue of bills under $5 was prohibited
to all banks, except the Nantucket. In 1802 the circulation of bills below that denomination, issued in other
States, was prohibited under a penalty; this resulted
in a scarcity of small change for currency, and in 1805
permission was given to her own banks to issue notes




64

State

Banking

Before

Civil

War

for $i, $2, and $3 up to 5 per cent of the capital.® This
amount was increased in 1809 to 15 per cent. 6 In 1812
it was reduced to 10 per cent, c and in 1818 increased to
25 per cent, where it remained for many years. d
In the other New England States there was less agitation, and in New York small notes were tolerated almost
without dissent. New Jersey in 1812 attempted to
establish a limit of $3, but in the following year fell back
to $1, and in 1815 authorized her banks to issue notes
for even less than $1, pending the war with Great Britain.
In 1830 the circulation of foreign bank notes under $5,
except those of New York City, were prohibited. This
law, however, became a dead letter. 6
In Pennsylvania there was more decided opposition,
and restrictions were imposed in 1817. There were,
however, evasions of the law and many small notes were
introduced from ot^er States. Public sentiment was
averse to stringent measures, and in 1820 defeated a bill
prohibiting the circulation of foreign notes./ Finally, in
1828, circulation of small notes of other States was prohibited. In Maryland specific prohibitions were inserted
in the charters of the Bank of Baltimore, 1795, and the
Mechanics' Bank, 1806, against the issue of notes under
$5; and in 1812 the restrictions were made absolute for
all banks seeking a renewal of charter.
a

Acts, Mass., 1805, ch. 24; Tenth Report of Bank Commissioners, i860,
p. 132.
& Acts, Mass., 1809, ch. 99.
cActs, Mass., 1812, ch. 56.
^Acts, Mass., 1818, ch. 76; see also Root, Sound Currency, 2:4.
«Niles, 47:1 76.
^Raguet, Currency and Banking, p. 136.




65

National

Monetary

Commission

The suspension of specie payments in 1814, in this State
as in other sections, delayed the progress which was being
made toward the suppression of small notes. With the
disappearance of specie, notes were issued in some States
as low as 25 cents, some with the sanction of the law, and
others without it. Notes were also issued by corporations,
public officers, and individuals as low as 5 cents. It
was difficult consequently, when specie payments were
renewed, to regain the ground lost during the period of
vitiated currency. Maryland, therefore, in 1814 was
forced to make some temporary concessions, but when
the war was over, endeavored to rid herself of these small
notes. In 1820 the presidents of the Baltimore banks
resolved that they would not issue any notes less than $5.°
In 1821 the legislature, noting that the existing law was
violated, imposed a penalty for each offense of issue by a
bank, including a fine of $5 to be paid by an individual
for passing the note of any bank not chartered by Maryland. 6 Such restrictions were not altogether welcomed
even by bank critics. Niles, who frequently referred to
small notes as "filthy dowlass," thought that public convenience would be served if one of the banks was authorized to issue $3 notes, 0 and in 1833, noting that bills under
$5 did not circulate in Maryland, remarks that it was
necessary to carry about silver dollars and smaller coin,
an inconvenience which hardly repaid for the security
against fraudulent issues of $1 and $2 notes. d Notwitho Niles,
&Laws,
c Niles,
d Niles,




19:17.
Md., session of 1820, ch. 150; Niles, 19:417.
29:177; November 19, 1825.
45-H566

State

Banking-

Before

Civil

War

standing this restrictive legislation, some of the country
banks issued, contrary to law, small notes on the ground
of necessity. Some, indeed, claimed the right as derived
from their charters, which could not be impaired by subsequent legislation.a
The legislature of Virginia in the charter of the Bank of
Alexandria, 1792, forbade the issue of notes of less than
$ 5 ; b and the same restriction is to be found in the charter of the Bank of Virginia, 1804. In 1815 some of the
banks were authorized to issue notes for $1, $2, and $3
until six months after the termination of the war with
Great Britain. 6 In 1816 it was enacted that no corporation or individual should issue a note or check for less
than $1, and the holder of such a note might recover $5
against the maker. d Virginia, like Maryland, suffered
from small notes put into circulation by banks in the
District of Columbia; although under the jurisdiction of
Congress they were among the worst offenders and found
a large field for profitable operations in spreading their
circulation over neighboring States. It was consequently proposed that the Government prohibit the
receipt of notes of banks issuing notes of less than $5.
Nilesr however, who could not be regarded in any way
as a bank sympathizer, questioned the expediency of
legislating upon this subject; "for public opinion,'' he
wrote, "was whipping the small notes out of circulation
a Report of Bank Commissioners, Maryland, 1837.
&Ivaws, Va., ch. 76, sec. 14.
c Acts, Va., 1815, ch. 25.
^ L a w s cf Virginia, 1816, ch. 23, sec. 10.




67

National

Monetary

Commission

as rapidly as public convenience would admit."® In
1820 Virginia enacted more stringent legislation, making
the issue of notes or checks intended to be circulated as
money for an amount less than $5 a misdemeanor and
punishable by fine or imprisonment. Penalties were also
enacted against bringing such currency into the State
with intent to circulate. b In 1837 the prohibition was extended to notes of less than $10, and after 1840 to notes
of less than $20. c South Carolina, in 1812, forbade the
Bank of the State of South Carolina to issue any note
under $1, and in the following year it forbade all other
banks to issue notes under $5, thus giving the Bank of the
State of South Carolina the monopoly of the smaller
notes. Ohio in 1819, Florida in 1828, and Georgia in 1830
forbade the issue of notes under $1.
By 1830 there were then only three States—Pennsylvania, Maryland, and Virginia—in which notes under $5
did not circulate. In North Carolina and South Carolina,
and in a few other sections, there were notes as low
as $0.25, $0.12^, and $.o6X- d The total amount of notes
under $5 in use throughout the country at this period
was estimated at about $7,000,000, and of $5 notes at
$10,000,000.e The agitation still continued, being reinforced by the hard-money policy of Jackson and those
who desired to exclude all forms of paper money. In
1835 the Treasury Department began to exert pressure
to reduce the circulation of bills of small denominations.
aNiles, 19:298; Jan. 6, 1820.
& Laws, Va., 1820, ch. 8, sec. 1-4; Niles, 19:65.
cLaws, Va., 1836-37, ch. 82, sec. 1.
^Gouge, History of Paper Money and Banking in the U. S., pt. I, p. 56.
« White's Report, Feb., 1831




68

State

Banking

Before

Civil

War

A circular was issued (April 6) stating that the Treasury
would exercise its discretionary power over the receipt
of public money and that ultimately it intended to exclude
all notes of a denomination of less than $10. It, however, announced that it intended to make arrangements
as soon as possible to discontinue the use of any bank as
a fiscal agent which continued to issue notes less than $5.°
Gallatin, although a friend of banks, advised the elimination of all notes under $10.
Connecticut, in 1835, forbade the issue of notes of
less than $2, and of less than $3 after January 1, 1836; in
the next year the minimum was fixed at $5. Her bank
commissioners, however, in 1837, complained that $1 and
$2 bills of Massachusetts and Rhode Island banks came
in and in some sections were abundant. Such bills, in
particular, were loaned by banks of Rhode Island and
used by manufacturers for the payment of laborers; and
as Connecticut banks would not receive them and prosecuting officers were averse to taking action, they remained
in circulation. 6 Maine, also, in 1835, passed an act prohibiting the circulation of all bills under $5; no bank was
permitted to issue any bills of $1, and after January 1,
1836, no bills of $2; and after June 1, 1836, no bills of $3;
and for the circulation of such bills there was a penalty
of double the value of the bills to be forfeited. Two
years later the commissioners reported that the law
had been obeyed by the banks, but private individuals
had encouraged the use of these illegal notes.
a See also circular of Feb. 22, 1836.
& Report of Bank Commissioners, Conn., 1837.




69

National

Monetary

Commission

The decisive action on the part of Pennsylvania in 1828
gave rise to a movement for a suppression in New York,
and in 1835 (April 20) the legislature prohibited the circulation within that State of the notes of other States of a
less denomination than $5, the penalty being the forfeiture
of the "nominal amount of such bank note, bill, or promissory note, with costs of suits;" and on March 31, 1835,
an act was passed making it unlawful "for any person or
corporation to pay, give, or offer in payment, or in any
way circulate or attempt to circulate as money within this
State, of a less denomination than $5, or of a denomination
between $5 and $10;" the penalty for violation of the act
being four times the nominal value of such bill, note, or
evidence of debt. Corporations having banking powers
were also prohibited from issuing or putting in circulation
notes of a less denomination than $5, under a penalty of
$100 for each bill put in circulation. This act was superseded by the act of February 28, 1838, which contained
still more stringent provisions against the issue and circulation of notes below the denomination of $5.® It proved
difficult, however, to exclude outside bills, for on the
northern frontier Canadian bills circulated quite as freely
as those of New York banks. This was attributed to the
defect in the laws which imposed a penalty upon both the
person passing and the person receiving a note, thereby
making it to the interest of both to conceal. The small
note law was also evaded in instances by the use of small
checks drawn by individuals upon a neighboring bank.*
a Assembly Report, N. Y., No. 215, March 2, 1835; Sen. Report, No. 108,
March 25, 1834; Sen. Report, No. 10, Jan. 10, 1838; Niles, 48:158; 49:2.
& Reports of Bank Commissioners, N. Y., 1837, 1838.




70

State

Banking

Before

Civil

War

So strong was the opposition to these restrictions that
the question became an issue in the state election of 1838,
and as a result the acts were repealed February 21, 1839^
Pennsylvania, in granting a state charter to the United
States Bank in 1836, forbade the issue of notes under $10;
North Carolina, in 1833, established $3 as the minimum
limit; Georgia, in the same year, suppressed notes under
$5; and Alabama about the same time prohibited the
circulation of notes of foreign banks under $5.^
Ohio, in 1836, also passed a restrictive measure, which
was opposed by the banks on the ground that under their
charters they possessed vested rights which could not be
impaired. The legislature, therefore, tried an indirect
method of compulsion by imposing a tax of 20 per cent on
dividends, unless banks surrendered their asserted rights.
The charter of the State Bank of Indiana, 1834, excluded
notes of less than $5, and the legislature reserved the right
after ten years to prohibit notes under $10. The Bank of
Missouri, chartered in 1836, went even further and prohibited notes under $20.
The suspension of specie payments in 1837, again
retarded the movement for suppression. Small notes and
tickets were once more brought into circulation, and many
of the States legalized their use temporarily. A few banks
in Massachusetts resorted to the issue of fractional bills
for $0.25, $1.50, and $1.75. Although the associated
banks of Boston discountenanced these issues as contrary
to the spirit of bank charters, public sentiment upheld the
fractional bill banks as benefactors. New Jersey, in 1838,
a
Report of Comptroller of Currency, 1874, p. xxviii.
&Niles 47:428.




7i

National

Monetary

Commission

repealed an anti-small-note law passed in 1835. In 1837
Virginia suspended the small-note law until April 1, 1839,
and expressly authorized the issue of $1 and $2 notes, not
exceeding 4 per cent of the capital. a This temporary permission was continued in 1840.6 In 1840 Pennsylvania
and the vSouthern States were practically the only sections
which were free from notes under $5, and De Grand, in
1841, stated that the attempt to suppress the circulation
of small bank notes had generally been repudiated by
public opinion. c
Agitation was renewed, however, beginning with about
1840, but so much ground had been lost that it was difficult to make much headway. In New York, enactments
against circulation did not prevent the issue of notes, and
in 1855, the small-bill law, which had been enacted twenty
years before, was repealed on account of its nonenforcement. In i860 New York was flooded with $1, $2, $3,
and $4 notes of the banks in the interior and of the New
England States. In Massachusetts an earnest effort was
made in 1855 to suppress bills under $5, but the country
banks opposed and the legislature did not take action, for
it was thought impossible to keep out the issues of other
States. d In Rhode Island fractional bills were prohibited
in 1853; and at that time more than one-fourth of the
total circulation of $5,000,000 was in denominations
under $5.
o Laws, Va., 1837-38, ch. 104; ch. 106, sec. 6.
&
Laws, Va., 1840-41, ch. 76; Laws, 1841-42, ch. 105.
c
Proceedings of the Friends of the National Bank, Boston, July 15,
1841, p. 15.
d T e n t h Report of Bank Commissioners, Mass., i860, p. 129; Merchants
Mag., 34:695.




72

State

Banking

Before

Civil

War

Pennsylvania again in 1850 (April 16) prohibited the
issue of notes of a denomination less than $5, but in another
later act (April 17, 1861) authorized the issuing of notes of
denominations of $1, $2, and $3 to an amount not exceeding 20 per cent of the capital stock paid in.
Virginia in 1854 imposed a fine of $10 for the issue of
notes of less than $5. The State constitution of Florida
in 1845 forbade the issue of notes under $5, and authorized the legislature, at its discretion, to raise the amount
to $20. The banking act of Ohio, 1845, provided that $1
notes should not exceed 16 per cent; $2 notes, 5 per cent;
$3 notes, 10 per cent, of the total circulation, and in 1854
the circulation of foreign bank bills of less than $10 was
prohibited. Indiana in 1855 forbade the State Bank of
Indiana to issue more than one-twentieth of ifcs bill circulation in denominations under $5, and Tennessee placed
a similar restriction upon banks other than the Bank of
Tennessee. 0 Kentucky in 18436 restored the privilege
of issue of notes of less denomination than $5, but again
imposed restrictions in 1858.°
I X . REDEMPTION 0 # BILLS—LEGAL P E N A L T I E S .

In the earliest charters there was no express provision made for the redemption of notes, nor was there any
penalty for nonredemption. The issuing of notes was
generally regarded as the principal object of a bank's
existence, instead of an incidental function. The limitation of note issues to a certain proportion of the capital,
a

Merchants' Mag., 37:219.
&See acts of March 8, 1843, and January 21, 1848.
c Act of February 15, 1858.




73

National

Monetary

Commission

which was often represented by stock notes of shareholders rather than by solid funds, was of little consequence. Practically the only security for convertibility
lay in the liability imposed upon stockholders, and more
particularly upon directors, in case of failure or mismanagement. Indeed, many in the earlier part of the century considered that it was improper and injurious to call
upon a bank for specie in payment of its bills. " Brokers
who sent home the bills of country banks were denounced
as speculators and bloodsuckers, whose extirpation would
be a public benefit." Respectable men defended the conduct of banks in interposing obstacles to the payment of
their notes to brokers who had bought them up to discount. A Boston broker was brought before the grand
jury of Vermont for demanding payment in specie for the
bills of one of its banks, on the complaint of the attorneygeneral that he was guilty of an indictable offense.a
As a result of disastrous experience, various methods
were tried to enforce redemption. On the one hand,
the public, through its legislatures, imposed penalties
upon banks for failure to honor their note obligations;
and, on the other hand, prudent and well-managed banks
found it necessary, in self-defense and for their mutual
benefit, to establish voluntary arrangements whereby
notes could be promptly redeemed. In Connecticut there
was a somewhat unusual provision that in case of the failure of a bank the holders of notes of denominations less
than $100 should have a first lien upon all the assets of
the bank. The note holder's priority was also recognized
a
Appleton, An Examination of the Banking System of Massachuestts,
i 8 3 i , p . 4.




74

State

Banking

Before

Civil

War

by Ohio in 1845, by New York in 1846, and by Massachusetts in 1849.a The legal penalties devised were of
two kinds: first, a pecuniary fine for nonpayment; and,
second, forfeiture of charter. The voluntary settlements
are represented by such schemes as the Suffolk system in
England and the practice in New York of redeeming
country notes by responsible agents at a stated discount.
Massachusetts in 1810 took the lead in developing
stricter responsibility by imposing a penalty of 2 per cent
a month for failure to redeem notes on presentation. b
The suspension of specie payments during the years
1814-1816 naturally gave new importance to the subject
of redemption, and at the close of the period, when the
country endeavored to extricate itself from the embarrassment of a depreciated currency more wide-spread
efforts were made to control bank circulation. The
Second Bank of the United States, which received its
charter from Congress in 1816, was required to redeem its
notes as well as its obligations to depositors, under penalty of payment of 12 per cent interest during the period
of nonfulfillment. New York adopted this principle, and
many States in different parts of the country quickly
followed.
New Jersey in a charter of 1823 prohibited a bank,
upon failure to redeem notes in specie, from continuing
to do business until resumption; and also provided for 10
per cent damages per annum. The same provisions were
repeated in charters of 1824. A charter of 1828 provided
o R . M. Breckinridge, Jour, of Pol. Econ., March, 1899, p. 258.
b Acts, Mass., 1810, ch. 37.




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for the forfeiture of charter and also for 10 per cent
damages. In 1834 a charter provided for forfeiture if
there was suspension for a space of seven days, but in 1837
this delay was increased to fifteen days.
In Maryland the charter of the Frederick County Bank,
1817, provided that if the bank refused to pay specie the
charter should be null and void; in 1819" the payment of
6 per cent interest on dishonored notes was enacted for
all banks, a rate which was quickly raised to 12. In Pennsylvania, in 1824, the cashier was required to indorse a
note when refused and the payment of dividends was
forbidden during the suspension.b
With few exceptions previous to 1830 there were no
penalties in southern charters for not redeeming notes.
Banks were under no legal obligation to pay demands
except by suit, and note holders were in the same position
as other creditors. Virginia, in 1834, made the Merchants'
and Mechanics' Bank liable for 12 per cent interest besides
damages, and in 1837, by general statute, made failure to
pay in specie a ground for issuing judgment on ten days'
notice for the amount of the bill and 10 per cent damages
and 15 per cent interest. It also provided for forfeiture
of the charters In 1838 the penalties were temporarily
waived, and in 1841 that of forfeiture of charter was
repealed. ^ It was then provided that notes presented and
not paid in specie should be indorsed by the cashier and be
subjected to 6 per cent interest. In 1856 e the rate was
a Laws, Md., session of 1818, ch. 117; Niles 16:359.
& Acts, Pa., March 25, 1824.
c Laws, Va., 1836-37, ch. 82, sees. 4, 5.
& Laws, Va., 1840-41, ch. 77, sees. 2, 3.
« Laws, Va., 1855-56, ch. 79, sec. 19.




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raised to 12 per cent. In North Carolina a charter was
granted in 1833 which included a penalty of 12 per cent
interest in case of refusal to redeem; and in South Carolina, in 1840, it was enacted that in case of nonredemption
of notes, the bank should pay 5 per cent of its circulation
every month. Florida imposed a penalty for nonredemption, in some instances providing for 10 or 12 per cent
damages, and in others demanding a forfeiture of charter.
In case of suspension by the Bank of Florida, 1843, the
directors were liable to indictment for misdemeanor, and
on conviction, to imprisonment for five years and a fine of
$5,000, the president and cashier were liable for indictment for felony and to imprisonment for five years and
a fine of $20,000, and in addition the bank was called
upon to pay 5 per cent damages.a Alabama, in 1821,
passed an act providing that nonspecie paying banks
should show cause why their charters should not be
revoked. Charters of most of the banks in Louisiana,
down to 1837, contained an express condition of forfeiture
for failure to redeem.h
In Ohio, by the general law of 1824, suspended banks
were subjected to interest on notes demanded and not
paid, but were exempt from further interest by giving
notice of the time they would resume. In charters from
1829, with one exception, a penalty of 12 per cent in addition to legal interest was imposed. In the charters
granted in 1833-34 the legislature reserved in case of nonredemption the power to amend or repeal the charter. In
o Acts, Fla., March 5, 1843.
& See Governor's Message, La., December 11, 1837.




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one case suspension for more than thirty days was expressly made a forfeiture.
Kentucky, in 1818, by a law creating forty new banks,
enacted that all notes should be redeemed either in specie
or in notes of the United States Bank, or of the Bank of
Kentucky; if refused, charters would be liable to forfeiture.
In 1821 Kentucky intentionally adopted a policy of inflation and the Bank of the Commonwealth by its charter
"was relieved from all danger of suspension by not being
required to redeem its notes in specie. Its paper was made
payable and receivable in the public debts and taxes, and
certain lands owned by the State south of the Tennessee
River were pledged for the final redemption of its notes.''
The charter of the Louisville Bank of Kentucky, 1833,
made it unlawful for the bank to issue any note, bill, or to
loan money after it shall have failed to redeem its bills or
notes in specie.
Indiana, in 1818, provided that if a bank failed to pay
notes in specie the cashier should be required to indorse
that fact on the note, after which the note should draw
interest at 6 per cent; in 1834, I 2 P e r c e n ^ interest was
allowed and suspension constituted grounds for closing the
bank as insolvent. The charter of the State Bank of
Indiana, 1842, provided that failure to pay in specie was a
cause for closing the bank except when the specie was
demanded by nonspecie paying banks in Ohio, Illinois,
Kentucky, or Michigan, or by those intending to send the
specie out of the State. a




<*> Laws, Ind., 1842, ch. 68, sec. 7.

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Illinois, in 1816, in granting a charter to the Bank of Illinois at Shawneetown, fixed the penalty for suspension at
12 per cent, but in 1841 the State Bank of Illinois complained that it was the only bank in the State whereby
suspension involved a forfeiture of charter. Missouri, in
chartering the Bank of Missouri, the second bank in the
State, required that all notes should be redeemed under
penalty of a forfeiture of 5 per cent per month.
X. REDEMPTION BY VOLUNTARY SYSTEMS.

Early in the century the question of accepting bank
notes in all places at par became a subject of dispute.
Banks in the Eastern States rapidly increased, and they
wished to gain all possible advantage from the circulation
of their notes in Boston. Objection was then made to the
cost of guaranteeing redemption because of the expense
of transportation, and this was entirely apart from any
suspicion of a bank's ability to redeem. Practice varied;
sometimes the bills were received at a distance at par,
sometimes at a small discount. "The country banks considered it a great hardship that the Boston banks should
send home their bills and demand specie for them instead
of putting them in circulation again. Public opinion took
the side of the country banks, and the Boston banks very
unadvisedly gave up receiving the bills of out-of-town
banks altogether. The consequence was that the bills of
country banks obtained the entire circulation even in
Boston. Boston banks had given them currency, their
solvency was not doubted, and for all common purposes
they became equally current with the bills of the Boston
24635—10




<5

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banks, which were only necessary for t h e purpose of making
payments at those banks. A double currency was t h u s
introduced; t h e one called foreign money or current m o n e y ;
t h e other, Boston money, t h e difference being for several
years about i per cent. * * * This state of things
introduced a new branch of business and a new set of
men, t h a t of money brokers, whose business it was to
exchange these currencies one for t h e other, reserving t o
themselves a commission of about one-fourth of i per cent
or, in the language of t h e day, giving a premium of threefourths per cent for Boston money and selling it at a
premium of i per cent. * * * The supply ere long of
(foreign) money exceeded t h e demand; and as t h e channels
of circulation overflowed, t h e brokers began t o send t h e
bills home for payment. T h e state of t h e currency
became the subject of general complaint. T h e brokers
were denounced as t h e authors of t h e mischief and t h e
country banks made no scruple of throwing every
obstacle in t h e way of their operations. * * * I t was
soon discovered t h a t a bank could be m a d e profitable in
proportion to its distance from Boston and t h e difficulty
of access t o it. T h e establishment of distant banks
became a m a t t e r of speculation, t h e favorite locations
being t h e remote parts of Maine and New H a m p s h i r e . " 0
An organized effort was t h e n m a d e to extend t h e circulation of foreign bank notes by t h e incorporation, in 1804,
of t h e Boston Exchange Office. This h a d a capital of
$150,000, consisting of foreign money and $50,000 in
specie. The charter provided t h a t t h e corporation should
a Examination of the Banking System of Massachusetts, 1831, pp. 10-12.




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not make any demand for specie in any other incorporated
banks " whereby to cause distress, nor offer to furnish any
person or persons with bills to that purpose;" and the
office in turn was restricted from asking or receiving a
premium for exchanging bills of any bank for specie, or
from purchasing a bank's bill at a discount. This institution, however, was bought up by a promoter who used
it for speculative purposes, and the experiment did not
receive a fair test.
As the evils of a depreciated currency increased, the
merchants of Boston in 1808 formed an association for the
purpose of sending back bank notes and demanding specie
for them. "This soon brought the currency to a crisis.
The Farmers' Exchange Bank in Rhode Island suddenly
failed under the most alarming circumstances. The
shock upon the public was tremendous. The Berkshire
Bank soon followed. The discovery that banks could
fail affected the credit of all. In the course of the year
1809 the greater part of the country banks of Massachusetts, Maine, and New Hampshire having any considerable amount of bills in circulation stopped payment. " a
It was at this time that the legislature of Massachusetts
imposed a penalty for nonredemption. But more supervision was needed than could be obtained by statute.
Foreign bank bills flowed into Boston to excess, and these
could not be converted into Boston funds except at a discount from 1 to 5 per cent. It was estimated that the
exchange of bills reached $100,000 a day, with an annual




#Appleton, Examination, etc., p. 14.

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cost to note holders of $125,000. Country banks "stuffed
the money market everywhere with their paper." a
In 1814 the New England Bank in Boston individually
undertook the task of securing the redemption of bills of
New England banks. It received the notes of all these
banks at a discount varying according to distance, but in
no case exceeding 1 per cent; and on condition of a permanent deposit they were returned to the issuing bank at the
same rate of discount. Discounts were thus kept within
a range of one-fourth to three-fourths per cent. This
policy tended to reduce the circulation of outside banks.
XI. SUFFOLK SYSTEM.

In 1819 the Suffolk Bank, of Boston, determined to
undertake the redemption of foreign money according
to the terms adopted by the New England Bank. It
was voted that any bank placing with the Suffolk Bank
$5,000 as a permanent deposit, with such further sums
as would be sufficient to redeem its bills taken by the
Suffolk Bank, should have the privilege of receiving its
own bills at the same discount at which they were purchased. Banks in Providence and Newport and 23
other banks, then keeping an account with the Suffolk,
were excepted from the requirement of a permanent
deposit of $5,000, provided they made all their deposits
at the Suffolk Bank. If any bank refused to make the
deposit required, its bills should be sent home for payment. As a consequence of the competition of the Suffolk Bank with the New England Bank, discount on




o Hazard's Committee, Rhode Island, 1826.
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country bank notes was lessened; but "the animosity
of the country banks, which were unwilling to keep a
deposit in Boston for the redemption of their bills,
was naturally very much aroused when the Suffolk
Bank, collecting their bills, sent them home for specie,
and much ill feeling was engendered/^ Various devices were planned to thwart the efforts of the Suffolk
Bank. When the Lincoln Bank, in Wiscasset, was
called upon for redemption of $3,000 of its notes, its office
first tendered a Boston draft, which was declined. The
cashier then sought delay by delivering small change,
and by the hour of closing the doors had counted out
only $500 in coins, nothing larger than 25 cents.6
Owing to the monopoly which the country banks still
possessed in the note circulation of Boston, it was determined to take more decisive action, for though Boston had more than one-half of the banking capital of
New England it supplied only one twenty-fifth of the
bills in use. 0 The Suffolk Bank consequently addressed
a letter, April 10, 1824, to each of the Boston banks,
calling attention to the fact that the "prodigious credit
thus enjoyed by the country banks is not owing to any
superior confidence in the stability of these institutions
or in their ability to redeem their promises in gold and
silver, but may be attributed to a discount founded on the
very difficulty and uncertainty of means of enforcing this
payment. Such would not be the natural operation of
these causes were these institutions what they professed to




a Whitney, The Suffolk Bank, p. 9.
&
Niles, June 16, 1821.
c Whitney, The Suffolk Bank, p. 10.
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be, establishments for the discount of country notes and
the convenience of country traders. Their bills would then
circulate only in their own immediate vicinity. * * *
Under the existing circumstances, we presume that a very
great proportion of the discounts of the country banks are
made in Boston. Loans to an immense amount are made
by their agents here at reduced rates of interest, payable
in three or five days after demand, so that they can be
in funds at very short notice, and in this manner necessarily deprive us of much valuable business. And this
great circulation is enjoyed by the banks out of the State,
who do not pay the tax to the Commonwealth which we
are compelled to pay." a Attention was also called to the
successful practice of New York banks, which, though
they deducted no discount to reimburse them for the expense of sending bills home for redemption, found a compensating profit in the increased circulation of city notes.
The Suffolk Bank thought that a discount of only onefourth of i per cent would be required if it should undertake the work of redemption. It was, therefore, proposed
that a fund be assessed upon the banks in proportion to
their respective capitals, to be placed at the disposal of
one or more banks for the purpose of sending home the
bills of the banks in Maine.
At a conference which was held of representatives of
the Boston city banks it was voted expedient to send home
the bills of all banks out of the State and also the bills of
other banks, as might be determined upon. Seven banks
thereupon subscribed $300,000 in order to carry out the




a Whitney, The Suffolk Bank, 12-13.
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arrangement, and the Suffolk Bank was chosen as the
agent.
This action created much excitement. The country
banks realized t h a t they must curtail their circulation and
t h a t it would probably be necessary to keep a larger specie
reserve.^ For a brief time there was a bank war directed
against w h a t was called the " Holy Alliance " and the " SixTailed Bashaw." Some of the oldest and strongest count r y banks held out for a considerable period, refused to
deposit, and paid in specie all demands. 6
The Hartford Bank, for example, claimed t h a t the syst e m was arbitrary and unjust and needlessly curtailed t h e
profits of circulation. 0 The Worcester Bank, which kept
its deposit with t h e New England Bank, also declined the
proposals of the Suffolk Bank and declared t h a t it would
not consent t o negotiate under an a t t e m p t at coercion. d
A messenger from t h e Suffolk Bank presented $38,000 of
t h e Worcester bills, or more t h a n one-half of its circulation; the Worcester Bank, having a credit of $39,000
with t h e New England Bank, tendered a draft in payment, which t h e messenger agreed t o accept if the
Worcester Bank would keep its deposit with t h e Suffolk
Bank. This offer was refused and the Worcester Bank
paid $28,000 in specie and dispatched a messenger to Boston t o pay t h e balance over the Suffolk's counter. The
Suffolk Bank, however, declined t h e tender and sent a
sheriff t o a t t a c h real estate of the Worcester Bank.




a Whitney, The Suffolk Bank, p. 15.
& Niles, May 14, August 27, 1825.
c Woodward, The Hartford Bank, p. 130.
^ Worcester Bank, p. 14; July 26, 1826.

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In 1825 the system was modified so that country
money was received at par, instead of at a discount.'
Under these terms, the business of the Suffolk Bank
rapidly developed and finally all of the banks in New
England practically accepted the arrangement. "The
general arrangement was as follows: Each bank placed a
permanent deposit with the Suffolk Bank of $2,000 and
upwards, free of interest, the amount depending upon
the capital and business of the bank. This sum was the
minimum for banks with a capital of $100,000 and under.
In consideration of such deposit, the Suffolk Bank redeemed all the bills of that bank which might come to
it from any source, charging the redeemed bills to the
issuing bank once a week or whenever they amounted to
a certain fixed sum, provided the bank kept a sufficient
amount of funds to its credit independent of the permanent deposit to redeem all its bills which might come
into the possession of the Suffolk Bank. The latter
bank charging it interest whenever the amount redeemed
should exceed the funds to its credit; and if at any time
the excess should be greater than the permanent deposit,
the Suffolk Bank reserved the right of sending home the
bills for specie redemption. As soon as the bills of any
bank were charged to it, they were packed up as a special
deposit and held at the risk and subject to the order of
the bank issuing them. In payment the Suffolk Bank
received from any of the New England banks with which
it had opened an account the bills of any New England
bank in good standing at par, placing them to the credit
of the bank sending them on the day following their




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receipt." 0 In 1831 the banks were charged daily with
all their redeemed bills instead of weekly. In 1834 t h e
business of redemption had increased to such an extent
t h a t it was difficult t o assort the bills in time for the
daily settlement. The Suffolk Bank therefore notified
t h e Boston banks t h a t instead of receiving all their foreign money a t par, it could t a k e on any one day only an
amount equal to one-half of their permanent deposit.
Above t h a t proportion it would charge one-tenth of
1 per cent. I t also restricted the foreign money to t h a t
received in the regular course, excluding deposits from
b a n k s and brokers. 6
" T h e banks of New England were divided into two
classes—those keeping a deposit with t h e Suffolk Bank
and redeeming their bills at its counter; and those which
kept an account with some other Boston bank, with
which an arrangement was made for the redemption of
their bills. The Suffolk Bank did not require the New
England banks t o keep a deposit with it as a condition
precedent t o receiving their bills at par. On the contrary, it received at par the bills of all sound New England banks, whether they kept an account with it or not.
I t only required t h a t they should redeem their bills at
some convenient place on penalty of having t h e m sent
home for specie.
" F o r the bills of the former class of banks t h e Suffolk
had security in t h e form of deposits and collections.
For the bills of t h e other class it had no security except
the good faith of t h e banks acting as their agents, and




a

Whitney, The Suffolk Bank, pp. 19-20.
& Ibid., p. 24.
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to which it charged and sent daily all the bills for the
redemption of which they were responsible. As these
eould not be sent till the day after they were received,
the Suffolk Bank was actually taking the risk of redemption on all this class of bills for one day without any
security; and should any of these banks fail it had no
positive assurance that the redeeming bank, with which
such failed bank kept an account, would receive from it
the bills it might have in hand."®
During the earlier years of the system the Suffolk Bank
had much difficulty in securing adequate deposits to meet
the terms of agreement with the banks. Particularly
was this so after 1831. Between that year and 1833, 90
new banks were chartered in New England, 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/' The Suffolk Bank thereupon
notified the banks which had overdrawn that their drafts
would not be allowed above $10,000. Notwithstanding
these instructions, 44 banks, in 1836, had overdrawn
$664,000.b
After the suspension of specie payments, in 1837, the
Suffolk Bank was not in a position to coerce the other
banks. Some of these continued to redeem at the Suffolk,
while others withdrew their accounts. Moreover, the
Suffolk Bank was unable to reduce the overdrafts of some
of its correspondents, particularly in Maine, and it was
finally obliged to decline to receive the bills of a large




a Whitney, The Suffolk Bank, p. 46.
b Ibid., 23-25.
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p a r t of them. Notwithstanding these difficulties, t h e
system was continued after resumption took place.
I n Rhode Island t h e Merchants' Bank of Providence
became t h e agent of t h e Suffolk. I t made arrangements
with most of t h e state banks t o redeem for t h e m t h e bills
of all other banks except those of banks located in t h e
same town. F o r this purpose it issued a large p a r t of its
circulation in t h e form of bills in denominations from $100
t o $1,000, a n d h a d a n understanding with other institutions t h a t such bills, when received in t h e course of business, would n o t b e presented for redemption in specie, b u t
only in p a y m e n t of their own notes. T h e Merchants'
Bank t h u s refused t o receive from a n y bank t h e bills of
other banks in t h e same town, b u t left each t o care for its
own circulation b y frequent redemptions of t h e bills of its
immediate competitors, while it cared for t h e redemption
of t h e banks b y groups in each town. T h e Merchants'
Bank paid interest on a n y balance against it, while t h e
Suffolk Bank paid n o n e . a
The following t a b l e b shows t h e redemptions which were
m a d e b y t h e Suffolk Bank from 1834 t o 1857:
1834
1835
1836
1837
1838
1839
1840
1841
1842
1843
1844
1845

$76,000,000
96,000,000
127,000,000
105,000,000
77,000,000
107,000,000
94,000,000
109,000,000
106,000,000
104,000,000
126,000,000
138,000,000

1846

$142,000,000

1847
165,000,000
1848
178,000,000
1849
199,000,000
1850
221,000,000
1851
243,000,000
1852
245,000,000
1853
288,000,000
1854
231,000,000
1855
341,000,000
1856
397,000,000
1857
376,000,000
a Report of Bank Commissioners, Rhode Island, 1836.
& For figures from 1834-1850, see Merchants' Mag., 25: 467; also Knox,
History of Banking, p . 369.




National

Monetary

Commission

The total cost to the bank for carrying on this work
of redemption in 1858 was $40,000, or about 10 cents
per $1,000.

In 1837 it was estimated that two-thirds of the circulation of Connecticut was redeemed once in thirty days
and the other third once in forty-five days, largely due
to the redemption facilities in Boston and New York;
in 1842 it was estimated that one-eighth of the circulation of the Connecticut banks was redeemed weekly at
the Suffolk Bank; and in 1849 & w a s reported that Connecticut circulation was redeemed in Boston once in sixty
days. In Maine, in 1842, a sum equal to the whole circulation of banks in that State was redeemed at the Suffolk
Bank about five times a year; the average time which a
bill issued by a Maine bank was in circulation until redemption was only about two months. In Rhode Island,
toward the end of the system, there was a circulation of
from $3,500,000 to $5,300,000, and the average local life
of a bill was not over a fortnight. Taking the circulation
of New England as a whole it was calculated that in 1857
it was redeemed eight times annually. a
On the whole the system met with warm commendation
on the part of the best bank and state officials who had
charge of supervision. The bank commissioners of Connecticut, in 1842, expressed a general approval of the system; it checked excessive discounts and circulation. In
Maine, the bank commissioners, in 1842, also stated that
in their opinion the Suffolk system had preserved banks
in Maine from the disasters which had occurred in some
o Bankers' Mag., 12:70; White estimates it ten times a year, Money and
Banking, p. 297.




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of the other States; the three banks in Maine which did
not redeem their circulation in Boston, although sound,
were not able to float their notes far from home: "Was
there not a moral obligation resting on those banks to
make their bills current in Boston, so as to prevent any
public apprehension ? " Again, in 1857, the commissioners
referred to the great benefits derived from the Suffolk
system; whatever objections there were to it in theory,
its practical operation had kept the banks in good credit.
A bank ceased to be in good standing when it was " thrown
out of Suffolk."*
The Suffolk Bank system, however, did not escape criticism. There was objection prompted by the selfish interest
of foreign banks. The Suffolk Bank, it was declared,
made New England pay tribute to Boston; it created a
perpetual run of every country bank upon every other for
the benefit of the Suffolk; it operated under " a higher
law;" and it made New England helplessly dependent for
currency at the feet of the banks at Boston. It was also
argued that the system was a device for causing country
bank notes to flow into Boston, and thus magnify the
commercial prosperity of that city at the expense of the
country. In reply, however, it was maintained that the
influx of country bank notes was due to the concentration
of trade and capital at Boston, and this rendered a system
of par redemption necessary. It was also an advantage
to a merchant in the interior who wished to purchase
merchandise in Boston, for he could carry with him country bank bills without resorting to specie or the purchase
a

See also Report of Monetary Commission, p. 327.




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M o n et ar y

Commission

of a draft on Boston, for he knew that his bank bills were
at par there.® It was argued- by some that the banks
were not able to maintain as large a circulation as they
would if the Suffolk system had not been in operation.
When the plan was first introduced, there was truth in
this claim; for example, the circulation of 16 banks in
Massachusetts, in six months in 1825, was decreased
$382,000; in Maine there was a decrease in the same
time of $337,000; while the circulation of Boston banks
increased $283,000. According to Appleton, 6 the principal inducement to the associated banks in Boston to appropriate the necessary funds to establish this system was
the belief that the measure would increase their own circulation, but this effort in the course of a few years
was partially defeated by the establishment of banks
in the immediate vicinity of the city, as Charlestown,
Cambridge, Roxbury. The real grievance, however, of
many of the complaining banks was that their paper was
raised to par value and they were deprived of profits
previously made from depreciation. 0 As the system developed, the notes of country banks were given a standing
which they otherwise would not have obtained. When
complaint was made in 1850 that the aggregate circulation
of the Maine banks was one-fifth less than the limit fixed
by law, it was urged in reply that country banks could
float a circulation far greater in proportion to their
capital than that of the Boston banks; d for the latter




o Merchants' Mag. 1851, 24:79.
6
Examination, etc., p. 18.
c Hazard's Report, Rhode Island, 1826.
d Merchants' Mag., 1851, 24:710.
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were by this system prevented from keeping a single dollar
of their notes in circulation out of Boston, since t h e
whole was gathered up by country banks and returned
to Boston for redemption. The capital of thirty banks
in Boston in 1850 was $21,010,000; their circulation was
$6,070,000. The capital of Maine banks in t h e same
year was $3,148,000, while their circulation was $2,301,000.
Critics argued t h a t t h e conditions which t h e Suffolk
Bank imposed upon its correspondents were too hard,
but analysis m a d e b y a writer in t h e Merchants' Magazine
controverts this claim; for example, a b a n k with a capital
of $100,000 was required to deposit in the SuflFolk Bank
$3,000, the interest on which a t 6 per cent per a n n u m
was $180. A b a n k in Maine could circulate its bills t o
the a m o u n t of 75 per cent of its capital stock, b u t t h e
average circulation of the sounder banks having a capital
of $100,000 did not exceed $50,000. The average redemption by t h e Suffolk Bank of such an institution was
about $10,000 a m o n t h or $120,000 a year. The bank
was a t t h e expense a n d risk of remitting this sum of $120,000 every year in order to redeem its circulation, and
this expense might be reckoned a t one-fourth of 1 per cent,
or $300. Other expenses would add $120 more, making
the total cost of redeeming at the Suffolk Bank, $600.
On t h e other hand, t h e average rate of exchange between
Boston and other places in New England was not less
t h a n one-half of 1 per cent, which would give $600 on
$i20,ooo. a If, however, the circulation was redeemed
more frequently the cost t o the bank was greater.




a Merchants' Mag., 1841, 5:262.

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The criticism of Amasa Walker, writing in 1857, was
more searching. He asserts that the system was begun
on the right principle, but had not been carried out faithfully. It should have been recognized and regulated by
law; returns should have been required of all moneys
received of the several banks and the accounts with each
bank. There was a common impression that the country
banks had specie in the Suffolk with which to redeem
their bills, but as a matter of fact there was no great
reserve of specie in the Suffolk bank. It had in 1856
twice as much circulation as its specie; the specie reserve
was a fiction. The arrangement by which the bank
undertook to make the bills of all the New England
banks current in Boston was a good one; it acted as a
check on the operations of banks disposed to go to an
excess, and it was a balance wheel to the dangerous
system of currency. The idea of a deposit was a farce,
however, for the Suffolk Bank loaned back money deposited with it to the bank from which it was received
on condition of receiving interest, by allowing the depositing bank to withdraw its account to the amount of its
deposit. In reality the Suffolk Bank was simply a great
clearing house in which all the balances of New England
banks outside of Boston were settled. It was a good
regulator of a bad systems
Although the services of the Suffolk Bank and the
system which it represented were approved by the
soundest banking opinion, there was frequent friction,
and about 1855 a movement was started on the part of
a

Nature and Uses of Money and Mixed Currency, pp. 65-67.




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outside banks to establish an institution of their own
which should conduct the business of redemption. As
a result, the Bank of Mutual Redemption was organized
in 1856 on a cooperative plan. As originally designed,
banks in Massachusetts were to subscribe one-half the
capital of $3,000,000, and banks in the other New England States the other half. In order to prevent any one
bank or small group of banks from gaining control, it was
provided that no bank could subscribe more than 5 per
cent of its capital. In this way it was believed the
foreign banks would be able to distribute back to themselves the profits which were derived from assorting
country moneys Within a year 143 banks held stock
and the project proved successful.6
Under these conditions the special influence of the
Suffolk Bank pame to an end. c The principle, however,
had been justified. "The bank had not labored in vain;
it had found the currency of New England in a chaotic
state, but by putting this principle into practice it had
brought order out of confusion, and had compelled banks
to keep themselves stronger than they otherwise would." d
Its successful operation was undoubtedly aided by a law
passed by Massachusetts in 1845 forbidding any bank to
issue any notes except its own, but yet it must be remembered that the system had been well tested long before
that date. Other reasons for the successful working of
the Suffolk system are to be found in the rigid system of
® Bailey, Bankers' Mag., 31:311.
& Bankers' Mag., 13:903.
c
Bankers' Mag., 13:384-393; 21:964.
d Whitney, The Suffolk Bank, p. 60.
24635— I O




7

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examination and supervision of banks by state officials
which was early developed in nearly all parts of the New
England States, and the fact that by allowing the correspondent banks to overdraw the Suffolk Bank could
exert a powerful pressure. "The country banks kept
their circulation as extended as possible for their own
profit. Their overdrafts on the Suffolk enabled them to
do so, but at the same time it put them completely into
its power. " a
It must also be remembered that the operation of this
system was confined to the area of New England, a section of homogeneous business interest, and there is grave
reason to doubt if it could have been extended over the
whole United States, limited as it was at that time. b
X I I . REDEMPTION I N N E W YORK.

The redemption of country notes in New York was
undertaken in a less systematic way than that attempted
in New England. Country banks, as a rule, did not keep
specie in their vaults, but funds in the city banks, and
redeemed their paper by drafts on the city. This redemption was interrupted in 1834, not because the country
banks were unable to redeem, but because the city banks
stopped taking up their notes. Some of the banks in
Albany undertook the purchase of country bank notes at
a moderate discount, and sent them home for redemption
by a messenger.0 The act of May, 1837, which legalized
suspension, provided, however, that during the suspension
a Whitney, The Suffolk Bank, p. 37.
& Report of Comptroller of Currency, 1878, p. xi.
c Report of Bank Commissioners, New York, 1835.




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of specie payments each bank should receive the notes of
other banks at par in payment of debts. When resumption took place, the city banks were averse to continuing
this. A voluntary arrangement was consequently substituted, by which some of the city banks undertook to
purchase country notes at one-half and then at threefourths per cent discount, and to hold them until redeemed
in funds current in New York City. Again, in turn, this
arrangement was dropped, since it required more capital
than the city banks wished to devote to it. By the next
plan, the country banks made exchanges among themselves of each others' paper at the State Bank in Albany,
but this provided no means of taking the notes out of New
York City, and consequently their bills sold at a discount
there. Objection was raised to a proposal that banks
should be compelled to receive each others' notes at par,
for, if this were done, country bank notes would engross
the circulation in New York City. The safety-fund banks,
however, by the act of 1829, were prohibited from purchasing their own notes at a discount, so that if they
redeemed at all in New York they must redeem at par,
but this did not apply to banks organized under the act of
1838. The buying of a bank's own notes, as well as those
of the safety-fund banks, proved more profitable for the
free banks than ordinary discount business, and tended
to displace the notes of the safety-fund banks. This lessened the ability of the latter to discount. Free banks
were doing a business in shaving notes of other banks. a
A compromise was sought in 1840, and (May 4) an act
a Knox, History of Banking in the United States, p. 416.




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was passed requiring all banks outside of New York, Albany, and Brooklyn to appoint an agent who should keep
an office either in New York or Albany for the redemption of circulating notes at a discount of not more than
one-half of i per cent.® This made the notes of a country
bank in the more distant parts of the State more valuable as a medium than specie, for the discount was less
than the expense of transportation.
A further step had already been taken by the banking
law of April 18, 1838, which provided that it should not be
lawful for any bank authorized under that act to issue any
notes at less than $1,000, to be put in circulation, payable
at any other place than the bank's office. In 1844 it was
proposed that banks be compelled to redeem in New York
City, but a legislative committee reported adversely, on
the ground that it necessitated a scattering of resources.
It was held that the ability of a bank to redeem was not
increased by taking funds out of its own vaults and intrusting them with a distant agent; such a measure would concentrate financial power in a few hands in the city of New
York and make the country banks'mere branches. 6
The bank commissioners in 1843 believed that the law of
March 4,1840, New York, requiring country banks to keep
agents in New York and Albany for redemption of circulating notes had worked admirably in preserving uniformity
in the rates of discount. Formerly it was not unusual to
discredit the notes of sound institutions for the purpose of
purchasing them in market, but the new law had checked
a Report of the Bank Commissioners, New York, 1840; Assembly Report
No. 325, April 21, 1840; Assembly Report No. 146, February 18, 1840.
& Assembly Document, N. Y., No. 127, March 14, 1844.




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the establishment of associations at places remote and
difficult of access, so as to render the transmission of the
notes for redemption vexatious and expensive.a
The comptroller of the State, however, in the next
year, reported in opposition to this view. He thought
that the redemption at a discount of one-half of i per
cent was one of the principal inducements for establishing free banks; notes were signed and circulated in
the city of New York; and by fixing the place of redemption at some distant point, the note holder was obliged
to go to the office in Wall street, where the notes were
really issued, and pay one-half of i per cent for redemption. It was therefore advocated that banks be required to redeem their notes at par in New York so as
to reduce the motive for multiplying shaving shops.
Again, in 1847, the comptroller advised par redemption.
He believed the objection that banks would be compelled to redeem at two places was not sound; the
practical effect would be redemption at only one place.
As it was, banks were established in obscure places with
the view of obtaining a circulation only and of doing no
other business. In 1851, the act of 1840 was so amended
as to reduce the discount upon country currency to onefourth of 1 per cent. This act closed the door to illegitimate banking, and many institutions wound up their
business.6
a Report of the Bank Commissioners, N. Y., 1843.
& See Report of Comptroller of Currency, 1873, pp. xiv-xv.




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XIII. METHODS OF EVADING REDEMPTION.

During the first half of the century various devices
were employed by speculative banks to increase their
circulation and avoid redemption. In 1818, a legislative
committee of New York enumerated some of the schemes
which were thus adopted, such as placing a fund in a
distant bank to redeem notes, and, after it became generally known that the notes were at par in that quarter,
issuing a new emission signed in ink of a different shade,
at the same time giving secret orders to the correspondent bank not to pay the notes thus signed. Others
issued a species of paper called "facility" notes, not
payable in money, but receivable by banks issuing them
in payment of debts due. Again, large accommodations
were given to individuals, on agreement that the borrowers
should keep in circulation a certain sum for a specified
time, the notes being designated by a private mark; and,
in case the notes were returned before the date set, the
borrowers were to be charged with the discount on such
sum for the remainder of the period. To others, loans
were made on condition that the borrowers pay their
notes when due in what was called current money; that
is, notes of banks which were current throughout the
State, but not including the bank's own notes. The
borrower, therefore, was often obliged to pay, as the
time drew near, a premium in order to secure acceptable
notes.
Most of these schemes bordered so closely upon fraud
that they had to be abandoned. Other methods, how-




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ever, were employed, some of which may be enumerated
as follows:
i. About 1835 it became common for banks in the
North to employ agents to exchange bills of one bank
for notes of other banks. This practice was continued
in Massachusetts and complained of by the commissioners in a report of 1840. The bank inspector of Vermont,
1837, criticised the practice and characterized it as a
kind of piracy of one bank on another; a bank situated
within reach of other banks sometimes had to decide
against discounting an application for a loan because of
the belief that the bills would be circulated in the vicinity
of an exchange agent and would be promptly taken up
and sent back for redemption. This consequently forced
banks to seek for discounts at distant places.
2. In some States, banks made their notes payable
at some other place than where the office was located;
for example, in 1816, the Dedham Bank of Massachusetts issued three-fourths of its circulation drawn on the
cashier of the bank at Middletown, Connecticut. The
legislature promptly passed an act prohibiting the issue
of notes payable at other banks unless payable also at
the bank of issue.® This act, however, did not extend
to checks or drafts for sums exceeding $100, and it was
subsequently learned that the Dedham Bank issued
bills for $101 in order to avoid the penalty. 6 In the
Southwest, this practice became an established custom.
For example, the Union Bank of Tennessee, 1837, had in
circulation $1,598,000 payable at New Orleans, as well
a Acts, Mass., 1816, ch. 91, May session, p. 345.
& Resolves, 1819, ch. 254, p. 697.




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as a large amount payable at Philadelphia. The Bank of
Illinois at Shawneetown, in the same year, had a considerable volume of notes payable at New Orleans, Louisville, and Philadelphia.
3. Notes were loaned on an agreement that they would
not be presented for redemption within a certain time.
In 1839 the bank commissioners of Massachusetts complained that some banks in that State loaned bills at a
lower rate of interest on condition that they should be kept
in circulation, or, in other words, that as often as the notes
came home they would be redeemed by the borrower and
again be put in circulation.a In Connecticut the legislature in 1837 found it necessary to pass a law prohibiting
banks from making loans which involved an express agreement that the notes would not be returned to the bank for
redemption within a limited time. The practice still continued, for in 1853 the bank commissioners reported that
some of the banks had engaged in loaning to persons outside the State, the borrowers guaranteeing redemption.
These bills were so loaned that they could be readily detected at the counter of the bank, and were returned to the
borrower, who redeemed them. This was called " protective
circulation/' and in that year amounted to $1,353,000. As
a result, the legislature in the following year forbade a bank
to loan its bills to any other bank, in or out of the State,
for circulation under an understanding or an agreement
to keep them in circulation for a specified period, or of
redeeming them if returned within a certain time.®
a

Report of Bank Commissioners, Mass., 1839, p. 19.
& Merchants' Mag., 3 1 : 225.




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4. A most common method was putting notes in circulation at distant points. Its extreme form is to be found
in the " Saddle-bag Bank " described by Niles in 1820: "A
bank whose notes were carried about the country in saddlebags to be exchanged with landowners for their notes."
In the middle of the century the practice was illustrated in
the development of "Wildcat banks" in the West. But
banks in the East were also guilty. Ill-managed banks
supplied brokers, shopkeepers, tavern keepers, drivers, and
workmen with quantities of paper and paid them liberally
for getting it off. Agents carried these notes to every corner of the country, even to the British provinces, and beset
travelers for an exchange of bills. One broker in Rhode
Island put off in one year more than $200,000 of the notes
of a speculative bank, mostly in one-dollar bills.0 In 1840
the commissioners of Connecticut complained that several
of the banks made discounts upon an understanding that
notes were to be put in circulation at a distance. Branch
banks in the South employed this method to a considerable
degree. In 1817 the legislature of Kentucky gave permission to the Bank of Kentucky and its branches that neither
should be obliged to take the notes of the others. b In Virginia, where the branch system prevailed, the governor in
1846 complained that the banks in Richmond paid out
notes of distant branches instead of their own, thus supplying the country with a depreciated currency. In 1857
each bank was required to redeem the notes issued by any
other bank in the State.
0

R e p o r t of Hazard's Committee, Rhode Island, 1826.
&Duke, History of the Bank of Kentucky, p. 16.




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5. The use of bank notes as a pledge in borrowing, with
the understanding that the notes should not be put into
circulation by the creditor bank was another method.
This practice was complained of by the bank commissioners of Maine in 1857 and by the commissioners of
Massachusetts as late as 1859. One bank would borrow
of another on the pledge of its own bills, with the implied
understanding that they were to be withheld from circulation during the existence of the loan.
XIV. POST NOTES.

Further evidence in regard to the loose requirements
for redemption of notes is to be found in the practice
of issuing "post notes." This term is applied to bills
payable at some future date, either to "bearer" or to
"order," either with or without interest. Originally, as
employed by the First United States Bank, they had a
legitimate use, being applied to paper used for transmission
from one part of the country to another by mail or post,
and as they were made payable to order and indorsed at
the point of receipt they were rendered safe against loss
or robbery. Later, however, this description of notes
was superseded by the use of bank drafts or checks, and
the term was applied to a kind of paper possessing none
of the original attributes except that of being made
payable to order. Such notes were issued for the purpose of extending circulation, and as late as 1837 were
common in most sections of the country.
Connecticut, in 1815, empowered banks to issue bills
up to one-half the paid-up capital, payable in two years
after the close of the war.




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In Massachusetts the Suffolk Bank in iSiSa was
authorized to make a loan by the issue of "post notes/'
In 1836 all the banks were permitted to issue such notes
up to 50 per cent of the capital in denominations not less
than $5. Interest on such bills was to be paid at \Y2 per
cent and cease when due. This privilege was used only
by weak banks and was repealed within a year. b
In New York banks occasionally put post notes into
circulation, but as a rule only for the purpose of making
remittances or in an emergency. In 1830 a law was
passed giving the holder of any note which the bank
refused to pay on demand an action against the institution
for money loaned. Post notes were not declared illegal,
but the practical effect of this law was to make them
payable on demand. Under the safety fund act, no bank
could issue any note unless the same were payable on
demand. In 1837 a petition was presented to the legislature that the safety-fund banks be permitted to issue
post notes for a limited period; c a legislative committee,
however, reported that this measure would be inexpedient, for banks which had already extended loans would
still further increase their obligations. Moreover, the
privilege would increase the practice of usury. d In 1840
the issue of post notes was made a misdemeanor.
In Pennsylvania the Manual Labor Bank of Philadelphia, in 1836, issued post notes in denominations of $1
a Whitney, the Suffolk Bank, p. 6.
& Acts, Mass., 1836, ch. 255, p. 967; Acts, 1837, ch. 224, p. 252; Martin,
Boston Stock Market, p. 9.
c Assembly Document, N. Y., No. 293, April 18, 1837.
d Assembly Document, N. Y., No. 309, April 25, 1837; see, also, Raguet
Currency and Banking, p. i n .




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to $20. This was a weak bank and soon failed.0 The
United States Bank in Philadelphia, in 1837 and 1838, put
out sixty-day bills paying 6 per cent interest, and it was
estimated that over $2,000,000 of these notes were held
by New York City banks.& The Second United States
Bank at the very outset of its existence voted to issue
post notes at sixty days for loans granted. 0
The legislature of Alabama, in 1824, authorized the
Bank of the State of Alabama to issue post notes " t o
order," not exceeding one hundred and twenty days; and
in 1834 the Bank of Mobile and its branches were authorized to issue post notes without interest until demand for
payment. They were made payable to a specified person
for a time not exceeding ninety days. In the following
year the bank was allowed to issue only up to one-half of
its paid-up capital and one-half of these notes were made
payable in specie at Philadelphia, New York, and Boston.
An extension of this privilege was granted in 1840 (February 3). Each of the specie paying banks was authorized
to issue $500,000 in post notes.
Mississippi, in 1837, allowed banks to issue post notes to
bearer, interest not to exceed 5 per cent and loaned at a
rate not exceeding 9 per cent. They were limited in time
to from six to thirteen months. The bank was obliged
to receive these notes for their own debts and they were
made receivable for taxes. d The Brandon Bank in 1838
made arrangements to redeem its circulation with Seventy's Niles, 56:36.
b Sumner, History of Banking, 11296.
c January 30, 1817; Sumner, History of Banking, 1:79.
d Acts, Miss., Special Session of 1837.




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day post notes payable in Philadelphia." In 1838 the
Mississippi Union Bank issued post notes on the ground
that there was nothing in the charter which prohibited
them, and because of the suspension of specie payments.
The governor in the next year complained that this
practice forced borrowers to pay at the rate of 22 per
cent, and in 1840 the issue of such notes was prohibited.
The Bank of Arkansas issued post notes from its establishment. The Bank of Tennessee in 1839 reported that
it had issued post notes on the ground that it was impolitic
during suspension to issue paper purporting to be payable
on demand without any intention of complying. They
had, therefore, issued twelve months' post notes with the
promise to redeem them when resumption took place.
Ohio in 1819 prohibited the issue of such notes, but they
were in use in 1839^ In Indiana the court stated that it
knew of no principle of commom law that required bills
or notes to be made payable on demand. As time paper
was regarded with disapproval, prohibition was inserted
in the banking act of 1829, but this applied only to banks
chartered under that act. As banking associations again
resorted to such issues in 1838, they were definitely forbidden by the legislature in 1840.
XV. NOTE BROKERAGE.

The establishment of many weak banks after the dissolution of the First United States Bank in 1811, vitiated
the currency and led to the issue of notes of depreciated
credit. The shaving of bills began to be a regular business,
a Raguet's Register, 2:43.
& Report of Bank Commissioners, Ohio, 1840.




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and a general system of brokerage in the buying and
selling of notes was developed. Note brokers first appeared in Boston when the State " r a n bank mad," a and
at that time " to the citizens of the Middle States there was
nothing more ridiculous than that of discounting bank
notes/' Such a business naturally flourished during the
period of the suspension of specie payments between 1814
and 1817, and by 1818 in every town large or small where
there was a bank one or more of these brokers might be
found, many of whom made $20,000 a year profit. Evidence of commercial embarrassment and of losses to bill
holders is without limit; countless illustrations can be
found in Niles' Register.b For example, in 1817 it is
noted that the bills of the banks of the District of Columbia were from 1 to i ^ per cent below par in Baltimore, only 40 miles away, and the bills of the Baltimore banks suffered about the same depreciation in
Washington. The bills of the State Bank in North Carolina were 4 per cent below par in Baltimore, while those
of the latter place were at the same discount in North
Carolina. " Since I began to write this article I have
paid as much discount on bank notes to get Baltimore
paper as my semi weekly marketing costs me." c Not
one trader in a hundred dared to demand of a bank the
payment of $1,000 of its notes. The bank regarded
every man as an enemy that asked it to meet its own
obligations. Niles recalls that he was among the most
a Niles, 15:218, November 21 1818.
& For prices of bank notes 1814-1841, see Gouge, Journal of Banking, pp.
354-355c Niles, 12: 262, June 21, 1817.




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zealous to support the banks in their refusal to redeem
during the war period, but now in times of peace, when " I
see speculators and stock jobbers and money changers
fatted like stall-fed oxen by a sequence of things that is
against all law and justice by the patriotism of the people,
it cuts me to the quick that I still suffer at the rate of
$300 or $400 per annum of my hard-gained earnings in
discounts on bank paper received at par, and as good, if
not better, as that which they have been pleased to fix
upon as a standard of value. "a In 1820, when conditions
had improved, the paper of Boston banks could not be
converted into passable money at Baltimore for less than
1 per cent and the discount on Baltimore bank bills was
even greater at Boston. Niles contrasts this with the
period eight or nine years before, when almost every bank
note received by him from any part of the United States
served all the purposes of specie without the aid of a
broker and without loss.6 At one time a large part of the
current money in Baltimore was composed of notes of
banks in the District of Columbia and Virginia, and was
at a discount of from 1 to 1 ^ per cent. The banks
consequently agreed to accept these notes at what was
called "short entries," to be carried out at the end of
forty-five days, equal to a discount of from three-fourths
to 1 per cent. c In 1828 it was estimated that the cost
for brokerage to citizens of Baltimore amounted to
$45,000 a year. Banks also engaged in this brokerage; in
a

Niles, 12; 262, June 21, 1817.
& Ibid., 19:81, October 7, 1820; for tables of prices of bank bills, see Ibid,
October 8, 1818, 14:396,415; July 10,1819; 16:321, 38:197 contains a table
showing prices between 1816 and 1829.
c
Ibid., 24:257.




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1823 it was reported that two Connecticut banks placed
in the hands of New York brokers a large sum for the
purpose of purchasing notes of other Connecticut banks
which were below par and then collecting on these banks.
A profit of 15 per cent per annum was thus made. 0
As late as 1834 the bills of New England banks were at
2 per cent discount in Baltimore, and those of New York
State outside of New York City were from 2% to 3 per cent.
Virginia money was from 4 to 5 per-cent discount in Baltimore, good banks in Ohio at 10 per cent, and in Boston
the notes of New York City were at 1 per cent discount,
and those of Philadelphia and Baltimore at 2 per cent. 6
Niles relates the following incident as an illustration of the
embarassment of using local bank currency in that year:
A gentleman of Connecticut called at his office in Baltimore to pay $5; he offered a $20 bill of the Phoenix Bank
of Hartford, and received a $5 Philadelphia note and one
of $10 of the Bank of the Valley of Virginia, with the
remark that the latter was better in Baltimore than his
own, the Hartford bill. The $20 note received by Niles
was sold at 1 ]/2 per cent discount, or at a loss of 30 cents on
the $5 received. The gentleman carried the Valley note
home to Connecticut, but could not dispose of it at less than
8 per cent discount, and consequently returned it. Niles
thereupon sent him a bill on a Hartford bank directly
obtained in exchange for the note which he had transmitted
with 7y 2 cents in his favor for such exchange at the brokers'
rates, which he waived.6 According to Niles, the dis-




a Niles, November 22, 1823.
&Ibid., 46:17, 85, 132, 133, 190, 191.
c Ibid., 47:218.
no

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count paid by New York merchants on Western bank notes
was over $500,000 per annum.
Another illustration is furnished by Lowndes, in his Letters to Calhoun,0 in a condensed journal of a traveler who,
about 1840, left Virginia for the West.
1
'Started from Virginia with Virginia money; reached
the Ohio River; exchanged $20 Virginia note for shinplasters and a $3 note of the Bank of West Union; paid away
the $3 note for a breakfast; reached Tennessee; received
a $100 Tennessee note; went back to Kentucky; forced
there to exchange the Tennessee note for $88 of Kentucky
money; started home with the Kentucky money. In
Virginia and Maryland compelled, in order to get along,
to deposit five times the amount due, and several times
detained to be shaved at an enormous per cent. At Maysville wanted Virginia money; couldn't get it. At Wheeling exchanged $5 note, Kentucky money, for notes of the
Northwestern Bank of Virginia; reached Fredericktown;
there neither Virginia nor Kentucky money current; paid
a $5 Wheeling note for breakfast and dinner; received in
change two $1 notes of some Pennsylvania bank, $1 Baltimore and Ohio Railroad, and balance in Good Intent shinplasters; 100 yards from the tavern door all notes refused
except the Baltimore and Ohio Railroad; reached Harpers
Ferry; notes of Northwestern Bank in worse repute there
than in Maryland; deposited $10 in hands of agent; in this
way reached Winchester; detained there two days in getting shaved. Kentucky money at 12 per cent, and Northwestern Bank at 10."
a Pp. 60-61.
24635—10




8

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Efforts were made in some States to restrict this traffic,
as, for example, in Maryland, where a law was passed in
1818 forbidding officers of banks in particular, as well as
other persons, from buying or selling the notes of any bank
in the State for less than the nominal value of the notes,
under penalty of a forfeiture of double the sum. a This,
however, did not restrain dealings in notes of foreign banks,
and in 1840 it was reported that some of the banks purchased such notes at a discount.6
XVI. SYSTEM OF VOTING.

In order to encourage participation in bank ownership
by persons of small means, and as a further check against
the monopoly of power by the rich, a system of regressive
voting for many years was almost universally followed.
Even Hamilton criticised the charter of the Bank of
North America because it adopted the principle of one
share, one vote, which promoted monopolization of the
power and benefits of the bank. The articles of association of the Bank of New York, 1784, in which Hamilton
was interested, limited the number of votes which a
stockholder could have: one vote for every share up to 4;
for 6 shares, 5 votes; for 8 shares, 6 votes; for 10 shares,
7 votes, and for every 5 shares above 10, 1 vote. c
The First United States Bank allowed 1 vote to 1 share,
2 votes to 3 shares, 3 votes to 5 shares, and so on until 100
shares had 20 votes. Different scales were adopted in
different States. In the Providence Bank in Rhode
a Acts, Maryland, session 1818, ch. 191.
& Report of Bank Commissioners, Maryland, 1840.
c Domett, Bank of New York, p. 12.




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Island, 1791, ioo shares gave 20 votes, and 200 shares 30
votes, the maximum allowed to anyone ;a in the Exchange Bank of Providence, 1801, the upper limit was
extended to 100 shares; in 1804, in the charter of the
Rhode Island Union Bank, the restriction, however, was
abandoned and for the first time in that State voting
power was proportionate to shares held. 6 Connecticut
likewise rejected this system in 1796, and made voting
power proportionate to share interest. In Massachusetts
there was 1 vote for 1 share, and for every 2 shares above
1, 1 vote with a maximum number of 10. Later the rule
was 1 vote for 1 share and 1 for every 10 additional shares,
until 10 votes, the maximum, was reached. By an act
of 1840, no one by proxies could cast more than 50
votes, and no officer of the bank more than 10.c In
New Hampshire, voting at an early date was according
to stocks New York also adopted the principle of
restricted voting/ In New Jersey, down to 1833, the
charter restricted the number of votes, and occasionally
after that date.
In Pennsylvania the system of graded voting was continued in the general act of March 25, 1824, and also incorporated in the charter given to the Bank of the United
States in 1836. Maryland introduced the graded system at an early date, and in 1820, a more curious restrica

Stokes, Chartered Banking in Rhode Island, p. 4.
Ibid., p. 17.
c Acts, 1840, ch. 61, p. 208.
d Commercial Bank, Portsmouth, 1825.
e Mechanics' Bank, 1810, 1 vote for every share up to 20; 1 for 5 shares
above 20 up to 100; 1 vote for every 10 above 100; Bank of America, 1812,
maximum number, 30 votes.
&




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tion was approved, whereby stockholders living within
10 miles of a bank could not vote by proxy, except
females and persons unable to attend by reason of bodily
sickness. Virginia continued the principle of a decreasing
scale in her general law of 1837.®
Alabama, in the charter of the Planters' and Mechanics'
Bank, 1816, set 100 votes as the limit. 6 Florida, in 1829,
also imposed a limitation of voting upon the stockholders
of the Bank of Florida, and in the charter of the Bank
of Pensacola, 1831, restricted the maximum to 30. Before the bank went into operation, however, the charter
was amended so as to give proportional rights. By a
charter in 1833, 1 vote to a share was repeated, but
the maximum number of votes was fixed at 100. In
the Commercial Bank of New Orleans, 1833, no one
could have more than 100 votes, and only those living
more than 5 miles from the city could vote by proxy.
It was also generally required that shares should be held
for at least three months in order to entitle the holder to
vote.
Ohio, in the charter of the Bank of Marietta, 1808, the
first established, made votes proportional to shares, but
in 1809 adopted a regressive scale. c The ratio, as adopted
in the charter of the Franklin Bank in 1833, was 1 vote
for each share up to 20; 1 vote for 5 shares above that,
with a maximum of 50. The Louisville Bank, in Kentucky, 1833, gave 1 vote for every share up to 50; for
every 5 above 50, 1 vote; and for every 20 above 100,




a Laws, Va., 1836-37, ch. 82, sec. 6.
& Toulmin's Digest, p. 39.
c Bank of Steubenville.
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i vote. The charter of the State Bank of Indiana, 1834,
limited the maximum number of votes to ioo; a later,
in a charter of 1855, the rule was 1 vote for each share up
to 50; 1 vote for every 5 shares from 50 to 100; and 1 for
every 10 shares over ioo. 6 Missouri, in 1813, fixed a
scale making 17 votes as the maximum.
XVII. LIABILITY OF DIRECTORS.
In the early development of banking, great stress was
laid upon faithful service by directors, and in order to
secure this, heavy liabilities were placed upon them. As
a rule, the members of the managing board were made
individually liable in their private capacities if debts or
liabilities exceeded the legal limit. Directors could exonerate themselves if they were absent, or if they dissented when the excess of indebtedness was contracted,
by giving immediate notice to that effect. Such was
the case in the charter of the Massachusetts Bank, 1784,
and of the First Bank of the United States, 1791. The
rule established for this bank was almost universally
copied in the subsequent charters of local institutions. 0
Frequently notice of dissent had to be given to some
public official as well as to the stockholders, as, for example, in the case of the First United States Bank, to
the President of the United States, and to the mayor of
the city by the charter of the Bank of Alexandria, 1792,
and in Maryland, to the governor.
° L a w s , Ind., 1834, ch. 7, sec. 3.
&Ibid., 1855, ch. i n , sec. 27.
c General law of Pennsylvania, 1824; general law of Massachusetts, 1829;
branch of the Bank of the State of Alabama, Mobile, 1832; Franklin Bank,
Cincinnati, 1833; Louisville Bank, 1833; Farmers' and Mechanics' Bank,
Hartford, 1832.
115




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In Vermont and Connecticut liability for redemption
of note issues was imposed upon the management. In
Vermont " directors were made liable for the debts of
their bank should successive issues take place under
fheir administration. Each director, too, was obliged
to give a satisfactory bond, usually $8,000, as a guarantee of the faithful performance of his duties. In Connecticut the directors and cashiers were held liable as
joint and several debtors should the debts of the institution exceed the amount specified in the charter." a
In some charters, directors were made liable if the
capital of the bank was impaired by the payment of a
dividend. Maryland recognized this principle in 1804, in
the charter of the Union Bank in Baltimore; Missouri,
in 1813, in the charter of the Bank of St. Louis; and Virginia adopted it in her general law of 1837; while Congress imposed this obligation upon banks incorporated in
the District of Columbia in 1817. Rhode Island, after
the scandal attached to the failure of the Exchange Bank
in 1805, made the directors personally liable for all debts
of the bank after the property of the corporation was
exhausted. 6 Directors and officers in the Arcade Bank,
Rhode Island, 1833, who committed fraud or embezzlement forfeited their shares, in addition to liability for
prosecution. Impairment of capital, irrespective of the
cause, made directors personally liable in the general
banking law of Pennsylvania, in 1824, and the same was
true of the Franklin Bank, Cincinnati, 1833, a n d the
a Iy. Carroll Root, Sound Currency, 8:216.
b
Stokes, Chartered Banking in Rhode Island, p. 21.




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Louisville Bank, 1833. In New Jersey, beginning with
1812, directors were liable for impairment of capital paid
out as dividends as well as for incurring indebtedness in
excess of legal limits By a charter, in 1818, directors
were liable for all notes for which the bank refused redemption; 6 and this was repeated in charters of 1828,
1830, and 1855.
North Carolina, in the charter of the Mechanics' Bank,
Newburne, 1833, made the illegal extension of the bank's
credit a felony on the part of the directors, and in another
charter, in 1846, defined it as a misdemeanor. The charter of the State Bank of Indiana made directors liable
for excess of debt and also in case of fraudulent insolvency. c
XVIII. LIABILITY OF STOCKHOLDERS.

In the first bank charters no special liability was placed
upon stockholders, and attempts to introduce this principle did not generally meet with success. Pennsylvania,
in 1808, passed a law imposing individual liability
but repealed it two years later. d Finally, in 1811,
the legislature of Massachusetts, owing to an increasing
distrust of banks, made stockholders individually liable
to the amount of shares held, if any loss arose on
account of mismanagement, as a condition for securing
further extensions of charters. An example of the
loose liability then existing is seen in the action of
the Hallowell-Augusta Bank, in Maine, which, in 1813,
a Laws of New Jersey, 36 Assembly, 2 sess., pp. 11, 12, sec. 24.
b Sussex Bank, Priv. Acts, N. J., 42 Assembly, 1 sess., p. 61.
cLaws, Ind., 1834, ch. 7, sees. 98, 101.
d Laws, Penna., 1807-1808, p. 186.




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divided 75 per cent of its capital among stockholders,
although there was outstanding a large amount of bills.
The supreme court of Massachusetts, in 1819,° decided
that the individual stockholder was not liable to a holder
of notes. h In 1849 liability was extended to cover redemption, whether failure was due to maladministration or not.
In New Hampshire, by the charter of the Concord bank,
1806, stockholders were made jointly and severally liable
for the redemption of bills issued; this requirement was,
however, dropped in the renewal of the charter in 1824,°
but as a rule unlimited liability prevailed. In Rhode
Island, stockholders' liability beyond the amount of investment was not introduced until 1814, in the charter of the
Union Bank, and then only when the directors violated
the bank process act; d but beginning with 1833 nearly all
charters provided for unlimited personal liability of stockholders.6 This discouraged the investment of trust funds
in bank stock, as well as ownership by silent partners who
did not care to concern themselves actively in the affairs
of their institutions./ In Vermont a bank was chartered
in 1817, which made stockholders liable in their personal
fortunes, but owing to the risk thus incurred it was not
put into operation. In the following year this burden
was removed, and as a rule liability was imposed upon
the management rather than upon the stockholders.
a Speare v. Grant, Massachusetts Reports, 16, p. 19.
& Gray v. Portland Bank, Massachusetts Reports, 3, pp. 378-383.
c Report of Bank Commissioners, New Hampshire, 1840.
d Stokes, Chartered Banking in Rhode Island, p. 30.
«Ibid., 40.
/ W. Phillips, Political Economy, p. 263.




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In New York, when the safety fund system was under
discussion in 1829, it was argued that protection of a
bank's creditors could be accomplished better by an
insurance fund than by placing the liability upon stockholders and directors; the latter would not invest
capital subject to extended liability so long as it was
possible for speculators to get control and mismanage
the bank. 0 As a result, stockholders in the safety fund
banks enjoyed freedom of liability, and nonliability was
extended to stockholders of the free banks authorized
in 1838, but in the State constitution of 1846 stockholders of all banks were made responsible for an amount
equal to stock paid in. In Maryland, the constitution
of 1851 required double liability.
Stockholders in the Bank of Alexandria (Va.), 1792,
were liable in proportion to their holdings in case debts
exceeded four times the capital, but only when the
directors' property was not sufficient.6 In charters
granted in the middle of the century the liability covered the circulation and express contract debts of the
banks. 0 Florida, in 1829, provided for liability in proportion to shares, and in 1843, made the stockholders of
the Bank of Florida liable for three times their stock.
Two years later the constitution made stockholders
individually liable for all debts in case of dissolution or
suspension of redemption.
a
See Plan of Joshua Forman; Message of Governor Van Buren, January
26, 1829.
& Laws, Va., 1792, ch. 76, sec. 13.
c Laws, Va., 1850-51, ch. 58, sec. 10; Laws, 1855-56, ch. 80, sec. 21.




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In Ohio a legislative committee, in 1839, reported in
favor of individual liability of stockholders to be applied
when banks owed one and one-half capital or when any
bank, from insolvency or suspension of more than thirty
days, was subject to the forfeiture of charter, and in 1842
individual liability was imposed. The state treasurer of
Michigan, in 1850, stated that the principle of individual
liability of stockholders, which had been previously
enacted, while it exercised a restraining influence, was of
small value to the noteholder in case of failure. Collection by the tedious process of the law forced the holder of
notes to sell them at the highest price in the market.
The Indiana stockholders in the state bank were made
liable in case of fraudulent insolvency for debts which
could not be collected from directors.a Double liability
only was adopted in the general law of 1855.b The charter of the Shawneetown Bank, in Illinois, provided that
the private property of stockholders should be held for
redemption of bills. By the banking law of Wisconsin,
1855, stockholders were required to execute a bond to
the amount of one-fourth of the circulating notes, as a
security over and above that deposited to indemnify the
bill holder.
XIX. QUALIFICATIONS OF DIRECTORS.

Further evidence of the early fear of a money power
is found in the restrictions placed upon the selection of
directors. These limitations were of a varied character,
including conditions as to length of service, residence,




a Laws, Ind., 1834, ch. 7, sec. 102.
& Laws, Ind., 1855, ch. 7, sec. 22.
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incapacity to serve as director in more than one bank,
ineligibility of public officials, and occupation. Later,
ownership of a certain amount of stock was sometimes
imposed.
(a) Length of service.—Hamilton, in his bank report of
1791, objected to the charter of the Bank of North America, because it did not provide for the principle of rotation
in the board of directors, so as to lessen the danger of
combinations among directors to use the bank for personal purposes or to monopolize its funds for the accommodation of any particular set of men. In accordance with this view, the charter of the First United
States Bank, 1791, provided that not more than threefourths of the directors, exclusive of the president, should
be eligible for the next succeeding year. This proportion
is to be found in many charters of state banks. Massachusetts followed it in her early acts, a and Connecticut
adopted this rule in the charter of the Hartford Bank,
1792. Maryland, in the act incorporating the Bank of
Baltimore, 1795, made the proportion two-thirds, but
in 1800 this restriction was repealed, subject to the consent of the stockholders. For many years, however, no
advantage was taken of this privilege. By the charter
of the Union Bank of Maryland, 1805, n o director could
serve for more than three years until two* years had
elapsed. In the charter of the Second United States
Bank, 1816, no director could hold office more than
three years out of four in succession. By this time,
however, such a restriction was being dropped in many
o Union Bank, 1792; Nantucket Bank, 1794; Newbury port Bank, 1795.




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States, and Cheves, president of the bank in 1821, complained that its application deprived his institution of
the services of qualified men, and as it was no longer to
be found in charters of other respectable banking
institutions, it ought not to be imposed hereafter on the
Bank of the United States. 0 Cheves was hardly justified
in this sweeping statement, for the restriction was incorporated in the general banking legislation of Pennsylvania,
1824, and also in the charter of the Bank of the United
States, granted by that State in 1836. The charter of
the Louisville Bank of Kentucky, 1833, limited eligibility
to two years in succession.
(b) Residence.—A common restriction was the requirement that directors should be residents of the State in
which the bank was organized, but in many cases a more
definite residence was prescribed. By the general banking law of Massachusetts, 1829, a majority of the directors
of its banks must be residents of the county in which
the bank was situated, and in 1853 this requirement was
repeated with a modification of residence to within 10
miles of the bank. The charter of the Washington
Bank in Rhode Island, 1800, which was organized for
the special benefit of farmers and mechanics, required
that two-thirds of the directors and the president should
be residents of the county. b A legislative committee in
1836 noted with approval that the directors of a large
majority of the banks resided in or near the town where
the bank was established, but reported that there was
a Memorial to the House of Representatives, January 21, 1821, Finance,
3:587.
& Stokes, Chartered Banking in Rhode Island, p. 13.




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one exception—a bank in Foster, six of whose thirteen
directors resided in Providence.
In New Jersey restrictions as to residence were not
uniform. In a charter of 1822, a director must be resident of the county in which the bank was located; in the
Peoples' Bank at Paterson, 1824, seven out of the thirteen directors must be inhabitants of Paterson; in another
charter in the same year, they were required to be inhabitants of the county; in yet another, they need simply be
citizens of the United States; and in a fourth, citizens of
NewT Jersey. In a charter of 1828 the president must
reside within 3 miles of the bank, but later the distance
was increased to 10 miles. In a charter of 1834 eight
of the thirteen directors must reside in the town where
the bank was established. In 1835 a charter was granted
permitting two directors to be citizens of Pennsylvania,
and by another in 1855 eight out of thirteen directors
must reside in Newark.
All of the thirteen directors of the Girard Bank in Philadelphia were required to be residents either of the city
or county of Philadelphia. The charter of the Mechanics'
Bank in Baltimore, 1806, required the directors to be residents of that city, but this restriction was removed in
1815, so as to permit the service of residents of any part
of the State. a The charter of the Exchange Bank of
Virginia, 1837, permitted two directors to be residents
of North Carolina.6 In 1838 the governor of Louisiana
vetoed a bill which provided that a director should have




aLaws,Md., 1814, ch. 53.
&Laws, Va., 1836, ch. 83, sec. 17.

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five years' residence instead ot one. In Missouri the charter of the Bank of St. Louis, 1813, demanded that all of
the directors should be residents either of St. Louis or of
Ste. Genevieve.
(c) Incapacity to serve as director of more than one bank.—
This restriction was common to all. In 1811, Massachusetts, in a charter of the State Bank, forbade any director
to serve in the same capacity in any other banking institution, and this requirement was later incorporated in
the Revised Statutes, and also in the safety-fund act of
New York in 1829. The same limitation is to be found in
the general banking law of Pennsylvania, 1824. As a
rule, this prohibition was extended so as to exclude those
who were partners in trade with a director in any other
bank.
(d) Ineligibility of public officials.—By a general law
of Pennsylvania, 1824, all executive and judicial officers
and members of the legislature were declared ineligible.
This restriction, although dropped in some of the subsequent charters, reappeared in that of the Bank of the
United States in 1836. By the charter of the Farmers'
Bank of Virginia, 1812, officials of both the State and the
United States were declared ineligible,a and this restriction was continued in the general law of 1837; in 1842,
general agents of manufacturing and mining companies
were also declared ineligible. In the charter of the Bank
of Florida, 1828, and again in 1845, government officials
were excluded. Certain state executive officers were




< Acts, Va., 1812, pt. 1, vii, sec. 15.
*

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State

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also excluded from the directorates of the State Bank of
Indiana.
(e) Ownership of stock.—As a rule, a director was required to be a stockholder, but not necessarily a large
owner; in Massachusetts a single share qualified. By
the charter of the Exchange Bank in Providence, R. I.,
1801, he must own 20 shares, and this amount was repeated in subsequent charters. In 1831, in the charter
of the Bank of America in New York, an amendment was
inserted requiring directors to own $1,000 of stock. There
was, however, no general rule in that State; in some banks
with a capital not over $100,000 a director must own
$1,000, while in one with a capital of $250,000 only $250
was required.** In the Merchants' and Mechanics' Bank
of Virginia, 1834, a director must own 10 shares, and
by a general law of 1837, 5 shares were fixed as the rule.
Ten shares were imposed in the charter of the Union Bank
at Tallahassee, Fla., in. 1833; a n d i*1 that of the Union
Bank of Louisiana, 1832, 50 shares. In the case of the
Franklin Bank of Cincinnati, 1833, 10 shares were required; in the Bank of Kentucky, in the same year, 25
shares; and in the State Bank of Indiana, 1834, 5 shares.
A more exceptional qualification was a requirement that
a certain number of directors should be engaged in some
particular occupation. For the management of the Mechanics' Bank of New York, 1810, seven of the thirteen
directors were required to be members of the General Society of Mechanics and Tradesmen of the city of New
York, of which four must actually be following a mechano Report of Bank Commissioners, New York, 1835.




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ical profession. In the general banking act of Pennsylvania in 1824, provision was made for the Mechanics'
Bank in Philadelphia, in which no person was eligible for
director unless he was a mechanic actually engaged in
some mechanical occupation which he had followed for
one year; and in the Farmers* and Mechanic's Bank at
Pittsburg the directors must be mechanics or farmers.
The charter of the Mechanics' Bank in Baltimore, 1806,
demanded that nine of the fifteen directors should be
"practical mechanics or manufacturers." In 1810 this
requirement was defined by a special act so as to mean
those who " shall have actually learned and wrought at
some mechanical or manufacturing trade for a term of
three years," and shall have been so engaged for at least
one year next preceding election.0 In 1818 this restriction was further modified so as to require only a majority
of the directors to be so engaged.b In Ohio, the charter
of the Farmers' and Mechanics' Bank of Cincinnati, 1813,
required that one-third of the thirteen directors should be
practical farmers, and one-third practical mechanics. 0
XX. REPORTS FROM B A N K S ; S U P E R V I S I O N .

Legislatures were slow in requiring reports or annual
returns from banks in regard to their condition. Indeed,
during the first part of the century, the accounts of banks
were guarded with secrecy; and writers on banking problems frequently refer to the lack of data. Matthew Carey,
for example, writing in 1811 on the First Bank of the United
o Laws, Md., session, 1810, ch. 134.
6
Laws, Md., session, 1817, ch. 39.
c Drake, Pictures of Cincinnati in 1815, p. 15.




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States, complained that he " labored under a most distressing destitution of material and documents. ,,a This
bank by its charter was required to make regular returns
to the Treasury Department, but only two of these found
the light of publication. "A Friendly Monitor," writing
in 1819, refers to his "embarrassment'' in obtaining the
most simple information in regard to the bank (Second
Bank): "If I ask a director, the seal of his finger is significantly on his lips." Dr. Eric Bollman, in his essays,
also alludes to this difficulty.b When Niles began to devote
a considerable amount of attention to the banking question
between the years 1818-19, his efforts to collect information were in a large measure unsuccessful. Secretary
CrawTford, in his report in 1820, was unable to obtain reliable data as to the capitalization of banks, and Gallatin,
who wrote at length on the subject of banking in the United
States, in 1831, obtained different figures from those of
Crawford, both as to capital and circulation; for example,
Crawford gave the circulation in 1815 as $110,000,000,
while Gallatin put it at $45,000,000. Gouge, writing in
1833, says that for seven years he had been collecting
accounts of banks, but did not think it worth while to publish them. He had a list of 28 failed banks which Gallatin
had not listed, and he notes that the latter had to guess at
the amounts of specie held by many banks.
In the first charter granted by Massachusetts, that of
the Massachusetts Bank, 1784, it was provided that any
one appointed by the legislature should have access to the
a
Letters to Dr. Adam Seybert, 1811, p. v; see also Tucker, Money and
Banks, p. 210.
&
See also Dunbar, Accounts of First United States Bank, in Economic
Essays, p. 171.

24635—10




9

I2y

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bank.® This right was repeated in subsequent charters.
In 1802 the legislature requested the governor to lay before
it at the next session the most recent bank statements. 5
This was followed in 1803 by an act calling for semiannual
statements to be made to the governor covering the following items: Capital paid in, debts due the bank, deposits,
notes in circulation, coin and metals on hand, notes of
other banks, distinguishing between those of Massachusetts banks and those outside; this statement was to be
signed by a majority of the directors and attested by the
cashier.0 In 1806 the cashier was required to take oath
and the range of items was slightly amplified, so as to
include the value of real estate. A distinction was also
made between "debts on interest'' and "debts not on
interest." In the circulation, the amount of notes under
$5 was called for and also the amount on hand. d In 1807
the banks were obliged to state the last dividend paid
and their profits at the time the dividend was declared.
In 1813 a further step was taken by adding a penalty of
$5,000 for neglect on the part of the bank to make the
return within fifteen days. 6 In 1838 a board of three
bank commissioners was established, appointed by the
governor, who should make annual examination of all the
banks in the Commonwealth, with special reports if requested by the governor. If the condition of any bank
was hazardous to the public or to those having funds in its
custody, or if it had exceeded its powers or had violated the
banking laws, the commissioners were authorized to proa

d

L a w s , 1780-1800, 1:115.
& Resolves, 1802, p. 380.
c
Acts, 1802, ch. 132.




128

Acts, 1805, ch. i n .
« Acts, 1813, ch. 140.

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cure an injunction from the supreme judicial court. This
board continued in existence for five years, during which
time it procured injunctions against seven banks. I n
1851 the board of bank commissioners was reestablished,
with practically t h e same powers and duties as the former
board.
Connecticut, in 1803, enacted t h a t the State should be
furnished b y the five banks which held the public deposits
with certain d a t a in regard to their condition, not oftener
t h a n once a m o n t h ; this was not for the protection of
depositors, b u t for t h e benefit of t h e State. a In 1822 a
general act was passed requiring t h e incorporated banks
of t h e State to report to t h e comptroller certain statements
covering t h e capital stock, debts due, deposits, notes in
circulation, etc., b u t there was no uniformity in rendering
the returns. No provision was made for official inspection or for t h e publication of reports. According to Woodward, the historian of t h e Hartford Bank, " a s t h e banks
had pursued a conservative course, and as no machinery
was supplied for correction of abuses, the law took b u t a
slight step forward in t h e way of supervision. Perhaps
the legislature wished to emphasize the right of t h e people
to know t h e condition of the institutions which furnished
their currency and had custody of their notes." h In 1836
the state treasurer, comptroller, and commissioner of the
school fund were appointed a committee to examine banks,
with authority to inspect all books and papers and to
examine bank officials under oath. When the Hartford




a Woodward, The Hartford Bank, p. 83.
b Ibid., p. 127.

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Bank was called upon for a total statement of assets and
liabilities its directors maintained that the proposed
method of inquiring into its affairs encroached upon the
privileges of its charter. The bank also claimed that its
charter was irrevocable and not subject to amendment
without consent of its stockholders, but in order to avoid
suspicion, it granted a full examination, reserving, however, its rights. In 1837 a law was passed providing for
the annual appointment by the legislature of two bank
commissioners whose salaries were to be paid by the banks
according to their capitalization. The Hartford Bank
and two others refused to pay their assessment, but in
1841 the former settled the proportion levied upon it
without acknowledging any legal liabilty, but as an act of
grace, believing " t h a t the services of judicious bank commissioners are highly beneficial to the public interest.'' a
From this time on opposition to supervision gradually
disappeared. b
In Vermont a board of three bank commissioners was
authorized in 1831. In New Hampshire it was reported
in 1840 that no examination of the Concord Bank had
been made since 1812. In Rhode Island annual returns
were required, but it was asserted that these did not
furnish a satisfactory disclosure of the condition of banks.
Banks set their affairs in order that they might make a
favorable showing. In 1836 a board of bank commissioners was established; in 1842 the act was repealed
and semiannual returns only were provided for; later, in




a

Woodward, The Hartford Bank, p. 141.
& See also Merchants' Magazine, 39:97.
130

State

Banking

Before

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ft^ar

1849, the returns were made annual, and again in 1856, a
board of commissioners was revived.
Down to 1824 banks in New York were not required to
make returns regularly. In 1827, by a general law, reports
to the state comptroller were demanded, and two years
later the safety-fund act provided for three bank commissioners, one appointed by the governor and two by the
banks, with power to make quarterly visits. Banks were
also required to report annually to the commissioners.
In 1835 reference was made to the beneficial effects of
periodical examinations, and the existing system was contrasted with former conditions when a bank director
deemed it one of his most important duties to throw an
impenetrable veil of secrecy around all the proceedings of
his institution. It was expected that the country banks
would be represented by one commissioner and the city
banks by another, and that these would be a check upon
each other. The governor and senate appointed one, the
banks in the southern part of the State another, and the
remaining banks a third. In 1837 the law was changed so
as to give the appointment of all three to the government;
but this brought them " within the vortex of the great political whirlpool of the State." ° In 1843 the board of bank
commissioners was abolished and returns were made to
the comptroller. In 1853 a ^ banks, banking associations,
and individual bankers in New York city were required to
publish a weekly average statement of their condition.
In New Jersey annual reports to the legislature were
required, beginning with 1812, but the number of items




a

Report of Comptroller of New York, 1848.
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Commission

was small. In an act of incorporation in 1824 failure to
report for three years forfeited the charters In 1837 the
returns were made more detailed, including capital, stock
notes, stock securities for loans, specie, real estate, debts
classified, surplus, expenses, dividends, amount of discounts, interest, and deposits.b In 1850 failure to file a
report entitled the chancellor to begin proceedings to dissolve the bank. c
The Bank of Pennsylvania in 1803 by its charter was
required to make a report annually to the legislature.
The act of 1814, creating a large number of new banks,
demanded that annual reports be made to the auditorgeneral, but complaints were subsequently made that down
to 1833 the Bank of Pennsylvania and Bank of North
America did not make regular returns.**
In Maryland, the charter of the Bank of Baltimore,
1795, provided for annual reports, or oftener, if required,
and gave power to the treasurer of the State to inspect
the general accounts of the bank, but not the accounts of
any private individual. This examination was not to be
used for any other purpose than for forming a just opinion
of the state of the bank relative to public safety and the
profits of the bank. (Art. 19.) A similar provision is to
be found in the charter of the Mechanics' Bank of Baltimore, i8o6. g This requisition of an annual report or the
o Priv. Acts, N. J., 39 Ass., p. 41, s e c , 14.
& Acts, N. J., 62 Ass., pp. 11-12, sec. 2.
c Acts, N. J., 74 Leg., pp. 151-152, sec. 30-31.
d Gouge, Journal of Banking, i : 405; according to Sumner, History of
Banking, 1:175, banks in Pennsylvania made no regular returns to the
legislature until after 1817.
« Bryan, History of State Banking in Maryland, pp. 33-35.




132

State

Banking

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War

right of inspection was generally incorporated in Maryland charters, but as the State did not endeavor to enforce
its powers the banks paid little attention to it. Repeated
acts requiring the statements to be made availed little
until 1826, when a penalty was imposed for noncompliance. 0
Virginia, in the charter of the Bank of Alexandria, 1792,
called for an annual report to be presented to the governor
"truly stating the situation of the bank and its notes/' 6
and the charter of the Bank of Northwest Virginia, 1817,
demanded reports on four quarterly dates. In 1831 the
legislature required a statement as to the amount of
debts outstanding on loans made during the preceding
year, classifying them into good, bad, and doubtful. c In
1834 the charter of the Merchants' and Mechanics' Bank
called for the amount paid in, real estate, debts due and
from the bank, gold and silver deposits, bills in circulation
and bills of other banks, dividends and surplus. d In
1837 the directors were required to make an examination
once in three months and to enter their results on the
records of the bank. The directors were also required to
transmit to the governor quarterly statements of the condition of the bank, including the items above named and
also dealings in exchange and premiums paid on them,
amounts of bad and doubtful debts with the classification
of notes according to denomination, and bills in circula« Bryan, History of State Banking in Maryland, pp. 34-35, 70.
& Laws, Va., 1792, ch. 76, sec, 14.
c Bank of Virginia and Farmers' Bank of Virginia; see Resolves, 1830-31,
No. 4.
< Laws, Va., 1833-34, c n - 72> s e c - I2 «
*




133

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Monetary

Commission

tion. a The statement was to be open to the stockholders at their regular meeeting, or to any three owning
ioo shares thirty days before election; and the legislature
was given the right of inspection. In 1856 the Bank
of Virginia was required, in addition to the statutory
report, to include the debt due by banks, debt due to
banks, discount of inland and foreign bills, loans to directors, specie, circulation, and deposits. b
In North Carolina charters generally required the making of an annual report; the statement, however, was of
simple character, being a condensed summary of the
bank's resources and liabilities. Examinations were
sometimes made by special legislative committees. The
constitution of Florida, 1845, required quarterly reports
to be made to the governor and also that banks be open
to inspection at any time by an examiner appointed by
the governor. The branch of the Bank of the State of
Alabama, 1832, was required to make reports to the general assembly, and the legislature had the right to inspect
the general accounts. In 1837 a dispute arose in Louisiana
as to whether a legislative committee could inquire into
the proceedings of the Bank of Orleans. The bank refused
on the ground that this was not demanded in the original
charter in 1811, nor in the renewal in 1823, nor in the
amendments made in 1831. The bank, however, was
willing to permit inspection provided it was not regarded
as a visitorial power or claimed as a right, and justified
its position because the State had in the charters of some




a Laws, Va., 1836-37, ch. 82, sec. 6.
& Laws, Va., 1855-56, ch. 60, sec. 6.

134

State

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War

other banks expressly retained the power of inspection.
On t h e other hand, it was maintained t h a t as t h e S t a t e
was t h e guardian of the currency, it had this right in
order to protect t h e public against depreciation.
I n Ohio, a law was passed, February 23, 1816, providing
t h a t semiannual statements be made to the auditor of the
State. Very few banks complied, and the committee of
the legislature in 1820 reported t h a t there were twentythree delinquents, some of whom had let a whole year
intervene between reports, some had made returns without oath or affirmation of the cashier, and others had
m a d e no returns since they went into operation. Only
one b a n k had strictly obeyed t h e law.® Other evidence of
t h e inaccuracy of reports is to be found in the report of
a legislative committee in 1819, where it is stated t h a t
some of the banks in their returns had omitted their real
estate; some their accounts with other banks, simply
stating in general terms t h a t t h e balances were in their
favor, while others omitted to state the number of shares
owned b y t h e State or the amount of surplus and undrawn
dividends remaining in the bank. In 1839, provision was
made for a board of three bank commissioners. By the
charter of t h e S t a t e Bank of Indiana, in 1817, the governor
and t h e general assembly could call for statements not
oftener t h a n once a month, which should include the
a m o u n t of capital, debts due, deposits, notes in circulation,
and cash on hand. 6
a Senate Journal, Ohio, 1820, p. 175.
& Laws, Ind., 1817, ch. 41, sec. 10; see also Laws, 1834, c ^- 7> s e c s - 65, 66;
Laws, 1842, ch. 70; Laws, 1855, ch. 7, sec. 27.




135

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Monetary

Commission

The returns which were made by banks were in many
cases incomplete and full of ambiguities. The term
"cash," for example, was not accurately defined. In the
case of country bank notes it sometimes included city
bank notes. a Bank commissioners in Connecticut, in
1842, thought that the reports then made in that State
were useless, and if continued should be more minutely
classified. In New York, in the same year, it was complained that for several weeks prior to a return banks
commonly made a forced preparation. b
XXI. BRANCHES.

The question of the utility of extending the operations
of a bank by the organization of branches was raised at
an early date. Hamilton, in his report on establishing a
national bank, briefly refers to the subject; he admitted
that branches might afford more general accommodation
and would lessen the danger of a run upon the bank, but
on the other hand, the complexity of such a system would
be apt to inspire doubts which ought to be avoided in the
introduction of a general banking system. Each branch,
also, must be under a distinct, though subordinate direction, to whom a considerable latitude of discretion must
be entrusted. As the property of a whole institution
would be liable for the engagements of each part, the
credit of the parent bank would depend upon the prudence
of the directors of each branch. In addition, it might be
noted that while a bank could through branches colleca

See Gouge, Journal of Banking, 1:324.
& Report of Bank Commissioners, New York, 1842; Report of Bank
Commissioners, Connecticut, 1846.




136

State

Banking

Before

Civil

War

tively extend larger discounts and thus earn greater dividends, the mother bank would be obliged to curtail its
accommodation in order to be prepared to redeem the
notes of its subordinate offices.a In the charter of the
First United States Bank permission was given to the
directors to establish offices of discount and deposit only
in any part of the United States, but it was not supposed
at first that this permission would be taken advantage of.
The directors, however, promptly decided to open branches
at New York, Boston, Baltimore, and Charleston, and the
number was afterwards extended. The bank did not
take the notes of its branches, and this was one of the
grounds of criticism in 1811.6
In the charter of the Bank of Pennsylvania, 1793, provision was made for the establishment of branches anywhere in the State, subject to the consent of the town or
borough; several were" put in operation, but most of
them were discontinued by 1810. In that year a law
was enacted requiring the central bank to be responsible
for all notes issued by the branches. 0 In 1809, the Philadelphia Bank was authorized to have eight branches,
and established four. Their business exceeded that of
the parent institution and gave it much concern; ultimately they were found unprofitable, and by 1817
arrangements were made to dispose of them.
Bryan, in his " History of State Banking in Maryland,''
refers to the influence which the Scotch system had
upon the development of banking in Maryland, and to
a Matthew Carey, Letters to Doctor Seybert, p. 19.
blbid., p. 58.
c Laws of Pennsylvania, 1809-10, p. 27.




137

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Monetary

Commission

this he attributed the introduction of branch banking in
1804. It had, however, but little development; no bank
had more than two branches and only a few had any.
Attempts were made to extend the system, but they were
not successful.0 In Delaware the Farmers' Bank of
Delaware had three branches.
The Bank of Richmond in Virginia, by its charter, 1792,
was authorized to establish offices throughout the State
with separate directors or agents. It was, moreover,
provided that any town holding 300 shares should have
the right to an agent, who should forward proposals for
discount to the directors.6 The system of branches was
continued in that State for many years. c >
From the beginning branch banking was the rule in
North Carolina. In i860 there were 16 banks and 26
branches in different parts of the State. The constitution of the State of Alabama, 1819, provided that state
banks might establish branches when authorized by the
legislature; provided, however, that not more than one
be created in any one session. Although the state bank
was chartered in 1823, no branches were organized until
1832; four were finally established, but their operation led
to abuses. They were run too independently of the parent bank; discounts were extended, and the circulation
was inflated beyond a conservative limit, the State being
bonded for their issues.
a Pages 15, 83, 85.
& Laws, Va., Ch. 77, sec. 24.
c Farmers' Bank of Virginia, 1812, to have six branches; Laws, Va.,
1836-37, ch. 83, sec. 2; Laws, 1849-50, ch. 59.




138

State

Banking

Before

Civil

JVar

In 1838 the Union Bank was chartered by Mississippi
and expressly authorized to establish branches, so that
loaning facilities could be brought near to residents in
different parts of the State. The bank on a technical
excuse did not create the branches expected under the
law, and consequently brought upon itself the criticism
of the legislature.
In Missouri the charter of the Bank of St. Louis, the
first institution organized in the State, permitted branches,
provided they were 50 miles from St. Louis and the same
distance from each other. No branches, however, were
ever created. The charter of the Bank of Missouri, 1817,
provided for the establishment of a branch for discount
and deposit only in a county which subscribed for $40,000
of the total capital of $250,000.
The constitution of Indiana, 1816, forbade the establishment of a bank unless it should be a state bank with
branches. When the State Bank of Indiana in 1833 was
under consideration the chief point of dispute was the
number of branches. The bill fixed this at 10; attempts
were made to reduce it to 5 on the supposition that the
fewer the branches the less mischief there would be.
Ten branches, however, were ordered; for most purposes
they were independent banks, subject to a certain control
by the State Bank. The latter was really nothing more
than a board chosen by the legislature, consisting of a
president and four members, besides one member chosen
by each of the branches, who had certain restrictive and
supervisory functions with little power of initiative; and




139

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Monetary

Commission

banking powers were exercised through the branches. 0
The board of directors could limit and control the discounts of a branch after they reached one and one-fourth
times the paid-in capital; they could suspend a branch
and close it; could equalize the public deposits in the
branches; were required to examine each branch once in
six months; could require reports; could call on them to
make up any deficiency in the assets of an insolvent
branch; could regulate the dividends so as to prevent
impairment of capital and secure a surplus fund of onesixteenth the capital; and could print the notes for all the
branches. Subject to these restrictions, branches were
free to conduct their business without control. Each
branch elected its own board of directors except the three
appointed by the state board, and the profits of each
were independent of all the others. The system did not
work well; it was complained that the parent bank exercised but a loose supervision over its branches and " used
toward its branches the language of a weak, indulgent,
and incapable parent who scolds her children, indeed, and
threatens and then lets them do pretty much as they
please." The independence of the several branches in
the State Bank was partly attributed to the fact that conditions were different in different parts of the State.
Some of the branches were in river towns, some in the
interior, one on a lake; the southern part of the State was
settled by people from the South and the northern by
a Laws, Indiana, 1834, ch. 7, sees. 2-3, 24; W. F. Harding, Journal of
Political Economy, December, 1895, p. 4.




140

State

Banking

Before

Civil

War

those from the East. The result was a diversity in business customs and standards. a
Although the branch system did not obtain a foothold
in the North, banks attempted to extend their operations
to a distance through agents. In 1837 several banks in
Connecticut established agencies in different parts of the
State for the purpose of making discounts, but the bank
commissioners claimed that these were virtually branches
which had not been recognized by law and should be
prohibited, or each branch should be made a separate and
distinct institution. 6
In 1836 the bank commissioners of Rhode Island
noted that though discounts were generally made at the
office of the banks, in some cases there was a committee
which made loans elsewhere. The legislature thereupon
promptly passed a law forbidding any bank to have an
office or agency for discount in any place other than the
office of the bank, except by express permission.
Massachusetts also condemned the practice, the law
reading: "No loan or discount shall be made, nor shall
any bill or note be issued by such bank, or by any person on
its account, at any other place than at its banking house." 6
Notwithstanding this prohibition, some banks violated
the spirit if not the letter of the law. In 1852 the bank
commissioners severely condemned existing practices:
" Banking institutions have a locality to which their operations are designed to be confined. It is a perversion of
such design if the officers are sent into the money market
« W. F . Harding, Journal of Political Economy, December, 1895, p. 9.
& Reports of the Bank Commissioners, Conn., 1837, 1838.
c Revised Statutes, Mass., ch. 36, sec. 8.




141

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Monetary

Commission

in other places in pursuit of paper which, under the form
of exchange, will give a higher rate of interest than it
would be prudent for them to exact of the business community in their own neighborhood; it is an interference
with the rights and interests of other banks, and the practice is frequently attended with loss on account of ignorance
of the true character of the paper. The increased facilities of communication have a tendency to concentrate
business in the metropolis. Managers of banks in the
country, established for local convenience, should be at
all times aware that to discount paper, receive checks,
and exchange their bills through an agency in the city is
an infringement upon the foregoing statute. , , a
In the following year the bank commissioners found it
necessary to take a more decisive action. Several banks
had been chartered in towns in the vicinity of Boston
where the local business was not large. In order to employ
their funds more profitably, the banks opened offices in
State street, Boston, and at stated hours the cashiers were
in attendance to receive deposits, pay checks, discount
notes, and indeed do all the business of the bank. In two
or three cases the business done in the city was greater than
that performed at home. In consequence of this the
bank commissioners issued a positive prohibitory order
and threatened an injunction on one or two banks which
were disposed not to yield.6
The free banking act of New York of 1838, amended
in 1848, expressly prohibited the establishment of branch
^Second Report of Bank Commissioners, Mass., 1852, p. 8.
6 Bankers' Mag., 1853, 8:437.




142

State

Banking

Before

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War

banks, due to a fear that banks in large cities might
monopolize the profits of note issue by organizing branches
in small inaccessible towns and thus throw obstacles in the
way of easy redemption of bills.®
X X I I . RIGHT TO CARRY ON A BANKING BUSINESS.

During the earlier years of banking the business was
frequently carried on by private individuals and unincorporated associations, whose operations extended to
the issue of notes as well as to the making of loans and
the receiving of deposits. Massachusetts was the first
State to place restrictions on such private enterprise.
In 1799 a l a w w a s passed forbidding anyone to join
any association to do banking unless authorized by law;
and a penalty of $1,000 was imposed to be recovered
by anyone who issued an action for debt, one-half to
go to his own use and one-half to the State, while the
notes of such an association were void.5 New Hampshire, also, in the same year prohibited private banking.
Rhode Island, in 1805, forbade the issue of notes by private parties. As late as 1826, however, the question
of r e m o v i n g r e s t r i c t i o n s c a m e u p , b u t a l e g i s l a t i v e

com-

et " Certain persons acting under the provisions of that law had set up their
so-called principal offices in obscure villages of the backwoods while issuing
their notes and attending to such other business as came in their way in the
important cities.

As they were thus able to evade or delay redemption at

city offices by referring holders of their paper to the remote counters at
which alone it was payable, or later might refuse to redeem in Albany or
New York except at a discount, the legislature sought to mitigate the
scandal by requiring that the usual business of a "free b a n k " should be
transacted at the place named in its certificate."

R. M. Breckinridge,

Sound Currency, 6:8; see Laws, of New York, 1838, ch. 260; 1840, ch. 202,
363; 1848, ch. 340.
&Acts, Mr.ss., 1799, ch. 32.
24635—10—10




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Commission

mittee reported adversely; attention was called to the
great number of failures of private banks in England
in 1814 and 1815, and as the community had become accustomed to regard existing currency with confidence and
it was held unwise to risk the possibility of a flood of
insecure notes.
In 1804 New York forbade all unincorporated companies from doing a banking business/ but this prohibition did not forbid individuals or incorporated institutions from engaging in banking and issuing notes.
Insurance companies, aqueduct associations, and many
individuals, such as tavern keepers and merchants, issued
notes in denominations as low as 6 cents. During the
war of 1812 this became a serious evil.6 The act of 1804
did not owe its origin to any new public policy, but to
the desire of capitalists already interested in banks in
New York City to prevent the Merchants' Bank from
continuing business without a legislative enactment.
In 1818 a more sweeping law was passed: "No person,
association of persons, or body corporate, except such
bodies corporate as are expressly authorized by law,
shall keep any office for the purpose of receiving deposits or discounting notes or bills, or issuing any evidence
of debt to be loaned or put in circulation as money;
nor shall they issue any bills or promissory notes or
other evidences of debt as private bankers for the purpose of loaning them or putting them in circulation as
money, unless thereto specially authorized by law."




a Laws, N. Y., 1804, p. 476.
& Knox, History of Banking, p. 398.

144

State

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It will be observed that this law went far beyond the
prohibition of the issue of notes, for it forbade receiving
deposits or making loans. The reason for this legislation
was largely due to the increasing operations of a private
bank managed by Jacob Barker, who was rapidly extending his business and encroaching upon the profits of the
chartered banks; these, therefore, endeavored to cripple
his activity. 0 It was difficult, however, to stamp out
a non-banking medium of circulation. In 1824-25 the
legislature chartered several loan companies which issued
bonds and passed them off as money, and this addition to
the volume of circulating paper was regarded as one of the
causes which led to the cotton speculation of 1826. There
was moreover continued discussion as to the wisdom of
such absolute restriction, and according to Gallatin, the
act of 1818 had no other effect than to deter prudent
capitalists from engaging in banking business, and this
increased interest rates. 6 Legislative committees in 1825
and 1826, recommended repeal on the ground that monopoly sheltered abuse; the operations of unincorporated
persons could not be conducted with so much concealment;
private bankers subject to unlimited liability would be
cautious; restriction tended to accumulate capital in New
York City, and deprived the farmer and manufacturer in
the interior of loaning facilities; and the system of charters
did not prevent dishonesty. Although a charter might
originally be placed in safe hands, the stock was transferable and could pass into the hands of irresponsible




a
6

Jacob Barker to the Public, 1819.
Gallatin, Writings, 3: 350.

145

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Commission

persons.® In 1837 the restraining law was repealed, thus
leaving every citizen in a position to pursue the business
of banking under the general law. It was followed by the
creation of a large number of private banking houses in
New York City, which received deposits, discounted notes
and bills of exchange, and dealt in coin and bullion. h
The change in policy excited much opposition, and the
Attorney-General denounced the measure as inexpedient
and unconstitutional. 0 By the act of 1838, providing for
the issue of notes based upon deposits of mortgages and
stock, private persons and partnerships, which were not
bankers at all, could issue circulating notes. For a time
there was uncertainty as to the construction of this law,
as it was difficult to reconcile it with other laws dealing
with corporations. One decision announced that private
persons or companies could not issue negotiable obligations, an^l that if issued, they were under no obligations to
redeem them; the construction extended even to bonds.**
This opinion, however, was condemned by a higher court
on the ground that the legislature never intended, in its
efforts to suppress offending banks, to destroy all the bills
which they put into circulation. 6 The reversal did not
remove popular uneasiness. In one instance, the supreme
a Report of Committee on Judiciary, N. Y., Jan. 31, 1825; Report of
Committee on Banks and Insurance Companies, 1826.
& Report of Superintendent of Banking Department, N. Y., Jan., i860,
P- 5c Senate Document, N. Y., 1835, No. 4, p. 13; Report Assembly Document, 1837, No. 303, p. 7.
d Safford v. Wycoff, 1 Hill, 11.
« 4 Hill, 465.




146

State

Banking

Before

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court set free a person who had counterfeited the bills of a
free bank, a but this decision was also overruled. b
New Jersey in 1815 forbade unincorporated institutions from doing a banking business under heavy penalty. 0
Pennsylvania, in 1808, forbade banks incorporated under
laws of other States to do business within her boundaries,
and two years later, unincorporated associations were
forbidden to issue notes, make discounts, or receive deposits, but the law was of little force, particularly in the
interior. There was a scarcity of specie and as the state
banks did not issue notes under $5, there was a lack of circulating medium. Notes were consequently emitted by
bridge and turnpike companies.d The Girard banking
house, a private bank which began business in 1812, issued
notes and this raised the question whether the other Philadelphia banks would receive them. A committee of these
institutions decided that since the laws of Pennsylvania
discouraged, if they did not prohibit the circulation of
notes of unincorporated banks, Girard's notes should not
be received either in payment or on deposit. Later, however, they yielded and received the notes.
In Maryland many of the early banks were started as
private institutions, but in 1810 an act was passed to
prohibit persons from associating with the purpose of
forming a banking company without first applying for a
charter. Each subscriber to such an association was
liable to a forfeit of $100 and the commissioner who under-




a

Debow v. People, i Denio, 19.
& Gifford v. Livingstone, 2 Denio, 380.
c Pub. Acts, N. J., 39 Ass. 2 sess., p. 13.
d
Sumner, History of Banking, 1:44.
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National

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Commission

took to receive subscriptions to a fine of $2,000. The
law was disregarded and there is no evidence of the imposition of the penalty. 0 In 1817 another law was passed
to the same effect, but this again did not prevent individuals from carrying on a banking business. 6
Virginia in 1805 made it unlawful to pass a note of any
unchartered bank. In 1816 unchartered banks were declared illegal and their notes null and void; a fine was
imposed for signing such a note and the holder of a note
under $1 could recover $5 from the issuer or signer. In
1820 new penalties were inflicted with imprisonment
from one to twelve months for individuals and a fine of
$50 for corporations. A fine of from $10 to $100 was
imposed for bringing such notes into the State for circulation, and a fine of $10 for offering to pass them. In
1848 trading by members of an association in the manner
of a bank, issuing or circulating notes or other instruments
of an unchartered company was made punishable by a
fine of from $100 to $500 and imprisonment. 0
North Carolina forbade private note issues in 1816.
Georgia, in 1815, imposed a tax of 8 per cent on all bills
then circulated by unchartered banks and 20 per cent
on all subsequent issues.d In the following year it forbade any unincorporated association from issuing notes
of $2 and over, and in case of violation, the holder might
recover 125 per cent. For notes less than $2, the holder
might recover three times the value. e Florida, in 1824,
0

Bryan, History of State Banking in Maryland, p. 42.
& Ibid., 31.
c Laws, Va., 1847-48, ch. 10, sees. 18-21.
d Knox History of Banking, p. 575.
« Sumner, History of Banking, 1: 87-88.




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State

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passed an act imposing a penalty of $50 on any one bringing into the Territory with intent to circulate, "any bills
and notes in the likeness of bank notes, which said bank
notes are, or have been, issued by any private individuals
or private unincorporated companies in the United
States.""
In Alabama, owing to the rapid purchase of public lands,
the Territory was drained of good money. This led,
therefore, to the issue of small notes, called " change bills "
by corporations, firms, and even individuals. The legislature consequently sought to restrict this abuse and in
1818, enacted that all such notes for a sum not exceeding
$1 were to bear interest at 100 per cent per annum from
date of issue.5 This became a dead letter, as did much
subsequent legislation of the same character.
In Ohio, before 1815, there were various concerns
carrying on a banking business without charters. Some
of these were swindling operations and others engaged
in business in good faith and afterwards became chartered
institutions. In many instances they issued notes until
the legislature resolved to put an end to opportunities
for abuse, and passed an act prohibiting the unauthorized
issue of circulating c notes. There was a penalty of a year's
imprisonment as well as a fine, and contracts with persons
or firms engaging in unauthorized issue were void. This
was the first of a long list of laws directed against unauthorized bank notes. d Agents of banks chartered by other
a Act of Dec. 22, 1824.
& Territorial Acts, Ala., 2d sess., Nov. 17, 1818.
c Laws of Ohio, 1815, 13:152.
d Laws of Ohio, 1816, 14:10.




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States were subject to fine and denied the privilege
of enjoining the courts; and anyone interested in such a
bank was made personally liable to any noteholder. These
restraining laws apparently did little good. It is stated
that in Zanesville, in 1818, there were more than 30 kinds
of paper passing from hand to hand; besides bank notes,
there were shinplasters issued by bridge, turnpike, and
manufacturing companies, city and borough authorities,
tavern keepers, and shoeblacks, ranging from 3 cents to $2.a
With few exceptions, these notes were of little value.
Kentucky, in 1817, forbade the issue of notes over $2 by
unauthorized associations, under penalty of ten times
the note; everyone who passed the note was liable to the
same penalty. This act, however, was only temporary in
its operation. Indiana, in 1815 (Dec. 26) subjected any
person issuing or passing an unauthorized note to a fine
of three times the amount, with liability to the holder.
In 1830, practically all States had confined the right of
issue to incorporated banks. The solitary exception was
Girard's Bank in Philadelphia. Congress, however, had
not restricted the issue of notes by the city of Washington
and there was still a small amount of paper in circulation
issued by the State of North Carolina.6 Gallatin's statement did not, however, hold good for subsequent years.
Under the cover of suspension of specie payments and the
looser laws of the new Western States and the nonenforcement of the laws already in existence in the eastern section,
a very considerable amount of fractional bills issued by
a

McMaster, History of the United States, 4:317.
& Gallatin, Writings, 3:264-265.




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individuals and business firms were at one time and another
put in circulation, oftentimes for the purpose of supplying
the want of small coin, due to the disappearance of
silver after its undervaluation at the mint by the coinage
act of 1834. A writer in the Merchants' Magazine in 1853
stated that in the interior a large batch of private shinplasters had been issued, to the amount of between
$1,000,000 and$2,000,000, which found a ready circulation.
XXIII. LOANS AND DISCOUNTS.
The subject of loans and discounts may be treated under
the following headings:
(a) The procedure followed in applications for loans and
in passing upon them by the directors or committee of
management.
(b) Character of security.
(c) Length of the loans.
(d) Renewals of loans.
(e) Amount of loan to any one person.
(/) Loans to directors.
(g) Partiality in making loans.
(h) Restrictions upon residents and nonresidents.
(a) The procedure followed in applications.
The by-laws of each individual bank commonly provided for the receiving of discounts either on one or two
stated days in the week, and requests for loans were to
be left on one day to be passed upon by the management
of the bank on the following day. The Bank of New
York, 1784, made its discounts on Thursday, the offerings
to be left under a sealed cover on Wednesday morning.




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It was the rule of the United States Bank, 1791, to receive
offerings on Mondays and Wednesdays, settle them on
Tuesdays and Thursdays, and make them known the succeeding days. a The Bank of Pennsylvania, 1793, prescribed that paper offered for discount should be delivered
on Tuesday and Friday and passed upon the next succeeding days.
By the rules of this bank no discount could be made
without the consent of three-fourths of the directors present. 6 The Bank of New York, early in the century, voted
that no notes be discounted between meetings of the board,
except in special cases upon judgment of the president,
and then not exceeding $4,000. Under the rules of the
Hartford Bank, 1792, all questions relating to discounts
were determined by ballot, and if two voted in opposition the loan was not granted. No reason was to be
given for the refusals In 1819 it was agreed that no name
which had appeared as a drawer, acceptor, or indorser on
unpaid paper, should be given consideration in any proposal for a loan. A copartnership desiring favor must
declare the names of its members/ and one partner could
not be accepted as an indorser for another. By an act of
Vermont in 1840, no loan exceeding $50 could be made
without the approval of a majority of the directors. The
charter of the State Bank of Indiana forbade the directors
to vote on loans in which they were interested, and on
a Leach, the Girard National Bank, p. 17.
& Same in Virginia, Laws, 1836-37, ch. 82, sec. 6; Second United States
Bank, 1816; By-laws, Girard Bank, 1832; Branch of the Bank of the State
of Alabama, 1832; Franklin Bank, Cincinnati, 1833.
c Woodward, The Hartford Bank, p. 64.
^Ibid., 125.




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all applications for $500 or upwards there must be five
concurring votes out of seven.
(b) Character of security.
1. Loans on pledge of bank stock.—Loans on the pledge of
bank stock were made at an early date largely to aid stockholders in satisfying the loose charter requirements in
regard to the paying in of capital. Such loans were made
not only to assist the subscribers, but also in the ordinary
business of the bank to furnish easy accommodation to
the owners. For a time there does not appear to have
been any special opposition to such loans, but abuse arose
in evading requirements as to paying in of capital, and,
secondly, in the special favors which stockholders obtained,
when banks came to be established to confer special rather
than general benefits. Bank stock was naturally regarded as excellent security, and so it was not unusual
for banks to permit loans to be made to stockholders
upon pledge of bank stock on single-name paper instead of
the usual requirement of two responsible names. Such a
provision is to be found in the by-laws of the Farmers'
and Mechanics' Bank of Philadelphia, 1809. The by-laws
of the Bank of the Valley (Virginia) allowed loans to
stockholders on pledge of stock without an indorser, for
three-fourths of the amount paid in.
The by-laws of the Second United States Bank, 1816,
also provided that if stock of the bank, or United States
stock or other such property approved by the board, were
pledged, one responsible name was sufficient. Upon its
organization the operations of this latter bank in aiding
the stockholders to pay their second installment due on




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the capital through loans on bank stock became a scandal.
The directors in December, 1816, gave express authority
by resolution for such loans and in the following year
(Aug. 26) authorized stockholders to borrow on their
stock at an advance of 25 per cent on the par value
thereof.0
Later there was so much abuse of such loans that some
States passed laws forbidding or limiting the practice.
Massachusetts, for example, in 1829, in a general banking
law forbade loans on pledge of bank stock for more than
one-half of the capital paid in. The charter of theBank of
Florida, of the same year, forbade any such loan. The
same provisions are to be found in the charters of the
Franklin Bank of Cincinnati, 1833, and the Louisville
Bank of Kentucky, 1833.
The bank commissioners of Connecticut, beginning with
1837, reported against this practice. They declared that
banks were not established for the exclusive benefit of
stockholders, but they were pleased to report that there
was only one bank in the State where these loans were
excessive. In 1841 they recommended that no stock note
should be discounted for more than three-fourths of the
value of the stock; that none should run for more than
four months, and all such notes should be paid in full at
maturity. Vermont, by an act in 1840, expressly prohibited such loans. The charter of the State Bank of
Indiana forbade loans on bank-stock collateral. In 1839
the bank commissioners reporting on the State Bank of
Illinois stated that the indebtedness to stockholders was
a For further details see Dewey, The Second Bank of the United States.




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large, amounting to one-fourth of the total. Nearly twothirds of the amount which had been paid in by private
stockholders had been loaned back to them. In the following year the legislature prohibited such loans.
2. Accommodation paper.—A very considerable part of
the loans which were made during the earlier period of banking were accommodation loans. This was in harmony
with the prevailing opinion that banks should serve all
classes by an advance of credit irrespective of the condition that such credit could be promptly liquidated.
In a contemporary report the following distinction was
made between accommodation paper and business paper:
"When an individual simply wishes to borrow money and
offers his notes with security to the bank, it is treated as
an accommodation subject to the customary call and
renewable. When a party holds a note given to him by
another for property sold and indorsed and sells it to the
bank, payment is always presumed and expected at
maturity, and it is termed a real transaction and the
security, business paper." According to Matthew Carey
there were two general varieties of accommodation paper,
"draw paper," and "extra accommodation paper." 0
The former carried on its face the evidence of its being
fictitious by the indorser transferring his claims in the proceeds to the drawer. The extra accommodation notes
were drawn to appear as if issued in a bona fide commercial transaction for value received. According to Holdsworth, business conditions in Pennsylvania were such as to
make a considerable use of accommodation paper impera-




a

Carey on Banks, Appendix, p. 2.
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Commission

tive. The importing merchant sold his merchandise largely
to country storekeepers at the nominal credit of six
months, but generally he could not obtain payment under
twelve months or even longer. These accounts with
country merchants were open-book accounts, very little
being given in payment. The retail shopkeeper was in
much the same situation as the wholesaler. He bought
his stock of goods on a six months* note and sold the bulk
of it on accounts current to people who did not expect
to settle oftener than once a year. How then, were the
wholesale importers and the large merchants to meet their
obligations and to replenish their stock? They received
in payment little cash or bona fide paper. To secure bank
credit they had to have recourse to accommodation paper.
Some idea of the extent to which the handling of accommodation notes went on may be had from the incident
related by Matthew Carey, himself a bank director and
merchant in Philadelphia, at the close of the war with
England. There were three large package sales of merchandise belonging to the merchants of Philadelphia during the summer months of 1815, amounting in all to
$1,515,000. The auctioneers made payment as follows:
Bank drafts, $665,900; several notes of sixty days ranging
from $10,000 to $50,000, amounting to $500,000; the
balance in notes of the purchasers of the goods. These
auction notes were all discounted at the different banks.
Carey declared that these notes at one time amounted
to over $1,200,000.
As time went on, and it was found that in order to
secure redemption of circulating notes it was necessary to




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have assets easily available, accommodation paper fell into
disfavor in the larger cities. In 1832 the charter of the
Girard Bank in Philadelphia forbade the discounting of a
note which on its face bore the evidence of accommodation
paper. Country banks, however, still favored this form
of investment of funds. In 1833 less than half of the
discounts of such banks in New York could be called
business paper. In New England there was a more
marked change; the bank commissioners of Massachusetts
in 1840 noted with approval that banks were reducing their accommodation notes; and by 1845 nearly all
bank discounts in Connecticut were on business paper.
By the middle of the century, in the larger cities, accommodation was rarely offered and more rarely accepted.
This change did not escape criticism. The bank commissioners of Massachusetts in 1840 thought that country
banks might make exceptions in favor of accommodation
notes, for such loans frequently proved serviceable to
their communities, and in Connecticut the bank commissioners regretted that a worthy class of borrowers was
deprived of advantages to which they were entitled. 0
In the South and Southwest public sentiment was divided. At times it was recognized that accommodation
notes were insecure and tied up the resources of a bank so
as to seriously embarrass it. In 1836 the president of the
Bank of Kentucky urged his board of directors not to
make any further loans, except those payable at maturity,
and also to get " clear as soon as practicable of the discounted notes, styled accommodation paper." 5 When
«Report of Bank Commissioners, Connecticut, 1841.
b Duke, History of Bank of Kentucky, p. 46.




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banks, however, attempted to restrict the volume of
accommodation loans and turned to bills of exchange for
investment, they were severely criticised, on the ground
that they sought an extra profit instead of devoting their
funds to the assistance of local and needy borrowers. For
example, a legislative committee of Kentucky in 1840
complained that the banks by falling into the practice of
doing a large business on accommodation notes instead of
business notes caused great embarrassment to the banks
without furnishing any equivalent advantage to the
country. It was highly necessary that the banks should
do an exchange business in order to make it possible to
pay specie outside the State. In Georgia the Central
Bank by its charter was authorized to loan on accommodation paper and forbidden to demand more than 20 per
cent of the principal at the end of a year, unless necessary, and in 1829, Dec. 19, the charter was amended requiring the bank to discount the notes of debtors to the
State. The Bank of Indiana also, in 1839, noted with
regret that its branches made extensive loans on accommodation paper, on much of which calls could be made
for only 10 per cent or less per annum.
Akin to loans on accommodation paper was the practice
of loaning on memorandum checks and overdrafts. In
1837 the bank commissioners of Massachusetts reported
that they found checks for small amounts in many banks,
and in a few for large sums. The latter were generally
secured by stock lodged as collateral. This kind of accommodation was becoming unpopular, but its existence was
again referred to in 1841.




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3. Loans on real estate.—As a rule, banks made loans on
real estate. As already stated, in some States banks
were obliged under their charters to loan a certain portion
of their capital to farmers, and this obligation was imposed upon city banks, as in Boston. Gradually such
loans were regarded by the sounder banks in the North
with disfavor, as they ran for too long a time and it was
difficult to secure prompt settlement at maturity. In
1820 a report was made by the State Bank in Boston in
regard to loans on real estate: $263,460 had been thus
loaned to 719 persons; 639 of these had paid a part or
the whole, amounting to $127,751; 80 of them had paid
no part of the principal, amounting to $30,081; and the
balance due from 639 persons was $105,627." Efforts
were made to close up these accounts, but some were outstanding as late as 1839. At times city banks were
drawn into loans on mortgages, .particularly during periods
of real estate speculation. In a report made to the legislature of New York in 1831, it was stated that nearly
$50,000,000 was loaned in New York City on mortgage
and the greater part of it at 7 per cent.6 In 1836 the
bank commissioners of that State reported that banks
had, under the guise of business paper, supplied credit
to those engaged in real estate speculation. According
to Clibborn,c it was the general practice in Cincinnati
to give accommodation to merchants or dealers in real
estate, such as town lots and houses in cities, rather than
to the discounting of real bills of exchange, which was but
» Stetson, An Historical Sketch of the State Bank, p. 44.
&Niles, 40:185.
c American Prosperity, 1837.
24 6 35—10




11

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a minor branch of their business. The banks encouraged
the renewal of these notes, and by taking mortgages on
the property would finally come into possession of a large
part at their own price. There were, indeed, two such
sales of nearly the whole city by the United States Bank.
In a settled population such a system could not exist long,
but in American towns, where there was a continual change,
experience was lost, and the practice could easily be repeated.
In the South banks were expressly organized to loan on
real estate. The Planters* Bank of Mississippi, 1830,
could make loans secured by mortgage up to one-third the
value of the property. The Union Bank of Louisiana was
essentially a land and slave bank and the charter provisions carefully prescribed the amounts which could be
loaned on lands, brick dwellings, slaves, etc. The Commercial Bank of New Orleans, 1833, could also loan on
lands and slaves secured by mortgage. Property in the
city must be improved and plantations be in full state of
cultivation. The Union Bank of Florida (Tallahassee),
1833, was also authorized to make loans on lands and
slaves. In 1836 the Real Estate Bank of Arkansas was
chartered; 127,500 acres of land were mortgaged, of which
only about 14,000 acres were under cultivation.
The management of the Bank of the State of South
Carolina in 1843 referred with satisfaction to its success
in making loans on bonds and mortgages and for
longer periods than business paper would run. They admitted that not all of the capital and credit should be so




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invested, but a considerable part could be safely and profitably thus loaned. This was seen during the suspension in
1839; of the seven banks in Charleston, six were purely
commercial, rejecting bonds and such securities; of these,
five suspended specie payments, while the Bank of the
State of South Carolina, which loaned on real estate, paid
in specie all its notes as presented. Although such loans
were slower in payment and the profits in business founded
on lands and slaves of the planter and mechanic and tradesman were not so large, all the property was visible and
could not be easily wasted without detection, and the
losses and risks were smaller.
Maryland introduced at an early date, in the practice
of the Farmers' Bank at Annapolis, a feature borrowed
from Scotch banking, known as the system of cash accounts. An account of this sort might be opened on application of any farmer, mechanic, or manufacturer for sums
from $100 to $1,000, whereby the borrower might draw or
pay in any sum not less than $50 at any one time and on
which settlements were to be made semiannually, the
party drawing the cash to pay interest for what he might
owe at 6 per cent per annum and to be allowed interest on
all sums returned from the time of payment. The party
opening an account had to give good personal or real security; the directors were not obliged to lend money on
such cash accounts to a greater amount than one-fifth of
the capital. The object of the practice was to aid the
farming interest, and was practically but another method
of loaning upon real security, since most of the bank's
patrons had little other available security. An attempt




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was made to introduce this method into the business of
some of the Baltimore banks. a
Crawford, in 1820,6 severely criticised loans to farmers.
He admitted that the establishment of banks in agricultural regions had greatly improved the general appearance of the country; comfortable mansions and spacious
barns had been erected; lands had been cleared and reduced to cultivation; farms had been stocked and rendered more productive by the aid of bank credits, but they
had been accompanied by the ruin of the owner. The
farm, with its improvements, proved unequal to discharge
the debts incurred in its embellishment. So general was
this distress that state legislatures were compelled to enact
relief measures and stay-laws to rescue their fellow citizens
from the inevitable effects of their own indiscretion. Of
similar import was the opinion of the governor of Georgia
in his message to the legislature in 1823; the operations
of banks were ruinous when introduced into the interior of
the country, and banks should be created only in those
places where surplus products of the State were carried to
the market. 0
4. Loans on Merchandise.—Some banks in the larger
eastern cities made a special practice of loaning to merchants on merchandise. For example, the Bank of New
York, which was chiefly a merchants' bank, beginning
with 1804, made advances on merchandise, and appointed
a special officer to inspect and appraise the goods offered
as security; this appraiser received a commission of
o Bryan, History of State Banking in Maryland, pp. 37-38.
& Finance, 3:498.
cSeeNiles, 35:346.




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one-half of i per cent of the loan, which was paid by the
borrower.
In Pennsylvania loans on merchandise came ipto general use during the embargo period. Owing to commercial
embarassment, the banks came forward to tide over the
delays which took place in realizing on importations. A
resolution of one of the Philadelphia banks, adopted
November 28, 1808, provided that the payer and indorser
of a note and the drawer and acceptor of a bill presented
for discount must be competent to meet their engagements;
that to insure this, an amount of property not of a perishable nature, should be held either by the indorser, acceptor, or such other person as might be approved of, sufficient to cover the amount loaned; that after a deposit
had actually been made, those who received it must give
ample proof and hold themselves bound not to part with
it until the bank should express its assent. In either case,
the property must be insured against fire. As noted by
Holdsworth, the historian of the Bank of Pennsylvania,
the use of the collateral loan, thus begun in adversity,
was in after years greatly extended in prosperity.
In the Southern States banks made extensive advances
on produce on the ground that cotton, tobacco, and sugar
were staple commodities which, if necesssary, could be
kept until a market was found. Later, however, when
there were violent fluctuations in prices, the banks in that
section became seriously involved; particularly was this
so during the period of cotton speculation in the thirties.
In Alabama the directors of the State Bank of Alabama,
in 1837, in order to increase their stock of specie, decided




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to make loans on cotton so as to secure exchange facilities
abroad. Anyone with a supply of cotton on hand might
have it valued, and on delivering it into the charge of the
bank receive an advance of not more than 25 per cent of
the value, and then give his note for the amount received,
payable in nine months. The bank then shipped the
cotton at the risk of the owner, who had the right to limit
the selling price until the cotton had been in port five
months. The proceeds of the sale were placed to the
credit of the note and the excess paid over to the owner
of the staple. In case the citizen was greatly pressed for
money and his cotton was not ready for delivery, the
bank might make him advances on his executing a written
pledge to deliver the cotton at some future date to the
bank agent in Mobile, in amounts sufficient to repay the
funds loaned.
The State Bank of New Orleans in 1836 voted that
whenever sugar or cotton were deposited in warehouses
and insured, the notes of the proprietors should be discounted for two-thirds of the cash value. In order to
avoid indorsement on notes and bills of exchange, credit
should be opened to those who could furnish mortgages
on real estate, not to exceed two-thirds of the cash value
offered.
The Mississippi Union Bank made loans on cotton; the
planter executed his note with indorsers to an amount
equal to the number of bales at $60 each. The cotton was
shipped under the control of the bank and sold in such
markets as the planter desired; the benefit of the exchange
went to the planter and no charges or commissions went




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to the bank. c In 1837 from two-thirds to three-fourths
of the loans of the Northern Bank of Kentucky were upon
notes and bills disbursed by drovers in the purchase of
live stock and driving the same to market, and by others
in aid of agriculture; fifteen-sixteenths of the capital of
the bank and its branches was employed in agriculture.
Of a somewhat similar character was the business authorized by the charter of the Bank of St. Louis, 1813, whereby
the bank could receive and hold as security for loans and
discounts, lead, or barter, or fur, or other property, provided it was left in the care, possession, and control of the
bank. In 1839 the State Bank of Illinois was criticised
for its connection with trade in lead and other commodities; $507,000 had been advanced on lead alone. This
was regarded as contrary to the spirit of the charter, for
the bank had been created for the common good of all
without reference to locality or particular pursuits.
5. Loans on stocks.—There was a long-continued objection to temporary loans on stocks for collateral security,
for such loans were more commonly advanced to brokers,
who were generally regarded as engaged in speculative
operations entirely foreign to the primary purposes for
which banks were established. A legislative committee
of New York in 1837 criticised the banks for making temporary loans on securities. It was recognized that often
the motives for such loans were good, for this practice
enabled banks to be prepared at a moment's notice to
meet any contingency; on the other hand, it made it
possible for brokers to secure funds with which to specu»Report of Bank Commissioners, Mississippi, 1838.




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late. The committee therefore recommended that no
bank be allowed to take stocks in hypothecation. As
securities at that time were not sound or stable, the commissioners held that such loans were not more available
than those which were made on common paper; the stocks
took the place of individual liabilities, while the money
went to furnish other States with capital. Too much
capital was thereby absorbed by the " fancy " stocks, both
of New York and other States. a Such loans, however,
increased until in 1855 a n unusually large proportion of
the loans and discounts of the New York City banks were
loans on call.6 This change aroused criticism; a writer in
Massachusetts stated that it was a common weekly occurrence for bank officers to appear at exchange or on the
curbstone for the purpose of negotiating with other banks
or bankers, at the same time refusing their own customers
money for good paper for the proper transaction of business in their own localities. City banks borrowed of the
country banks, a practice of very doubtful utility. 6 The
bank commissioners of Massachusetts in 1855, thought
that the system of demand loans was one to be deprecated,
for it put too great a strain upon the community; banks
had better substitute for demand loans, paper so timed
that it will turn up at proper intervals to relieve the circulation without surprising the public. d In 1858 the governor of Connecticut recommended that banks be prohibited from making loans on call.6
a

Assembly Document, N . Y., No. 328, May 11, 1837.
& Merchants' Magazine, 33:340.
c Silex, Letters on Banks and Banking, 1853.
d Fifth Report of Bank Commissioners, Mass., p p . 74-75.
< Merchants' Magazine, 39:97.




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6. Exchange.—During the first quarter century of banking in the United States banks did not seek to gain a special profit by dealings in bills of exchange. According to
Raguet, a "The discounting of notes or acceptances payable on the spot was the sole mode in which the capital and
credit of the banks were formerly employed, and if by
way of accommodating their customers they occasionally
discounted a note or acceptance payable at a distant place
it was always done upon the spot, the banks not calculating upon any profit in the way of exchange, but relying
on getting their money back again by supplying another
customer with a check or draft at par." Ordinary exchange transactions between different cities and States
were left to individual competition, which established the
market rate. The Second United States Bank in 1817,
however, entered upon the business of a dealer in domestic
bills of exchange by buying and selling bills upon all
points where its branches were located, upon terms that
gave it a profit on the particular transaction, and this
practice was responsible for the general custom which
subsequently prevailed among banks.
During the life of the United States Bank exchange
business was largely controlled by that institution. If it
did not monopolize the business it practically determined
the scale of rates which could be charged by local banks.
With the downfall of the bank in 1836 and the closing of
its branches the business fell into the hands of the local
and state banks, and at once complaints were freely made
in all parts of the country that these institutions were
charging excessive rates.




"Currency and Banking, p. 120.
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The term ''exchange' 1 was also applied to transactions
which did not spring from a sale of goods, but was used
whenever money was to be paid in a different place from
that in which it was loaned. Banks here found an opportunity for imposing more than the legal rate of interest, and ordinary loans were frequently made to assume
the character of an exchange operation. In many
States this became a scandal so great that under the
national banking law the right of charging exchange
was granted only in the purchase, discount, and sale
of a bona fide bill.
The bank commissioners of Connecticut, 1838, noted
that there had been a great increase in the exchange
business during the previous year and that the practice
had been an evil of rapid growth. Connecticut banks
discounted notes payable in New York and gave a draft
for the net proceeds for which they charged from onehalf to 3 per cent. This charge was far beyond the
exchange expenses. It was consequently recommended
that a tariff of exchange charges be adopted by the legislature or that a charge beyond exchange expenses be
entirely prohibited. 0 In 1855 a law was passed regulating exchange, but the state authorities complained
that its spirit was evaded for the purpose of obtaining
more than the legal rate of interest. 5
In Massachusetts the general banking law of 1829
provided that in discounting drafts or inland bills of
exchange banks could charge over and above the rate
a This recommendation was repeated by the bank commissioners in
1841.
& Reports of Bank Commissioners, Conn., 1855, 1856.




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of interest only the then existing rate of exchange between the place where the draft was discounted and the
place where it was made payable. In 1838 the commissioners reported that though the charges for exchange
had not been extravagantly high many country banks
demanded from one-fourth to one-half of 1 per cent
for exchange on notes discounted which were payable
in Boston. This was regarded as a questionable practice,
for the country had no reason to make any such charge,
since they wanted funds in Boston. The banks, however,
defended the practice on the ground that they must
compensate some city bank for the collection and redemption of bills in Boston. The legislature, by an act
of April 25, 1838, made certain restrictions as to exchange,
and in 1840 again passed an act for its regulation. a
The law, however, was necessarily flexible and liable
to loose construction and evasion,* and the commissioners
again reported that there was a great diversity of practice; some of the banks demanded no exchange upon
paper payable in Boston, while others charged rates
varying from one-fourth to 1 j5er cent; this was held
unjustifiable, for such paper was almost universally
preferred by banks; it was surer to be paid at maturity
than paper payable at their own counters; and its payments placed their funds in Boston for the redemption
of bills, at the least possible expense and hazard, with
the least possible loss of interest. They also complained
that the banks, when they made collections in their own
vicinity for Boston or other banks, always made some
charge for collecting and remitting the funds to Boston, on
a Acts, Mass., 1840, ch. 94.
& Second Report of Bank Commissioners, Mass., 1840, p . 15.




169

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Monetary

Commission

the ground that they did not wish to draw upon their Boston funds.0 In 1842 the commissioners noted that this
practice of charging by country banks on paper payable
in Boston had been discontinued. However, the business
was later revived; in 1851 it was stated that exchange
was more generally charged than ever before and that
institutions of long standing engaged in the practice. b It
was admitted by banks that paper had been framed for
the purpose of receiving exchange. 0 In i860 attention
was called to the fact that a large proportion of the paper
on which exchange was charged was made payable in Boston or New York, and sometimes in the nearest large
town, and occasionally even in places " ridiculously near."
This exchange was found to exist between different parts
of the same village, where it happened to lie upon the
borders of two adjacent States; and one transaction
was cited in which a bank director had made a note
payable at another bank not half a mile distant across
the state line, and paid one-fourth of 1 per cent exchange,
when he was expected to pay the note at his own bank
where it was discounted. The exchange was merely
a respectable cloak to cover extra interest. Indeed,
it was stated that in nine times out of ten where the objectionable exchange was charged, it was demonstrable
that no exchange existed, or if it did exist, that it was
in favor of the place where it was exacted. d In 1862
one bank, by name, was accused of charging discount
on notes payable at its own counter, and at the date of
« Second Report of Bank Commissioners, Mass., 1840, pp. 15-16.
& Fourth Report of Bank Commissioners, Mass., 1854, p. 83.
clbid., p. 84.
d Tenth Report of Bank Commissioners, Mass., i860, p. 136.




170

State

Banking

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War

examination this practice applied to about one-third of
the notes under discount. This was in direct violation
of the law. The excuse given by the officers of the bank
was that exchange was only charged upon renewal of
notes as a sort of penalty for having to continue the loan.a
Rhode Island banks almost without exception secured
extra interest through charging for exchange. * Rates of
exchange on drafts were nominally one-fourth of i per
cent on Boston and New York, rising to 2 per cent on the
West and South. The banks charged from 1 to 2 per cent
on four months' acceptances on New York in addition to
the rate of interest. The total rate of interest therefore
varied from 9 to 12 per cent. In 1836 the price of drafts
was fixed by law, and exchange above one-fourth of 1 per
cent for New England and New York, increasing to 2 per
cent for points south of South Carolina and west of Ohio,
was prohibited.
Bank commissioners of Maine in 1837 reported that
there was no uniform rate of exchange on domestic bills.
In Portland some of the banks took one-fourth of 1 per
cent without regard to time, and others charged oneeighth, one-fourth, and even one-half per cent per month,
making the amount of exchange dependent upon the time
of the bill. This was obviously a method of obtaining
unlawful interest. Similar criticism was made in 1857;
each bank put its own construction on the term, " existing
rate of exchange," which was authorized by law. Bank
commissioners of Vermont in 1854 reported that most of
the banks made a greater profit in selling drafts than that
derived from their ordinary business; there was thus a
0

Twelfth Report of Bank Commissioners, Mass., 1862, p. 159.




171

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Monetary

Commission

temptation to make it a condition of discount that the
borrower should purchase a draft at a premium although
he might not wish to use the funds in market.
Bank commissioners of New York in 1837 declared that
the rates of exchange might be cut in half and there would
still be a fair compensation to the banks. They did not,
however, think that the banks had as much influence in
regulating exchange as was generally supposed.0
The governor of Mississippi in 1838 noted with disapproval that the banks of his State had devoted most of
their funds to the purchase of bills of exchange drawn on
cotton dealers, and condemned them for seeking to gain
usurious interest in the shape of exchange, instead of
discounting ordinary bills. In Georgia a legislative committee, in 1840, condemned the prevailing practice of
dealings in fictitious bills as a substitute for promissory
notes. In Alabama, the management of the Bank of the
State of Alabama in 1837 voted that in order to relieve
the existing commercial distress it would purchase six
months' bills drawn against the shipment of the cotton
crop of that year. The bank commissioners, however*
complained of the growth of this business, for when the
State determined to engage in the business of banking
its primary object was to furnish a sound circulating
medium and " t o facilitate by small temporary loans the
various branches of industry and laudable enterprise in
which the citizens might engage;" dealing in bills of
exchange was advantageous, but liable to great abuse,
because adventurers could palm off upon directors bills
not founded upon shipments, but rather those that were
drawn purely for the accommodation of parties, known
^Report of the Bank Commissioners, New York, 1839; see also Assembly
Document No. 229, 1835, 3:4.




172

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Banking

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War

as "kite bills/' and the bank was accused of having taken
a good deal of this paper. In 1840, however, the commissioners admitted that the banking system was not
adapted to the requirements of a commercial community,
for the State had changed from being a purely farming
State to engaging in large operations in the sale of cotton.
As illustrating the suspicion with which exchange business
was regarded, the statement of the president of the Bank
of the State of Alabama, explaining in 1840 why bills
were not then purchased, may be cited: The charter and
the legislature required for the purchase of foreign bills
the action of at least three of the directors; but it was
impracticable for such a committee to go into the exchange
market and make the necessary purchases. There was
also a restriction in the charter that all bills should have
at least two good indorsers, and this form of foreign
exchange could rarely be had.°
In Ohio the bank commissioners in 1839 criticised the
banks for refusing to discount domestic paper and giving
preference to fictitious bills of exchange, in order to
extract from needy borrowers a usurious rate of interest.
Objection was also made to the high rates charged on
legitimate bills; since the completion of the Pennsylvania
canal, the cost of transportation from the Ohio River did
not warrant a rate of over one-half to 1 per cent, but banks
charged as high as 5 per cent. Some reform was made,
for in 1844 it was reported that the majority of the loans
during the previous year had been made on bills payable
in eastern cities, founded on actual transactions. In 1850
rates on bills drawn out of the State were regulated by
statute.




fl

H. R. D o c , No. i n , 26 Cong., 2d sess., 522.
173

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Monetary

Commission

In 1838 the state banking officials of Indiana complained
of dealings in fictitious bills; there was no reason for
banks undertaking to make remittances to other States,
since banks were not created for the purpose of regulating domestic exchange. On the other hand, the State
Bank, 1839, advised that some of its branches turn from
loans on accommodation paper to exchange in order to
carry off the produce; preference should be given to
shippers of produce on exchange not having over six or
seven months to run. This policy was definitely followed
after 1844. A comparison of the dealings in promissory
notes and bills of exchange by the State Bank, 1835 to
1858, is shown in the following table:
[From Harding, Journal of Political Economy, December, 1895, p. 114.]
Promissory
notes.

Year.

$1, 500, 000
2,300,000
2,900,000
3,000,000

174

$400,000
900,000
400,000
600,000

2,600,000
2,500,000
2,200,000
i,700,000
1,700,000
1,900,000
1,700,000
1,600,000
1, 700,000
i,700,000
1,800,000
1,600,000
1,500,000
1,600,000
900,000
1,000,000
900,000
500,000
200,000

i8351836.
18371838.
18391840.
1841184218431844184518461847184818491850.
18511852185318541855185618571858.




Bills of exchange.

800,000
900,000
400,000
400,000
500,000
1,200,000
1, 400,000
1, 500,000
1,800,000
2,000,000
2,500,000
2,900,000
2,800,000
3,500,000
3,400,000
3, 700,000
3,900,000
300,000
200,000

State

Banking

Before

Civil

War

In 1855 it was made a misdemeanor for a stockholder,
officer, or employee of a bank to purchase a bill of exchange
of any Indiana bank for a less rate than that specified on
the face of the bill.0
In Kentucky the practice of making fictitious bills of
exchange early received legislative attention; in 1817 the
charter of the Bank of Kentucky was amended so as to
prohibit dealings in bills " founded on a speculative system
of acceptance." The handling of legitimate exchange
business in Kentucky and Tennessee, however, became a
serious problem. The products of these States, flour,
mules, hogs, horses, rope, and bagging, were largely sent
South, either to New Orleans or Charleston. It became
the custom of the banks to reimburse themselves for the
acceptances which they made by selling drafts on the East
in payment of eastern merchandise purchased by merchants at home. This it was possible to do through the
sale of the funds which accumulated to their credit. In
detail, the business may be illustrated as follows: A
farmer or manufacturer in Kentucky drew on a shipping
merchant at Louisville; he cashed the bill at one of the
branches of the Bank of Kentucky in the interior. This
bill was then remitted to Louisville for collection and was
there paid in drafts upon the East. Upon the credits
thus accumulated the bank checked in favor of the debtor
merchant in Kentucky who imported from that section.
The banks were in the habit of charging something more
for bills payable in the South than they had to give for
eastern funds, and of charging a premium on eastern funds
a Laws, Ind., 1855, ch. 7, sec. 41.

24635—10




12

175

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Monetary

Commission

when they sold them to the merchants. When the Bank
of the United States ceased to do business in 1836, the
rates were increased. The local banks explained this on
the ground that arrangements could not be made with
collecting banks in the South to furnish drafts at any
definite rate or at any fixed time after collection. The
latter would agree to furnish drafts only as eastern and
northern funds could be procured. For this reason a
charge of 5 per cent in addition to interest was justified,
and even then it was maintained that profits were uncertain. a
Trade was thus heavily burdened. During the earlier
existence of the United States Bank bills of Kentucky
traders in New Orleans sold at from 1 to 1 j4 per cent discount, and banks were accustomed to supply remittances
in great abundance to any part of the United States at a
premium of one-half of 1 per cent. 5
Banks, however, claimed that they did not demand
extortionate rates; for the rate of discount charged upon
bills drawn on points against which there was a balance
of trade, was less than that charged by private brokers.
It was admitted that the Bank of the United States had
dealt upon better terms, but that was due to its national
character. A local bank sometimes had to let its notes
lie idle. For example, when the Northern Bank of Kentucky bought a bill upon New Orleans, payable at a season
of the year when exchange upon Philadelphia or New
York could not be procured, the funds of the Kentucky
a

Report of the Richmond Branch of the Northern Bank of Kentucky,
1837.
& Message of the Governor of Kentucky, 1840.




176

State

Banking

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War

bank so invested lay idle in New Orleans as a dead deposit
in a bank which paid no interest. The Kentucky bank,
consequently, must of necessity compensate itself for this
loss by charging a higher rate in New Orleans. The Bank
of the United States did not have to undertake any such
risk, for it could actively employ its funds through its
branch at New Orleans.0
Aside from these considerations, banks in the Southwest intentionally endeavored to increase their exchange
business at the expense of ordinary discounting; for an
advantage was found in the purchase of bills, because of
greater certainty that they would be paid at maturity.
Payment of a bill of exchange was thrown to a distant
point and aid was thus given by banks other than that
to which the bills belonged or at which they originated,
while in the payment of ordinary notes custom had come
to require whatever indulgence the bank could give. 6
For quick assets, therefore, bills were preferred; for example, after the Northern Bank of Kentucky had been
made a United States depository on condition that these
deposits might be called for on demand, it invested them
in short bills.e
On the whole, such investments in Kentucky were regarded with approval. In 1837 a joint legislative committee of Kentucky argued in favor of bills of exchange;
the bill business was limited by the actual operations of
commerce; the accommodation business was as limitless
as the want of money, rage of speculation, or the spirit of
« Report of the Bank Commissioners, Kentucky, 1840.
b Ibid., 1839.
c Northern Bank of Kentucky, 1837.




177

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Monetary

Commission

gambling. In discounting a note a bank exchanged its
own credit for that of the individual and received 6 per
cent per annum for the difference; in purchasing a real
bill, the bank bought a certificate of real value. A legislative committee in 1838 thought that the proportion of
bills of exchange to notes under discount was too small;
in the regular course of business the amount employed in
exchange should be about one-third of all the investments
of the bank, for without this proportion a sufficient amount
of eastern funds to meet the demand for remittances could
not be furnished. On the other hand, it was stated that,
as a general principle, the banks ought not to be forced
into the bill line, and any constraint to extend bills and
diminish discounts would be an infraction of the charter
and a violation of public duty.® In 1840 a legislative committee gave its unqualified assent to the efforts of banks
to convert their business paper into bills of exchange,
although they admitted there was danger of going too far.
The Maysville branch of the Bank of Kentucky, 1840,
in explaining why it had not invested as largely in bills of
exchange as the mother bank desired, urged that this
investment was seductive in its character because it introduced the evils of a fluctuating amount of circulation,
expanding during the bill season and contracting during
the year. The accommodation line had to approximate
the amount of capital, and bills of exchange beyond accommodating the exporting and importing interest ought
not to be encouraged. Later, in 1849, a legislative committee of Kentucky reported that, although the banks#
a Reports of the Bank Commissioners, Kentucky, 1838, 1839.




I7S

State

Banking

Before

Civil

War

could deal in bills of exchange, it deprecated the increasing
tendency of banks to concentrate their capital in operations of this character. One of the first objects for which
banks were created was defeated, for local accommodation
was denied.
The charter of the Bank of Tennessee provided that the
amount of bills of exchange for the parent bank or kny one
of its branches should not exceed the amount of notes
discounted. The bank management, however, stated
that some of the branches were located in districts in which
bills could not be purchased. As it was believed necessary that the investment in such bills should equal the
charter limits, it was suggested that permission be given
so that the bank as a whole could hold an amount of bills
equal to the notes discounted by all. a In 1845 the president of this bank again referred to the desirability of
exchange investments; hitherto this policy had not been
sufficiently pursued; discounts by some of the branches
had been made chiefly on accommodation notes, and on
this kind of paper debtors were unprepared, either from
habit or inability, to pay even moderate calls. The same
advice was repeated in 1849, and it was then remarked
that some of the branches had been benefited by the larger
investment in this direction.
An illustration of the use of fictitious bills of exchange
as a means of extorting usurious interest is to be found in
a report of a legislative committee in Missouri in 1838,
which helps to explain the prejudice against an operation
which might be wholly beneficial. A person puts his note




a

Bank of Tennessee, 1839.
179

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Monetary

Commission

into a bank, say for $10,000; t h e bank tells him t h a t t h e
indorsers are good, b u t t h a t they have not t h e money t o
loan. If he has a trade on h a n d of importance, he concludes to draw a bill of exchange on some person in a dist a n t city who will accept and agree to pay it when due,
four months thereafter. H e draws his bill, gets two or
three to indorse it, and then t h e bank, which before h a d
no money, takes t h e bill and pays him t h e money, deducting a premium, say 5 per cent and t h e interest also. The
premium is $500, t h e b a n k interest is $233.33; total
$733.33 for t h e use of $10,000 for four months. A t t h e
end of four months, he makes another bill in t h e same way
a n d sends t h e money t o t h e city upon which he drew t o
pay t h e first one, when it becomes due; 15 per cent will
thus be paid for premiums and 7 per cent for interest in
t h e year. Add 5 per cent every four months for expense
of transmitting t h e money to meet the bills, a n d t h e
borrower pays 37 per cent for t h e use of $10,000.
Over a large section of t h e Southwest exchange business
after 1840 fell mostly into the hands of private bankers.
Alabama, Mississippi, Florida, Illinois, Arkansas, a n d
Michigan, with the Territories of Wisconsin a n d Iowa, h a d
few banks, although a short time previous there h a d been
a nominal capital of $43,000,000 employed in t h e banking
business. The results were satisfactory, for rates were
lower and more regular t h a n when charter b a n k s abounded.
According to a writer in t h e Merchants' Magazine in 1843,
" p r i v a t e houses have a great advantage over corporations
in t h e economy, precision, and skill with which t h e business is conducted.. They contain also within themselves




180

State

Banking

Before

Civil

War

a conservative principle which constantly counteracts a
tendency to overtrading. The facilities they offer for t h e
collection of debts actually due is greater t h a n t h a t of
b a n k s ; but, on t h e other hand, they afford no means to
t h e debtor to evade p a y m e n t or renew an obligation.
Hence, when bills are due against any section for goods
purchased t h e whole amount must actually be paid. By
a necessary consequence the dealer, aware t h a t t h e only
means in his power to meet this obligation is by making
cash sales t o a corresponding amount, becomes very careful not to b u y more t h a n he thinks he can sell. When,
therefore, a draft is m a d e upon him, he has t h e means of
meeting it; and as his sales have been governed by the
actual means of t h e producers to buy, the means of remittance is always commensurate to the sum of t h e drafts.
The bills of t h e produce shipper always find ready sale
with the holder of the draft upon the dealer. Every mail
from the seaboard which brings to the western house
drafts for collection carries back produce bills in liquidation of those drafts." 0 Again, in 1850, another writer
compared t h e existing system of "free trade in exchange''
with the old plan of monopoly under the United States
Bank. Rates of exchange in New York were compared
as follows: h
April, 1833.
New Orleans .
Charleston _ _ _ _
North Carolina
Richmond

1 t o i | per cent discount
2 per cent discount
__ __do.__
2\ per cent discount _ _ _
1 per cent discount .

a Merchant's M agazine, 8: 563.




181

April, 1850.
Par to £ discount.
| per cent discount.
\ per cent discount.
\\ per cent discount.
| per cent discount.
&Ibid., 22: 551.

National

Monetary

Commission

(c) Length of loans.
During the earlier years of banking borrowers were apt
to regard a bank as a benevolent rather than a money
making institution, and as it possessed special grants by
legislative favor it was held bound to accommodate the
public. A bank was therefore criticised when it demanded that notes be paid at maturity, and that no
renewals be allowed.
In Rhode Island the Providence Bank, the first established in that State, adopted a thirty-day limit on discounts, but the nature of its business forced renewals—a
large part of the loans were made to aid the commercial
interest and as the vessels took long voyages before settlements could be made it was necessary to secure long
credits. The discounts of merchants approached very
closely to long-time accommodation paper. a The largest
proportion of notes discounted ran for sixty days and of
drafts and bills for four months. A legislative committee
in 1826 reported that advances ought to be made by banks
at long-time, as merchandise was sold on credit from four
to six months. In 1857 it was customary to make loans
to the textile manufacturers on long credit—eight, ten, and
twelve months' discounts were common, while those under
four months were rare. After the panic of 1857 a six
months period for credits was for a time observed. 6
In Connecticut, by the rules of the Hartford Bank, 1792,
loans were not to exceed forty-five days. This term was
quickly Extended to sixty days, and in 1809, to three
a

Stokes, History of Chartered Banking in Rhode Island, p. 14.
b Ibid., p. 51.




182

State

Banking

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War

months. This became the usual rule. a The rules of t h e
Worcester Bank, 'Massachusetts, 1804, limited discounts
to sixty days; all loans on lands and mortgages were to
be made for one year.
The Bank of New York, 1784, began with a maximum
period of thirty days and permitted no renewal/' Very
shortly the time was extended to forty-five days, c and
then loans for longer periods became common. Eight
months was an established period for New York importers,
and Boston banks afterwards claimed t h a t they were
forced to submit to t h e same length of time for manufacturers. I n 1857 there was an interesting exchange of
opinion between a New York banker, Mr. J o h n A. Stevens,
and Mr. N a t h a n Appleton, of Boston. The former criticised the banks for the granting of long credits. In reply
Mr. Appleton stated t h a t while he was opposed to long
loans, he did not think t h a t banks should confine their
discounts to short paper which, even if good for banks,
was bad for the community. " I have been for upward
of forty years a director of a Boston bank, during the
greater part of which time they have confined their discounts to real business paper which should be paid at
m a t u r i t y and have not refused it even when having six
months to run. This system has worked well and always
gives the b a n k enough coming in to meet any emergency.
I hardly recollect a discount day when the bank has not
been able to discount some new paper. " d




« Message of Governor Wolcott, May, 1822.
b Domett, Bank of New York, p. 20.
clbid., 38.
d Bankers' Magazine, 12:407.
183

National

Monetary

Commission

The Bank of Pennsylvania restricted its loans to sixty
days, and the Philadelphia Bank, 1804, to four months.
According to Raguet, in t h e first p a r t of t h e century it
was not a general practice in Philadelphia to discount
notes t h a t had more t h a n sixty days to run. Within
thirty years, owing to t h e competition of banks and t h e
increase of bank capital for which short paper could not
be found, it became t h e custom to discount four a n d six
months' paper. To this extension is attributed in p a r t t h e
gravity of the suspension of 1837.®
I n Maryland the.banks differed as to t h e length of their
discounts. Country banks as a rule gave longer periods
t h a n city institutions. After 1808 this point was generally regulated by charter; in those granted between 1810
a n d 1818 two banks were limited to sixty days, one to
four months, nine to six months, and for two there was
no limit. 6 The Mechanics' Bank discounted notes u p t o
four months, and on a loan secured by property t h e maxim u m time was two years. c
Virginia, in the charter of the Bank of Northwestern
Virginia, 1817, adopted one hundred and t w e n t y d a y s ; d
and later it made for all banks six months as t h e maxim u m limit. e In South Carolina t h e Bank of t h e State,
1812, was forbidden by its charter to loan for more t h a n a
year.
a Financial Register, 1838, p. 9; see also Raguet, Currency and Banking,
p. 96.
& Bryan, State Banking in Maryland, p. 71.
c Maryland Laws, 1806, ch. 19.
d
L a w s of Virginia, 1817, ch. 39, sec. 11.
« Charter of the Merchants and Mechanics' Bank, 1834; general law of
1837.




184

State

Banking

Before

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War

Alabama, in 1839 a n ( i 1840, passed acts for the relief
of debtors. I n 1839, for example, it was provided t h a t
not exceeding 20 per cent of the debt due a b a n k on notes
running to m a t u r i t y or upon bills and notes in suit, or
upon which judgments had been obtained, could be collected in any one year. The Bank of t h e State of Alabama
at Huntsville consequently required notes to be given for
one hundred and twenty days. This legislation led to an
increase in the suspended debt and p u t the banks in a
worse position t h a n they were before. The commissioners
which examined the branch of the Bank of t h e State of
Alabama at Decatur in 1840, however, thought t h a t such
legislation was highly desirable and commended t h e action
of t h e ipanagement of t h e bank, which, " actuated b y motives of benevolence and philanthropy, had withheld a
large a m o u n t on which suits might have been commenced.
A policy nicely discriminating between the claims of those
having t h e means and neglecting to pay their installments,
and those who, without distress to their families, cannot
raise the means to do so, is, in the opinion of the board,
the true policy. " a
(d) Renewals of loans.
The Bank of Hartford, 1792, prescribed t h a t any person
not punctual in meeting his note was not to receive further
loans. In 1809 it was ordered t h a t a p a y m e n t of 20 per
cent would be expected on a ninety-day loan at maturity,
and t h a t no renewal would be received for a greater sum
t h a n four-fifths of t h e principal falling due. & In 1821 t h e
a

H . R. Document, No. i n , 26th Cong., 2d sess., p. 612.
& Woodward, The Hartford Bank, p. 88.




185

National

Monetary

Commission

management voted that notes which had been put in the
hands of an attorney for collection should not be renewed.
The Worcester Bank in Massachusetts ordered that no
notes should be renewed for more than four-fifths of the
original sum and at every renewal one-fifth of the original
loan should be paid in. a
By the rules of the Bank of New York, 1784, renewals of
loans were not permitted. The by-laws of the Girard
Bank, of Philadelphia, 1832, forbade the renewal of a note
for a sum equal to that originally discounted, and justified
renewals only in case of mistake, accident, or urgent necessity, to be determined by the sound discretion and judgment of the president.
In South Carolina the Bank of the State, 1812, forbade
renewal unless a year's interest was paid in advance.
One-tenth of the loan was to be called in each year.
The Central Bank of Georgia, 1828, renewed accommodation notes every six months. The Planters' Bank in
Mississippi, 1830, could not renew real estate loans until
one-fourth of the principal was paid. By an amendment
to its charter in 1833 loans could be renewed for one, two,
or more years at a 9 per cent interest. The Union
Bank of Louisiana, 1832, a real estate bank, gave renewals
at the end of a year, provided one-eighth was paid, thus
allowing a loan of eight years.
By the middle of the century renewals and extensions
were the exception rather than the rule. 6




a Worcester Bank, 1804-1904, pp. 8-9.
& Merchants' Mag., 22:89; I 7'-5 1 1 -

186

State

Banking

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Civil

War

(e) Amount of loan to any one person.
In accordance with the idea that banks should distribute
their benefits as widely as possible, limitations in some
States were placed upon the amount which could be
loaned to any one person. Such restrictions do not, however, appear in the early charters of New England. In
the course of time bank commissioners began to complain
of the excessive amounts granted to single individuals, and
in 1838 the commissioners of Connecticut recommended
that individual discounts be restricted to a certain percentage of the capital. The legislature, however, took no
action, and in succeeding reports similar complaints were
made. In 1847 it was reported that banks with less than
$100,000 allowed single discounts amounting to $30,000.
In 1854 a bank with a capital of $80,000 had loaned nearly
$50,000 in one case and $42,000 in another. In that year
the legislature took action and passed a law providing that
no loan should be made to any person or corporation for
more than 15 per cent of the capital. There was still dispute, for some of the banks construed this liability as
applicable only to a direct loan.a In Vermont, by an act
of 1840, no individual could borrow more than 10 per
cent of the capital. As the result of a special inquiry in
Rhode Island in 1843 it was found that one bank had
loaned $72,000 to one borrower, and that another bank,
organized in the interest of farmers, had made a single
loan of over $25,000.
The Bank of New York about 1810 reduced the maximum of a single loan to any one person to $20,000, but the




a

Acts, Conn., ch. 11, sec. 2.
187

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Commission

legislature of that State did not impose restrictions. The
Bank of Pennsylvania limited the total indebtedness of
any individual or firm to $50,000.
In Maryland, by the charter of the Mechanics' Bank,
1806, loans on property, which could be made only to oneeighth of the paid-in capital, were limited to not more
than $3,000 to any one person. 0 Virginia required of
her banks returns in regard to the amount of individual
discounts. In 1837, for example, the Merchants and
Mechanics' Bank of Wheeling reported these loans:
Over $20,000
$10,000 to $20,000.
$5,000 to $10,000
$1,000 to $5,000_
$500 to $1,000

1
20
163
i»357
1, 065

$200 to $500
$100 to $200
Under $100 _

1, 634
1, 133
626

Total

5, 999

The charter of the Bank of Kanawha (Va.), 1839,
made elaborate provision by which small loans were to
take precedence over large ones. Applications for discounts were divided into five clashes, as follows: (1)
Applications for sums $100 to $500; {2) applications for
sums $500 to $2,000; (3) applications for sums $2,000
to $5,000; (4) applications for sums $5,000 to $10,000;
(5) applications for sums $10,000 to $20,000. All applications in the lower classes were to be granted before giving an application in the higher classes. The total indebtedness of any one person or company was limited to
$50,000.*
a

Maryland Laws, 1806, ch. 19.
& Laws, Va., 1839, c n - 87, sec. 3; see also ch. 88, sec. 13.




188

State

Banking

Before

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War

In South Carolina, the Bank of the State, 1812, could not
make a loan larger than $2,000, and loans on mortgages
must be apportioned between the election districts.
Georgia in the Central Bank, 1828, limited its loans to
$2,500 to any one person and they were required to be
distributed as equally as possible among the citizens of
the State, according to population. In 1840 the bank
reported that in accordance with the recent act of the
legislature it had just completed the distribution of
$750,000 to citizens of the counties.
By the charter of the Bank of Alabama, 1823, it was
provided that loans should be apportioned among the
counties of the State in proportion to their representation
in the general assembly, and the counties were to be
notified of the amounts their citizens were entitled to
borrow; in 1837 the Branch Bank of the State of Alabama
was criticised because it did not wait for the elections
in order to determine the proper apportionment of loans
in different parts of the Stated
The Planters' Bank of Mississippi, 1830, was limited
to $4,000 on any one real estate loan. The Mississippi
Union Bank, which began operations in 1838 by resolution
of its board of directors distributed its loans on personal
security as equally as applications would admit, to the citizens of the whole State; $2,855,000 were thus loaned during the first four months; the largest amount loaned to
any one person was $10,000, and this in only two cases;
the average of the loans was $i,8oof In 1840 an act was
passed requiring that no loans be made for more than
a

See 25 Cong., 2 sess., H. R. D o c , No. 79, p. 536.




189

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$20,000 to the principal and for not more than $50,000
to an endorser.
The Bank of Kentucky, 1834, could employ only twofifths of its capital in Louisville, the remainder being
reserved for the scattered branches. a In 1843 the banks
of Kentucky were required by law to loan to citizens in
each of the Congressional districts where branches of
the Bank of Louisville were not located, upon new accommodations. b
Kentucky in its bank returns demanded a classification
of loans according to the amounts demanded from each
bank. Returns of the Northern Bank of Kentucky in
Lexington, 1837, classified borrowers as follows:0
$100 to $500
$500 to $1,000
$1,000 to $5,000
$5,000 to $10,000
$10,000 to $20,000
Above $20,000

251
155
205
33
7
3

In 1839 the banks reported that they endeavored to
distribute their accommodations as widely as possible.
One of the larger banks, for example, stated that "in
making loans we have endeavored to disseminate large
accommodations in proportion to demand. It has been
the studied effort of this bank to equalize bank accommodation and facilities among the surrounding and neighboring counties."
< Duke, History of Bank of Kentucky, p. 38.
*
& Act of March 8, 1843, sec. 15. Duke, History of Bank of Kentucky,
pp. 98-99.
«See Senate Document No. 471, 25 Cong., 2d sess.; also Document No.
172, H . R. 26th Cong., 1st sess., p. 749, et seq.t also p. 785.




190

State

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In Tennessee there was the same solicitude that loans
should be distributed throughout the State. The Bank
of Tennessee, 1839, at its organization, published a statement in the newspapers as to the amount which each
county was entitled to borrow, the proportion being
determined by population.**
I In Indiana, by the charter of the State Bank, 1834,
no corporation could borrow more than 5,000 at any one
branch, except by permission of the central board. In
1839 complaint was made of the great inequality in the
grant of loans to citizens of the different parts of the
State J less than one-twentieth of the people of the State
enjoyed discount privileges; of the 5,000 borrowers, 600
were stockholders and directors who took more than a
third of the total; three-fourths of the loans were devoted to thirteen of the counties, or less than one-sixth
of the whole number; the farmers, who constituted
about three-fourths of the people, received but one-fourth
of the discounts; the merchants were the favored class,
and the loans which they received were injurious, in that
it made it possible for them to obtain large purchases
abroad on credit and thus stimulated on the part of the
people a love of indulgence and display which increased
the consumption beyond the production. Illinois, m
1840 (Jan. 3), restricted single direct loans by the State
Bank to $10,000 and indorsement to $25,000.
a See Report to the legislature, Oct. 7» l8 39-

24635—10




13

I9J

National

Monetary

Commission

(/) Loans to directors.
During the second period of banking, when banks were
organized more for the personal profit of the stockholders
than to serve public interest, the question of loans to
directors engaged much attention. In Massachusetts an
act was passed in 1838 limiting the amount for which
directors and officers might be liable unless the stockholders by an express vote authorized a larger sum. This
was. perhaps due to an investigation of the Commonwealth
Bank, in which it was found that excessive overdrafts
had been allowed to directors; although the management
had voted some ten years before that no money should
be drawn from the bank by memorandum check or overdraft, the practice continued and it was claimed that there
were similar practices in other banks. This informal
method of borrowing was largely in favor of directors. 0
In 1838 and again in 1851 limitations were imposed
restricting an individual director to 8 per cent and the
whole board to 30 per cent of the capital except by express
vote of the stockholders; 6 in 1843 the cashier and subordinate officers were forbidden to borrow of the bank.
In Connecticut in 1819 the Hartford Bank, following a
policy of increased caution, voted that any director
offering a note for discount should absent himself from
the board meeting while the loan was under consideration ; c
and in 1839 it forbade loans to its president.** The bank
a Report of the Bank Commissioners, Mass., 1838.
& First Report of Bank Commissioners, Mass., 1851, pp. 7-9; Second
Report, 1852, p. n .
c Woodward, The Hartford Bank, pp. 125-126.
d Ibid., 147.




192

State

Banking

Before

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War

commissioners of this State as early as 1837 called attention to the impropriety of large loans to directors. These
were lenders to the bank and there was a strong objection
to their being also borrowers. As a result, in the following
year an act was passed disqualifying a person to serve as
a director whose indebtedness to his bank exceeded $9,000
above the stock in his name, and in 1840 it was further
enacted that the directors collectively should not be
indebted for more than one-third of the paid-in capital.
Notwithstanding this restriction commissioners found
reason for continued criticism. In 1841 the direct loans
in fifteen banks to directors amounted to $311,000 on a
total capital of $2,438,000. In some banks the directors
were indebted to nearly one-third of the capital on accommodation paper only, and if their indirect liabilities as
indorsers were taken into account the indebtedness would
amount to one and a half. A more restrictive law was
consequently passed, but there were complaints that the
services of some valuable men were lost to banks of small
capital. There was additional embarrassment because the
law prohibited a loan to any company or corporation of
which a director was a member or stockholder.
In Vermont, by the safety fund act of 1831, directors
as well as stockholders were limited in loans to $2,000, but
this provision was easily evaded. In 1840 it was enacted
that no stockholder or director should be indebted for
more than 5 per cent of the capital, and that all of the
directors together should not be indebted to a greater
amount than the aggregate amount of 3 per cent for
each director. In 1854 the bank commissioners reported




193

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Commission

that, in spite of legal restrictions, there was no limit to
the indebtedness of any one; it was possible to evade the
law because indebtedness arising from the purchase of
bills of exchange was excepted in the percentage
calculation.
In Maine directors' loans were restricted to 8 per cent of
the capital, but the bank commissioners in 1842 reported
that some directors borrowed more than the law permitted
and declared that this abuse was responsible for more
failures of banks than any other one cause. The practice
became an abuse in Rhode Island, and in 1837 it was
reported that banks, to a considerable extent, were simply
engines to supply directors with money. At two of the
banks one-half the discounts and at another three-fifths
were for the accommodation of directors and firms of
which they were members."
New York, in 1811, regulated the amount which a director
could owe to a bank, b and under the safety-fund act of
1829, directors were restricted from receiving discounts,
including indirect liabilities, for more than one-third of the
capital; in 1842 the bank commissioners declared that
they thought it was unwise to restrict loans to directors
too rigidly; these officers were generally men who were
active in business in the vicinity of the bank and presumably would be able to meet their engagements. 0
In New Jersey the by-laws of the Newark Banking and
Insurance Company, 1808, limited the liabilities of directors according to their property. A separate loan to any
a Report of Bank Commissioners, Rhode Island, 1837.
& Session Laws, N. Y., 1811, ch. 64.
c Report of Bank Commissioners, New York, 1842.




194

State

Banking

Before

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War

one person or firm was limited to $15,000 and the maximum total to $30,000. Loans to directors were arranged
in three classes, according to their property: To those with
the "best estates," $12,000 was granted; to the second
class, $8,000; and to the third class, $5,000. It was left
to the "good judgment" of each director to classify himself, and the bank adopted the resolution " t o earnestly
recommend to every director of this bank to abstain from
drawing, accepting, or indorsing for the accommodation
of any person or persons whatsoever, except for such
amounts only as their circumstances and resources would
enable them to pay in case of their friends' failure."®
By a charter in 1824 no director could borrow more than
the value of his bank stock; 6 and beginning with 1830
charters frequently forbade loans to stockholders or
directors or on notes drawn by one director and indorsed
by another.
By the charter of the Mechanics' Bank of Maryland the
president and directors could not borrow on accommodation paper more than $9,000. In 1818 it was provided
that the officers of the bank should have the same loaning
privileges as officers of any other bank in the State; 0 and
in 1820 it was provided that directors should be entitled
to discounts on the same terms as an)r other person.d
There was considerable legislation in regard to the amounts
which directors could receive; in the charter of the Farmers' Bank at Annapolis, 1804, directors were prohibited
< Charles J. Rockwood, One Hundred Years, a Record of the Work of the
*
Oldest Bank of the State of New Jersey, pp. 12-13.
& Acts, N. J., 49 Ass., p . i n , sec. 13.
c Session Laws, Md., 1817, ch. 39.
d Session Laws, Md., 1819, ch. 134.




195

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Commission

from receiving discounts on different terms from others. a
Afterwards a definite limit was placed to the amount of
discounts which directors might receive: For the Farmers'
Bank the limit was $i ,000 a week, for the Mechanics' Bank
of Baltimore the total was fixed at $9,000 renewable at
discretion, and for the Hagerstown Bank $500 a week.6
Whenever discounts to directors on accommodation paper
exceeded $9,000 the directors were to be informed and
discounts to such persons were to be curtailed at the discretion of the board. In 1837 a legislative committee
reporting on this subject stated that such discounts were
reasonable and proper inasmuch as they were made to
merchants and manufacturers who were responsible.
The general banking law of Virginia, 1837, forbade a
director who was interested in a loan to be present when
the application was considered, and in 1842 a law was
passed limiting a director or firm of which he was a member to an indebtedness of not more than $5,000.° The
charter of the Bank of Alabama, 1823, forbade bank officials to indorse for one another. In 1836 (Dec. 17) an act
was passed making it unlawful for a director to be liable
for more than $35,000. Loans to directors, however,
became an abuse, and in 1837 the bank commissioners
reported them as excessive. It was stated that presidents
and directors were indebted for over $1,000,000 and expresidents for more than double that sum. d In 1839 the
legislature prohibited directors from becoming liable in any
manners




o Laws, Md., 1804, ch. 61.
& Bryan, State Banking in Maryland, p. 36.
cLaws, Va., 1841-42, ch. 105.
d Report of Bank Commissioners, Ala., 1837.
« Acts, Ala., Jan. 13, 1839.
196

State

Banking

Before

Civil

War

Directors in the Planters' Bank, Mississippi, 1830, could
not legally borrow more than $6,000 at any one time, and
in 1840 (Jan. 21) loans of any amount to directors were
forbidden to all banks.
Clibborn, an Englishman, after five years' residence in
Cincinnati, wrote in 1837, as the result of his observation,
that banks would not discount unless the directors were
directly or indirectly interested. A more serious abuse
was the practice by directors of indorsing for a consideration of 1, 2, or more per cent. The bank commissioners of
Ohio, in 1839, criticised the excessive loans which had been
made to directors and officers where the direct liabilities
amounted to a sum nearly equal to all the specie of all the
banks. In Indiana the charter of the State Bank of
Indiana, 1817, limited loans to a directer to $5,000 and his
indorsements to $10,000, but this restriction does not seem
to have been sufficient. In a report made November,
1840, it was stated that discounts to directors amounted
to about one-ninth of the total loans and the discounts
to other stockholders *to about one-fourth. In 1855 it
was enacted that no director could be indebted for more
than double the amount of his shares in the bank, except
on bona fide bills of exchange, payable out of the State. a
In Kentucky a legislative committee, in 1837, investigated loans to directors and found that as payers on discounts and as drawers of bills the total amount to 31
directors in three banks was $1,224,000. This, however,
was less than loans to the same number of persons not
connected with the management.




a Laws, Ind., 1855, ch. 7, sec. 37.

197

National

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Commission

(g) Partiality in making loans.
Allied to the practice of making excessive loans to
directors was partiality in the granting of discounts. In
Connecticut there was for many years complaint that
banks were partial to directors and their friends. In 1839
the bank commissioners stated that directors' loans were
long-continued and renewed, thus tying up funds to the
disappointment of men in active business. On the other
hand, the Worcester Bank in Massachusetts in its petition
for a renewal of charter in 1811 gave as one of the reasons
for favorable consideration, that loans had been made
without partiality and stockholders had been among the
smallest borrowers.
In 1806 the Bank of North America in Philadelphia was
subject to an investigation from which it was learned that
directors had been in the habit of granting loans almost
exclusively to a few favored individuals. 0 During the
embargo period, when money pressure became great, the
banks denied the applications of those forced to turn to
money lenders or brokers who in many cases were agents
of bank directors and who, because of their official relations, were able to control the loanable funds of banks to
their own advantage.
The historian of state banking in Maryland also notes
that there was considerable dissatisfaction because discounts were confined to a small number of friends of banks
and were not made on the merit of paper offered.6
« Lewis, The Bank of North America, p. 84.
& Bryan, State Banking in Maryland, pp. 36-37.




198

State

Banking

Before

Civil

War

The branches of the Bank of the State of Alabama had
a by-law by which each director on discount day could
call up out of the regular order two notes and have
them discounted as a matter of right in order to meet
the needs of special cases. This practice easily degenerated into favoritism, and in 1838 the bank examiners
reported that much of the apparent dissatisfaction with
the State Bank and its branches had grown out of the
partial manner in which discounts had been made and the
large amount of discounts which had been granted by
directors to themselves. It was estimated that the legal
voters in the State numbered 55,000. Of these only
11,611 were indebted to the banks. The president and
directors had borrowed over $1,000,000 and ex-directors
more than $2,000,000, while others had obtained direct
accommodations to the amount of $3,054,000." By an
act of February 2, 1839, provision was made for compensation to directors, in the hope that by payment for
services their readiness to recompense themselves at the
expense of the bank would not be so great.
The governor of Mississippi, on January 17, 1838, in a
message stated that the bank commissioners reported
that a few persons had obtained control of banks and made
most of the loans to commission merchants, speculators,
and officers of the banks. The banks consequently were
dependent upon the planters.
a Report of Bank Commissioners, Ala., 1838.




199

National

Monetary

Commission

(h) Restrictions on loans to residents and nonresidents.
During the earlier period of banking loans were generally made to persons living in the vicinity of banks.
Acquaintance or citizenship was regarded as a necessary
requisite; for example, by the rules of the Hartford Bank,
1792, the drawer or indorser of a note must be a resident
of Hartford.** Beginning with about 1830 there was an
excess of banking capital in some sections of New England, due to the desire of bank organizers and promoters
to secure profits through circulation. In order to earn
these dividends it was necessary to make loans outside of
the immediate vicinity in which the bank was established.
This was looked upon with disapproval by conservative
financiers and generally criticised by the bank commissioners. For example, the bank commissioners of Massachusetts, 1841, reported that several banks were in operation which were not needed. They could not loan their
funds upon good business paper in the vicinity, and loans,
therefore, had to be made upon accommodation paper
which had to be "traveled for." This was generally
second-rate paper. Directors could not acquaint themselves with the character of business at a distance, and it
was remarked that the best class of paper did not travel
abroad to be discounted in strange places. Sureties upon
such paper were inclined to take advantage of technicalities in order to avoid prompt payment.
During the years 1852-1855 this subject again excited
public attention. In the former year the bank commissioners referred to loans which had been made by banks




0 Woodward, The Hartford Bank, p. 21.
200

State

Banking

Before

Civil

War

to parties in distant States which were not based upon
business transactions, but rather with the view to extending circulation. It is noted that paper thus inconsiderately taken was frequently not paid at maturity, that
renewals were submitted to, and that serious losses closed
the operation. It was also reported that loans were made
by Massachusetts banks with a small amount of local
business to banks outside the State whose stocks were
pledged to secure the redemption of their own issues and
whose profits were derived from the higher rate of legal
interest in other States. a In 1853 a legislative committee,
in reporting upon additional bank capital, stated that
there were two rules which should be observed: first, that
the business of any given locality needed the use of any
capital asked for; second, that there was capital there, or
in the neighborhood, seeking that form of investment.
It was observed that there was a very considerable portion
of the loans of some banks represented by names and
collateral remote from home, frequently in the West;
this use of a bank's resources operated harshly on those
in the vicinity who looked for business accommodations
to the banks. Some of these loans, apparently well
secured, had been made on advances from railroad and
other enterprises, which, however, were incomplete;
as a consequence, they must be renewed, and however
urgent might be the wants of the local neighborhood,
they could not be called in. A bank commissioner
admitted that an opinion had been expressed in some
quarters that banks were not bound to regard the wants
a Second Report of the Bank Commissioners, Mass., 1852, p. 8.




201

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Monetary

Commission

of their neighbors or to be confined within the Commonwealth in dispensing discounts, thus making all public
considerations give place to the interest of the stockholders. This doctrine, however, they were happy to
say, was rarely advanced and one which it was hoped
would never find favor with the public or the legislature. 0
In the following year they called attention to the disastrous
consequences of the policy previously reprehended;
several banks which had indulged in remote loans had
been forced to pass their dividends. 6 In 1859 the commissioners again criticised the practice of forcing loans at
a distance: The bank officer who loaded his carpet-bag
with notes of his bank and wended his way to State street,
there to conduct the business of the bank with brokers
and sharpers, was doing an ill-advised business; it would
be better if he devoted his eflforts to extending the bank's
circle of customers at home and thus create a safe and
reliable circulation. It was, however, impossible to prevent the practice, for in i860 it is again noted that there
was a growing custom among the banks to seek paper for
discounting among brokers. c Notwithstanding these official cautions, the Boston Board of Trade, in 1857, memorialized the legislature to the effect that there was an
insufficiency of banking capital, which caused merchants
and manufacturers to resort to New York and elsewhere
for the negotiation of a large part of their business
paper. d
a Fourth Report of the Bank Commissioners, Mass., 1854, p. 82.
& Fifth Report of the Bank Commissioners, Mass., 1855, p. 73.
c Tenth Report of the Bank Commissioners, Mass., i860, p. 137.
d Bankers' Magazine, 1857, 11:90a.




202

State

Banking

Before

Civil

War

In Connecticut, loaning abroad was regarded by the
bank commissioners as a serious evil. Beginning with
1837 there is hardly an annual report in which the subject
is not referred to. In 1837 it was reported that the legislature had never incorporated a bank except on the consideration that its capital should be employed in the
neighborhood of its location. Banks ought not to loan in
another State. It was noted, however, that some had lent
large sums to strangers in remote parts of the United
States, and that, in particular, the Middlesex County Bank
had discounted paper in New York City and a considerable
amount in Chicago. Complaint was made that the City
Bank of New Haven had made large loans outside the
State without due regard to the needs of New Haven; in
1836, for example, discounts amounting to $401,000 were
made in the State and $1,337,000 outside the State. In
the desire to secure large profits the bank had lost sight
of public interest. The total proportion of loans to citizens in Connecticut and to those outside was one to eight;
in 1831 it had been only one to five. In the next year
it was stated that Connecticut banks kept funds, varying
from $1,000,000 to $1,500,000, in New York in the
hands of brokers of banks. This policy was open to criticism, because there was a need of capital at home and
loans ought not to be placed beyond the jurisdiction of
the State. In 1841 they reported that the greatest losses
which banks had sustained were due to the large amount
of loans without adequate security, in the hands of brokers,
and also to loans made mostly in the western part of New
York in 1837 and 1838. In 1844 it was admitted that




203

National

Monetary

Commission

banks found it impossible to find use for all their notes in
discounting good paper at home, and consequently reduced
their rates. Banks, however, had been tempted to make
investments in stocks, and large balances accumulated
in New York City, on one-half of which interest was
allowed. This led to injurious consequences, for a large
amount of unemployed capital in New York City had a
tendency to advance the price of stocks and to develop
a spirit of speculation. No longer did the banks enforce
the sound and wholesome rule requiring at least one
responsible indorser within the State.® In 1854 they again
complained of the placing of notes in the hands of brokers
who were engaged in railroad enterprise and stock speculation. Seven banks had loaned to a New York broker,
engaged in the construction of a western railroad,
$508,000. Banks had also purchased negotiable paper in
large amounts in New York at rates of discount exceeding
that permitted by the law at home. Thus they were
obliged to curtail domestic accommodations. Finally, in
1855, b a law was passed prohibiting any Connecticut bank
from loaning outside the State more than one-fourth of its
capital actually paid in and deposits. In the next year
it was reported that the loaning of money abroad on railroad securities had been to a great extent discontinued,
but in 1857 reference was again made to the illegal practice
of discounting paper abroad at rates ranging from 7 to 12
per cent, under the plea that paper bought on Wall Street
was not discounted, but bought. A large amount was
a Report of the Bank Commissioners, Connecticut, 1847.
b Acts of Conn., 1855, c n - I]t> s e c - 5-




204

State

Banking

Before

Civil

War

annually sent to New York for investment in bonds and
mortgages at 7 per cent, making it difficult for manufacturers and traders at home to get the necessary facilities
at 6 per cent. In 1862 the commissioners reported that
the law requiring the banks to loan to persons in the State
an amount equal to their capital stock before they loaned
outside had not been observed by many of the banks.
These still loaned for accommodation or circulation in the
West.
In 1836 the bank commissioners of Rhode Island noted
with disfavor that the directors of the Newport Exchange
Bank had made large purchases of paper in New York,
as well as in Providence, and recommended that the
practice of discounting abroad should be corrected by the
legislature.
The bank commissioners of New Hampshire in 1840
reported that the Wolfboro Bank had made very large
loans to individuals outside the city, particularly in New
York and New Jersey; $105,000 had been loaned to a single
person in New York City, and apparently a very considerable part of this was without security beyond personal
responsibility. In 1841 the bank commissioners recommended that banks be restricted from loaning to persons
outside the State more than one-fourth or one- fifth of the
capital.
By the charter of the Union Bank of Maryland, 1805,
discounts upon personal security required the names of
two responsible persons, residents in Baltimore; if other
security was given only one name was required, but in that
case property should be so conveyed that it could be sold




205

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Monetary

Commission

immediately. The bank commissioners of Ohio referred
with disapproval to the prevailing practice of banks in
opening accounts with distant individuals or brokers.
This disregarded the purpose of the bank charters; favors
were intended for persons living in the immediate vicinity
of the bank. The charter of the Bank of Kentucky, 1806,
provided that loans could be made only to citizens of the
State.
In closing this account of the investments of banks it
should be noted that some banks followed the path of
prudence, as judged by the most conservative standards
of the present day. Such an institution was one in Connecticut, of which Mr. Isaac Bronson was president for
more than thirty years during the earlier half of the
century. He never discounted paper at his counter for
a longer period than sixty or ninety days and would not
in any instance consent to a renewal. Consequently after
the bank had been a short time in operation the payments made on the discounted paper equaled the emissions of bank bills. Thus the means of redeeming all
the paper he issued soon became ample, by the fruits of
discounts only, without the employment of any capital.
Every bill which remained in circulation was soon represented by its equivalent in specie in the vaults of the bank.
During all this time he would be gradually investing on
good security and on half yearly interest the specie capital
of the bank so that two classes of customers would be
accommodated—those who needed discounts for sixty or
ninety days with bills advanced on indorsed notes at the
counter, and those who wanted loans for months or years.




206

State

Banking

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War

with the specie capital, on giving safe security. The specie
capital was all soon lent on half yearly interest, and the
discounts could be indefinitely extended as they supplied
the means for redeeming all the bills of the bank without
resort to the capital. The revenues of the bank from
these two sources made an average dividend of ten per
cent yearly during the whole of Mr. Bronson's administration. This bank, without resort to its capital, although
its discounts were liberal, was one of the few which sustained specie payments during the war of i8i2. a
XXIV. LOANS TO STATES.

There were two opposing principles which influenced
legislation in regard to the making of loans by banks to
state governments. On the one hand was the fear that
governments might become too dependent upon banks;
on the other, a growing conviction that the States ought to
receive financial assistance from institutions which were
chartered as grants of special favor. This conflict of
opinion is well illustrated in the charter of the First
United States Bank. As already stated, one of the reasons assigned in the preamble for incorporating this institution was to make loans to the Government in sudden
emergencies, and yet it was carefully provided in Article xi that no loan should be made to the National Government for more than $100,000, or to any particular
State for more than $50,000, unless previously authorized
by Congress. In this way it was believed the financial
relations of banks to state governments could be kept
0 Financial Register, 1838, 2:15-16.
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under control, but on the whole the desire to make the
banks supporters of public credit was more powerful than
the fear of their ascendancy. This is seen in the provision
of the First and Second United States Banks which
called for the subscription of a large part of the capital
in government securities. Indirectly this was a loan of
capital to the Government. Later it was recommended
by able writers, as by Gallatin, that all of a bank's
capital should be loaned to the Government, that is, invested in public stocks. a Gilbart, an English authority,
in contrasting American with English banking practice,
criticised our policy of requiring banks to make loans to
the Government, on the ground that the latter would require them only in times of distress when banks were least
able to make them. 6
It was a common practice in many States to require
banks to make loans, if called upon, to the State which
chartered them. In Massachusetts, for example, the charter of the Union Bank, 1792, required it to loan the State
a sum not exceeding $100,000 at 5 per cent, and a similar
provision was applied to most of the banks subsequently
organized. By the charter of the State Bank in 1811, the
State could borrow at any one time a sum not exceeding
10 per cent of the capital, payable within five years at 5
per cent, but the total liability to the bank was limited to
20 per cent of the capital. By an act of 1816, the treasurer of the State was authorized to enforce loans and was
given power to levy a fine of 2 per cent a month on sums
o See also Lord, Principles of Currency and Banking, 1829, pp. 72, 84.
& Gilbart, History of Banking in America, p. 88.




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refused." In some cases loans to the State were so large
that the banks were weakened for commercial purposes.
Ten per cent of the capital became the common rule, until
1829, when the general law made 5 per cent the ratio for
any one loan, and 10 per cent the maximum total. The
penalty of 2 per cent per month for refusal was continued.
Though not compelled by its charter, the Bank of New
York in 1794, at the request of Secretary Hamilton, made
a large loan to the Federal Government and it also accommodated the State. 6 The Mechanics' Bank of New York,
1810, was under obligation to loan one-sixth of its capital
for three years at 5 per cent. In 1812, when the old Bank
of the United States was reorganized in New York as the
Bank of America, it had to pay a heavy price. The act
of incorporation called not only for a loan of $100,000 at
5 per cent and one of an equal amount at 6 per cent, but
also demanded the payment of a bonus of $400,000.
These conditions proved so onerous that they were subsequently remitted. 0 New Jersey, in 1815, required the
Farmers' Bank to loan to the State $50,000 on thirty days'
notice.5
Pennsylvania forced her banks to lend their credit as
the price of organization. The Philadelphia Bank, 1804,
was required to loan $100,000 at not over 5 per cent for
five years, in addition to a gratuity. In 1814, the law
chartering a large number of new banks demanded that
each should loan to the State one-tenth of the paid-in capi»Acts, Mass., 1816, ch. 133, Jan. sess., p. 177.
& Domett, Bank of New York, pp. 50, 54.
c Acts, N. Y., March, 1813, and February 26, 1819.
d P r i v . Acts, N. J., 39 Ass., 1 sess., p. 162.




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tal for five years, and this requirement was repeated in the
general banking act of 1824. In 1825 the Bank of North
America, in securing a renewal of its charter, was called
upon to loan one-twentieth of its capital at 5 per cent.®
In addition to charter requirements, special acts were frequently passed authorizing specific loans from banks.
Between 1820 and 1830 the Bank of Pennsylvania, in particular, was called upon to render extensive aid, so great
indeed that it involved the bank in serious embarrassment.
In 1828 an attempt was made to incriminate the directors
for making large loans to the State, while, on the other hand,
in the next year the bank was publicly attacked for not
loaning the amount desired by the State, and thus crippling certain plans of internal improvement.
In Maryland the legislature at the beginning of her
banking policy was disposed to fear the results of a too
great dependence of the State upon banks. The charter
of the Bank of Baltimore, 1795, imitated by others, limited
the amount of credit to the United States or to any State,
including Maryland, to $50,ooo.6 Between 1812 and 1816,
doubtless moved by the exigencies of war, these restrictions were removed and all banks were permitted to loan
to the State of Maryland up to the amount of capital and
to the United States up to one-third of the capital. 6
North Carolina, by the extension of two charters in
1814, required each bank to lend up to one-tenth of the
capital. In South Carolina, in 1822, for charter extension, a bonus of $20,000 was demanded.
a Lewis, History of the Bank of North America, p. 91.
& Bryan, History of State Banking in Maryland, p. 28.
0 Ibid., p. 49.




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The experience of Alabama illustrates the way in
which some of the new States became dependent upon
the banks for loans. This State was admitted "into the
Union in 1818, a time of financial stringency; settlers
were purchasing public lands and a large number of citizens were indebted to the Federal Government for these
lands, purchased on the installment plan. By the terms
of agreement at the time of its admission to the Union,
the State could not tax lands until five years after sale,
and lands unsold were not taxable. Much of the land
that could be taxed was being cleared for cultivation
and had not reached its full value; receipts from taxation, therefore, were slight, and loans were necessary.
At the very beginning of its organization, in December,
1819, the legislature authorized the government to
borrow $20,000 from the banks at Huntsville and St.
Stephens for the use and benefit of the State.
The charter of the Bank of Missouri, 1817, gave the
State the privilege of borrowing one-half of its stock
holdings without giving receipts. The State Bank of
Indiana, 1817, was required to loan up to $50,000 for
five years whenever authorized by law.®
The Bank of Kentucky, though not required by law,
readily responded to demands for loans in behalf of public improvements. In 1836 it loaned $200,000 to the
city of Louisville to pay its subscription to the stock of
a railroad, and other similar loans were made. 6




a Laws, Ind., 1817, ch. 41, sec. n .
& Duke, History of Bank of Ky., p. 49.

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XXV. LOANS TO SPECIAL INTERESTS.

In a few States, particularly in New England, the
charters, during the earliest period, required banks
to make loans to special classes in the community, as
farmers or mechanics. The Plymouth Bank in Massachusetts, 1803, was required to appropriate one-eighth part
of its capital "with exclusive regard to the agricultural
interests and to loan this in sums not less than $100 or
greater than $500 for not less than one year, to be secured
by efficient mortgage." The same duty was imposed
on the Worcester Bank, 1804. The State Bank in 1811
and the Suffolk Bank, 1818, both in Boston, were called
upon to loan in small sums one-tenth of their capitals
to the citizens outside of Boston who were engaged in
agricultural or manufacturing pursuits. The same policy
was followed in Maine. In 1802 one-eighth must be
loaned to farmers, but in 1812 this was reduced to
one-tenth.° In Rhode* Island, although bank charters
did not set aside any specified portion of capital to be
loaned to farmers, the need of the agricultural section
for accommodation was given a prominent place in a few
of the incorporations. In a preamble of the Rhode Island
Union Bank, 1804, it is stated that the interests of the
farmer had not been sufficiently consulted, u a n d the
pledge of his real estate, which is the only security in his
power to give, has not been accepted." 6
Though New York, as a rule, did not place specific obligations of loans to special classes upon her banks, there are
o Stackpole, Sound Currency, 7:58-60.
& Stokes, Chartered Banking in Rhode Island, p. 13.




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instances of responsibility which were recognized. The
Bank of New York, for example, in 1792, at Hamilton's
request, loaned $45,000 to the Society for Establishing
Useful Manufactures, organized in Philadelphia for the
purpose of building factories in New Jersey, at a rate of
interest at 5 per cent; Hamilton wrote, " I n my opinion
banks ought to afford accommodation in such cases upon
easy payments of interest. I think 5 per cent ought to
suffice where a direct public good is present." 0 In October, 1793, the bank also made a loan of $5,000 on the
request of the mayor of New York City to "aid the poor
and most distressed citizens of Philadelphia under a
pressure of very great calamity." 6 In their interest to
serve mechanics, the legislature in at least three charters
provided that a specified number of the directors should
be mechanics. This was true of the Mechanics' Bank
of New York, 1810, which was also required to devote
$600,000 of its $1,600,000 of capital for the use of mechanics and tradesmen. The charter of the Mechanics' and
Farmers' Bank of Albany, 1811, demanded that a majority
of the thirteen directors should be practical mechanics;
and that of the Tradesmen's Bank of New York, 1823,
that thirteen of the twenty directors should be either
mechanics, manufacturers, or selling goods of American
manufacture.
By the charter of the New Jersey Manufacturing and
Banking Company, 1823, manufacturers were entitled to
preference to all others in respect to loans and discounts. c
a Domett, Bank of New York, p. 49.
& Ibid., p. 50.
c Private Acts, N. J., 48 Ass., 1 sess., p. 162.




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In 1809 Pennsylvania, in the charter of the Farmers'
and Mechanics' Bank of Philadelphia, imitated Massachusetts, providing that one-tenth of the capital should
be loaned to farmers if applied for, and in 1814 the legislature required that the new banks should loan not
exceeding one-fifth of their capital, for one year, to farmers, mechanics, and manufacturers of their respective
districts. This provision was repeated in the general
banking law of March 25, 1824.°
In addition to these examples of regard for particular
classes in the community, the great state "property"
banks in the South and Southwest should be referred to.
These were designed primarily to make loans to farmers
and planters, but were organized on principles entirely
distinct from commercial banks.
xxvi. DEPOSITS.
During the earlier period of state banking individual
deposits did not play an important part in banking business. Loans were taken out in bank notes rather than in
the use of credit against which checks could be drawn.
As Dunbar * states, " Comparative sparseness of population and the imperfect development of the banking
habit in a new and more slowly advancing country, and
in a less advanced age than the present, created an
early preference for currency which passes from hand
to hand and discouraged the use of that which implies a
resort to the bank."&




a Article xxiv, sec. 8.
& Dunbar, Economic Essays, p. 174.

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After 1840 there began to be an increase in deposits
and a relative decrease in the use of bank notes. In
that year deposits, for example, in New York amounted
to only $16,100,000, but by i860 they had increased
over sevenfold, while capital and circulation increased
only threefold. Specie holdings were about four times
as much, but if the great increase in demand obligations
of depositors is considered, this increase was entirely
inadequate. In 1857, when the panic occurred, the
specie reserve amounted to only about 13 per cent of the
combined obligations of depositors and note holders.
It was then realized as never before that deposits constituted a liability which it might be extremely difficult
to meet in times of a crisis. Already the practice had
grown up of the payment of interest by banks both on
demand deposits to individuals and on country bank
balances.
In 1859 the bank superintendent of New York reported that the business of the country had ceased in a
very considerable degree to be transacted through the
medium of bank notes; facilities were now so convenient
for cash, checks, and drafts that bank accounts had
come into general use. It was estimated that within
ten years the number of depositors had increased twenty
times.
In 1820 in a bank investigation in New York, an attempt was made to learn whether interest was allowed
at that time by city banks to country banks on their
balances. One of the witnesses stated that he thought
the Bank of America paid interest to the Planters' Bank




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of Georgia; another stated that he knew of such accounts
but was unable to give specifications; and a third said
that he never knew of such a practice. Within a few
years, however, the practice became general, although
frequent efforts were made to do away with it. In
1852 the New York City banks generally agreed to abolish
the practice of allowing interest on country bank deposits, but the agreement was not kept.® The bank superintendent of New York, in 1857, condemned the practice;
it attracted large amounts from outside banks which
were practically demand loans; because of this the
sudden suspension of specie payments in 1857 was
largely due.
In Massachusetts frequent efforts were made to break
up this practice. The subject was discussed by the
bank commissioners in their report of 1839; m 1840
they stated that some of the individual deposits bore
interest, but, in 1851 the commissioners reported that
in that year they had not met with any instance of
interest on individual deposits.
The commissioners of Rhode Island in 1836 reported^
that interest was paid by some of the banks, but generally
on small sums not exceeding 5 per cent. The commissioners of Maine in 1862 stated that a few of the banks allowed
interest of from 3 to 5 per cent. The commissioners of
Connecticut in 1854 complained that banks resorted to
the practice of borrowing money in the form of deposits
at rates from 4 to 6 per cent and then loaning it at advanced rates. This practice was questioned, since it
a Merchants' Mag., 38: 328; Senate Report, No. 58, February 29, 1856.




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tended to concentrate the surplus capital at points where
the banks were located. If the money thus deposited
was loaned outside the State it was detrimental to business. It was a wide departure from the true principle of
banking and invited and encouraged large deposits. A
law was consequently passed limiting the rate of interest
on deposits, but it was repealed in the next year. In
1862 the commissioners reported that the practice of paying interest was generally discontinued.
The charter of a bank organized in New Jersey in 1834
specially provided that 3 per cent interest should be
allowed to special depositors. These funds, however, were
not to be withdrawn for sixty days. a
XXVII. SPECIE RESERVE.

After 1837 the question of having an adequate specie
basis to support circulation became a matter of common
discussion. Practically the only provisions relating to
the holding of specie were those requiring original payments in gold and silver of a certain portion of the capital
stock before the bank began business, but, as a rule, banks
did not retain this coin after operations were once begun.
Another indirect requirement was that which prescribed
a penalty in case a bank refused or delayed redemption
of bills. In these provisions it will be observed, however,
that there was no specification of keeping on hand a fixed
amount.
In Massachusetts the joint committee on banks and
banking in 1840 reported that it would be unconstitutional to impose upon banks the requirement that they




a Acts, 58th Assembly, p. 148, sec. 18.
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should keep on hand 10 per cent in specie, as this would
be a new burden not contemplated in the original charters. In 1850 0 the subject was again investigated by the
legislature, but a committee again thought that application of a definite rule was too difficult to determine; there
was a great variation in the amount of specie kept by individual banks; in Plymouth County banks varied in
their circulation as compared with specie from 16 to 24;
in Norfolk County, from 6 to 30; in Middlesex, 5 to 41;
in Suffolk, in which Boston is located, from 1 to 42; in
Bristol, 6 to 64^ In 1855 the bank commissioners reported that the banks kept too little specie; country banks
with a capital of more than $26,000,000 had but about
$1,000,000 in specie, and the city banks with a capital of
$33,000,000 had an average of only about $3,000,000.°
In the next year the commissioners again referred to the
subject and noted that the banks had not improved their
position: "We continue to feel surprised that judicious
men connected with banks still continue to speak with
indifference of the item of specie." d
In 1858 an act was passed requiring the banks to
keep on hand in specie 15 per cent of their aggregate
liability for circulation and deposits. Banks outside of
Boston, however, could count as specie their balances in
other banks, not bearing interest, which could be applied
to the redemption of bills. Under this proviso a country
bank was not obliged to keep a dollar in its own vaults,
a See Senate Document, Mass., No. 6, 1850.
& Merchants' Mag., 37:183.
c Fifth Report of the Bank Commissioners, Mass., 1855, p. 76.
dSixth Report of the Bank Commissioners, Mass., 1856, p. 78.




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and such exceptional favor met with the disapprobation
of the bank commissioners, who thought that at least 5
or 10 per cent should be kept by the bank itself.^ The
bank commissioners had originally proposed that 20 per
cent should be kept. The bill was passed against great
obstacles in the face of the hostility of the country banks,
and in order to secure its passage it was obliged to make
the above concessions. Balances in New York banks were
also allowed to be counted on the same footing with those
in Boston, a concession to meet the practice of some
banks in the southern and western parts of the State
whose balances were kept more largely with New York.
The restriction that specie balances must not draw
interest was removed by the legislature in 1859 o n the
ground that the payment of interest forced the city banks
to extend their loans in order to meet the expense.
Under these exceptions and modifications the specie reserve was practically no higher than it was in 1825, and
consequently did not prove as beneficial as it was hoped. 5
Another point to be taken into consideration in judging
this legislation is that the specie which was held by
Boston banks did duty not only for Massachusetts, but
for the whole of New England, inasmuch as the banks of
the other states had their currency daily redeemed in
Boston. In i860 the aggregate circulation of the five
States in New England other than Massachusetts was
$22,500,000, while the specie was only $2,500,000; if to
this be added the deposits of $14,500,000 and the liabilities of Massachusetts banks be taken into account, there
a Eighth Report of the Bank Commissioners, Mass., 1858, p. 95.
b Report of Bank Commissioners, Mass. i860, p. 125.




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was a total of nearly $90,000,000 of liabilities protected
by only $9,500,000 of specie.a This law gave rise to a new
abuse, the borrowing of specie by one bank from another
in order to enable it to make up its legal average, and
this practice was said to be much resorted to by banks
in Boston.b In 1861 the average specie holdings of the
country banks was only 7% per cent and of the Boston
banks 21 per cent. c It is also to be noted that many of
the Boston banks did not in individual weeks show a
legal reserve. One bank, for example, was below the
legal average in thirty-four out of the fifty-two weeks in
the year, while six others were below the line for twenty
weeks or more.^ Massachusetts therefore did not have a
preeminent record, as judged by specie holdings of her
banks; for the five years ending with 1820 the average of
specie was 23 per cent; for the period ending with 1825
the average was 20 per cent; 1830, 17 per cent; T835, 8
per cent; 1840, 12 per cent; 1845, 21 per cent.
During the four years succeeding 1857 the proportion
fell to less than 9 per cent, which was not much more
than the low standard of 1837. The specie reserves of
Massachusetts banks were lower than those of the whole
country taken together; for all the United States, the
reserve never fell below 13 per cent, while in Massachusetts in 1835 it fell to 7^ per cent. e
In 1846 Maine passed a law which gave a specie basis
to the circulation, and in 1857 every bank was required
a Tenth Report of Bank Commissioners, Mass., i860, p. 126.
& Ibid., p. 124.
c Eleventh Report of the Bank Commissioners, Mass., 1861, p. 150.
d Ibid., p. 148.
« Ibid., p. 147.




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to keep at least 5 per cent in specie in its own vaults. In
Connecticut, as early as 1838, the bank commissioners
recommended that circulation be based upon specie, and
in 1841 the proportion of one-third was suggested. In
1848, 10 per cent was recommended, for this would not
be a hardship on many of the banks, as most of them had
more than that amount of specie on hand. A law was
subsequently passed requiring 10 per cent of the circulation to be kept in specie.
In Rhode Island a legislative committee in 1826 reported that it was a well-settled principle in banking " that
every well-conducted bank, even though it confined its
advances to the discount of commercial paper or to bills
of exchange at short dates, must have always on hand
one-third or as much as one-half of the total amount of
its circulating paper.'' Although some believed that
Rhode Island banks could do as well with a much smaller
proportion, as one-fourth or one-fifth, such a policy was
not approved, since banks must be provided against
emergencies. Taking all banks together, the specie was
more than a third of the notes, but there was a great difference in Rhode Island in the amount of circulation put
forth by commercial banks and other banks. Eight commercial banks, for example, with a capital of $2,931,000,
had only $218,000 in notes, with $183,000 in specie; and
twenty other banks, with a capital of $795,000, had
$466,000 in notes and only $156,000 in specie. Under
the operations of the Suffolk system of redemption there
was a constantly decreasing amount of specie, and it
ceased to play an important part as a basis of circulation
and was treated rather as a reserve.




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Country banks in New York kept but a small amount
of specie; about 1820 amounts ranged from oneeighteenth to two-sevenths of the combined notes and
deposits. Eleven city banks in 1829 had one-seventh of
their demand obligations in specie, while the same number of country banks had only about one-twentieth.
This, however, did not include the sums which country
banks kept with the city banks to meet obligations for
note redemptions. The bank commissioners in 1833
called attention to the small specie reserve, less than
$2,000,000 for a circulation of $12,000,000, and warned
the legislature of the danger. Under the bank act of
1838 each banking association was required to keep
1 2 ^ percent of its circulation in specie. This provision,
however, was repealed in 1840, but the comptroller of the
State in the following year reported upon the necessity of
increasing the specie basis. This could be done in one of
two ways—by suppression of small bills or by increasing
the specie. A reserve of 20 per cent of the circulation in
specie was favored. Nothing was done, and for years, with
the growing importance of New York City as a commercial
center, the weak state of the specie reserve excited comment. a For two years, 1853-1855, banks made voluntary agreements to keep an average of 20 per cent of specie
on their weekly balances, but this was abandoned.
The panic of 1857, however, brought into new prominence the need of conservative practice, and in March,
1858, the city banks made an agreement " t o keep on
hand at all times an amount of coin equivalent to not less




a See Merchants' Mag., 25:152.
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than 20 per cent of our net deposits of every kind, which
shall be made to include certified checks and other liabilities except circulating notes, deducting the daily exchanges
received from the clearing house." (Report of Comptroller of the Currency, 1873, p. xxiv.)
Although there was little legislation in States south of
New York on this subject, the need of a better protection
to the circulation through the holding of coin was frequently referred to by the bank commissioners and legislative committees. Not, however, until i860 was there any
specific requirement as to specie holdings by banks in
Pennsylvania, and in the law then passed only 8 per cent
in specie or its equivalent was demanded. a In Maryland,
a legislative committee in 1837 reported that the ratio
of circulation to specie was less than the healthy and
authorized proportion of 3 to 1. A committee of Virginia, about 1835, stated that it was difficult to determine
how much specie a bank should have in order to redeem
its notes—the estimate was usually of 3 to 1, but in
Virginia the actual ratio was $5.22 to $1. An act in
1837 provided that banks should have one-fifth of their
notes in specie and forbade a bank to make any loan
when the reserve fell below this limits This ratio was
observed in subsequent legislation/" Alabama, in 1837,
enacted that the Bank of the State of Alabama should
have one-fourth of its capital in specie by July 1, 1841.
o Pub. Laws, Penn., i860, p. 459.
& Laws, Va., 1836-37, ch. 82, sec. 3.
cLaws, Va., 1850-51, ch. 58, sec. 10; Laws, 1855-56, ch. 60, sec. 4;
ch. 61, sec. 4; ch. 63, sec. 4.

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In 1838 the bank commissioners of Mississippi advised
that the banks should have $1 in specie to every $3 in
circulation and deposits. Louisiana had the credit of
taking the most advanced position of all the States in
her reserve requirements for banks; for many years the
Louisiana State Bank maintained a specie holding of onethird :;of its total responsibilities. In 1838 the associated banks of New Orleans agreed to carry, in 1839, specie
holdings of one-third of their cash responsibilities. In
1846 the banking law of Louisiana required the banks
to hold one-third of their aggregate circulation and
deposits in specie, while a sum equal to the remaining
two-thirds must be invested in short paper payable absolutely at maturity. Discounting by a bank which had
been ten days below the specie line was made an act of
insolvency, requiring liquidation, and directors or managers who assented to the violation of the law on this point
were made individually liable for all debts. This legislation was approved by its results; banks of New Orleans
passed successfully through the crisis of 1857, a t l ( i * n
March, 1861, at the beginning of the civil war, they held
sixteen millions of specie to a capital of twenty millions.
Ohio, in 1839, enacted that the volume of bills issued
should not exceed three times the amount of specie on
hand, exclusive of deposits. 0 By the free-banking act
of 1851 banks were required to have on hand in gold or
silver, or their equivalent, 30 per cent of their outstanding
notes. The State Bank of Iowa, 1858, required a reserve
of coin of one-fourth of the circulation and a similar
reserve in current notes for the deposits.




a

Rev. Stat., Ohio, 1841, p. 126.
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X X V I I I . SURPLUS.

Only in a few instances did banking laws during the
early period provide for a surplus. If there was any
decided opinion, it was apparently adverse to a bank's
accumulating large funds in excess of capital, due to the
fear of large moneyed corporations.
Connecticut, in 1835, passed a general law forbidding
any bank to retain as surplus more than 5 per cent of
its paid-in capital. Three years later, however, this act
was repealed.** In 1846 the bank commissioners stated
that banks should not be allowed to accumulate a large
surplus, as it would tempt those who knew the true condition of the bank to take advantage in the purchase of
stocks of those who were less well informed; but in 1849
they reported that banks should be encouraged to create
a surplus, so as to make dividends uniform.
Maryland, in the charter of the Mechanics' Bank, 1806,
permitted the management, if it desired, to retain at least
1 per cent of the capital from surplus profits as a contingency fund. This was common in other charters, but
not in all.& Virginia, in the charter of the Merchants'
and Mechanics' Bank, 1834, required the laying aside of
$10,000 surplus before the payment of more than 6 per
cent dividends. 0 In 1837 all banks in that State were
required to maintain a surplus of at least 5 per cent, not
exceeding, however, 10 per cent of the capital, before
paying dividends. This was known as a " contingency




a Woodward, The Hartford Bank, 137.
6 Bryan, State Banking in Maryland, 33.
cl,aws, Virginia, 1833-34, ch. 72, sec. 10.

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Monetary

Commission

fund." a In 1852 it was enacted that banks should
not pay over 6 per cent dividends until 1 per cent of the
capital had been carried to surplus, to be continued until
the total surplus equalled 5 per cent.5
Florida, in a charter of 1845, limited dividends to 10
per cent, and required the excess profit to be set aside
as a safety fund. The Franklin Bank of Cincinnati, 1833,
permitted no dividend of more than 3 per cent to be paid
until the bank had a surplus of $30,000. The charter of
the Bank of Kentucky, 1834, provided that no dividend
should be declared until there was a surplus of $20,000
for every million dollars of stock. c By the charter of
the State Bank of Indiana, 1834, e a c ^ branch was required to set aside one-sixth of its capital before dividends were paid.^
a Laws,
&Laws,
c
Duke,
^Laws,




Virginia, 1836-37, ch. 82, sec. 6.
Virginia, 1851-52, ch. 120, sec. 4.
History of the Bank of Kentucky, 38.
Indiana, 1834, ch. 7, sec. 54.

226

The Safety-Fund Banking System in New
York State, 1829-1866




BY

ROBERT E. CHADDOCK, PH. D.
University of Pennsylvania

227




THE SAFETY-FUND BANKING SYSTEM IN
NEW YORK
CONTENTS.

CHAPTER I.—Banking experience before 1829 in New York:
Page.
Early banks; political influence
233
The restraining laws of 1804 and 1818
235
City banks and country banks; differences; bank statements. _
236
Evils of special charters by legislature
242
Provisions of the charters
243
First enumeration of banking powers
244
Payment of capital
244
Periods of granting charters before 1829
247
A disordered currency and banking practices
248
Scandals of 1825 and 1826
251
Evils of the method of stock distribution
251
The Revised Statutes of 1827; debates
253
How classify the evils found ?
256
CHAPTER II.—The safety-fund law of 1829:
Plan of Joshua Forman; the bill formulated
259
The provisions
259
The debates
263
Antagonism of city banks
267
Banks chartered under the law
269
Significance of guaranty of all debts not understood
271
The law supplemented in 1838 by a general banking act—
no longer special charters
272
CHAPTER III.—The test of the safety-fund system:
1. Operation of the system before 1840, when serious failures
began
275
The commissioners' reports showing increases of capital,
dangers of certain banking practices, such as overissue
and too little specie
2 75
Discount of accommodation paper
276
Stringency in 1835; political influence
277
Difficulties of redemption of country paper
277
Suppression of small notes
278
Hypothecation of bank stock
278
Investigation of banks in 1835; evils
279




229

National

Monetary

Commission

CHAPTER III.—The test of the safety-fund system—Continued.
i. Operation of the system before 1840, etc.—Continued.
Page.
Pressure upon the legislature in 1836 for new banks
281
Evils of stock distribution; concrete cases
284
Bank investigations in 1837; evils
289
Bank statements, 1830-1842
296
The panic of 1837 and the safety-fund system
300
Further restrictions upon note issue
301
First call upon the fund in 1837; three Buffalo banks suspended ; two charters repealed
302
The banks and resumption of specie payments
304
Pressure during 1839
305
Derangement of currency partly caused by operation
of the free banks
305
Country notes at great discount
307
Law of May, 1840, providing redemption agencies and
maximum rate of discount
307
Evils of "accommodation paper" further described
308
2. Bank failures, 1840-1842; causes—
Banks that failed
309
General causes; specific causes for each bank
309
Assets of failed banks and amount realized
319
Bank statements of failed banks from time of organization
until failure
320
Analysis of causes of failures
322
How far due to an imperfect system of banking law_ _
324
How far due to causes outside the power of legislation—personal irresponsibility, etc
325
3. The actual burden of the bank failures upon solvent banks
and the public—
Comptroller's problem
327
Settlement of the debts of failed banks
328
Analysis of affairs of failed banks showing charges upon
the fund for notes and other debts
332
The bank fund inadequate, state 6 per cent stock
334
How the solvent banks met the burden, total contributions and per cent on capital, 1830-1866
335
Losses to note holders; Canada's system
336
Losses to depositors
339
Law of 1838; comparison
339
Elasticity of the two systems, the bond deposit and safety
fund; diagram
341
Provisions for redemption
346




230

Safety-Fund

Banking System in New

York

CHAPTER III.—The test of the safety-fund system—Continued.
4. How the charges upon the fund might have been decreased
if the amendments to the act had been placed in the original law—
Page.
Responsibility for notes only and its effect
350
Registration of notes and its effect
355
Notes a first claim on assets
355
Individual liability of stockholders
355
Hypothecation of a bank's own notes as security
357
Summary
358
5. Operation of the safety-fund system, 1843-1866—
Failures in 1848, 1854, and 1857
359
Canal Bank; assets; causes
360
Lewis County Bank; assets; causes
364
Bank of Orleans, Reciprocity Bank, and Yates County
Bank
365
Final disposition of the fund
366
CHAPTER IV.—The general banking law of 1838; conclusions:
1. The adoption of the security-deposit system under a general
banking law
369
Debates on banking
370
Reports on banking in 1825 and 1826
371
Debates during 1836, 1837, and 1838
372
Law to allow private banks of deposit and discount, without power of note issue
374
Session of 1838; change of attitude toward the safetyfund system
376
Passage of the law of 1838
380
Provisions
380
2. Conclusions—
Bearing of the operation of the safety-fund system, as
we have described it, upon the guaranty of deposits
382




231




THE SAFETY-FUND BANKING SYSTEM IN NEW YORK STATE:
1829-1866.
j>

CHAPTER I.

BANKING EXPERIENCE BEFORE 1829 IN NEW
YORK.
At an early date in New York State banking was restricted and the privilege made an exclusive grant by
special legislative charter. A combination of circumstances brought this about. The community had vivid
recollections of losses sustained under the colonial banking
systems with their excessive and inconvertible issues of
paper currency. The impression was common that
banks were combinations of the rich against the poor,
and should be strictly regulated by the people's representatives. But before many years had passed the
granting of special bank charters had been carried into
politics and it became the interest of the party in power
to compel all banking to be done through these chartered
corporations.
The Bank of New York had been formed by Hamilton
in 1784, but was not able to secure a charter until 1791.
This first bank in the State was thus compelled to carry
on its business for seven years before the legislature
would grant it a special charter. In the following year
the Bank of Albany was chartered, and in 1793 the Bank
of Columbia at Hudson. So far the needs of the com-




233

National

Monetary

Commission

munity, and not politics, seem to have guided the legislators. Until 1799 only $1,600,000 was employed in
banking.
Now politics in New York S t a t e grew more intense.
I t so happened t h a t t h e stock and management of t h e B a n k
of New York were in the hands of t h e Federalists. T h e
Republicans, led b y Burr, claimed t h a t t h e b a n k discriminated in favor of Federalists, a n d he devised a
scheme for incorporating another b a n k in New York
City. The legislature was Federalist and, therefore, t h e
only hope for another charter was to deceive t h e members
as t o t h e real purpose of t h e new corporation. This Burr
proceeded to do a t t h e session of 1799. T h e city was in
need of a supply of pure water a n d t h e public realized
this fact. The legislature was, accordingly, asked t o
charter, on the most liberal terms, a company which
would undertake this great public work. B u t it was not
certain how much capital would be required, so in t h e
charter the authorization was asked for and granted t h a t
t h e company be permitted to procure $2,000,000 capital
a n d then use any surplus not needed for the water-supply
business " i n a n y way not inconsistent with t h e law a n d
Constitution of t h e United States, or of t h e S t a t e of New
Y o r k . " a The majority of the legislature did not know
t h a t they were granting perpetual banking powers, b u t
such was t h e purpose to which t h e new company devoted
its surplus.
At t h e session of 1803 the application for a charter
for t h e New York S t a t e Bank a t Albany assumed a politic Hammond, J. D.: The Hist, of Polit. Parties in the State of New York,
o
3d ed, 1845, Vol. I, p. 326.




234

Safety-Fund

Banking

System in New York

cal character. The applicants claimed that the Bank
of Albany belonged to Federalists and that it discriminated against Republicans. They advocated the bank
in the interests of the public while they attached to
their application a scheme of speculation and private
gain. This charter passed the legislature, but two other
companies, the Merchants' Bank of New York and the
Mercantile Company of Albany, failed to secure charters.
The charge was at once made that influential men connected with existing banks, and interested in the monopoly
thus formed, prevented the further creation of banking
corporations. At any rate, the next legislature, instead
of incorporating new banks, passed the restraining law
of 1804, which had been recommended by a committee
of the assembly, consisting of one member from each
county. This law prohibited associations of persons from
banking and placed a fine of $1,000 on any individual
becoming a member of such an association, but did not
prevent individuals or incorporated institutions from
engaging in banking and issuing notes. a Notes were
issued of various denominations, as low as 6 cents in
value, by the Bankers' Exchange Bank, the Utica Insurance Company, the Little Falls Aqueduct Association,
and such individuals as Calvin Cheeseman, besides many
tavern keepers, merchants, and turnpike companies.
A further restraining law was passed in 1818 effectively
preventing private banking or note issue until 1837,
when it was repealed, except that private bankers were
not permitted to issue notes for circulation as money.
< See semi weekly Albany Argus, Dec 20, 1836: Article on the " Restrain*
ing Law," over name " F r a n k l i n . "




235

National

Monetary

Commission

In a debate on the renewal of bank charters in the
session of 1827, the speaker of the house asserted that
the profits of city banks "do not depend upon the circulation of their bills, but arise from the discount of
notes/' This emphasizes a difference between the city
and country banks which has been marked at all periods
of our history, but especially during the early years when
the deposit and check system of banking had nowhere
developed to such a great extent as at present, and when
deposits were an insignificant item in the statements of
the country banks. Therefore the speaker goes on to
point out in the same speech that the profits of country
banks in 1827 depended on the quantity of bills kept in
circulation. a The city banks had larger deposits and
capitals on which to extend discounts and consequently
made less use of note issue. Since note issue was the
chief function of most country banks, the chief concern
of legislation was to protect the note holders from losses
through bank failures, or from depreciation of bank paper
by overissues. We must keep this fact in mind all through
this discussion in order to understand the course of legislation.
Not many of the banks were required by their charters
to report to the legislature regularly, but from those that
did so report the following items show the kind of banking business done by country banks.




a Argus Supplement, Mar. 9, 1827.

236

Reports of banks to trie Nezv York

assembly.

I?

1820.a
Debts due
bank for
discount,
loans, etc.
(i) Greene County Bank
__.
(2) Washington and Warren Bank
(3) Bank of Geneva

$79,651.60
30S.977-3S
235,201.52

Capital
subscribed.

$90,000.00
400,000.00
400,000.00

I

Capital
paid in.

$43,669.30
176,218.75
100,000.00

Deposits.

$20,334.00
186,059.00
187,625. 00

Specie.

Si-

£14,440.35
201.30

$10,000.00

21,536.46

27,257.7s

oAssem. jol., 1820, pp. 468-469.

3-

1824.
(1)
(2)
(3)
(4)
(5)
(6)




Central Bank
Bank of Plattsburg
Bank of Geneva
Greene County Bank
Bank of Auburn
Washington and Warren Bank

$113,221.18
188,379.94
425,482. 79
126,167.15
207,447-59
291,966.12

$200,000.00
300,000.00
400,000.00
90,000.00

$45,000.00
60,000.00
175,000.00
42,669.30
143,928.00
176,218.75

$128,717.00
188,643.57
418,155.00
116,367.50
i5S.34i.oo
89,750.00

$9,887.36
21,467.08
49,025.21
25,155-39
27,603.39

$22,I36.76
18,076. 74
50,399.37
7.773.04
51,841.17

»
6 Assem. jol., 1824, pp. 273-276.
tt>

National

Monetary

Commission

These reports, as above stated, do not show the full
resources of the banks, for the cash items, consisting of
deposits with banks in Albany and New York to meet
the redemption of notes and payment of drafts, etc.,
as well as the notes of specie paying banks, are not recorded, nor is the value of real estate belonging to the
bank estimated. But the reports do show, first, that
only one-fifth to nearly one-half of the subscribed capital
had virtually been paid in, and also that the profits, of
these country banks depended very largely on their
notes in circulation, the notes in almost every case largely
exceeding the amount of capital paid in, and about equaling the debts due to banks for discounts, loans, etc.
The reports also show that very little specie was actually
kept in the vaults with which to redeem notes and pay
deposits, the amount ranging from one-eighteenth to
two-sevenths of the combined notes and deposits. It
may be said, however, that the cash items kept on deposit at New York and Albany for note redemption
should be counted in the reserve for notes, which would
raise the percentage considerably. It is also clear from
the reports how small a part of the total business of
these country banks consisted of deposits.
A more elaborate report of 22 banks was gathered and
presented to the state senate by the committe of which
Senator Allen was chairman, January, 1829.° This report
includes eleven banks in New York City and Albany as
well as the same number of country banks and will throw
additional light on banking conditions, especially the contrast between city and country.




«Sen. jol., 1829, pp. 81-84.
238

CITY BANKS.

Bank

(i)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)




Mechanics and Farmers' Bank, Albany,
Bank of Albany
New York State Bank, Albany
City Bank, New York City
Union Bank, New York City
Bank of America, New York City
Mechanics' Bank, New York City
Merchants' Bank, New York City
Tradesmen's Bank, New York City
New York Bank, New York City
Phoenix Bank, New York City
Total.

Notes discounted and
loans.

Capital
paid in.

Notes.

#312,000

1, 2 6 7 , 0 3 3
1,252,840

1,000,000

2, 328, 074
2,848,898
2, 0 8 3 , 298

2, 0 3 1 , 2 0 0

2,904,991
980,026
r6,702,467

Specie.

Balance due
from banks.
I

$ 1 , 0 1 7 , 962
484,077
791,814

743.454

Deposits.

$325,000
100,700
178,002
244,904
200,320
221,884
607,105

240,000

369, 600
1,000,000

2,ooo,000
I, 463, 0 0 0 '
363,160 j
1, 9 7 3 . 2 0 0
500,000 |
1
ir, 252, 1 6 0 |

i

574,325
I9§, 140
540,955
337,288
3,528, 623

$396,774

$26,000

151,018
359.707
219,215
222,068
332, 238

184,610

755.794

199,114

625,992

222,396

$170,053

30,261

30,976
66,806
45,754

340,324 !

99,978
79,078

94,202
47,711
113,890
206,480
432,356
308,779
54,42'8
349,641
175.108

4,448,088 |

1.018,330

1.952,648

248,046
796,912 \

33,357

to
8*
orq

i

?3-

COUNTRY BANKS.

Bank.

(i)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)




Jefferson County Bank
Bank of Utica
Bank of Geneva
Ontario Bank
Farmers'Bank
Bank of Troy
_.
Mohawk Bank
Bank of Auburn
Middle District B a n k . .
CatskillBank
Central Bank
Total

Notes discounted and
loans.

$109,343
1,198,799
489,522
1,118,987
618,433
948,660
273,080
228,393
567,807
414.747
217,749
6,185,520

Capital
paid in.

$74,000
500,000
300,000
500,000
278,000
352,000
165,000
143,928
397.485
n o , 000
86,000
2,906,413

Notes.

Deposits.

Specie.

$94,545
607;046
372,654
500,944
153,397
326,379
78,128
264,630
293.750
274.5IO
I7L527

$18,921
176,041
128,248
267,776
79,686

80,940
16,208

$14,113
25.500
30.745
28,937
n , 660
io,533
12,941
30,455
15.684
7.965
18,096

3.137.5io

1,042,865

Balance due
from banks.

206,629

96,394
83.893
49,470
45.288

#66,012
83.541
319,602
186,064

i6,947
200,909
155.656
39,900
58.493

C}
^

o

s

Safety-Fund

Banking

System in New York

The committee regarded all the above reports as satisfactory and as proof of the " sound state of our circulating medium." They regarded it as a cause of congratulation that in forty years since state banks began to be
chartered only five had suspended payment of their notes.
There were no data of losses to the public from these
failed banks, but the capital was small.0
The above reports, with their summaries, show the essential differences in the banking business as carried on
in the country and city. It will be noticed, of course,
that the capital employed in the city banks is almost
four times as great as in the same number of country
banks, while the notes issued are about the same in
amount. The deposits of the city banks are about four
times those of the country banks and the specie on hand
about five times. A larger relative amount of specie
was necessary in the city banks to meet the greater demands there. The table shows that the city banks depended upon their paid-up capital and their deposits for
their ability to discount and loan rather than upon their
credit in the form of bank notes. The amount of notes
in circulation is less than a third of the capital and only
about three-fourths of the deposits. In the country
banks, on the other hand, the paid-up capital, instead of
being two-thirds of the loans and discounts, as in the case
of the city banks, is less then one-half of the loans and
discounts. The notes in circulation exceed the capital
and are three times the amount of deposits, which again
is in marked contrast to the city banks. The notes, in-




oSen. jol., 1829, p. 79.
241

National

Monetary

Commission

stead of being about one-fifth of the loans and discounts,
as in the case of the city banks, amount to more than onehalf. The city banks held on hand about one-seventh
of the demand obligations of notes and deposits in specie,
while the country banks held only about one-twentieth.
The large balance due from banks shows that the country
banks kept large sums with the city banks to meet obligations for note redemption, drafts, etc. The table as
a whole shows too small proportion of specie as a basis
for a sound banking system, and in the case of the country banks too much dependence upon note issue as a
source of profit. All these facts must be kept in mind
when we discuss the safety-fund law of 1829. Thus
will the opposition of the city banks be explained.
Since the granting of a bank charter by the legislature
had become a matter of party politics, charges of corruption were frequently made and in some cases proven. It
was to the interest of existing banks to keep rivals out of
the field, and those who sought charters used various means
to win over legislators. Stock was distributed to members
with the promise of an immediate market at a premium. a
Granting of a bank charter was linked with various forms
of special legislation, and log-rolling was encouraged. The
party in power could make the distribution of bank stock
a part of the spoils of political victory. These evils were
all inherent in the system of granting bank charters by
special legislative act, which did not always result in
placing a bank where the needs of the business community
demanded or in securing the investment of bona-fide




a Hammond, Vol. I, pp. 332-337.
242

Safety-Fund

Banking

System in New York

capital in the institution when chartered. # Previous political corruption and scandal influenced the convention
of 1821 to place a clause in the constitution requiring a
two-thirds vote of the legislature to pass a bank charter.
They hoped thus to avoid the log-rolling and bargaining,
but as a matter of fact the effect was " t o increase the
evil by rendering necessary a more extended system of
corruption." a A bonus was sometimes demanded by the
legislature in return for the grant of a charter. The result of this policy is shown by a memorial of the Fulton
Bank of New York City protesting, in 1833, against being
subjected to the safety-fund law, on the ground that it
had already paid a bonus of $133,000 when its charter was
granted in 1824, and therefore should be exempt from the
tax of one-half per cent imposed by the law of 1829.
This alleged bonus was paid by allowing the trustees of
Daniel D. Tompkins, who had a claim upon the legislature
for patriotic services, to subscribe for $150,000 in stock and
pay for the bank stock with the stock of the Richmond
Turnpike Company at par. The stock of this turnpike
company netted the bank only $17,000.6
An examination of these early charter provisions will
show how sound banking develops slowly out of experience. The charters from 1800 to 1825 show certain common provisions to which others were added as experience
dictated. Among these we find the limitation of the bank
in ownership of real estate and trading in goods or stock,
certain specifications as to qualifications and election of
directors, the requirement of registration for a valid trans-




o Hammond, p. 337.
& S. Doc. 104, 1833, Vol. I I
243

National

Monetary

Commission

fer of stock, the regulation of the total debts, exclusive of
the specie actually on hand, to three times the paid-up
capital, and the personal liability of the directors, who
were responsible for the excess unless absent or dissenting.
The maximum interest rate for short loans was fixed at
6 per cent. 0 It will be observed that there is as yet no
enumeration of banking powers specifically granted, no
uniform requirement for reports or provision for inspection,
no provision for paid-up capital before opening for business, no reservation of the right of the legislature to modify
or repeal the charters granted, and no satisfactory method
of distributing the bank stock.
In chartering the Union Bank, as well as two other
banks, in 1811, the legislature appointed the first directors, 6
but the charter of the Middle District Bank, granted in
the same year, provided for commissioners named by the
legislature to distribute the stock and arrange the first
election of directors. c This latter method, by commissioners, continued d to be followed under the safety-fund
system for several years and was the source of much complaint and abuse.
In 1811 the requirement was made that the business of
the bank should be carried on at the place specified in the
charter and not elsewhere, and that stock must be held a
certain time before election of directors in order to entitle
the owner to a vote. A limitation was placed in the charter regulating the amount which the president or any di-




a

Session Laws, 1805, chap. 43.
& Session Laws, 1811, chap. 34.
«Ibid., chap. 68.
< Ibid., chap. 46.
*
244

Safety-Fund

Banking

System in New York

rector might owe the bank at any one time for loans and
discounts, and preventing any person from being officer
or director in more than one bank. Directors or officers
must not purchase notes or bills at usurious rates, and the
cashier and clerks must give bonds. 0
In 1824, in chartering the Bank of Rochester, the legislature required an oath, by the president and cashier, that
25 per cent of the capital had been actually paid in, half
in specie and half in current notes, before the bank could
legally issue its own notes. 6 This amount was increased
to 50 per cent in 1825 in chartering the Commercial Bank
of Albany. c Therefore, before the safety-fund law of 1829
it was not necessary to pay in more than 50 per cent of
capital subscribed before beginning business, and in some
banks only 1 2 ^ per cent was required in specie.
During 1824, in a bank charter, a penalty was placed
upon failure to redeem notes on demand, and it was made
the duty of the president and cashier to report to the
Comptroller under oath annually the condition of the bank,
specifying the items required, and the right " t o alter,
modify or repeal" the charter was reserved. 6
In granting a charter to the Commercial Bank of Albany
in 1825 the act enumerates expressly the banking powers,
and continues, "but the said company shall have and
possess no other powers whatever, except such as are expressly granted by this act." This is the first charter
found where such powers were enumerated. The bank
was also prohibited from receiving the transfer, pledge or




a Session Laws, 1811, chap. 64.
& Session Laws, 1824, chap. 46.
c
Session Laws, 1825, chap. 117.
245

National

Monetary

Commission

hypothecation of any stock of the bank itself or of any
other incorporated company. At the opening of the bank
the affidavit of the president and cashier must state that
no loans had been made, as far as the officers knew, to
enable any stockholder to pay the amount of his shares
under any implied or express agreement that such loans
were to be repaid by a discount of any note or other
security by the bank. The charter prohibited the directors from dividing as dividends or paying to the stockholders any part of the capital stock or reducing the capital without the consent of the legislature. It was made
illegal to discount or receive any note in payment of any
part due upon stock of the bank, or to enable stockholders
to withdraw money paid on stock. Directors were made
personally liable for amounts thus withdrawn or discounted.
The president or directors who violated these provisions,
as well as those with reference to the total legal debt
allowed, were guilty of a misdemeanor and liable to fine
of $1,000 and three years' imprisonment, or either. In
the annual report the president and cashier must take oath
that the specie on hand is bona fide the property of the
bank " and has not been borrowed or in any wise obtained
with a view to make the return." ° These charter provisions have been stated in some detail to show the necessary growth of restrictions in the charters to remedy certain evils that developed. The provisions above stated
indicate clearly what those evils were and need no comment. But the fact to be emphasized is that all these




a

Session Laws, 1825, chap. 117.

246

Safety-Fund

Banking

System in New York

provisions must be inserted in every bank charter if they
were to be effective for the particular bank.
Bank charters granted and capital authorized, 1791-1825.®
Aggregate
capital
authorized.

Period.

$7.43o»ooo

1791-1810 (inclusive).
1811-1818 (inclusive).
1821-1825 (inclusive)-

17.290,000
4, 300, 000
«Assem. Doc. 102, 1836, Vol. II.

During the first period not more than one bank charter
was granted in any single year. It was a time of conservative banking, with no failures. With the expiration of the
charter of the first United States Bank there was a rapid
increase of state banks,, as shown for New York State in
the above table. These figures do not include reductions
made in bank capital by failures or voluntary reductions
during the period, nor do they indicate the amount actually
paid in and employed, but only the amounts authorized
by charter. It will be observed that the period of greatest
activity was during and after the war of 1812. The period
following this war was characterized by more reckless
banking and by specula/tion. During the two years, 1824
and 1825, eight of the ten additions were authorized, but
no more charters were granted until after the safety-fund
law was passed in 1829. Of the ten incorporations during
the first period in the above table, there were only two
failures and those were during the period following, but
of those organized in the second and third periods there
were six failures. The information as to causes of failure




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Monetary Commission

and the affairs of the failed banks, before the safety-fund
system was inaugurated, is too inadequate to allow conclusions, but the failures were probably due to the evils
indicated in the provisions of the later charters, just stated
above. 0
The governor, in his message in 1818, describes the evils
of a disordered currency which are "aggravated by the
banking operations of individuals and the unauthorized
emissions of small notes by corporations." He cautions
the legislature against allowing the incorporation of banks
in places where they are not required by trade, because
such banks have few deposits and must rely upon note
issue for profit. These notes are diffused by loans or by
appointing agents to exchange them for the notes of other
banks. They grant discounts liberally, but the apparent
business activity is deceptive; there is a struggle of rival
banks to redeem their notes, and to do this they must call
in loans and embarrass borrowers. "The banishment of
metallic money, the loss of commercial confidence, the
exhibition of fictitious capital, the increase of civil prosecutions, the multiplication of crimes, the injurious enhancement of prices, and the dangerous extension of credit
are among the mischiefs which flow from this state of
things." 6
The report of the committee on banks of the assembly,
during the same year, gives us more concrete examples of
the abuses to which the governor referred. They refer to
speculation in banking and declare that banks " enable the
oCf. h. Carroll Ro©t: "New York Bank Currency," Sound Currency,
Vol. II, No. 5, p. 3.
6 Assem. jol., 1818, p. 15.




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Banking System in New York

designing, unprincipled speculator to impose on the credulity of the honest, industrious, unsuspecting part of the
community—examples of this sort are too common and
notorious to need any illustration." 0 The committee
cites various schemes of banks to force their notes into circulation. Banks sometimes give accommodations to an
individual on condition that he will pay the note when due
in current money, meaning the current notes of other banks.
This compels the borrower to lay aside current money during the time his note is running in order to be able to pay
at the end of the time and often makes it necessary to
borrow, at a high rate of interest, any balance that he does
not possess when his note becomes due. Some banks lend
on condition that the borrower leaves one-half the sum in
the bank until the note is due, thereby receiving usurious
interest. Merchants, who have payments to make abroad,
stand the loss caused by depreciation of the bank's paper
rather than incur the bank's resentment by asking for
specie or current notes and thus losing the chance to secure
accommodations at the institution. The committee reports a case of boycott where the board of directors of a
bank passed a resolution declaring that "no man should
hold a seat at that board, or receive any discounts at the
bank, who should trade at a certain store in the same village, in consequence of the owner having asked for a sum
less than $4,000 in current money to remit to New York,
while at the same time he kept his account in said bank." b
The case is cited of a farmer who came to a bank for a




a Assem. jol., 1818, pp. 307 et seq.
& Ibid., p. 309.

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Commission

renewal of his note, indorsed by one of the directors, and
this director charged him $100 to aid him in securing the
renewal.
The committee further gave its opinion that the circulating notes in the State were chiefly of the banks whose
capitals were small and composed principally of the notes
of individual stockholders called " stock notes/' Therefore, the security of the note holders consists of the private
fortunes of individual stockholders and those fortunes consist, in great measure, of the stock of the bank for which
they have given their notes. This period of stock-note
banking continued from the war of 1812 until the safetyfund law was adopted."
An assembly committee reported on the part of the
governor's message which referred to banking and currency in 1819. They pointed out that so long as banks
were established with reference to commercial and industrial needs they had been a blessing. But the success of
banks and large dividends led to a clamor for bank
charters. Banks were located where business did not
demand and their multiplication was followed by excessive
issues of bank notes without adequate means to redeem
them. 6 To keep these notes in circulation banks often
placed obstacles in the way of prompt redemption. c Distrust was thus created in the minds of the public. To get
a renewal of a note at a country bank the borrower frequently was required to present the value of the note in
< Cf. A. C. Flagg: Banks and Banking in the State of New York, 1777*
1864, Brooklyn, 1868, p. 3.
b Cf. Sen. jol., 1819, p. 68. .
cCf. Assem. jol., 1820, p. 467.




250

Safety-Fund

Banking

System in New York

the notes of other banks for which the bank issued an
equal amount of its own notes. This operation suppressed
the circulation of other banks and extended the bank's
own circulation.a During the session of 1825 the legislature chartered several loan companies who proceeded to
issue their bonds and pass them as money. This addition
to the circulating medium contributed to the cotton speculation of 1826. About this same time corporate abuses
were revealed in insurance and other corporations, which
involved prominent New York business men. h This increased the public alarm. The house in 1825 passed 18
bank bills with a capital of over $7,000,000, but only 3 were
finally chartered with a combined capital of $1,150,000,
because the house was checked by the senate. c The house
was called the "lobby assembly" during and after this
session. The Argus describes this assembly as " alone in
all the records of our country as the most subservient to
the lobby and the most regardless of the public funds, the
public interests, and the public will." d
This legislature granted a charter to the Commercial
Bank of Albany and appointed a commission to apportion the stock. The commission, it was alleged, appropriated to themselves and a few favorites a majority of
shares of the stock. The merchants had been urged to
subscribe, and then the stock was distributed largely to
a Cf. Daily Argus, Mar. 29, 1825. Speech of C. D. Colden in the senate on
a bill to allow private banking.
& Willis S. Paine: The Laws of the State of New York, Relating to Banks,
Banking, etc., 5th ed., 1903, pp. 23-24, gives further details. Alarm in
minds of public led to demand for the Revised Statutes of 1827.
c Daily Argus, Apr. 29. 1825.
< Argus, Oct. 23, 1826.
*




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Commission

others. They held a popular meeting to disapprove and
passed resolutions declaring that the commissioners "had
converted a matter of general interest and concern into
an affair of individual profit and speculation." 0 Such
complaints were common, and this method of distribution
of stock gave rise to serious evils. Sometimes it enabled
a few men to control a bank for speculative or political
purposes. They might borrow the specie needed to start
business, pay dividends out of capital or redistribute the
paid-up capital to the stockholders in discounts, and,
under the appearance of prosperity, sell the stock at a
premium. A number of bank failures before 1829 revealed the bad conditions of banking practice and destroyed the confidence of the public. 6 This state of
affairs went far to justify Senator Colden's criticism in
the senate, in a speech on private banking, that most of
the recent bank charters were granted not to those who
wanted banks that they might lend money, but to those
who wished to sell the stock at a profit.c
At the opening of the session of 1827 notices were
given of applications for 19 new bank charters and 23
renewals.d The governor in his message cautioned the
legislature against the evils of excessive issues of paper
money and referred again to the forced and artificial
circulation, with its train of evils. He recommended
general regulations to restrict notes and to provide for
o Albany Argus, June 14, 1825.
& Pamphlet: Origin, Provisions, and Effect of the Safety-Fund Law of
New York State. Albany, 1834, pp. 3 and 4.
c Albany Argus, Mar. 29, 1825.
d Albany Argus, Jan. 11, 1827.




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Banking

System in New York

redemption and payment of debts, as well as to increase
the responsibility of directors.
The Revised Statutes, adopted in 1827, on banking
summarize the chief existing evils which the legislators
sought to cure by general laws, rather than leaving the
matters to specific provisions in each charter, as before.
Most of the provisions are to be found in the most carefully restricted charters previously passed by the legislature and have already been noted. Article I is entitled,
"Regulations to prevent the insolvency of moneyed corporations and to secure the rights of their creditors and
stockholders/'
It was made illegal for directors to pay dividends
except from profits; to in any manner pay to stockholders
any part of the capital stock or reduce it without the
consent of the legislature; to receive notes of stockholders
or make discounts in payment of capital stock; to receive
from another corporation, in exchange for the shares,
notes, or bonds of their own company, shares, notes, or
bonds of the other corporation; to extend loans and
discounts beyond three times the paid-up capital; and
to loan or discount to the directors, or upon paper for
which they stand responsible, to an amount more than
one-third of the paid-up capital. A method of computing
profits, from which alone dividends could be paid, was
outlined, and, when losses exceeded these undivided
profits, it must be considered an impairment of the capital
and must be made good before further dividends could
be paid. The law sought to prevent fraudulent transfer
of the property of the corporation or a transfer to benefit




253

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Monetary

Commission

particular creditors in case of contemplated or actual
bankruptcy. If any director violates or is concerned
in violating any of the above provisions he becomes liable
personally to the creditors and stockholders to the full
extent of the loss so sustained. Such director, whether
loss results or not, becomes guilty of a misdemeanor
and subject to a fine and imprisonment, or either. Every
director is presumed to know about the affairs of his
corporation, so as to determine whether any act or omission of his violates the provisions. If he dissents or is
absent from the meeting where such violation occurs
he must record his dissent, or he becomes liable with the
o'thers. Every insolvency is deemed fraudulent unless
the affairs of the company appear on examination to
have been fairly and legally administered. It is incumbent on directors and stockholders to repel by proof
the presumption of fraud. In case of a fraudulent
insolvency the directors by whose acts or omissions the
failure was caused, wholly or in part, and whether then
in office or not, shall be liable to the stockholders and
creditors for their proportionate share of all losses.
After the liability of the directors is exhausted in such a
case, the rest shall be made good by the stockholders,
to amount not exceeding the nominal amount of the
shares held. Annual reports to the comptroller are
required under oath of the president and cashier. No
corporation may issue any bill or notes for less than $i,
to circulate as money. The directors and officers are
prohibited from purchasing, directly or indirectly, any
evidences of debt of the corporation for less than their




254

Safety-Fund

Banking

System in New York

nominal value. This prevented the purchase of their
own bank notes at a discount. The directors and officers
were also prohibited from discounting or loaning, directly
or indirectly, upon paper which they knew to have been
offered for discount to the directors or any officer and
refused. This practice continued under the safety-fund
system. Finally an affidavit was required by the two
chief officers of the bank stating that the capital required
by charter to be paid had been actually paid.
These provisions were stringent and meant to regulate
improper practices, such as impairment of capital or
stock-note capital, misuse of funds by officers or directors,
and speculation. Personal liability was a recognized
principle of the Revised Statutes. a The provisions were
not to be applied to corporations in existence January
i, 1828, but only to those charters granted or renewed
after that date. But no more bank charters were granted
until the safety-fund law of 1829 had been passed, which
exempted corporations under it from the operation of
sections 14, 15, 16, 17, and 18 so far as those sections
provided for the personal liability of the stockholders
of failed banks. The liability of directors to the stockholders was still retained as provided in these sections,
but March 30, 1830, the legislature definitely repealed
sections 11 to 18, inclusive. This repeal did not affect
any existing bank or officer. Therefore, the banks chartered under the safety-fund law during 1829, about 27 in
number, still retained the liability of directors, while the
stockholders of these banks were free from personal
0 For text complete, cf. Revised Statutes of 1827, chap. 18, Pt. I, Title II.
24635—10




17

255

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Commission

liability. Of course the directors of banks continued to
be responsible for violations of the first nine sections of
the statutes, but the requirement that they repel by
proof the presumption of fraud was no longer operative
and it was easy to evade the law, especially so long as
there was no careful inspection by a regular official of
the State.
In the debate on these Revised Statutes on banking
the argument was advanced that such strict requirements
and personal liability would drive men of capital and
integrity from the banking business and leave it in the
hands of irresponsible men and speculators. Parties for
and against restriction were formed and the debate became warm between the opposing forces. When the
safety-fund law came up for adoption a compromise was
sought between the severe restrictionists and those who
advocated perfect freedom in banking. It was supposed
that the safety fund rendered unnecessary longer the
severe provisions and yet afforded security to the public.
The evils we have observed so far in banking have
been due either to a bad system, imperfectly guarded by
needed restrictions; to official misconduct and lack of
responsibility in management by officers and directors,
or to the stage of business development at which banking
had arrived in the process of working out a sound policy
that would meet the test of prosperity, as well as of business adversity. Legislation had gone far to remove the
evils of a bad system by requiring certain standards in
banking and by the enforcement of greater responsibility upon directors, but to remedy the other evils was




256

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Banking

System in New York

not always possible by legislation. Stockholders must
learn by experience to hold directors to a more rigid accounting, and directors in turn must not allow themselves
to become men of straw in the hands of designing bank
officers of their own choosing. Safe methods of banking
were only learned by long experience. The proper relation of a specie reserve to the demands and obligations
of a bank was only gradually appreciated. Too much
loaning was done on accommodation paper instead of
on the evidences of past business transactions. a The
fact that note issue formed the chief source of profit to
the country banks led to forcing notes into circulation
not necessarily in response to the demands of trade, but
issued upon the notes of borrowers who came repeatedly
to have their notes renewed, and thus kept the bank
notes in circulation. There were certain evils inevitably
associated with special charters, which, although much
improved by laws applying to all banks alike, still existed under the safety-fund system in granting the charter,
locating the bank, distributing the stock, and enforcing
the provisions of the law.
GENERAI, NOTE.—Where references are made to the Albany Argus during
1829 or before t h a t date, the daily edition is meant. An abstract of the news
from the daily was made in the semiweekly edition and the editorial columns dated by the daily editions. I t is to these abstracts that reference
is made under the date of the daily editions. In 1838 the regular daily
edition is used. For all other years the date of the semiweekly edition
on the outside cover is given.
< Assem. Doc. 69, 1833, Vol. I I , p . 8: Report of the Bank Commissioners.
*




257




CHAPTER

II.

THE SAFKTY-FUND LAW OF 1829.
The journals of the house for the session of 1829 show
29 petitions for the renewal of old bank charters and 37
for new banks and incorporations. The charters of these
old banks were soon to expire. The senate committee
reported in favor of renewals for all the old banks which
had been fairly and honestly administered. a t This was
the opportunity for the legislature to make any changes
that seemed desirable in the system of banking.
It was at this time that Joshua Forman presented his
plan to the governor for improving the banking system.
Forman was a graduate of Union College, a publicspirited lawyer widely known, who had strongly advocated the Erie Canal project while a member of the
legislature in 1808.b His plan emphasized especially
security for note issues. Because of their charters and
the prohibition of private banking, the chartered banks
had the exclusive privilege of furnishing a paper currency by which they made a profit. Therefore, the State
should exact a guaranty for the soundness of that paper.
The banks should in common be answerable for it. c The
idea was that all banks in the State should be formed
into an association, so far as that all should be liable
for the obligations of each, and yet allow the property
a

Sen. jol., 1829, p. 77.
& Encyclopaedia of Contemporary Biography of
Vol. II. New York, 1882, pp. 277-280.
cAssem. jol., 1829, pp. 179 et seq.




259

New York State,

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Monetary

Commission

and profits to belong to each in severalty. The plan was
submitted to prominent New York and Albany bankers
and approved in principle before it was presented to
the governor. Forman and his friends hoped by this
method to render it to the interest of each bank to sustain the credit of all other banks in the State. a In presenting his plan, Forman advocated that banks be confined to discounting short-time commercial paper payable at maturity without renewal, and that they be compelled to invest their capital in safe public stocks or in
bonds and mortgages. He asserted, what appeared to
be the fact, that losses from the failure of banks, although
considerable, were insignificant when compared with the
public injury caused by the management of solvent
banks. He had in mind the custom of banks of discounting and lending beyond the limit of safety and then
suddenly calling their loans to meet obligations, to the
ruin of many and the inconvenience of many more.
The governor, in his annual message, voices the public
interest in the solvency of the banks and the stability of
the paper, and urges the legislature to give its attention
to these points in the banking system. He emphasized
the objection, before made, that the severe measures
adopted in 1827 might place banking in the hands of
irresponsible men. He proceeded to outline the Forman
plan, which was referred to the assembly committee for
report. This committee prepared a bill on the lines
suggested, which the chairman, Mr. Paige, presented to
the assembly with a report in defense. This report
a Cf. Hammond, Vol. II, pp. 297 et seq., for further details.




260

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Banking System in New York

maintained that the fundamental principle of banking
was convertibility of paper into coin. One notices at
once how completely banking was identified with note
issue. Excessive issues must be guarded, and the committee recommended issue not to exceed twice the paidup capital. a The committee sought a plan which would
avoid the objections urged against the principle of personal liability, and yet provide for the complete indemnity
of the bill holder from all losses resulting from bank
failure. The proposed plan seemed to them to secure
the creditors of banks against every possible loss and to
invite public confidence.
It was proposed to require each bank, for which a
charter shall be granted, renewed or extended, to contribute a percentage of its capital to a common fund
for the payment of all the debts of an insolvent bank,
exclusive of the capital stock, after the assets of the
bank itself had been exhausted. No bank could be
required to pay more than one-half per cent on its capital
yearly. These payments were to continue until 3 per
cent of the capital had accumulated in the "bank fund,"
when the payments were to cease until the fund should
be depleted by future payments. In case of such diminution of the fund the comptroller was authorized to call
upon the solvent banks for additional contributions not
to exceed one-half per cent in any year. The capital
of the fund was to be invested in a specified manner,
and after the expenses of administration had been paid
the remainder of the income was to be paid to the banks
a

Paige report, Assem. jol., 1829, pp. 436 et seq.




261

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Monetary

Commission

as dividends. It was provided that the affairs of the
failed banks should be settled through receivers appointed by the court of chancery; and, upon order of the
court, after the assets were exhausted, the comptroller
was authorized to pay the debts still unpaid, exclusive
of the capital stock, out of the fund.
Three bank commissioners were provided for—one appointed by the governor and two by the banks—whose
duties were to visit each of the banks organized under the
law at least quarterly, and oftener if requested by three
safety-fund banks. They had power to examine the
officers under oath and to investigate the affairs of the
bank thoroughly enough to determine, if possible, its solvency. If the bank was found to be violating the provisions of its charter or of the safety-fund law, it was
provided that the commissioners might apply for an injunction against the bank, and if the investigation satisfied the court that such a course was necessary, a receiver
could be appointed to close the affairs of the bank. It
was provided in section 28 that the corporation might be
dissolved if it should neglect its payments to the fund, if
it should lose half its capital, if it should suspend specie
payment for ninety days, or if it should refuse to be
examined.
The banks were required to report under oath annually
to the commissioners, who were directed to prepare an
abstract of the returils and submit it to the legislature
with their annual report. Their term of office was to be
two years, and they were removable by the governor.
The issue of bank notes was restricted to twice the paidup capital and the loans and discounts to two and one-




262

Safety-Fund

Banking

System in New York

half times t h e capital. T h e penalty for a false statement
by officers, or for t h e exhibition of false papers with intent
to deceive t h e examiners, or for false entries in t h e b a n k
books was imprisonment for from three to ten years.
The act modified t h e Revised Statutes of 1827 as to the
liability of stockholders, as before explained. They were
no longer personally liable. This was again modified in
t h e constitution of 1846 so as to hold t h e m responsible, as
at present, for an amount equal to t h e a m o u n t of their
stock paid in. The commissioners were prohibited from
being stockholders in any bank. The rate of interest was
regulated. The capital stock must all be paid in and an
oath of t h e officers to this effect filed before opening the
bank for business. This was a great advance over the
previous system of allowing p a r t of t h e capital to remain
unpaid, and t h u s offering the temptation to all the evils
which we h a v e described in connection with banking on
the notes of stockholders or on an utterly inadequate cash
basis. Such was t h e law proposed and finally passed
after w a r m debate."
I n order t o learn the a t t i t u d e toward this proposal, it
will be worth while to follow the debates on the bill
briefly. T h e committee which presented t h e bill predicted
t h a t t h e new system would impart stability and currency
to t h e circulating medium, prevent runs on banks, and
avoid combinations between institutions to destroy a particular bank. The city banks had been accused of trying
to ruin certain country banks, b u t under t h e proposed
plan each would be interested in upholding t h e others.
a For text of act cf. Assem. jol., 1829, pp. 752-756, or I^aws of 1829,
chap,. 94.
263




National

Mon etary

Commission

To objections against the bank commissioners the committee asserted that it was not a new principle and was
meant to ascertain whether the high trust of creating a
currency was being properly executed. Such inspection
would be desirable for the stockholders because it would
increase the confidence of the community in the bank's
paper. Merely powers of inspection were granted, and
therefore the commissioners could not seriously injure any
particular bank by the exercise of their powers. To the
court was granted the final decision as to a permanent
injunction. The banks would be benefited because there
would be a set of men whose express duty it would be to
prevent insolvency and losses which the banks themselves
would have to pay. a No solvent bank could be required to
pay more than one-half per cent annually on its capital,
and in some of the States there was a i per cent tax
annually on banking capital.
The speaker of the assembly argued that the fund was
inadequate, as indeed it proved, for all the debts of the
banks. He pointed out that the banks were permitted
to issue notes far beyond their capital and that in case of
serious failures settlement from the fund might be delayed
over four or five years, which proved to be the case later.
Meanwhile the farmer and the mechanic must wait and
suffer loss. He considered the Revised Statutes preferable to such a law. b A few days later the speaker offered
a substitute for section 2 of the original bill creating a
fund, in which he advocated the usual tax on banks, but
o Paige rept., Assem. jol., 1829, pp. 439-440.
6 Albany Argus Feb. 28, 1829. Report of debate in the House Feb. 27,
1829, on safety-fund bill.




264

Safety-Fund

Banking

System in New York

the tax to be allowed to accumulate up to $5,000,000 as
a bank fund from which the bills of failed banks might be
paid. The fund would be kept at that amount, and whenever it exceeded the amount the tax on banks would be
used for general expenses as before. In case of a bank
failure the legislature may provide by special act for the
payment of the bills out of the fund. In this substitute
the notes of a failed bank alone were secured by the fund,
and not all its debts. This seems to have excited no
comment. It indicates how completely the legislature
was concerned in securing the note holder by the new law.
Losses by depositors were not mentioned. 0 Objection
was of course made to the speaker's substitute on the
ground of delay in redemption and consequent losses.
Another representative, Mr. Hubbell, pointed out that
the very existence of such a fund would relax "public
scrutiny and watchfulness which now serve to restrain or
detect malconduct." 6 This argument appealed to many
then, and to-day, when deposits have assumed such a
large place in the modern banking business and when a
bank extends its credit not only by bank notes but much
more by deposit accounts, the argument assumes added
weight. Mr. Dickson objected also to the fund idea
because it required a "compulsory partnership" between
institutions which knew nothing of each other. It was,
moreover, morally wrong to transfer losses from bill
holders, or the community generally, to the stockholders,
who might be equally innocent of any wrongdoing in the
failure and unable to bear the responsibility. The fear
o Albany Argus, Mar. 4, 1829. Debate in assembly on bank bill, Mar. 3.
& Albany Argus, Feb. 28, 1829.




265

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Commission

was also expressed that a monopoly would be formed, a
"monied aristocracy," which would control future applications for bank charters or combine to crush individual
banks. 0 The multiplication of banks and the increase of
competition might enlarge the bank fund but it would also
decrease the profits of existing banks. This attitude had
been very early shown by the chartered banks.
The argument grew spirited between those, on the one
hand, who thought the Revised Statutes on banking were
"odious fetters" and that they would prevent men who
were financially responsible from venturing into the banking business, and on the other, those who objected to their
repeal, except perhaps the clause requiring directors to
repel by proof the presumption of fraud, on the ground
that these requirements were the only defense against
fraud and complete control by the agents and officers of
the banks. Many were sure that the "bank fund" would
put a premium on reckless banking and encourage the
unscrupulous to put in circulation all the bills possible,
and, since the notes were secured by the entire banking
capital of the State, it was maintained that this would be
easier to accomplish because those who took the notes
would be less watchful and exacting. It was pointed out
that the bill holder was guarded, but not the stockholder.
Many were skeptical of the power of commissioners to
prevent fraud and insolvency because, it was said, they
must depend upon the statements of bank officers anyway
and would prove no more efficient than the reports
already required. 6 Besides, it was feared that^ their




o> New York Evening Post, Mar. 4, 1829.
b New York Evening Post, Mar. 28, 1829.
266

Safety-Fund

Banking

System in New York

duties were " inquisitorial" and that such power might be
used to ruin individuals.
Notwithstanding the fact that Mr. Forman had presented his plan for approval to several city bankers and
financiers, there developed a very serious opposition from
the New York City banks. This will be explained by
references to the table showing the items of the statements of city and country banks, presented for 1828, in
the last chapter. It was there pointed out that the capital and deposits of the city banks were much larger than
those of the country banks and that their use of notes
was much more restricted. Although the safety-fund
law allowed the issue of notes to twice the paid-up capital, the table, referred to above, shows that the city banks
kept in circulation less than one-third the amount of their
capital. It was quite different with the country banks,
which circulated notes far in excess of their capital. Now,
the chief fear, as shown by all the legislative debates of this
and other legislatures, was for the security of the current
bank notes. The law of 1829 proposed to levy the assessment for the fund upon the capital of the banks, not upon
the amount of notes issued. Losses from other sources,
while secured by the fund, were not emphasized in the
debates. Therefore, the city banks objected to a tax
upon their large capitals to support a fund to secure not
only their own notes, which were small in amount compared with their capital, but also the notes of the country
banks, which were issued to amounts much larger than
their capitals, upon which the same assessment was made.
The fund was not liable for the capital stock. Besides,
such a law, they alleged, would make them partners of




267

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Monetary

Commission

the country banks and would reduce their credit to the
same level.
The final vote on the bill in the house stood 76 to 29
and in the senate 20 to 6. Of the delegation of 11 in the
house from New York city and county, 5 voted for the
bill and 4 against, with 2 not voting. In the senate 3 of
the 6 negative votes came from the first district, of which
New York City formed a part. a
It is interesting to note here that in the assembly, before the bill passed, Mr. Mann offered a proposition that
all bank notes be countersigned by a central agent and
issued to the banks in authorized amounts in order to
prevent fraudulent overissues and counterfeiting. The
amendment was not adopted, and in consequence the
bank fund was charged later with a large amount of illegally issued notes. 6 This defect was not remedied until
1843, when the solvent banks had actually suffered at
the hands of unscrupulous bankers.
By the new law stockholders were relieved from personal liability imposed in the Revised Statutes, but the
responsibility of directors to the stockholders was retained as provided in those statutes. It must not be
forgotten that the restrictions before described as to the
payment of all the capital before opening and an oath to
that effect by the officers were retained. This oath must
also state that no loans had been made to enable a stockholder to pay his stock and then receive a discount from
the bank to discharge the debt. The other provisions of
a

Assem. jol., 1829, p. 757; also Sen. jol., 1829, p. 393.
b New York Evening Post, Mar. 19, 1829.




268

Safety-Fund

Banking

System in New York

the Revised Statutes stated in Chapter I, except as modified by the safety-fund law of 1829, remained in force.
At the session of 1829 16 old banks were rechartered
and 11 new ones. a The provisions of the charters were
uniform. They specified the place of deposit and discount, the duration of the charter, amount of capital,
precise powers in addition to the general powers granted
in the Revised Statutes, chapter 18, the restrictions as to
capital, notes, and loans and discounts, the provisions
for contributions of one-half per cent annually to the
bank fund, and for inspection by the commissioners.
The New York City banks refused at first to accept
charters under the new law. It was pointed out that the
city banks paid lower dividends than the country banks
and could not charge as high an interest rate, because of
the competition of the United States bank. Therefore
they could not afford the added one-half per cent tax for
the fund. Editorials in the Evening Post predicted ruin
for the city banks under such a law. b Mr. Paige, in the
assembly, in a debate on renewing the charter of the Mohawk Bank, at Schenectady, admitted that the law was
not as favorable to the city banks as to the country banks;
but the act was the best that could be adopted in the
state of variant opinions.0 Dickson, in debate on a bill
to extend the charter of the Union Bank of New York
City, declared some concessions to the New York banks
were "just and reasonable," since the law operated more
a Albany Argus, May 6, 1829. Verified from legislative acts.
&New York Evening Post, Apr. i and 3, 1829; Albany Argus, Apr. 6,
1829.
c Albany Argus, Apr. 9 and 17, 1829.




269

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Monetary

Commission

severely against them. He said that he had favored the
safety-fund plan because he thought it would be "likely
to reconcile conflicting opinions and as decidedly preferable to the then existing system." He pointed out that
for years the dividends of city banks had averaged about
5>£ per cent, and to deduct one-half per cent from this
might cause the withdrawal of many stockholders. He
attributed the smaller dividends of city banks to less use
of bank notes and their quick return for redemption, as
well as to greater expense of operation. More specie
must be kept also to meet foreign demands.
Soon after the law was enacted the Middle District
and Columbia banks failed. These two failures gave
the New York City papers an opportunity to find fault
with the new bank law, the " country banks," and the
country members of the legislature. One of the city
papers declared that it would be very convenient to
have the coffers of the city banks responsible for the
defalcation of those in the country, and now it was
possible to understand the anxiety of the country members for the passage of the safety-fund act.® Really
these failures were an argument in favor of the new law,
for they were incidents of the old system, not chargeable
to the new.
The governor, in his message in 1830, stated that the
provisions of the law had received the decided approbation of the public, but reported opposition from the
banks as to the severity of the Revised Statutes in
reference to the responsibility of directors to Stocke Albany Argus, June 1, 1829.
d




270

Safety-Fund

Banking

System in New York

holders. He was of the opinion that these restrictions
might be modified under the safety-fund system. a The
legislature, as explained in Chapter I, proceeded to
repeal sections 11-18, inclusive, of the Revised Statutes,
which relieved the directors of banks incorporated in
the future from liability except for amounts involved in
specific provisions in sections 1-9, described in Chapter I.
Besides the 27 banks chartered or rechartered under
the new law in 1829, 9 new banks were authorized in
1830; 8 were rechartered, all in New York City, and 9
were chartered for the first time in 1831; 2 were rechartered and 7 were chartered in 1832, and from 1833 to
1836, inclusive, 28 new banks were authorized. In 1836
the capital of the Dutchess County Bank was increased
and the bank placed under the safety-fund law. In
1839 two banks were rechartered under the safety-fund
law. This is a total of 93 banks, either chartered or
rechartered under the law of 1829. There were never
more than 91 in actual operation at one time.&
The debates on the safety-fund law, as before pointed
out, made little reference to security for other debts of
a bank than note issues. The country banks made
their loans chiefly from capital and their own notes,
and the latter exceeded the former in the small banks.
The bank commissioners pointed out in their report to
the legislature, in 1834, that in the United States the
issues of paper " depend almost entirely upon individual
« Sen. jol., 1830, p. 22.
&Root: Sound Currency, Vol. II, No. 5, pp. 6, 7; also table giving
names, location, capital, etc.

24635—10




18

271

National

Monetary

Commission

discounts, regulated in amount by what the banks consider their ability to redeem."® Every note discounted
made a new emission of currency. No special effort was
made by the new system to protect the stockholders
of a bank, the chief concern being naturally the note
holder. The fund was not liable for the capital stock of a
bank. This would not be so true of the city banks where
the deposit business had developed to a considerable
extent. Most secondary writers on the safety fund refer
to this guaranty of all the debts of a failed bank as one of
the chief defects of the system. The makers of the law
themselves did not apparently realize the significance of
the guaranty until the bank failures of 1840-1842 caused
the system to break down under the burden, and mortgaged the fund for the rest of its existence. The commissioners, in their report in 1841, declared that all debts,
exclusive of capital, were a charge upon the safety fund.
This feature, they declared, "does not, until recently,
seem to have been generally understood, either by the
public at large or even by those engaged in the business
of banking." 5 The report goes on to express doubt of its
justice or expediency and asserts that the law of 1829 was
"primarily designed to secure bank-note holders and not
depositors or other creditors."
The free banking system under a general law was inaugurated in 1838 and no more special bank charters were
granted by the legislature. Under this system securities
must be deposited for the full value of the notes issued,




a Assem. Doc. 102, 1834, Vol. II, p. 10.
& Assem. Doc. 64, 1841, Vol. I l l , p. 16.
272

Safety-Fund

Banking System in New York

as at present under our national banking law. No
guaranty was attempted for the other debts of a bank.
The Canadian system likewise furnishes a guaranty for
notes only, by providing a fund of 5 per cent of the average
circulation from which the notes of failed banks are
redeemed.
Having studied the banking conditions antecedent to
the safety-fund system, and having seen the new system
in operation, we will now turn to a study of the banking
experience under the plan of the safety-fund law.




273




BANKING CAPITAL IN NEW YORK IN 1 8 3 6
# 2 1 , 8fcl,2.0O
. $10,290,000

w/WM/w//////m////m^,

> 2,500,000

700,000
# 650,000
3,

$> 4-,304-, &00
5^5,000

$500,000
Jt 1,400, OOO

.#_0£>Q OOO
Ik 3 5 0 , 0 0 0

$f>

d^

Capfe) employed m banking; ID NYSfefe^ Jao,ia3e
"Banking capdal mquested \rano Lagbbt>»e -session Jan
Capital aduelly aulborized by charter a+ session o} ie3fc

fr 1 , 6 3 0 , 0 0 0
* l , 4 2 0 y OOO
* 770,000

A^
^

TtbmanViomerals correspond 1o Senerte disfoicte

OOO

#1,3,50,000
$ I, 8 5 0 , 0 0 0

t?

& /,75<ROOO
3 <> 6 , 6 0 0 , 0 0 0

& 8bo, o o o

\

V

^

<<P
c
.c

V

J*

il

4

t* \c-

j<-

M

rf# / d ^

r%
*#>

&

^

tf*

&

J?
uP

••-rM----j

p#"'»

<p
1

' ^ ^

INCORPORATED BANK CAPITAL IN 1826
IN 5A/AE. DISTRICTS
I £ is>, erro, ooo
W— None
5U 4 1,300.000
JI# H5o,ooo
Y & 1,400,000
3214 250,000
HI & 3,535", 000
2L# 400,000
NOTES
/^sp "faker? from Historical Collections oJ Stale oj New York* ky J.w.5a^ber & Heo^ HOW^N.Y-1&41
5ena1e districts jrom M/illbmsb New York. Anno&l T2etfis1er - iss6 p-ps^-se
For fidpres see Assem. Doc &<s>- IS36 -vfoO ea>dTbe Sessions LAWS.

2463S (To face p. 275.)



CHAPTER

III.

THE TEST OF THE SAFETY-FUND SYSTEM.
i. OPERATION OF THE SYSTEM BEFORE 1840 W H E N SERIOUS FAILURES BEGAN.

In January, 1832, the bank commissioners reported
that capital invested in safety-fund banks had increased
from $6,294,600, at the time of the last report, to
$18,856,800. Circulation of notes of banks outside of
New York City had largely increased, partly owing to the
use of the capital of the canal fund which, as invested,
"may be considered as an addition to the bank capital
of the State." 0 There was buying of the stock of new
banks for speculation, since especially the country banks
yielded above the legal rate in dividends. The report
gave warning of the danger of overissue and too much
bank capital. The large banks, however, particularly the
city banks, are restrained in their issues by the rapidity
of the return of their notes for redemption and the wider
use of the check system.
The report of the commissioners in January, 1833, calls
attention to the small specie reserve, less than $2,000,000,
to support a circulation of $12,000,000 in notes, and
warns the legislature of the danger in times of panic and
depression. It is pointed out also that the legitimate
function of banks is not the loaning of capital, but to
furnish a sound currency. 6 What the report really does
is to distinguish between the bank of issue and the bank




0

Assem. Doc. 70, 1832, Vol. II, p. 7.
b Assem. Doc. 69, 1833, Vol. II, p. 5.
275

National

Monetary

Commission

of deposit and discount. Capital for industry should be
borrowed from individuals or corporations not associated
with the business of circulation, for the bank of issue, in
order to sustain its circulation, must make loans for short
periods. The report goes on to assert that "of the discounted paper of the country banks we should think
less than half was entitled to the denomination of business paper;" that is, paper founded on actual business
transactions to be paid at maturity. 0 Much paper discounted was evidently made to procure a loan, and often
renewed. This was accommodation paper and might be
called in by the bank suddenly or a renewal might be
refused at a critical time when the borrower most needed
help, especially if the redemption of bank notes was
demanded with unusual frequency.
The report of the following year again urges that the
amount of the currency should be proportioned to the
amount of business, and should not be enlarged to furnish
capital to create business. 6 Experience had so far indicated that the establishment of new banks in the country
increased the aggregate circulation by about the amount
of new capital created, c without a corresponding increase
in the specie reserve. The demand for new banks was
growing, but the commissioners recommended the increase
of the capital of old banks rather than the creation of new
ones, on the ground that this plan would furnish the most
capital to the community with the least addition to the
circulation. The average circulation for a bank with
a Assem. Doc. 69, 1833, Vol. I I , p. 8.
& Assem. Doc. 102, 1834, Vol. I I , pp. 10 et seq.
c Ibid., p . 14.




276

Safety-Fund

Banking

System in New York

$100,000 capital was about $160,000, but for a $300,000
bank the circulation seldom exceeded the capital. Therefore the security of the larger bank was greater, for the
claims of the public for notes were proportionately less
upon it.
The report in January, 1835, gave the description of a
severe pressure in the money market, when all the branches
of industry seemed to be in an unusually prosperous condition. It was called a political panic. Uncertainty was
made to pervade the public mind. The banks were
attacked; charges of insolvency were circulated; the people were urged to demand specie, and it was predicted
"that the safety fund was crumbling to ruin." a
Banks in the country were not then required to redeem
their notes except at their counters. They did not, however, depend on specie in their vaults, but kept funds in
the city banks, where they accumulated in the natural
course of business, and redeemed their paper by drafts on
the city. This redemption was interrupted in 1834, according to the commissioner's report, not because the
country banks were unable to redeem, but because the
city banks stopped taking up their notes and sending
them home. This led to charges injurious to the country
banks. As proof that they were able to redeem their
paper when sent home, the country banks did later take
up within sixty days $2,000,000 of their circulation. 6
Public confidence was not seriously impaired, thanks, as
the commissioners pointed out, to the safety-fund law.
a Assem. Doc. 74, 1835, Vol. II, pp. 5 et seq.
&Ibid., p. 7.




277

National

Monetary

Commission

The report again asserted that the amount of specie
was too small for proper security when the banking capital and note circulation were so rapidly increasing. It
was proposed to prohibit smaller denominations of notes
and limit the circulation to the amount of the capital
instead of twice the capital, as at present. To suppress
small notes would infuse more specie into the circulation.
The average dividends of all banks for the past three
years was reported as 7.31 per cent, and the dividends of
country banks,' which would be most affected by the
suppression of small notes, were considerably higher than
the city banks. Therefore the banks could bear the
changes proposed. At the same session at which the
above report was rendered the legislature passed a law
forbidding the circulation of bills under $5 after a specified time. The measure was unpopular and became a
political issue in the next campaign for governor. The
law had to be modified in 1837 when specie payments were
suspended. a
The report of the commissioners called attention to the
practice of stockholders of borrowing capital with which
to pay their stock. In some instances the stock of the
bank was pledged as security in the hands of those from
whom the capital was borrowed. This was a dangerous
practice, because under pressure the stockholders came
to the newly opened bank for an accommodation loan,
and the operation became equivalent to withdrawing the
capital just paid in by substitution of the notes of the
stockholders. The commissioners recommended that charojohn Jay Knox: History of Banking in the United States, 1900, p p .
407-8.
278




Safety-Fund

Banking

System in New York

ters granted in the future have a provision prohibiting
the hypothecation of the bank stock for at least a year
after the opening of the bank. a The report in January,
1836, urged again that the legislature require money paid
on capital stock of new banks to be raised by the individuals without pledging the stock itself.6 The pressure
for new banks was very strong and speculation had become a mania. Bank stock was a profitable investment
and many were eager to get it only to sell it again at a
premium. Consequently they borrowed capital for dealings of this character and sometimes exploited the bank
in paying back their loans.
During the session of 1835 the banks were investigated
by the bank committee of the assembly with reference
to certain practices referred to in the governor's message
of that year. The governor said, "Instead of discounting notes according to the usual course of business they
(the banks) have required drafts of their customers, payable at some distant place, knowing that the drawers
had not and did not expect to have funds at such place
to pay them; when these drafts arrived at maturity,
others were offered to the same banks and taken in payment of the former. A discount of 1 per cent beyond
the legal rate of interest has been exacted on these successive drafts." c The charge was made that this was a
method of securing more than the legal rate of interest
from those who were under the necessity of seeking
accommodations from the banks. It was a method of
a Assem. Doc. 74, 1835, Vol. II, p. 24.
& Assem. Doc. 80, 1836, Vol. II, p. 15 et seq.
c Assem. Doc. 229, 1835, Vol. I l l , p. 4 et seq.




279

National

Monetary

Commission

increasing the profits of the banks who practiced it, in
a manner similar to those banks which, being organized
primarily to circulate notes, established offices at some
distant place, difficult of access, and then redeemed the
notes issued, not at their counters, but at offices in the
city, where they charged a discount and thus made profit.
The bank commissioners had referred to the practice of
giving preference to discount of paper payable in the
cities, especially by some banks in the western part of
the State, and then charging the premium of exchange
on its renewal. It was natural and proper for banks to
prefer paper payable in the cities when based upon actual
business operations, " b u t to compel or encourage the
making of such paper for the mere purpose of being able
to exact a premium * * * can be nothing less than
an evasion of the law and, in many cases, grossly oppressive upon the borrower." a The offense here referred
to seems to have been the discount of accommodation
paper, and as a condition, expressed or implied, requiring it to be made payable at Albany or New York, on
which, at maturity, the bank could charge the premium
of exchange in addition to the discount on the renewal
paper. The committee found some evidence of this
practice. The great difference in rates of premium
charged on drafts by different banks in places very similarly located is irreconcilable with the idea of a "fair sale
of drafts for purposes of remission." 5 The committee
warned the banks that such practices would draw public
oAssem. Doc. 229, 1835, Vol. Ill, pp. 4-5.
b Ibid., p. 10. See figures showing these differences.




280

Safety-Fund

Banking

System in New York

suspicion and censure upon banks generally in the interior of the State. The committee commended the preference of paper payable in the city, if done in good faith,
and characterized the sale of drafts upon the city at a
fair premium as just and economical. Banks must not
be condemned indiscriminately; but where they make the
motive for giving a discount the hope of selling a draft
at a premium to pay it, they should be censured. At the
session of 1835 a law was passed which was designed to
remedy the above evil. It prohibited a bank from
receiving premium of exchange on any draft made by the
bank, used or applied in payment of any bill, note, or
other demand, due to or discounted by said bank. It
was also made illegal for any bank to place money or
notes in the hands of any person for the purpose of loaning or discounting. It had been complained that some
banks did this to the profit of their officers.0
No bank charters were granted in 1835. The report
of the commissioners in January, 1836, had a distinct
note of warning. The circulation and deposits were
greatly increased, and the discounts had grown by almost
$7,000,000. There had been an increase of specie, due
largely to the recent law suppressing small notes, which
operated well and was approved. The demand for new
banks at the session of 1836 was stronger than ever.
There had been a large investment of capital in western
stocks and real estate, which increased the pressure on
the banks for ordinary business. The "mania of specu<*Laws of 1835, chap. 307; also John Cleaveland: The Banking System
of the State of New York, 1864, pp. 77-79.




281

National

Monetary

Commission

lation" was growing. Caution was urged in increasing
the number of banks. It was recommended rather to
increase the capitals of the old ones because by this
method the currency would not be expanded to such an
extent. "By connecting the currency with the success
of such enterprises (speculations), we should not only
give fresh impulse to the excitement, but expose the
whole community to the disastrous consequences of a
revulsion." 0 Some banking capital was required, but
in no proportion to the amount asked for.
The governor, in his message in 1836, said that already
notices had been published of intended applications for
93 new banks during the session.6 He warned the legislature against supporting the growing speculative movement and urged provision for the stability of banks in
times of panic. He called attention to the destructive
cycle of overtrading, expansion of credit, overissues of
paper, speculations, reactions, contraction of paper, dull
trade, and bankruptcy.
A reference to the map at the beginning of Chapter III
will show graphically how, large was the capital employed
in banking previous to this session of 1836, and how it
was distributed over the various senatorial districts of
the State. It will also be evident how immense was the
increase demanded from the legislature during this single
session of 1836, as well as the small amount granted by the
legislature compared with that demanded. It appears
from this map that the capital had been, in general, distributed over the State by the legislature in about the




o Assem. Doc. 80, 1836, Vol. II, p. 11 et seq.
& Semiweekly Albany Argus, Jan. 5, 1836.
282

Safety-Fund

Banking

System in New York

proportions which the various districts would naturally
need. Most was needed in the First district, where New
York City was located, and the next district in importance was naturally the Third, in which the state capital
was situated; the Second was overshadowed by the New
York City banks, and the Fourth was comparatively
undeveloped. The Fifth, Sixth, Seventh, and Eighth
districts were rapidly developing and each had about
the same amount of banking capital. In 1836 the Fourth,
Sixth, and Eighth asked for much more than they had
already employed. Especially in the case of the last
district, this was probably to be explained on the ground
that it was the farthest west and most subject to the
boom in real-estate speculation. Banking capital was
desired to aid in this wild rush for wealth. It will be
noted, however, that the legislature was conservative in
granting only a very small percentage of the amount
requested. New York City was probably largely influenced to demand a large increase because the United
States bank was closing up its affairs. In both the First
and Third a relatively small increase was granted.
By comparing, from the map, the amount of incorporated banking capital in 1826 with that in 1836, in the
same districts, we can not say that there had been, under
the safety-fund system, an extravagant increase in banking capital. Of course, under the safety-fund law all
the capital authorized must be paid in and actually employed, which was not true under the previous system.
The legislature of 1836 passed an unusually large number of laws, few of a public nature. It chartered 12 new
banks out of the large number of applications, and in-




283

National

Mon etary

Commission

creased the capital of two old banks. The aggregate
capital added was $5,670,000.® The charters passed
the house by votes ranging from 96 to 24, to 88 to 29. 5
The votes in the senate were all by such majorities as
24 to 3 and 22 to 6.c Therefore, it can not be claimed
that these charters were passed by a very close vote.
They required, of course, a two-thirds vote. An article
in the Albany Semiweekly Argus, April 25, 1837, entitled
"The Times/' refers to these bank charters and the
plan of securing the capital to purchase the stock, in
some cases. It was asserted that the funds were advanced by trust companies and other banks to persons
wishing to buy stock. These persons, in some cases,
received discounts from the new bank to pay these debts.
This was substantially the old stock-note system. A
resort to this method shows that stock was sought for
speculative purposes and that there was little real capital
to be employed in banking. When we consider that 5
of these 12 banks chartered in 1836 failed before the close
of 1842, these facts assume grave importance.
The bank commissioners' report, in January, 1837,
stated that the distribution of the stock of new banks
was the cause of " violent contentions and bitter personal
animosities.'' d This was done, as explained in Chapter
I, through commissioners appointed by the legislature
o This counts the Dutchess County Bank increase of capital to $450,000.
By the reports of the bank commissioners it was increased to $600,000,
making the total increase $5,820,000. For $5,670,000, see Semiweekly
Argus, May 31, 1836.
& See Semiweekly Argus, May 31, 1836, for these and other votes.
c See Semiweekly Argus, May 17, 1836.
d Assem. Doc. 78, 1837, Vol. II, pp. 7 et seq.




284

Safety-Fund

Banking

System in New York

from the neighborhood of the new bank. The distribution was sometimes made a part of the spoils of the
victorious political party and sometimes a matter of
profit to the commissioners and their friends. Thus the
stock and, consequently, the control of the bank some-*
times fell into the hands of those least qualified in character or financial responsibility.
The governor, in his message in 1837, urges a different
method of distribution of stock.® Mr. Young,* in a debate in the senate in 1837, referred to the last session
when so many senators aided in passing bank bills and
then went home to share in the profits of the stock. A
resolution was introduced calling for the investigation
of the conduct of a senator who sold bank stock at a great
advance. Much bitter feeling was aroused and many accusations were made. 6 A general resolution was later
introduced and debated hotly—
"Resolved, That, in the judgment of this senate, it is
highly improper for a member of the legislature to vote
for the passage of a law creating a bank or moneyed
corporation, and afterwards to solicit or receive stock in
said corporation on the distribution of the stock thereof/' c
At the session of 1836, the capital of the Jefferson
County Bank was increased. The manner in which the
additional stock was distributed was a matter of investigation by the next legislature. It was found that the
nine commissioners had opened the books for subscription August 15, 1836, and had kept them open through




o Semiweekly Argus, Jan. 10, 1837
& Semiweekly Argus, Jan. 20, 1837.
c Semiweekly Argus, Feb. 3, 1837.
285

National

Monetary

Commission

the following day. About 500 persons applied for stock,
which oversubscribed the amount. The commissioners
met to distribute the stock. There were two parties
among the commissioners, and each party made up its
bwn list of favored applicants for stock. The party that
numbered five carried its list and really distributed the
stock. One of the majority party asserted that they
calculated " t o have the stock where we can lay our hands
on it." Before the distribution, Lowery Barney received
from several persons power of attorney to subscribe for
stock in their name. He generally took the persons'
notes for the amounts to be paid on their subscriptions,
which amounts he paid at the time of subscription. All
those persons who gave power of attorney received stock,
while many other subscribers were refused. They soon
transferred their stock to Barney, who sold it to G. C.
Sherman, the man who really furnished the money with
which to buy the stock. Barney was the agent of Sherman. Others did the same thing in order to acquire
more stock than was allowed under the act of incorporation. These persons were shown to have borrowed large
sums to enable them to carry out these operations and
pay up their capital stock. The largest stockholders
were indebted for stock purchased, on notes not payable
until after the election of directors. The investigation
showed that $45,400 of stock had, since the original distribution and previous to the payment of the last installment, been transferred by various persons to G. C.
Sherman; $10,550 to Alphius Green, and $7,200 to I/.
Paddock. These three received in the original distribution the full amount of stock allowed by law. Out of




286

Safety-Fund

Banking

System in New York

about 500 original subscribers, 97 actually received stock
in the first distribution. Every one of the 9 commissioners received the maximum amount allowed by law,
250 shares. At the time the committee investigated,
after the above transfers of stock had taken place, there
were only 36 holders of stock, an average of 333 shares,
but 7 men held 7,695 shares of the whole 12,000 which was
originally placed in the hands of 97 persons. Truly,
they had placed it where they could lay their hands upon
it. The committee decided that the distribution was
illegal and improper—partial and unjust. It appeared
clear that there was an understanding between the commissioners and others to give certain persons more than
the law allowed.a
At the same session another case was investigated, this
time by a select committee of the senate. It was found
that the same methods were used in the case of the Oneida
Bank that have been detailed for the Jefferson Bank.
Some of the commissioners themselves were instrumental
in procuring authority to subscribe for stock, the power to
sell the same afterwards, and a blank form of hypothecation of the stock so subscribed as security for moneys
advanced to pay the subscriptions. By this means large
blocks of stock came into the hands of a few persons. In
several cases three of the commissioners advanced the
funds for the subscribers who gave them authority to subscribe stock for them. The maximum allowed by law in
this case was 25 shares of stock. The reason assigned for
the above operations by three of the commissioners was
a Assem. Doc. 284, 1837, Vol. I l l , for above details.
24635—10




19

287

National

Monetary

Commission

" t o secure to themselves and their friends the control of
the said bank." The committee condemned such conduct
as incompatible with "pure, fair, impartial, and discreet
exercise of their duties." It was shown that the bank's
stock, to the amount of i ,076 shares, or $106,350, had been
hypothecated to the Farmers* Loan and Trust Company
on November 8, 1836, by 14 different persons, all to raise
money to pay the subscriptions due on the bank stock. a
The concrete cases just explained will make clear the
purpose of an act passed in 1837 to remedy the evils of
stock distribution. It provided for the sale of the stock at
public auction, with three weeks' notice of the time and
place. The size of the shares was regulated at $100. On
the first day of the sale the commissioners must not sell
more than five shares to any one person. If the sale continued the second day, they must not sell more than 10
shares to one person, and on the third day, if the sale continued, not more than 20 shares to one person. A person,
to purchase stock on the first three days of the sale, must
be a resident of the county where the bank was located.
The purchaser must not sell, assign, transfer, or pledge in
any manner his stock until at least three months after the
whole capital was paid. Before the payment of the last
installment on the stock or within twenty days afterwards,
each stockholder must take oath that he is the bona-fide
holder of the stock purchased by him and has paid for it
with his own money; that it is not pledged or hypothecated
at all; that he had not contracted to sell or pledge it, and
that he owns no other stock in the bank, directly or indict Sen. Doc. 58, 1837, Vol. II, for above details.




288

Safety-Fund

Banking System in New York

rectly. False swearing was subject to penalty for perjury
in the above cases.a When the evils of distribution were
remedied it was too late, for no more charters were granted
for new banks under the safety-fund system.
The session of 1837 was characterized by bank investigations. In January a resolution was introduced into the
assembly requesting a select committee to inquire whether
the banks had been guilty of illegal or improper practices,
contrary to the letter or spirit of their charters—i. e., application of their funds to other purposes than legitimate
banking, usury, speculation, etc. Other similar resolutions were offered.b In February a petition of citizens of
Alleghany County requested an investigation of the banks,
fearing "the presence of a licensed aristocracy in this
county." 0 The petitioners made charges of oppression
and opposed the present system of banking on the ground
that it promoted speculation, impaired men's morals,
granted a monopoly power to a few, made it possible for
banks to refuse loans to business men and .small dealers,
and endangered the welfare of society. A select committee reported that the Sacketts Harbor Bank had violated the law as to circulation of paper as money and its
charter was promptly repealed.^
A select committee reported on the safety-fund banks,
having for its object to discover whether the evils reported were inherent in the system itself or whether they
a

Semiweekly Argus, May 23, 1837, for above text.
& Assem. Docs. 34 and 42, 1837, Vol. I; and Assem. Doc. 130, 1837,
Vol. I I .
c
Assem. Doc. 130, 1837, Vol. I I .
d Assem. Doc. 243, 1837, Vol. I I I .




289

National

Monetary

Commission

are such as may occur under any system. "If the officers
and conductors of the banks have perverted the privileges
and immunities of the institutions to purposes of fraud
and oppression, they should be held amenable." a The
report went on to state: "Nothing has been discovered in
our banking institutions generally which should tend to
the destruction of confidence in them. * * * Your
committee are of the opinion that many of the abuses
which have been charged and may have been practiced
are not attributable to the system by which they were
created, but are alone chargeable to the cupidity and
avarice of those who have been intrusted with their management." 5 The committee investigated specific charges
and made inquiries of all the safety-fund banks. In the
report the details and evidences are given for each bank.
We shall not review the charges, which were not substantiated by the committee, but only the practices actually
found and proven by the committee. Of the latter we
shall give a brief summary, and that not for individual
banks. It was found that many of the charges against
New York City banks were not supported by good evidence. Some banks had extended their loans even beyond
limits of prudence. Some loans to individuals seemed too
large in comparison with the capital, but these were explained by the officers as temporary and in process of
reduction. Some of the city banks were making large
temporary loans, subject to call, which the officers asserted
to be necessary in order to meet the large government
drafts without suddenly curtailing discounts. It will be
o Assem. Doc. 328, 1837, Vol. IV, pp. 4 et seq.
h Ibid., p. 6.
290




Safety-Fund

Banking

System in New York

remembered that the Government was distributing its revenues among the States. Most of the customs dues were
collected in New York City. Therefore, there was a constant draft on the city banks by the Government to
remove its funds. The temporary loans were made on
stock hypothecated as security. The committee recognized that, in most cases, the motives for these loans were
good, but also asserted that it had become a cause of
clamor against the city banks, because it enabled brokers
and others to secure funds with which to speculate, in
buying up the paper of banks at a discount. The committee therefore recommended that no bank be allowed to
take stocks in hypothecation, because it regarded the
practice as a leading cause of difficulty in the city banks.
Of course banks were already prohibited from taking their
own stock in hypothecation. This idea of the committee,
both as to the expediency of temporary loans and the
hypothecation of stock as security, would not meet with
much attention to-day when it is generally recognized
that the loans of a commercial bank must be liquid and
can best be made so by short-time loans on good business
paper and by call loans to those who need funds temporarily. Stocks to-day form a large part of the collateral
offered for these short loans. In 1837 it was a question
of what stocks were good collateral and what sort of loans
might wisely be made. Banking experience has developed
far since then, but the same problems arise. Then, the
opposition evidently arose because of the operations of
speculators in bank paper whose business was encouraged
by some banks through temporary loans. Further, these




291

National

Monetary

Commission

loans sometimes endangered the solvency of the bank
when the security depreciated in value or proved worthless. But the same thing may happen to-day, although,
in general, our information about stocks is more accurate now. It was taking a more serious risk for banks to
accept stocks as security in 1837.
Among some of the country banks it was found that
loans to individuals were in amount out of proportion to
capital. "The committee are of the opinion that a bank
can never be either so safe and profitable to the stockholders, or so useful to the community, as when its discounts are confined to legitimate business paper, the discounts of moderate amounts, and of course extensively
diffused." a By large loans to the few, many were excluded from accommodations, and the jealousy of the public was aroused. If, as in some cases, these loans were
confined to the officers and directors, then indignation
and distrust were invited.
The officers of several of the banks were found to be
purchasing paper at a discount, in some cases apparently
with their own funds independent of the bank, but in
other cases, after the paper had been refused for discount
at the bank, and with funds which they secured in large
amounts from the bank. This practice was calculated to
excite public odium and discredit the bank. In other
cases the bank loaned to brokers who made a business of
buying notes at a discount. This made the bank a sort
of broker's office. Such discounts by officers of banks
and by brokers were usually at high rates and were there-




oAssem. Doc. 328, 1837, Vol. IV, pp. 36-37.
292

Safety-Fund

Banking

System in New York

fore, when previously refused at the bank, a species of
usury by the bank and actuated by greed on the part of
the bank's officers. It was discovered that in most cases
the officers, when in this business, borrowed heavily from
the bank, even when they testified that they were doing
the discounting with their own private funds. Such loans
to officers were apt to be poorly secured. Banks themselves were sometimes guilty of usurious practices, as
shown by the investigation in 1835, before described,
when they discounted paper, and as a condition of the
discount required that it be made payable in New York
or Albany, in order to be able to sell drafts for the proceeds and charge, in addition to the discount, a premium
of exchange. The Bank of Orleans was a great offender
in this sort of transactions. The directors intrusted the
affairs of the bank to the cashier who abused their confidence. He refused discounts at the bank and then purchased the notes "for his own account at the bank, and
with the funds of the bank, at a usurious and ruinous rate
of interest.'' He allowed two clerks to overdraw to the
amount of $20,000, which they used to purchase notes at
3 per cent per month offered to the bank for discount
and refused. Three of the directors were guilty of the
same practice. In 1837 the bank commissioners discovered these practices and took measures to close the
bank, but immediate reforms were begun and the cashier
resigned, so that the bank was allowed to continue. This
shows the wisdom of bank examinations. a Too little care
a Assem. Doc. 256, 1838, Vol. V, for details.




293

National

Monetary

Commission

was shown by stockholders in electing directors, or by
the bad system of distributing stock the bank was allowed
to fall into the hands of speculators or unscrupulous men.
Proxies were sometimes secured in sufficient numbers to
allow the election of directors who would place all the
management of the bank in the hands of the cashier, who
used his power for his own profit.a
One of the most common irregularities found was in
the manner of protesting notes. The laws of 1835,
chapter 307, section 2, forbade a bank to be in any manner, directly or indirectly, interested in the fees of any
notary public who did its protesting business, and regulated the fees to be charged by an officer or clerk of a bank
if also a notary. If the notary, employed to protest paper
in which the bank was interested, was also a stockholder
in the bank he must not receive any fees. Many banks
violated this law intentionally for the profit of officers or
stockholders, or in ignorance. The cashier, being also a
director and stockholder, and, therefore, disqualified,
would make an arrangement with a notary, by which
the cashier could do the protesting, using the notary's
name and paying him a fee.6 Or the officers would do
the protesting business and charge higher fees than the
law of 1835 permitted. In various ways the officers of
banks evaded or disregarded the law. It only adds to the
a For examples of the practices just described, with names and evidence
taken by the committee, see Assem. Doc. 328, 1837, Vol. IV, pp. 27-28,
pp. 31-32, pp. 39-40, pp. 43-44, pp. 45-49, especially flagrant abuses;
pp. 50-55, good concrete examples of oppression. Some astonishing cases
of extortion cited.
& Assem. Doc. 328, 1837, Vol. IV, p. 41.




294

Safety-Fund

Banking System in New York

volume of evidence against bank officers of this early
period of banking development.
It will throw light on the sort of banking being done if
some of the chief items of the bank statements of the
safety-fund banks, over a period of years, are presented.
The figures will be stated approximately in millions and
will be given for all the banks under the safety-fund law,
for the banks in New York City alone, and for all others
outside of the city.




295

Chief items of bank statements of safety-fund banks,

i8jo-i842.a

NOTE.—By city banks are meant those of New York City.
[Amounts are stated in millions of dollars.]
Year.




Total
banks.

1830

1831

1832

1833

1834

1835

1836

1837

58

69

76

Location as to city or
country.
All_
City
Country.
All
City
Country _
All
City
Country.
All
City
Country..
All
City
Country..
All
City
Country..
All
City
Country..
All
City
Country..

Capital.

Loans
Circula- and distion.
counts.

Specie.

Specie in
Profits
Individual per cent in Circulation per cent of in Specie
of in per cent notes and
per cent
deposits.
capital.
of capital. deposits. of capital.

6.3

5-3

18.8
n-3
7-5

12. o
4-4
7-6

32.8

5-8

17. 7

4.0

64
39

1.8

101

20. 2

12. 2

35-6

7-9

11.9

4. 2

20.8

7.0

60
35
96
68
39

IS- 1

8.3

8.0

14.8

22. 7

15-4

43- 7

12. 6

4-9

24.4

10. 1

10.5

19-3

26. 2

14-5

14. 6
11.6

1.8
i-3
-5

26.5

14. 6

5- 1

2.8
8.4

9-6
14.3

5-3
9.0
14. o
4.6
9- 2

1.4

104

5-0

52-9

1.6
.6
5-6

14.4

193

5-0

30. 5

4.4

11.6

55
34

9-5
19. o
6.4

22. 4

2.8

82

59- 7

14. 1

33-

10. 6

1 6 -

iS +

2

11.9

12. 6

26. 5

3-5

32.5

22. 1

67-3

16.6

8.2

36. s

11. 2

15-9

13-9

30.8

3-8

32- 2

11.6

53-3

%.o
8.6

28.0

9-8

25.3

2.9

26.5
9-8
15- 1

44

21. 1

17 +
1624 +
20 +

106

8.7

68

12. 7

16.6
*5-6

13- 4

72

15-0

6.3

15-0

50

20. 1

85
36

15- 1

9-6
19.4

10. 4

8.9

i838

89

1839

1840

1841

1842

85

All
City
Country..
All
City
Country.
All
City
CountryAll
City
CountryAll
City
Country..

32.4
16.6
IS-8
33-o
16.6
16. 4
32. 6
16.6

17-7
4-4

13-3

60.3
30.0

5-9
4.4

3-4

30.3
47- 2
21. 9

3-7

6-5

25-3

1.3

14.3
4. 1
10. 2

49-5
22.8

3-8

26. 7

1. 1

30. 7
16. 7

II.4

44- 1
21.8

4- 2

14. 0

7-3
8.9

16. 0

29- 5

15-3
14. 2

9-9

4.1

3-4
5-5

22.3
40.9
21.3
19- 6

1-5

5.o

4.9

3-3
•9

5-9
4-9

1. 0

IS- 2
IO.8
4-4
13.2
10. o
3- 2
i5-o
10. 6
4-4
12.3
94
2.9
13.6
10. 9
2. 7

1 7 -

54
26

17 —

12 +
16 +
12 +
16 +
IO —
l6-

8 +
15-

40
44
25
64
37
25
52
30

17.9
29. o
8.4
21. 6
27. 6
13-4
16. 7
25.8
7-5
17.7
24. 4

i5-i

ft.
13- 6

to

8.8
26. 2
34- 2

a

For the figures used as a basis for the calculations of the table see "Reports of the Bank Commissioners" in the assembly documents
year by year. Miss Hasse's list of documents for New York banking will give the number and volume of these reports. The figures given
in the January report of each year were taken for the preceding year. Thus the figures found in the report in January, 1831, were taken as
covering the year 1830, etc. In the reports the New York city and country banks were not reported separately until January, 1835, but the
statements for the New York City banks for 1831, 1832, and 1833 were given in the report of the bank commissioners for 1837 (Assem. Doc.
78, 1837, Vol. II, p. 18). By using these items and the totals for all safety-fund banks the amounts for the country banks during these years
were found. The figures are presented in millions and tenths. The percentage of profits on capital was estimated from figures given also in
the bank commissioners' reports. They are not necessarily an accurate index of dividends actually declared. In the report of the bank commissioners for January, 1835, the dividends of the banks are given for 1831, 1832, 1833, and 1834, classified in four groups, according to the
size of capital and location in city or country. The rate of dividend is given for each group. The New York City banks are put in one group,
and the country banks are classed in three groups, according as their capitals are $100,000 and under, $100,000 to $200,000, and over $200,000.
The $100,000 group shows the largest dividends and the city group the lowest. For the details see Assembly Document 74, 1835, Volume
II, page 20. I t is not to be understood that profits, as presented in the table, mean the same as the dividends actually declared. The
city banks especially probably kept a surplus and did not divide up all the profits as dividends. The country banks would probably not
keep so large a surplus, if any. The large profits help to explain the pressure for new banks. The last three columns of the table were
calculated from the figures given in the table and are only approximate, but were carefully calculated.




I

a*

51

National

Monetary

Commission

A comparison of the above table with the one setting
forth the items of the city and country banks in Chapter
I will show in general the same differences existing between
the city - and country banks. The city banks, during the
period covered in the table, issued notes to an amount
varying from between a third and a half of their capital,
during the first half of the period, to one-fourth or onefifth during the second half of the period. The country
banks, on the other hand, issued an amount of notes which
exceeded the capital during the first part of the period
and decreased to even less than half in some years during
the latter part of the period. Taking all the banks, the
notes compared with capital tended to decrease during
the period. The deposit business was growing in both
city and country banks, but especially in the city. In
the table in Chapter I it was observed that the city banks
kept an amount of specie equal to about one-seventh of
their demand obligations of notes and deposits and the
country banks about one-twentieth. In the table just
presented it appears that the city banks begin the period
with about the same proportion as before, but during the
period the specie increases until they hold one-fifth and
one-fourth, and even more. The country banks, as shown
in next to the l#st column of the table, also increased their
specie from about one-twentieth of the notes and deposits
to about one-tenth. Taking all the banks, it will be clear
that there was during this period a distinct increase in
the specie basis of banking. The table also makes clear
that the agitation for the suppression of notes under $5
during 1834 and 1835 and the passage of the law in the




298

Safety-Fund

Banking

System in New York

latter year did help to infuse more specie into the circulation, as its advocates claimed it would do.
The last column of the table was calculated for all
banks under the safety fund, in order to meet a charge,
sometimes made, that as the capital invested in banking
increased the amount of specie was divided up among
the larger number of banks, and therefore the relative
amount compared with capital decreased. This will be
disproved by a glance at the percentages.
It will be observed from the table that there was a
steady increase in banking capital, circulation, loans, and
deposits until 1836, when a climax was reached. All
these items had about doubled within a period of six
years. It was a period of rising prices and speculation
which was sure to be followed by the results of overexpansion. The profits of the banks, as shown in percentage of the capital, steadily increased during the
period up to and including 1837, with a slight advantage
in favor of the city banks. This does not seem to accord
with the gloomy predictions of the New York City banks
when the safety-fund law was passed. They declared
then that it meant ruin for them and that they could not
bear the pressure of the extra tax of one-half of 1 per cent,
while, because of their large dividends, the country banks
were quite able to bear the tax to create the fund. During the period of liquidation following 1837 the profits
declined, and now the advantage was distinctly on the
side of the country banks. The city banks were at a
disadvantage during the period when trade was deranged
and the exchanges in confusion as a result of the recent
panic. The country banks were not so severely affected,




299

National

Monetary

Commission

because not so intimately connected with the great center
of the nation's trade and industry.
It was a matter of serious concern in the minds of many
as to how the safety-fund.banking system would endure
the pressure of panic. There had been many warnings
of revulsion in trade. Our imports had been rapidly
increasing over exports. Three European houses had
extended credits to the United States to the extent of
about $19,000,000, which further stimulated trade.
The reaction began by a check on our credit abroad and
the sending home of our protested bills. There was a
sudden demand for specie to export. As the above
table shows, the specie in the city banks rapidly decreased during 1837. Demands by depositors, followed
by a run on the city banks, completed the panic, and
specie payment was suspended in New York City May
io. a The commissioners go on to assert that the suspension was not the result of defects in the organization
of the banks, but was an incident to their connection
with the commercial interests of the country. It was,
however, the fault of the banks that they were not better prepared to meet the emergency. They could have
weathered the domestic revulsion, but the foreign reaction was unexpected. The commissioners considered the
debts of the banks to be sound and predicted that their
losses would not be great. The table, before presented,
will show how the loans were curtailed in 1837 and the
circulation reduced about one-half. The commissioners'
report presents the aggregate liabilities of all the banks
to the public on January 1, 1837, as $82,444,841, which
« Assem. Doc. 71, 1838, Vol. Ill, pp. 4-5. Bank commissioners' report,




300

Safety-Fund

Banking

System in New York

had been reduced by January i, 1838, to $49,434,459.°
The immediate resources of the New York City banks to
meet immediate liabilities were 63 per cent of the liabilities at once due. This showed strength on the part of
the city banks at the time when the commissioners reported—January, 1838. An arrangement had been effected between the city and country banks under which
the notes of all the banks of the State were current at par
in the city. Banks sacrificed the discount formerly paid
by the public. The arrangement inspired confidence between the banks, lessened the rate of exchange, and
facilitated the intercourse between city and country. It
was feared that, since specie payment had been suspended, banks would issue notes to a dangerous amount.
Therefore, on May 16, 1837, soon after suspension, the
legislature passed a bill further restricting the issue of
notes. Banks, under the law of 1829, were permitted to
issue to an amount equal to twice their capital; but under
this new law banks could issue as follows:
Bank-note issue authorized by law of May i6,
Capital.

1

Notes.

Capital.

iSjy.a
Notes.

$100,000

$150,000

$500,000

$350,000

120,000

160,000

600,000

450,000

150,000

175,000

700,000

500,000

200,000

200,000

i,000,000

800,000

i

250,000

225,000

1,490,000

1,000,000

300,000

250,000

2,000,000

1,200,000

400,000

300,000

a For text of law see Semiweekly Argus, May 19, 1837.

These restrictions were not severe, because it was the
small bank that issued the largest proportion of notes,




"Assem. Doc. 71, 1838, Vol. I l l , p. 6.
301

National

Monetary

Commission

and the large city banks did not wish to avail themselves
of the power of note issue even up to the limit set by the
new law, if we are to judge by the past experience of the
city banks. The commissioners call attention to the
fact that all the banks in the State had been authorized
to issue $68,625,000 in notes; but under the new law the
same banks could issue only $29,590,000.°
The year 1837 brought the first call upon the safety
fund, which had been accumulating from the contributions of the banks since 1831. The commissioners found
it necessary to proceed against three BuJBfalo banks for
violations of the law which endangered their ultimate
solvency. Injunctions were issued against them. Then
it was discovered that the law of 1829 provided for the
payment of the debts of failed banks only after the assets
of the banks were settled up and the balance ascertained.
It was perceived at once that the note holders of failed
banks would lose through the depreciation of their notes
awaiting payment. Consequently the legislature passed
an act, in May, 1837, enabling the authorities to take
measures to pay the notes of failed banks at once out of
the fund, and thus prevent depreciation and loss to the
note holders. It allowed the comptroller to use his discretion as to the measures to be employed. After the
other creditors of the failed bank should be satisfied the
amounts thus paid from the safety fund for notes were
to be repaid to the comptroller from the remaining assets of the bank, if any were left. If after a final settlement of the affairs of the failed bank the fund was not




a Assem. Doc. 71, 1838, Vol. I l l , p. 12.
302

Safety-Fund

Banking

System in New York

repaid and was thereby decreased, the solvent banks
were to be called upon to make good the deficiency by
renewed contributions. a The Canadian banking law provides that the notes of failed banks shall bear interest at
5 per cent until redeemed from the safety fund. This
prevents depreciation and the sale of the notes at a loss.
However, the notes are redeemed at once from the fund
and the fund repaid from the assets of the failed bank.
The notes, moreover, are a first lien upon the assets of
the failed bank.
As soon as the act, above described, was passed the
chancellor of the court authorized the comptroller to take
such measures as he deemed necessary to redeem the
notes of these three Buffalo banks. Their outstanding
circulation, as reported by the bank commissioners,
aggregated $413,961. The comptroller gave public notice
that the bills of these banks would be received in payment
of canal tolls and all other debts to the State. This gave
credit to the bills in actual circulation. Considerable
sums were thus received by the State and redeemed
from the bank fund, but all advances thus made, together
with interest at 7 per cent, were repaid to the fund by the
several banks for whose notes they were made. The
three Buffalo banks were allowed to continue under certain restrictions imposed by the court, but later they all
failed hopelessly.
In the same year the legislature repealed the charters
of two banks, the Sackett's Harbor and the Lockport,
for violation of the banking laws. The comptroller took
a

For text of act see Semiweekly Argus, May 23, 1837.

24635—10




20

3°3

National

Monetary

Commission

the same measures, as in the case of the Buffalo banks,
to redeem the notes of these banks. Shortly afterwards
the Sackett's Harbor Bank was allowed to revive its
charter and all advances out of the fund, for the redemption of its notes, were repaid with interest. The affairs
of the Lockport bank were settled in such a manner as to
leave the safety fund practically undiminished in 1840
when the first really serious failures began. 0
The bank commissioners, in their report for January,
1839, commend the banks of the State because "they
were.enabled to take the lead in the resumption of specie
payments." 5 Resumption took place with apparently
little agitation, and the losses did not seem to be as great
as expected. All the banks, except the Oneida and
Brooklyn banks, whose capitals had been impaired previous to the revulsion, in their annual reports showed " a
surplus of profits on hand, after deducting bad debts." c
It might be questioned, in view of the future failures of
some of these banks, whether the officers had the courage
or the desire to count as bad all the debts that should
have been so classed. The commissioners, in fact, express
uncertainty as to the proportion of debts that may yet
prove bad, and that, consequently, may impair the capital.
The officers hesitate to withhold dividends, and so are
slow to count as bad debts the doubtful cases.d When we
see the figures for the assets of the banks which later failed
and the amounts realized from them by the receivers,
a L. Carroll Root: Sound Currency, Vol. I I , No. 5, p. 8.
& Assem. Doc. 101, 1839, Vol. I l l , pp. 3 et seq.
c Ibid., p. 5.
* Ibid., p. 6.




304

Safety-Fund

Banking

System in New York

we shall be forced to conclude that many bad debts were
not charged to the loss account at this time. Dividends
were forbidden by the legislature during suspension in
1837. Therefore dividends were especially large the
following year. As seen in the table, before presented,
the profits were reported for 1837 and stood especially
high, being 24 and 20 per cent of the capitals of the city
and country banks respectively. For 1838, the profits
reported were 17 per cent in both classes of banks.
The readjustment after the panic of 1837 was not
quickly or easily made by the banks. The table, before
presented, shows the items rising and falling in spasmodic
attempts to regain the normal state. The report in 1838
stated that the banks in the country had generally extended their circulation to the limit allowed by the law
of 1837 and complaints were made that the limit was too
low. The commissioners thought "the range of circulation, under the law as it is, high enough." 0 A very important fact as to circulation was also pointed out, that
the amount of circulation which a bank can sustain depends upon the local. situation as much as upon the
amount of its capital.
The report of 1840 described another financial disturbance during which "the pecuniary distress of the last
autumn was decidedly more intense, more general, and
more embarrassing than any that has occurred since our
acquaintance with the subject." 6 By this time the free
banks organized under the general law of 1838 were in
operation. The whole situation was aggravated by "the
a Assem. Doc. 101, 1839, Vol. I l l , p. 8.
& Assem. Doc. 44, 1840, Vol. I I , pp. 4 et seq.




305

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Commission

practical operation of the two systems of banking.'' They
were organized on different principles and their restrictions were not uniform. The general result, not anticipated, had been to contract the volume of currency.
This is how it happened. It was supposed that the banks
under the general law were not subject to the restrictions
of the Revised Statutes as to buying their own notes at
a discount in the market. The safety-fund banks were
not allowed to do this. Buying their own notes, as well
as those of the safety-fund banks, at a discount proved
more profitable for the free banks than the discount business, and, besides, tended to displace the notes of the
safety-fund banks, for which they were readily exchangeable. This would account for the large redemptions of
safety-fund banks during the summer of 1839. This situation lessened the ability of the safety-fund banks to
discount, since their notes issued were rapidly collected
by free banks and sent home for redemption. The free
banks, moreover, many of them, were not furnishing discounts to any great extent, but doing a business in " shaving" their own notes and the notes of the other banks. 0
Embarrassment to borrowers was the natural result.
Besides, the withdrawal of capital to invest in the stocks
of other States, to be deposited with the comptroller
under the general banking law to secure the issues of notes,
and the suspension of specie payment in other States
contributed to the distress. It is to the credit of the
New York banks that under such conditions they did
not suspend specie payment a second time.
o Knox: History of Banking in United States, p. 416.




306

Safety-Fund

Banking

System in New York

The system of redemption of the country-bank notes
had become deranged and the paper was at a great discount in the city in 1839. This was due to the discontinuance of the voluntary arrangement between city and
country banks during the panic by which country notes
were kept at par and the banks divided the expenses of
redemption instead of making it a charge upon the public.
But the city banks had found the burdens of redemption,
under the conditions above described, too heavy, and
had discontinued the arrangement. Confusion resulted,
and discounts on country notes ranged as high as 6 per
cent. a This was a great source of profit to those who
" shaved" notes and a high tax upon the public. It will
be observed from the table, before given, that the circulation of the city banks had been reduced in 1839 about
25 per cent, while that of the country banks had decreased about 50 per cent. Of course the above conditions affected the country-bank circulation more severely.
This confusion of 1839 became intolerable, and in May,
1840, the legislature passed a law requiring all banks,
whether free or safety-fund, outside of New York, Brooklyn, or Albany, to appoint an agent and open an office in
New York or Albany for the redemption of their notes at
not more than one-half per cent discount. The commissioners' report in January, 1841, stated that the law was
operating with great success and was producing general
uniformity in the value of country paper. The promptness of the country banks to redeem produced confidence
in the soundness of their condition. 6
a

Knox, p. 408; also Assem. Doc. 44 1840, Vol. II, pp. 6 et seq.
& Assem. Doc. 64, 1841, Vol. I l l , p 6.




307

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Commission

The bank commissioners again called attention to the
fact that the vice of banking had always been to invest
in "accommodation paper." The effect was to increase
or decrease the currency according to the supposed wants
of business rather than its real needs. Banks should confine themselves more to business paper as security for
loans and discounts. 0 The commissioners in 1841, in
contrasting the free banking system with the safety-fund
system on this point, pointed out that the free banks
could not use their capital to any extent in their discounting because it was invested largely in securities deposited
with the comptroller for notes issued. Their ability to
make excessive issues was restricted. They could not
rely upon these securities to provide for the ordinary
redemption of notes, but must rely upon payments due
on notes discounted. They must, therefore, confine their
loans to business paper on short time and paid at maturity as a general rule. The profits of note issue were not
so great under this system, because of the necessity of a
dollar-for-dollar security, purchased and deposited with
the comptroller. The safety-fund banks, on the other
hand, had entire control over their capital and employed
it, together with their credit, in discounting and issuing
notes. The profits which came to the safety-fund banks
from this privilege produced " a n unavoidable tendency
toward excessive issues." The banks were tempted to
loan on accommodation paper to keep their notes out and
facilitate enterprises that were either doubtful or required
a long time to enable them to repay the loan. h In this
« Assem. Doc. 44, 1840, Vol. II, p. 16.
& Assem. Doc. 64, 1841, Vol. Ill, pp. 10-12.




308

Safety-Fund

Banking System in New York

temptation of the safety-fund banks we find much to
explain the worthless assets of the banks whose failure we
are now about to describe.
2. BANK FAILURES I840-1842; CAUSES.

During the years 1840-1842 bank failures followed one
upon another in rapid succession, in the order named
below:
(1) City Bank of Buffalo.
(2) Wayne County Bank.
(3) Commercial Bank of New York City.
(4) Bank of Buffalo.
(5) Commercial Bank of Buffalo.
(6) Commercial Bank of Oswego.
(7) Watervliet Bank.
(8) Clinton County Bank.
(9) Lafayette Bank, New York City.
(10) Bank of Lyons.
(11) Bank of Oswego.
Some causes of these failures we have already suggested in general terms. Three of them had secured
their charters in 1834 and five more in 1836, when the
mania of speculation was at its height. Thus eight, out
of the total of eleven, had begun their careers under the
immediate temptation to reckless banking, under the
direction of officers who in some cases had shown an
almost incredible disregard of any interests but their
own private gains. There had been charges of political
motives in granting some of these charters and there
existed a bad system of stock distribution, already described in detail, by which there was the chance that the




309

National

Monetary

Commission

stock of a bank would fall into the hands of a few men
who were interested primarily in the speculative side of
banking. Stockholders secured the funds with which
to purchase stock by borrowing it and, in some cases,
hypothecating the stock of the new bank as security.
Then, the next move was to secure a loan from the new
bank, after it opened for business, in order to repay the
old loan. Thus, was more than one bank weakened,
because its stockholders did not really possess capital to
invest in banking, but themselves borrowed in order to
reap the profits from the ownership and sale of bank
stock. The investigations of 1835 and 1837, which have
been detailed in the preceding pages, revealed certain
evils which legislation tried to remedy to some extent,
but which showed the greed of bank officers; the lack of
moral responsibility on the part of directors and officers
to the stockholders and to the public; and the conception
of banking, even the privilege of note issue, as a private
business, organized purely for gain. There had been too
much loaning to officers and directors, sometimes for
questionable purposes, and often on insufficient security.
There had been too large loans to individuals, and often
upon paper created to secure the loan, and often renewed
at maturity, that is, upon accommodation paper rather
than upon business paper falling due in a short time and
not often renewed. The country banks, in order to
increase profits, were constantly tempted to extend their
note issues beyond prudent limits, and upon doubtful
security. The public, moreover, were not so watchful
as to the notes, because the resources of all the banks were
pledged to secure the notes of each one. It was, there-




310

Safety-Fund

Banking

System in New York

fore, easier, if the bank officers were willing to take the
risk, to force a large circulation upon the public, not always in response to the needs of trade. There had not
yet developed a proper theory of reserves for the demand
obligations of a bank in notes and deposits. In fact,
those interested in banking seemed so unconscious of the
rapidly developing deposit business and its claim to a
reserve to meet demands, that when the serious failures
occurred they were surprised that the law of 1829 had
made the fund responsible for anything but notes. Too
little specie was kept as a basis for sound banking, but
this defect, too, was in process of remedy. It is noteworthy that only two of the banks that failed were New
York City banks, and one of these paid its obligations
to the public in full without withdrawing anything permanently from the bank fund.
The specific causes of failure for each bank, so far as we
have been able to gather them, will now be presented:
CITY BANK OF BUFFALO.

In a debate in the legislature in 1841 on this bank
the charge was made that it had begun business in 1836
without real capital. The subscribers for stock gave
their notes to secure the money with which to pay up
the capital stocks It was also stated in debate that John
B. Macy, the president of the bank, was indebted to the
institution to the amount of about $100,000 on doubtful
security, and another officer to the amount of $60,000
on fancy stocks and corner lots in Toledo. 6 The Argus




a Semi weekly Argus, Jan. 26, 1841.
&Semiweekly Argus, Feb. 2, 1841.
311

National

Monetary

Commission

of February 7, 1840, issued a few days after the failure
of the bank, quotes the charges of distribution of the stock
of the institution to politicians at the time of its organization, and, in an editorial, points out the fact that a part
of the state canal funds are in the bank, intimating an
attempt on the part of state officers to support the bank.
The bank commissioners asked for an injunction and a
receiver in November, 1839. The hearing was set for the
first Tuesday of December and, in the meantime, a temporary order was granted. The bank asked for an extension, which was granted until January, 1840, and then
until February 3, 1840. On the latter date no one appeared for the bank and the receiver was appointed. In
March the receiver reported that some of the books were
not posted up and that the accounts with persons and
banks "were in an unsettled state. , , a Much real estate
was held by the bank as security. It appeared that, after
the injunction had been served, some of the officers made
an arrangement with certain individuals "whereby an attempt was made to extinguish certain debts, and to create
liabilities against the same in violation of the injunction
and in fraud of said bank "b It seems that too long a
time elapsed between the request for an injunction and the
final hearing, which gave an opportunity for this attempt
at fraud on the part of the officers. Certain securities
were given up to debtors of the bank in exchange for property worth very little. This was done through a committee of directors which never reported.
aAssem. Doc. 87, 1841, Vol. IV.
6 Assem. Doc. 108, 1841, Vol. IV; also Doc. 144 m same volume.




312

Safety-Fund

Banking

System in New York

The assets showed reckless banking or bad judgment.
Bonds and mortgages were held by the bank, valued at
Which the receiver estimated at
Bills discounted, considered " good "
Bills discounted, considered "doubtful"
Bills discounted, considered " b a d "

$178, 508
67, 534
64, 360
83, 643
182, 850

"The receiver is of the opinion that from the whole
amount of bills discounted, the sum of $100,000 may be
realized."® The names of the makers of the paper discounted are given on pages 22-32, and there was probably
a large quantity of " accommodation paper." There were
large debts to officers and directors without good security.
WAYNE COUNTY BANK.
The bank commissioners reported to the legislature on
the affairs of this bank. 6 It was directed chiefly by the
cashier until May, 1840, when he resigned. He was given
a free hand by the directors and large profits became the
ruling purpose. Improper practices resulted. The cashier, according to report, practically chose the directors
through the proxies of nonresident stockholders. The
commissioners regarded this lack of care on the part of the
directors as the chief cause of what followed in the history
of the bank. The cashier, tempted by his power, engaged
in speculation for years and drew large sums from the
bank by discounts to others who were ostensibly interested in the speculations, but who were used really to disguise the loans on the books, so that the cashier's name
might not appear. Doubtful securities were substituted
for what were probably good ones at first. When the




« Assem. Doc. 87, 1841, Vol. IV, p . 33.
& Assem. Doc. 172, 1841, Vol. V.
313

National

Monetary

Commission

new officers came to readjust the affairs of the bank, they
found worthless securities and bad debts.
COMMERCIAL BANK OF N E W YORK CITY.

This bank was also the victim of its cashier and the
speculation of the times. It was charged with the loss of
more than one-half its capital and an injunction granted.
The bank had purchased, in September, 1841, from its late
president, $140,000 of its own stock at 20 per cent below
par, and had applied about $55,000 of this stock to the
payment of a debt due the bank from the president.
Valuable securities were allowed to be withdrawn and
others substituted that were doubtful. The cashier embezzled $56,000, concealing it by a memorandum counted
as cash. He put in circulation bills of the bank for his
own benefit without recording them on the note register.
He had continued such practices for four years, beginning
during the mania for speculation in 1836-1837. Speculation was not confined to the cashier.^ Here are some of
the items still due the bank in 1843: 6
Bills discounted, under protest
Loans on stocks or other securities
Overdrafts
Defalcation of late cashier

$288,212
115, 059
71, 959
56,000

BANK OF BUFFALO AND COMMERCIAL BANK OF BUFFALO.

The Buffalo banks, it will be remembered, had been
already under injunction in 1837. They had apparently
been closely watched by the commissioners. They had
been examined for a period of a week in July, 1841.




a Assem. Doc. 29, 1842, Vol. I I , pp. 12-13.
b Assem. Doc. 75, 1843, Vol. I l l , p . 1.
3H

Safety-Fund

Banking

System in New York

They possessed assets of real estate, bonds, mortgages, and
personal securities, unavailable for banking purposes, at
least under pressure. But it was represented by the
officers that most of these assets were worth the valuation
on the books of the bank. It was not possible to determine what part of the capital was impaired. The commissioners could not, therefore, apply to the court. In
one of these banks there was a debt against a single firm,
of which the late president, now deceased, had been a
member, to the amount of one-half the capital of the
bank, besides a large personal debt against the late president himself. This joint debt, incurred before 1839, had
been secured during that year by a mortgage on property
in another State, which has since proved of little value.
In October, 1841, it was discovered that the Bank of
Buffalo had issued notes beyond the legal limit. An
injunction was granted within ten days. It was found,
however, that during this time many of the depositors
had become alarmed and had withdrawn their funds.
They were paid in bills of the bank—an utter violation of
law. a The commissioners in 1843 declared, concerning
this bank, that the nature and magnitude of the frauds
were " unprecedented in the history of banking in this
State." 6 Other overissues were discovered when the
comptroller began to redeem the notes out of the safety
fund. Already, at the time of this report, January, 1843,
the comptroller had redeemed $237,731 over the legal
limit, which exceeded the amount given in the engraver's
oAssem. Doc. 29, 1842, Vol. I I , pp. 14-16 for above.
& Assem. Doc. 34, 1843, Vol. II, pp. 16 et seq.




3i5

National

Monetary Commission

account by about $143,000.® In November, 1842, the
three commissioners consulted the books of the bank
again, and summoned officers and directors. I t was
shown that the officers had sworn falsely in their reports.
They were indicted for perjury. 6
In November, 1841, the Commercial Bank was examined and an overissue of $180,000 was found. The
cashier swore that these notes were in the possession of
agents at New York and Albany and had been redeemed.
It was discovered, on inquiry at Albany, that the president of the bank had received notes to a large amount
from the redemption agents, but had again put them in
circulation. An injunction was at once secured. The
overissue amounts to about $190,000, but about $60,000
of this amount the bank claims as its property, not in
circulation.* There were no penalties upon bank officers
for overissue, but penal enactments would not have been
adequate to reach the evil. Registration of notes by a
state official was needed.
COMMERCIAL BANK OF OSWEGO.

The bank commissioners in 1842 reported that it was
understood that this bank, when organized in 1836, fell
under the control of irresponsible persons, and that its
funds were, to a large extent, applied to the payment of
shares, and to the private speculations of its managers.
The management changed in 1840 to men of known
integrity, but in April, 1840, the bank was found in an
<*Assem. Doc. 34, 1843, Vol. I I , p . 19.
b Ibid., p . 20.
c Assem. Doc. 29, 1842, Vol. I I , pp. 14-16 for above.




316

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Banking

System in New York

embarrassed condition. The books showed a debt against
one person to an amount equal to one-half the capital.
Large sums were long overdue, with poor security. The
effort to save the bank was of no avails
WATERVIJET

BANK.

The cashier fled in 1841, at the discovery of gross frauds
over several years. These had been concealed by false
entries and perjury. A new cashier was appointed, but,
owing to the depreciation of securities, the bank could not
proceed. The failure was brought about by allowing the
entire care of the affairs of the institution to rest in the
hands of a single officer.6 The bank had hypothecated
its own notes, which, although not illegal as long as within
the authorized limit of issues, was bad banking. c At the
sale of the assets of the bank, the comptroller, through his
agent, bought the following:
Notes and drafts against Peter Comstock
Bonds and mortgages of Peter Comstock

$113, 098
106, ooo

The comptroller thinks that very little can probably be
collected on these. It shows too large loans to an individual on poor security. d
C U N T O N COUNTY BANK.

This bank suspended payment of its notes at its agency
in Albany in December, 1841/ Its credit was so affected
by this suspension, temporary though it was, that its
a Assem. Doc. 29, 1842, Vol. II, pp. 16-18.
b Assem. Doc. 34, 1843, Vol. II, pp. 7-8.
c Semiweekly Argus, July 19, 1842. Statement from the comptroller's
office, July 13, 1842.
d Assem. Doc. 4, 1848, Vol. I, p. 77, comptroller's report.
« Assem. Doc. 29, 1842, Vol. II, p. 18.




317

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Monetary

Commission

whole circulation came in for redemption, and the bank
failed in April, 1842. It, too, was chartered in 1836, and
for several years had been " almost exclusively managed
by its president and cashier without the care or supervision of the board of directors.'' The officers appropriated the funds to private purposes or for their favorites
in the shape of loans and discounts. These speculations
by the officers threw heavy losses upon the bank, because
the security given for the loans proved worthless. a
LAFAYETTE BANK OF N E W YORK CITY.

An injunction was granted on the ground that this bank
had lost over one-half of its capital. It has met all its
claims to the public and one-half of its capital stock.
Large loans to its directors and others for speculation
caused the failure.6
w

BANK OF LYONS.

Chartered in 1836, this bank is said to have fallen under
the control of two persons who paid large premiums to
secure a majority of the stock. These persons borrowed
money to do this, and then repaid it by abstracting the
amount from the bank, and depositing notes and securities. About three years before failure, a new management came into power and tried to save the bank, but a
serious decline in the assets, which were not readily convertible, made the task an impossible one.c
After the affairs of these banks, which had failed during 1840-1842, had been settled in part by the receivers,
the senate, impatient at the delay and suspicious that




a Assem. Doc. 34, 1843, Vol. II, pp. 14-15.
6 Ibid., p. 6.
c Ibid., pp. 15-16.
3i8

Safety-Fund

Banking

System in New York

the receivers might not be very faithful in all cases, asked
their committee on banks in 1845 to investigate the affairs
of the receivers and reports The following from that
report throws much light upon the causes of failure:
Amount of
assets at
time the receiver took
charge.

Bank.

City Bank of Buffalo. _ _
_
Bank of Buffalo
Commercial Bank of Buffalo _ _
Wayne County Bank
Bank of Lyons

$739,oi7
1,221,843
985,064
293.970
385,608
213,353

Clinton County Bank
Commercial Bank of New
York
Watervliet Bank
Commercial Bank of Oswego._

543,430
858.472
202,379
507,173

Amount re- Amount of
Estimated
alized from assets unsold value of unassets sold.
sold assets.
in 1845.

$166,576
82,837
172,864
56.744
37,445
32,693
76,019

$570,000

$50,405

456.447
246,201
236,229
163.813
64,382

49,690

303,339
19,459
80,653

301,406
204, 137
94,087

33,638
11, 534
12,753

10.52S

These assets tell a story of reckless and fraudulent
banking, culpable conduct on the part of officers, and the
ordinary depreciation that always accompanies a period
of panic.
Now, the chief items in the bank statements of at least
a part of the insolvent banks, over the period from their
organization until their failure, may prove enlightening
as to the kind of banking done during solvency. It must
be admitted, however, that the developments following
failure showed that, in some cases, false statements had
been made. Bank officers were not apt to show in their
reports a dangerous state of affairs, and we have the bank
commissioners' statement that the banks prepared for
these annual reports by curtailing loans, etc. 6
« S. Doc. 118, 1845, Vol. I l l , p. 6.
& Assem. Doc. 29, 1842, Vol. I I , p. 20.
24635—10




21

319

National

Monetary

Commission

Chief items of annual statements of banks that failed,

1840-42.

[Amounts are expressed in thousands of dollars.]
Name of bank and capital
in full.o

Year. Loans and
discounts.

1. City Bank of Buffalo
(capital, $400,000) — 1836

Circulation.

Specie.

Deposits.

Dividends
in per cent
of capital.

105

32

41

(b)

661

235

19

50

656

(>)

298

41

58

(*>)

1839

2. Wayne County Bank
(capital, $100,000)

298

1837
1838

703

269

13

13

<*)

1830
1831
1832

244

157

1833

249

1834
1835
1836

237

i59
137

7
5
6
7
8

11

10

238

150

14

18

10

218

130

10

9

10

1837
1838

224

114

10

11

246

141

10

S3

15

1839
1840

228

119

29

10

250

144

9
4

713

109

42

105

1,151
1,092

189

5o

224

217

166
85

4

84

8
8
8

195
169

13

6

3. Commercial Bank of
New York (capital,
$500,000)

1834
1835
1836
1837
1838

809

183

5i
52

754

230

57

1839
1840

769

i57

5i

123

776

121

55

129

129

1XA
8

13

4. Bank of Buffalo (capital, $200,000)

1831
1832

285

122

19

1833

299

164

34

1834

384

134

33

1835
1836

427

226

30

459

182

36

1837
1838

417

181

439

187

1839
1840

360

8
8
8
8

22

45
66
87
54

26

92

123

25

125

8
8

386

196

16

123

568
653

192

84

85

273

47

114 i

4

5. Commercial Bank of
B u f f a l o (capital,
$400,000)

1834
1835

8

a For the basis of the figures in these tables, see the report of the Bank Commissioners
for the various years, in Assembly Documents.
6 No dividends.




320

Safety-Fund

Banking System in New York

Chief items of annual statements of banks that failed,

Name of bank and capital Year. Loans and
in full.
discounts.

5. Commercial Bank of
Buffalo, etc. (continued) _

Circulation.

1840-42—Continued.

Specie.

Deposits.

Dividends
in per cent
of capital.

1836

701

152

43

1837

622

237

21

51

1838

635

298

30

96

1839

640

iS5

32

134

4

1840

642

247

40

223

8

1836

4i5
361

160

20

25

1837

144

ir

14

4

1838

416

182

21

26

5

1839

497

142

9

21

8

1840

402

216

8

52

153

19

6. Commercial Bank of
O s w e g o (capital,
$250,000)

7. Watervliet Bank (capital, $250,000)

476

83

17

1837

383

42

17

1838

450

161

17

1839

392

97

52

4

1840

410

119

12

28

9

1841

8. Clinton County Bank
(capital, $200,000)

1836

400

115

3

23

20

16

1836

262

1837

248

1838

33&

1839

95
54

6

54

36
53

11

15

125

11

21

336

125

11

21

1840

397

194

11

20

1841

347

168

1834

690

98

47

79

183S

841

141

58

127

1836

1.059

205

106

135

4
12

5

14

8

7

9. Lafayette Bank, New
York City (capital,
$500,000)

iH
8

1837

717

34

41

110

4

1838

760

IOI

33

124

12
4

1839




9i

27

84

S83

95

33

167

1841

10. Bank of Lyons (capital, $200,000)

660

1840

477

72

51

63

1836

337

182

24

14

1837

3SS

172

9

14

1838

343

166

17

19

1839

323

125

8

12

1840

310

ii5

10

23

1841

290

81

10

11

321

3V*

12

8

National

Monetary

Commission

The statements, just presented, add little to what has
been already described in the banking practices of the
period. Too little specie was kept on hand to enable
the banks to withstand pressure. In some of these banks
the circulation was not contracted with prudence as the
panic came on. We must consider the figures given in
connection with the practices described as causes of
failure. The loans and discounts may not appear excessive, but if a large amount is loaned on accommodation paper, often renewed, or to the officers or others on
poor security, then in time of pressure the condition of
the bank becomes serious. The circulation may not even
approach the legal limit, and yet, if many of the notes
are put in circulation on paper which had no immediate
connection with past business transactions, and which is
not likely to be paid at maturity, the resources of the
bank endanger its solvency. In several of the banks it
is evident that the specie fluctuated rapidly with the demands for note redemption, or the demands of depositors.
The average dividends were not excessive, but they
varied much from year to year.
The commissioners, in their report in January, 1842,
declared that "confiding to the president or cashier, as
the case might be, the unrestricted control over the
affairs of the bank has, in our judgment, largely contributed to the downfall of all the safety-fund institutions which have failed during the past year." a When
the directors were thus neglectful, the temptation of
the officers was often too strong and they and their friends




o Assem. Doc. 29, 1842, Vol. I I , p. 5 et seq.
322

Safety-Fund

Banking

System in New

York

exploited the bank. The law was sometimes evaded by
artifice.
It was also pointed out that the commissioners were
often powerless to prevent a failure because the bank was
not violating any positive law which would justify an
appeal to the court for an injunction. It was often difficult to ascertain when the capital was impaired, because
the officers, in order not to be compelled to suspend dividends, represented a debt as good when it was doubtful
or worthless. Thus the bank might be utterly ruined
before proof was secured.a In their next report the commissioners recommended that their powers be extended
so that "they-may be authorized to arrest the proceedings of any bank whose operations, however conducted,
shall, in their opinion, be adverse to the interests of the
stockholders or the safety of the public. "b
The report in 1842 emphasized a practice of which
some of the insolvent banks had been guilty, the hypothecation of their own notes as security for loans. By this
practice banks that "have become embarrassed by improvidence and bad management and which, if standing
on their own credit alone, would be unable to extend their
already ruinous liabilities, are now enabled, upon the
security of the fund, not only to sustain an unsound circulation but virtually to compel those banks which are
managed with prudence and success to become their
sureties." 0 I t does not alter the case that the pledge
of notes must not exceed the legal limit. The Comp-




fl Assem. Doc. 29, 1842, Vol. I I , p. 10.
b Assem. Doc. 34, 1843, Vol. I I , p. 11.
c Assem. Doc. 29, 1842, Vol. I I , pp. 18-19.
323

National

Monetary

Commission

troller in his report of the following year called attention
to the same evil practice and asserted that most of the
banks which had failed had kept up for years by loans
from banks and brokers, and, in some cases, from the
canal fund, "on pledges of the notes of such banks,
which were in effect a mortgage upon the safety fund." 0
It is probable that high rates of interest were frequently
offered for such loans. This practice of hypothecation
was prohibited under severe penalties by a law passed
April 12, 1842.b It was a fact that when the comptroller began to redeem the notes of the insolvent banks
from the fund, large sums were presented by banks and
brokers. It is probable that at least a part of them were
obtained in the manner above stated. 0 .
It will be evident that a part of the responsibility for
these bank failures must be placed upon the imperfect
system under which they occurred. The system of distributing bank stock as well as the manner in which the
charter itself was secured, the lack of a system of registering the notes issued to prevent illegal issue, the use
of the funds of the bank by its officers, the tolerance of
the practice of hypothecation of a bank's own notes as
security, were all finally remedied by amendments to
the banking law, in some cases too late to prevent insolvency. Some had advocated a definite specie-reserve
requirement, but it met with little favor.d The panic of
1857 was needed to emphasize the lessons already begun
as to sound banking.
a Assem. Doc. 10, 1843, Vol. I, p. 53.
&Semiweekly Argus, April 29, 1842, for full text.
c Assem. Doc. 4, 1844, Vol. I, p. 53.
d Daily Argus, Jan. 3, 1838, governor's message.




324

Safety-Fund

Banking

System in New York

If we are to credit the estimate of the bank commissioners and others in touch with the situation, many of the
evils we have described would have occurred in any system. They put especial emphasis on the custom, so frequent, of allowing the affairs of the bank to be managed
by one or two officers. They blamed the stockholders for
not requiring more care from the directors, and the directors for allowing themselves to be "men of straw." But,
at the same time, it was declared unfair to prevent voting
by proxy. Then it was not a matter for legislation to
reach, but rather for experience to show the necessity of a
more rigid accountability of directors and for business
progress and wisdom to put a premium on a stricter responsibility of bank officers to the public and those whom
they served. Of course legislation could and did place
restrictions about the election of directors and impose
penalties for violation of trusts. With irresponsible persons once in control of a bank, the results which we have
described in the insolvent banks naturally followed.
Iyoans were concealed and false statements made; good
securities were replaced by worthless ones, and speculation for personal gain threw large losses upon the bank
because the security given for loans was not required to
be first class.
Legislation had provided bank commissioners to inspect the affairs of the banks at least quarterly, and yet
the governor in 1843 stated that it was evident the appointment of these officers "has not answered all the
valuable ends which were anticipated."® He could not
see how such complete insolvency as had just been shown
« Semiweekly Argus, Jan. 3, 1843, governor's message.




325

National

Monetary

Commission

to exist in some of the failed banks could escape their
notice. In 1829, when this subject had been debated,
some declared that commissioners would have to depend
on the statements of bank officers anyway and, therefore,
would not accomplish the purpose desired. Before 1837,
one commissioner was appointed by the governor and
senate and two by the banks themselves. After that
date all were appointed by the governor and senate.
Charges of political influence in appointment and of incompetency were made. If these charges were true, it
may account for some of the practices of banks being
overlooked. But no doubt many times the commissioners were deceived, and, by their own statement, they
were often powerless to prevent practices until it was too
late. Instead of increasing the power of the commissioners, however, the office was abolished in 1843. The
committee which reported on this bill to the assembly
declared that "experience has demonstrated that when
bank officers are honest, commissioners are unnecessary;
when they are dishonest, commissioners are unavailing."*8
It is certain that the commissioners had accomplished
more than the above statement gives them credit for, and
we have preserved inspection as a part of our present
banking system. b
oAssem. Doc. 154, 1843, Vol. VI.
b The report of the Comptroller of the Currency of the United States,
1908, Table 66, classifies the causes of failure of 496 national banks from
1865 to 1908. He finds that the largest number of failures occurred from
(a) injudicious banking and depreciation of securities, 66 failures; (b)
general stringency of money market, shrinkage in values, and imprudent
methods of banking, 50 failures; (c) wrecked by cashier, 33; (d) excessive loans to others, injudicious banking, and depreciation of securities, 33;
(e) excessive loans to officers and directors and depreciation of securities, 29.




326

Safety-Fund

Banking

System in New York

3. THE; ACTUAL BURDEN OF THE BANK FAILURES UPON
THE SOLVENT BANKS AND THE PUBLIC.

The problem to be solved by the comptroller was how
the bank fund was to be used to meet the rapidly accumulating charges upon it from insolvent banks. The
act of 1837 (chapter 350), before described, gave the comptroller authority to redeem the notes of insolvent banks at
once, instead of waiting until all the affairs of the banks
had been settled, on condition that one-third of the fund
be preserved for other debts than notes. a But this act
did not authorize the comptroller to call upon the solvent
banks to replenish the fund, except under the law of 1829,
which would require him to wait until all the affairs of the
insolvent banks had been settled and thus find out whether
the fund was permanently diminished. The act of May
26, 1841 (chapter 292, sec. 5), provided that, when the
comptroller applied any money of the fund to the payment of debts of banks, and the fund was thus reduced
below the sum provided for in the act of 1829 (3 per cent
of capital), he might call on the safety-fund banks for an
additional contribution, not to exceed one-half of 1 per cent
on the capital. 6 Some of the banks last chartered had
not yet made up their original 3 per cent on their capital.
The new law was construed by the comptroller so as to
require these banks to pay double (1 per cent) until the
original 3 per cent was completed. Nine banks did actually pay more than one-half of 1 per cent annually until
their original 3 per cent was completed.0 This did profit Assem. Doc. 15, 1842, Vol. I, pp. 32-33, comptroller's rept.
&Ibid., p. 34.
cS. Doc. 145, 1847, Vol. IV, p. 49.




327

National

Mon etary

Commission

duce a slight inequality between banks, due to the time of
securing their charters, if we consider what a bank had to
pay in any single year.
By January, 1841, the capital of the bank fund amounted
to $914,342.24. The comptroller, therefore, by the law
of 1837 requiring him to keep one-third of this amount
for other debts than notes, could only expend about
$610,000 in redeeming the notes of insolvent banks. 0
The City Bank of Buffalo and the Wayne County Bank
had failed in 1840 and their notes were being redeemed
by the comptroller. Up to September, 1841, when the
Commercial Bank of New York failed, the comptroller
had paid out about $428,000 to redeem notes of these
two banks. 5 Up to January, 1842, he redeemed $118,631
of the notes of the Commercial Bank. c This left the
comptroller but a small part of the original $610,000
which he felt authorized to devote to notes of insolvent
banks. Then the Bank of Buffalo failed in November,
1841, with an apparent circulation of about $290,000.d
The comptroller did not regard himself as authorized to
redeem the notes of this bank without further legislation,
since to do so would encroach upon the part of the fund
reserved for other debts.
The bank commissioners so construed the act of 1837
as to permit the comptroller to go on redeeming notes,
and the situation was also somewhat relieved by the
additional contributions of one-half per cent called for
a Assem. Doc. 15, 1842, Vol. I, p. 40.
& Assem. Doc. 13, 1841, Vol. I, p. 51, and Doc. 15, 1842, Vol. I, p. 85.
c Assem. Doc. 15, 1842, Vol. I, p. 39.
^The actual circulation later discovered to be over $400,000, due to
fraudulent overissue.




328

Safety-Fund

Banking

System in New York

by the comptroller under the act of 1841 and due January, 1842. Other failures followed and the fund proved
inadequate, since a part must be reserved for other debts
than notes. The comptroller stated in his report that he
could not redeem any more notes without legislation, and
that the note holders must await the slow accumulation
of the one-half per cent yearly contributions. a
April 12, 1842, the legislature passed an act authorizing the comptroller, on order of the court, to take
measures to redeem the notes of the insolvent banks at
once, and to apply any or all of the fund to this purpose
in the order in which injunctions had been granted against
the bunks. The fund was to be reimbursed out of the
assets of the failed banks. This act also provided that,
after all liabilities already incurred had been discharged,
the fund should be applied to the payment of the notes
only, of failed banks. It provided for a severe penalty
upon bank officers who issued notes beyond the legal limit.
The act further granted to the solvent banks the right to
commute their annual contributions for the next four,
five, or six years in the notes of the insolvent banks,
allowing them interest at 7 per cent on the amounts
commuted until the same would have been regularly due. 6
Sixty-four banks took advantage of the privilege of
commuting in the notes of failed banks. They paid in
$477,609, which amounted to a redemption of this sum
from the bank fund.c In this advance payment of the
notes of failed banks the solvent institutions were allowed
o> Assem. Doc. 15, 1842, Vol. I, p. 41.
& Semiweekly Argus, Apr. 29, 1842, for full text.
c Assem. Doc. 10, 1843, Vol. I, p. 50, for details.




329

National

Monetary

Commission

to pay in the bills of any of the insolvent banks regardless of the order in which the injunction had been granted.
This was inconsistent with the law of April 12, 1842.
At this time " a large portion of the outstanding notes of
the insolvent banks was held by banks and brokers,
where, in many cases, they had been left on deposit as
security for loans." a These holders of packages of notes
pledged as security for loans ought not to have been
treated the same as the general holder of notes in actual
circulation. Obviously, this privilege of commuting,
allowed to banks, was unfair to the general body of note
holders, especially holders of notes of banks which failed
early.
In May, 1843, an injunction was served on the comptroller, forbidding him to pay any portion of the bank
fund to the creditors of any bank failing since the Bank
of Buffalo, without reserving sufficient to pay all creditors of the Bank of Buffalo and those banks failing prior
to the Bank of Buffalo. The object was to protect the
depositors and other creditors of these banks. b Until all
the debts of these four banks were paid, not even the
notes of the banks that failed later could be redeemed.
The comptroller suggested that the legislature authorize
the issue of state stock to pay all the charges on the
bank fund, the stock to be redeemed out of the future
contributions to the safety fund by the solvent banks. c
During 1844 the comptroller continued to redeem the
notes of the four banks allowed under the injunction




< Assem. Doc. 4, 1844, Vol. I, p. 53.
*
&Ibid., p. 51.
clbid., p. 54.
330

Safety-Fund

Banking

System in New York

above mentioned. Up to September 30, 1844, he had
redeemed $1,502,170 of the notes of the failed banks,
including the amount commuted. a The amount of the
bank fund at this same date was $145,493.72. (See
Assem. Doc. 25, 1845, Vol. I, p. 50.)
Inquiries were made of the receivers of the insolvent
banks in December, 1844, as to the probable draft on the
safety fund necessary to pay other debts than notes, after
the assets of the failed banks had been applied. The
receivers estimated it at $1,017,000.6- The suggestion of
the comptroller as to the issue of state stock to secure
funds with which to pay all these debts was followed by
the legislature in 1845, when an act was passed authorizing
the issue of 6 per cent state stock, secured by the future
contributions to the fund.c
The comptroller was now in a position to settle all claims
against the safety fund, whether consisting of notes or of
other debts. A summary of debts paid out of the fund
and the final burden on the fund, after the assets of the
failed banks had been disposed of as far as possible, will
now be presented.
a Assem. Doc. 25, 1845, Vol. I, p. 32, for details.
& Ibid., p. 51.
c Assem. Doc. 25, 1846, Vol. I, p. 55.




331

National

Monetary

Commission

Statistics of the transactions of the failed banks with the safety fund.

Name of bank.

City Bank of Buffalo
Wayne County Bank
Commercial Bank of New York
City
Bank of Buffalo
_
Commercial Bank of Buffalo
Commercial Bank of Oswego
Watervliet Bank
Clinton County B ank
.
Bank of Lyons
Lafayette Bank, New York City _ _
Not specified
Total

a

Receipts
burPayments to Other debts from as- Finalupon
sets, paid den
redeem notes.
paid.
fund.
into fund.
$99,996

£317, 107
113.131
139,837
435.540
186,861
163,162
134,107
71,896
52,898

$217,111
129,209

7,i88

278,778
584,781
606,376
239,12a
198,333
228,153
88, 990
38

$16,078
146,129
149,241
424,515
78,352
77,484
156,257

5.000
2,392
13.258

40,053

3.76i

1,088,109

138,077

38

6,482

725
1.615,302

2,565.334

a The figures for the City Bank of Buffalo may be verified by reference to Assem. Doc.
25, 1846, Vol. I, p. 33, for the amount of notes redeemed from the fund. Then for the
final charge upon the fund, after all that could be realized from assets had been paid to
the safety fund, see Assem. Doc. 9, 1851, Vol. I, in the table showing charges against the
fund at that time. The rest of the first column will also be verified from the latter document, except for the Watervliet Bank and the notes " n o t specified." To verify the notes
redeemed for the Watervliet Bank refer to Assem. Doc. 5, 1847, Vol. I, p. 40. For the
amount of notes " n o t specified" reference must be made to the comptroller's reports
following 1850, and the sums were found to aggregate $725.
The second column will be verified from Assem. Doc. 9, 1851, Vol. I, in the table showing charges against the fund for other debts than notes, except for the Watervliet Bank.
But in this same document, p. 32, the comptroller explains t h a t since the close of the
year (Sept. 30, 1850) he has issued stock to the amount of $5,424.78 to pay the remaining
creditors of the Watervliet Bank. He had already issued stock for $72,059.31 for the
debts of this bank (p. 35). The two amounts total $77,484, which is the amount in the
table.
The third column, consisting of the receipts paid into the fund from the assets of the
insolvent banks, is the same as found in the table of L. Carroll Root, "Sound Currency,"
.Vol. II, No. 5, p. 11 and in the " R e p o r t of the Monetary Commission of the Indianapolis
Convention," Indianapolis, 1900, p. 240, in footnote. I have verified all these figures
from the annual reports of the comptroller and the bank department, except the " n o t
specified." Here the figures are difficult to vouch for. The particular documents from
which the figures may be verified will gladly be given in detail, if desired. The last
column is simply an addition of the first two diminished by the third, which gives the
final charge upon the bank fund which must be made up by the contributions of the solvent banks.

Of the whole 11 banks which failed so near together only
2, the Lafayette Bank of New York and the Bank of
Oswego, were able to settle with their creditors and pay




332

Safety-Fund

Banking

System in New York

their notes without calling upon the fund for assistance.
The creditors were all satisfied after the long delay, either
by payments from the fund or by the issue of bank-fund
stock. The safety fund, therefore, was a claimant for the
amounts subsequently realized from the remaining assets
of the insolvent banks, up to the full amount advanced.
As a matter of fact, only a very small proportion of the
amount advanced was ever realized and paid back to the
fund, as shown in the above table. The conversion of
assets was slow. In some cases the receivers sold them
at public auction. The comptroller, in his report for 1846,
stated that he had sent an agent to such a sale of assets of
the City Bank of Buffalo, to bid on any assets which
seemed to be going at too great a sacrifice. He bought
assets of the City Bank, to a nominal amount of $470,000,
for $16,900.° This shows how worthless they must have
been. In cases where the receiver collected the assets, the
proceeds, after the expenses were deducted, were paid to
the comptroller from time to time. The third column in
the table gives the summary of all such collections, and to
secure the sums there given the yearly reports of the
comptroller and bank department had to be consulted in
order to find out what was turned into the fund from each
bank's assets.
The capital of the 11 insolvent banks amounted to
$3,150,000, most of which proved a loss to the stockholders. Only one of the failed banks had a capital so
small as $100,000, one had $150,000, three had $200,000,
two had $250,000, two had $400,000, and two had




«Assem. Doc. 25, 1846, Vol. I, p. 57.
333

National

Monetary

Commission

$500,000. Their total contributions to the bank fund
amounted to $86,279, whereas they drew upon the fund
for over $2,500,000.° Members of the legislature, the
bank commissioners, and others had frequently expressed the fear of too small banking capital, because
they feared an excessive note issue as compared with
resources. The small country bank usually exceeded the
amount of its capital in notes, and thus the public had a
larger claim upon its resources than upon the resources
of a larger bank which did not issue such a large proportion of notes. The failures of 1840-1842 do not show
that small banking capital proved fatal to the solvency
of the institutions.
The bank fund had proved inadequate to meet the demands from all the debts of the insolvent banks even by
the payment of the extra one-half per cent annual contributions provided by the law of 1841 to meet the emergency and replenish the fund. The law of 1845 had
authorized assistance by the issue of 6 per cent state
stock, to be redeemed by the future one-half per cent
contributions of the solvent banks. The comptroller
stated, in his report for 1849, that $900,828.47 in this
stock had been issued.6 This did not include the $77,484
afterwards issued to pay the debts of the Watervliet
Bank, so that altogether a little less than $1,000,000 in
state stock at 6 per cent was issued to pay the debts of
the insolvent banks. The 6 per cent annual interest
upon this stock was a charge against the fund and was
contributed by the solvent banks. The stock was re-




« Assem. Doc. 5, 1847, Vol. I, pp. 57-58.
& Assem. Doc. 5, 1849, Vol. I, pp. 30-31.
334

Safety-Fund

Banking

System in New York

deemed as fast as convenient from the contributions to
the fund.
How did the solvent banks meet the burden thus imposed? Banks chartered in 1829 took six years to pay
up their 3 per cent on capital at the rate of one-half per
cent annually. There were no additional contributions
called for until January, 1842. Therefore, the banks
chartered in 1829 and immediately following had a few
years during 1836-1841—how many years depending on
the year of their charter—during which they did not
contribute to the fund, having paid their full 3 per cent;
but banks chartered later, for instance in 1834, had
just finished their 3 per cent on capital required by the
original law of 1829 when the new call came to replenish the fund with an additional one-half per cent annually. After the first contributions, in January, 1842,
the solvent banks were compelled to contribute the same
amount, one-half per cent on capital yearly during the
remainder of their chartered existence, and some charters did not expire until 1866. This was due to the fact
that the safety fund had become mortgaged, as above
explained, and needed the contributions in order to redeem the state stock with interest at 6 per cent.
Therefore, before 1842 the banks averaged less than
one-half per cent on their capital in contributions to the
fund.a The exact percentages, as calculated from figa
S. Doc. 145, 1847, Vol. IV, pp. 1-49, gives in detail the amount contributed by each bank yearly up to 1847. This document also shows
how many banks commuted in the notes of failed banks, as allowed by
legislature, and the amounts so paid into the fund in advance, as was
explained on a previous page. I t shows also how many and what banks
paid more than one-half per cent and during what years, owing to the time
of receiving their charter and the call for additional contributions.

24635—10




22

335

National

Monetary

Commission

ures taken from the reports of the bank commissioners,
which state the annual total contributions and total
capital of safety-fund banks, ranged from one-half per
cent to .13 per cent on capital before 1842, the lowest
of course being in 1841, when a large part of the banks
had already completed their 3 per cent contributions.
The contributions following 1842 were regular, and were
intended to be one-half per cent on the capital. For the
whole period, 1830-1866, the amount paid by the solvent
banks would average a little less than one-half per cent
on their capital. The total contributed by the solvent
banks during the entire period was $3,119,999.24.° The
total payments from the fund for all the debts amounted
to less than $2,600,000, as the table already given shows.
The rest was paid, mainly, for interest on the 6 per
cent state stock advanced, under the law of 1845, to
meet the charges against the fund at that period.
Losses to note holders before the redemption of the notes of
insolvent banks; Canada's system.—As we have described,
the law of 1829 did not provide for immediate payment of
notes of insolvent banks from the fund, but only after
the final settlement of the affairs of the bank and after
the deficiency not covered by the assets of the bank had
a
This computation was made from figures taken from the reports of the
bank commissioners, the treasurer's reports, and the reports of the banking department, in Assembly documents, as given in Miss Hasse's document list on New York banking. The affairs of the safety-fund banks
were in the hands of the bank commissioners until 1843, when the office
was abolished. Then reports were made to the comptroller, and, finally,
in 1851, the banking department was established. The sum given is
somewhat different from that given by Mr. Root in "Sound Currency,"
Vol. II, No. 5, p. 12. He gives $3,104,999.51, which is not so different
from the above as to be a serious discrepancy.




336

Safety-Fund

Banking

System in New York

been ascertained.
When injunctions were procured
against the Buffalo banks in 1837 it was perceived that,
unless something could be done, the notes of these banks
would depreciate while the note holders waited for their
redemption or sold them at a discount. Therefore, the
law of 1837 provided for immediate redemption to prevent
losses from falling upon holders of notes of failed banks.
When the failures of 1840-1842 came so rapidly as to
exhaust the bank fund, the same problem arose. The
governor in his annual message, in 1843, recalls the fact
that the safety fund was designed mainly to protect note
holders and calls attention to the inadequacy of the fund
in the present situation. He further states that if no
part of the bills of failed banks are paid out of the assets,
the safety fund can not discharge, with present means
and future contributions, the obligations laid upon it for
bills alone, until January, 1849.° This shows clearly the
situation of the note holders, for notes pass current as
money and depend for their value upon being convertible
on demand or at least exchangeable. This situation was
relieved by the issue of state 6 per cent stock in 1845 to
secure funds with which to redeem all the notes of all the
failed banks, but the period from 1840 to 1845, when the
fund could not meet all demands for redemption, caused
great losses to the note holders, due to depreciation.
These losses can only be estimated. The comptroller in
his report, in 1845, stated that the losses to note holders
by depreciation had been at least $350,000. Not much
could have been lost after his report, for provision was at
once made by the act of 1845 for the redemption of the




a

Semi weekly Argus, Jan. 3, 1843
337

National

Monetary

Commission

notes. 0 As shown by the bank commissioners' reports,
the total circulation of the 11 failed banks at their last
report before failure was $1,723,366. Two of the banks
paid their notes without assistance, which diminished the
sum from which depreciation would likely result. The
amount last reported, given above, was no doubt different
from the amount at the time of failure and the amount
reported did not include the illegal overissues, but this
last reported amount of notes gives an approximation to
the actual amount outstanding at the time of failure.
The notes of the banks that failed first were promptly
paid, to the extent of over $500,000, and the solvent
banks commuted their future contributions to the safety
fund to the extent of almost another $500,000 in the notes
of insolvent banks. On these notes the depreciation could
not have been so great as upon the notes left unredeemed,
when the safety fund had been exhausted, until the time,
in 1845, when the state stock was issued to pay the remainder. The comptroller in his report, in 1846, says,
"The loss to first holders of the safety-fund notes was
from 20 to 25 per cent and there has been a loss of about
four years' interest to subsequent purchasers." 6
This
corresponds pretty accurately with the statement in the
previous report of the comptroller.
The need in case of the failure of a bank is for prompt
redemption to prevent depreciation. Canada, in her system, has a guaranty fund from which the notes of failed
banks are promptly redeemed, but, in addition, the notes
of failed banks draw interest at 5 per cent from the




a Assem. Doc. 25, 1845, Vol. I, p . 52.
& Assem. Doc. 25, 1846, Vol. I, p. 71.
338

Safety-Fund

Banking

System in New York

time of failure until redemption. This makes the notes
pass current and prevents depreciation. The notes are
a first lien on the assets of the bank. a
Of course' there must have been great inconvenience to
the depositors of banks that failed. It is also probable
that some sold their claims at a discount rather than wait
until they should be settled out of the bank fund. The
bank commissioners' reports show a total amount of deposits by individuals in the failed banks, at the time of
the last report before failure, of $681,204. Depositors'
accounts were finally settled out of the bank fund along
with other debts. The amount given in the above reports
does not necessarily correspond with the actual deposits
at the time of the failure of the banks. It is noteworthy
how much more important a place notes held at that time
than deposits. The reverse is the case to-day. Now the
temptation is to expand deposit credits, then the effort,
at least among the smaller country banks, was to keep a
large amount of notes in circulation.
The law of 1838, which provided for the organization
of banks under a general law instead of by special charter,
sought to secure only notes. It required a deposit of securities to cover the full amount of the notes in the hands
of the comptroller. These securities might be sold to redeem the notes of an insolvent bank. The problem was
as to what securities should be accepted. At first stocks
of the United States, New York State, or of any other
State approved by the comptroller were accepted, as well
as bonds and mortgages on real estate. This created a
market for the stocks of other States, and when a bank
» Horace White: Money and Banking, 3d ed., 1908, p . 382.




339

National

Monetary

Commission

failed and an attempt was made to dispose of these stocks
they often depreciated in value. It took several years
to convince the legislature that, while mortgage security
might be very good for some purposes, it was not suitable
for banking purposes, because under pressure it was not
always convertible without serious sacrifice. The difference between security and availability was not at first
clearly recognized.
We are, therefore, not surprised when the comptroller,
in 1845, reports that the loss to bill holders in the case of
insolvent free banks has been nearly 39 per cent, as compared with 20 to 25 per cent under the safety-fund system. 0 As the general banking law was perfected losses
became less and less. The following is a summary of the
results of the sales of securities prior to January, 1849,
to redeem the notes of insolvent banks, under the general
law of 1838:6
Indiana stock sold for 49.08 per cent of nominal value
Illinois stock sold for 49.13 per cent of nominal value
Arkansas stock sold for 58.77 per cent of nominal value
Michigan stock sold for 72.95 per cent of nominal value
Alabama stock sold for 71 per cent of nominal value
New York stock sold for 92.86 per cent of nominal value
Bonds and mortgages sold for 67.71 per cent of nominal v a l u e . .
Average for all, 63.51 per cent of nominal value

$449, 000
239, 000
176,000
66, 000
79, 000
257, 555
472, 988
1, 739, 543

The average for all the securities, 63.51 per cent, corresponds closely to the statement of the comptroller in 1845,
given on a previous page, because the 39 per cent loss to
bill holders, there stated, represents a depreciation in the
value of securities deposited with the comptroller for the
redemption of notes. The table shows the danger of allowo Assem. Doc. 25, 1846, Vol. I, p. 71.
& Root: Sound Currency, Vol. I I , No. 5, p. 20, also comptroller's reports.




34o

ELASTICITY OF
FREE AND SAFETY FUND BANKS.
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>
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ISI^TE:




Spaces noarKed represent $ 100,000 each
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figures M e ^ c b S^ 0 ^ ^ ^ D jltxDTbe
cioavterlM reports o) rbe CorDptroller
24635 ( To faoe p. 341.)

Safety-Fund

Banking

System in New York

ing the deposit of state stocks, other than New York
State, as security for notes. It also makes clear that
bonds and mortgages are not good security when the
bank fails and the attempt is made to realize upon them
at once. The defects in the law of 1838 were remedied
by amendment after experience had proved the wisdom
of a change. State stocks, other than New York, and
bonds and mortgages were abandoned as security.
Elasticity of the two systems—the bond-deposit and the
safety fund; provisions for redemption.—The basis on which
the free and safety-fund banks issued notes was quite
different. The free banks, especially the smaller ones,
must invest a large part of their capital in certain specified securities, which were deposited with the comptroller,
in return for which notes were issued to the bank, countersigned and registered. The bank officials were then
permitted to sign these notes and issue them as money.
The whole circulation of free banks was thus secured by
a dollar-for-dollar deposit of securities, outside of the
control of the bank. In case of the failure of the bank
to redeem its notes promptly the comptroller was authorized to sell the securities and redeem the notes with the
proceeds. The State was not responsible for the payment of the notes except to apply the securities properly
to that purpose. The interest on the securities was paid
to the banks which deposited them as long as these banks
redeemed their notes promptly. It is clear that in many
free banks a large proportion of the capital was beyond
their control.
The safety-fund banks, on the other hand, retained full
control of their capital, except the small contribution




341

National

Monetary

Commission

made annually to the fund. They were free, therefore,
to use both their capital and their credit in their discount
business. Consequently the note-issue business was more
profitable for the safety-fund banks.
In the one class of banks the notes were based upon
securities purchased or possessed for that purpose, and
the value of these securities was not always favorably
connected with the demand for more bank notes. It
might easily happen, and did happen, that when there
was need for more currency it was to the interest of the
banks to withdraw securities and sell them in the market,
thereby decreasing their circulation and increasing their
reserves. In times of pressure the withdrawal of securities was often the only way a bank could meet the demands for redemption of its notes. This happened during the panic of 1857. The report of the bank department in 1858 states that in September of 1857 the pressure upon the country banks to redeem their notes was
beyond all precedent. Many of the interior bankers
began to withdraw securities from the bank department
by returning their circulation. It seemed the only way
for these banks to meet the demand for redemption, since
the capital of many of these small banks was mainly invested in the securities in the bank department. The
total amount of stocks, bonds, and mortgages returned
to the banks by the department from October 1 to 13,
1837, was $2,641,422, mostly to country banks.®
By elasticity of bank-note issues we mean that the
amount of notes expands when there is demand for more




a Assem. Doc. 4, 1858, Vol. I, pp. 14-16.

342

Safety-Fund

Banking

System in New York

currency for legitimate purposes of trade and that the
amount contracts when there is no longer a demand.
The operation we have just described was a perverse
elasticity.
Experience has shown that there is much greater
demand for currency at one season of the year than at
another. This means that at one season the currency
ought to expand and at another contract. But for the
banks to create a new investment demand for securities
would mean a rise in price to some extent at least, and
the opposite if securities were withdrawn as a basis for
notes and thrown upon the market suddenly. Increase
of currency by the free banks, therefore, was ordinarily
limited to such as could be obtained by the deposit of
whatever securities the bank happened to have. The
possession of securities involved the tendency to keep
them on deposit at the bank department and to keep out
the full amount of currency even when there was little
demand, or, rather, as is apt to be the case under the
currency principle of note issue, to calculate about how
much currency could be kept constantly in circulation
and then deposit securities for that amount. This plan
prevented the possible losses connected with trying to
expand or contract the notes to suit the needs of trade.
If the bank should tie up its capital in securities to an
amount greater than the circulation which it could keep
out, it would mean that the part of the investment above
the amount of notes would yield only the interest on the
securities and nothing more. Therefore, there was little
margin left for emergency, suffering resulted in time of
stress, and panics were promoted under such a system.




343

National

Monetary

Commission

There was no certainty that when the business community was most in need of additional currency it would be
accommodated.
On the other hand, the safety-fund banks based their
notes on the general resources or assets of the bank,
retaining control over their capital and being limited only
as to the maximum amount which they might issue. They
followed what is called the banking principle of note issue. a
It was not necessary for the safety-fund banks to tie up
their capital in securities or cause delay in meeting the
demands for notes. They could respond immediately and
in exact proportion to the demands of trade. We have
seen that these banks sometimes abused their privileges,
and did not always issue notes based upon actual business paper, but sometimes upon accommodation paper.
This was, however, not the fault of the asset principle of
currency, but was the result of bad banking practice.
This system is the one followed in German banking, where
one-third of the issue of notes is secured by a cash reserve
and the other two-thj.rds by short-time commercial paper
of undoubted soundness. In the days of the safety-fund
system in New York State the idea of such a cash reserve
had not yet developed. This system of note issue means
that when there are abundant general assets in the shape
of good business paper, and consequently the demand is
lively for currency, notes will be issued, and when business is not so active the notes will be automatically withdrawn without loss or disturbance.
o White: Money and Banking, 3d ed., pp. 297-298 for distinction between
"currency" and "banking" principle of note issue.




344

Safety-Fund

Banking

System in New York

Fortunately for comparison, we have the two systems
existing side by side in New York State from 1838 to
1866. I have selected 25 free and 25 safety-fund banks,
with about the same amount of capital in the aggregate.
Five were selected from the city of New York and 20 from
outside in each class, because the note issue of the country
banks was a more important element of their banking
business. The figures were taken from the quarterly
reports of the banks to the comptroller during the years
1848,1849, 1850, and 1851. It seemed necessary to take a
period at least thus far removed from the beginning of the
free-banking system in order that it might be found in a
more perfect operation, and yet not too late in order that
the safety-fund system might not be too near expiration.
The accompanying diagram shows the results. No attempt is made to show the circulation in per cent of
capital. Bach group of 25 banks has about the same capital, but of course the free banks never issued so large a
per cent of their capital in notes as the safety-fund banks.
All that the diagram attempts to show is the actual variation in amount of notes issued by the two classes of banks
with the same capital. The less elasticity of the free
banks is thus shown. The June variation is large in both
systems, due to the usual lack of demand for currency at
that season of the year. The extreme range of variation
of the safety-fund group was 536 thousands and the
greatest single variation from one report until another
was 475 thousands; in the free-bank group the extreme
range was 290 thousands and the greatest single variation
was 282 thousands. Thus, with a given employment of




345

National

Monetary

Commission

bank capital, the capacity of the two systems to issue and
vary the amount of the issue from time to time is shown. 0
Mr. Root, in Sound Currency, Volume II, No. 5, page 22,
has given a diagram showing the elasticity of the note
issues of the safety fund and free banks, compared as a
whole, and also of the rural safety fund and the rural free
banks, when compared in groups separate from city
banks. He has computed the issues in per cent of the
capital, and his diagram is for a later period, 1858, 1859,
i860, and 1861. The results are more striking than in
the diagram just presented, and show clearly the advantage of the safety-fund banks in elasticity. The
decreasing use of bank notes as well as the inelasticity
under the free banking system would surely have proved
more serious than it actually was had not the safetyfund system been in operation at the same time and had
not the deposit business been rapidly developing to take
the place of notes.
Under the safety-fund system up to 1840 there was no
law requiring redemption except at the bank's own counter.
A safety-fund bank was not permitted to purchase its own
notes at a discount. The notes of country banks were
often at considerable discount in the city. They were
purchased and sent home for redemption by brokers or
bankers who made a business of thus securing the redemption of notes at a more or less unreasonable profit to themselves. The public which used the notes was thus made
a The largest amount of notes issued during these years by the 25 safetyfund banks was 4,957 thousands, as compared with 3,548 thousands for
the free-bank group. So, incidentally, the figures show that, under the
law of 1838, note issue was less profitable and a much less percentage of
capital was issued in notes.




346

Safety-Fund

Banking

System in New York

to bear the expense of redemption. This became a heavy
burden. The banks made the profit out of the privilege
of note issue and yet objected to bearing the expenses of
redemption.
There had been much discussion in the legislature from
the beginning of the safety-fund system about requiring
redemption in New York and Albany at par, thus relieving
the note holders from the great inconvenience and expense.
This is now recognized everywhere as a necessary part of a
currency system, but at that time the influence of the
banks was strong enough to prevent the requirement.
During 1837 the banks, during suspension of specie payments, had a mutual arrangement between city and
country by which the bills of country banks were kept at
par and the expenses of redemption were shared. This
voluntary arrangement broke down in 1838 and 1839, when
the free banks were being organized and specie payments
had been resumed. Many of the free banks, as we described before, made a business of shaving notes and were
allowed to purchase their own notes at a discount as well
as those of the safety-fund banks. The notes of country
banks were at a great discount in the city during 1839,
even as much as 6 per cent. The situation became intolerable. The problem was taken up in the legislature in
1840. Some argued that to require the banks to bear the
expense of redemption at par was only reasonable, since
they made the profits. The debate shows that some
thought the rate of discount ought to be graded according
to the distance of the bank from New York City, since the
actual expense of redemption would thus vary. The
house adopted the principle of par redemption once in the




347

National

Monetary Commission

course of the debate on the bill. a The senate, however,
would not agree. I t seems that the legislature saw the
need of preventing the evils in brokerage and "shaving''
notes in New York City, but that the bank interests were
unwilling to bear the whole cost of redemption. The bill
was finally passed in May, 1840, requiring banks to establish agencies for redemption in New York or Albany, and
fixing one-half per cent as the maximum discount allowed.
This was a compromise between those who wished par redemption and the banking interests. The attempt was
made to place the rate at one-fourth per cent when the
notes were redeemed at Albany, since the cost would be
less, but the rate of one-half per cent was finally agreed to
as a concession to some of the country banks. b
Still some free banks, not really banks of deposit and
discount, made their profits buying up notes at onehalf per cent discount. The senate committee on banks
in 1850 reported on this situation. The governor's message was referred to by them as recommending further
legislation to prevent " abuse in the organization, under
the general law, of institutions designed rather to profit
from the mere issue of notes than to furnish banking
facilities to the business community. 0 The committee
agreed with the governor and they pointed out that the
law allowing the purchase of notes at one-half per cent
discount made such business a source of profit to many
banks rather than the legitimate banking business. They
a Semiweekly Argus, Apr. 3, 1840.
& For debates see Semiweekly Argus, Mar. 17 and Apr. 28, 1840. F o r
text of bill see Semiweekly Argus, May 5,1840.
c S . Doc. 25, 1850, Vol. I, p. 1.




348

Safety-Fund

Banking

System in New York

estimated that there was a circulation of $8,000,000 in
notes which were not at par in New York or Albany and
on which, therefore, the one-half per cent might be charged.
These notes were redeemed, according to the committee,
about four times each year. This would allow the charge
of one-half per cent on $32,000,000 of notes annually. The
committee pointed out 25 free banks with a capital of
$1,600,000 whose discounts aggregated only $80,000, and
individual deposits $50,000. These banks were making
their profits from issue of notes and buying their own
notes at a discount of one-half per cent, only to issue them
again. Ten of these banks showed a circulation of
$650,000 without any discounted paper. These facts led
the committee to favor the reduction of the rate of discount allowed by law to the point where expenses of redemption would be just covered. This would drive such
banks, as above described, out of business. Therefore, in
1851, the legislature provided that agencies must be
established at New York, Albany, or Troy, and that the
rate must not be more than one-fourth per cent discount.
Still the public must help bear the burden which should
have been carried by the banks, but at least the old evils
were removed, and the charge reduced to about the actual
expense involved in the transmission of notes home for
redemption. 0 Prompt redemption helped to inspire confidence in the banks. This law applied equally to both
free and safety-fund banks.
«S. Doc. 25, 1850, Vol. I, pp. 1-5, for details of above report.




349

National
4. How

Monetary

Commission

THE CHARGES UPON THE FUND MIGHT HAVE BEEN

DECREASED

IF

THE AMENDMENTS TO THE ACT HAD

BEEN INCORPORATED IN THE ORIGINAL ACT.

We have already given evidence to indicate that those
who passed the original act, and even bankers themselves,
little realized the significance of making the bank fund responsible for notes and all other debts. The New York
City banks objected to the fund because they must pay the
assessment on their large capitals, while their circulation,
for which they considered the safety fund as security, was
relatively small. The country banks, on the other hand,
paid their assessment on small capitals, while their circulation was relatively large. If deposits had been considered by the city banks as guaranteed by the fund, which
was really the fact, the disparity between the city and
country banks would not have been great. To-day, when
a bank lends, not simply the money actually left in its
charge by depositors, but its credit in the shape of deposit
credit accounts on the basis of a sufficient cash reserve, this
guaranty of deposits would be a matter of great importance, for it would increase the credit of the institution to
have the borrowing public know that all deposits, whether
of cash or credit accounts, were guaranteed by a safety
fund, backed by all the banks.
The legislature in 1829, as shown by the debates, was
considering the guaranty for notes, not other debts. Deposits were not a large enough element in the banking
business to attract attention. The chief losses of the past
had, at that time, been suffered by note holders. It was
recognized that notes must be made a universal currency




350

Safety-Fund

Banking

System in New York

in order to be most useful. Deposits, while they are the
same in essence as notes, need not nor can they become a
universal currency. The comptroller, in his report in 1849,
declared: "The State is under no more obligation to
attempt this impossibility (i. e., to secure against all
losses) than it would be the equally absurd one of making
every merchant capable of meeting all the obligations he
should incur." The duty of the State, therefore, begins
and ends with furnishing " a good and safe currency for the
public." 0 In 1850 the comptroller expressed his opinion
that the fund would have been "sufficient to fulfill the
original design of insuring the redemption of the banknote circulation," but it came to destruction because "all
the liabilities of the banks, however illegitimate or extraordinary, were made chargeable upon it." 6 In the opinion
of the comptroller, this guaranty gave an unnatural credit
" t o unsound and speculative institutions, which enabled
them to expand their affairs to an inordinate extent without reference to their intrinsic resources." Mr. Knox
holds the same opinion, adding that the debts were contracted in some cases "for the emolument of their (the
banks') managers." 0 He holds further that the failure of
the safety fund was due, not to principle, but chiefly to the
attempt to charge it with all debts. The history of the
fund from 1829-1866 indicates that if it had been applied
to notes only it would have been ample, and "would have
made the circulation of the safety-fund banks more secure
than that of the banks under the free banking system"
« Assem. Doc. 5, 1849, Vol. I, p. 53.
b Assem. Doc. 8, 1850, Vol. I, p. 57.
c Knox, p. 409 et seq.
24635—10




23

35i

National

Monetary

Commission

(p. 413). There was much discussion in the constitutional
convention, in 1846, as to the obligation of the State to
protect both bill holders and depositors. Some held that
they should be considered on a par; others that the depositor should be left to take care of himself, being a " voluntary creditor," while the note holder is an "involuntary
creditor" of the bank and, therefore, should be specially
protected. a
•
Whatever the theoretical merits of the case may be, the
practical situation of a bankrupt safety fund confronted
the legislature in 1842. In the act passed April 12, 1842,
it was provided that the fund, after paying all the liabilities
already incurred by bank failures, should be applied only
to the payment of notes. 6 Thus the legislature recognized
the failure of the fund to secure all the debts of banks.
The legislature, in 1838, when it passed the general
banking law, made no attempt to secure anything besides
notes.
What of the assertion that the fund would have been
ample to meet the redemption of notes alone? This is a
mere question of fact to be determined from the comptroller's reports. In his report for 1849 the comptroller stated
that the banks had contributed to the fund since 1829 a
total of $1,876,063.76. The whole circulation redeemed
for insolvent banks up to that time was $1,548,558.33.
This left a surplus of $327,505.43 to redeem any other
notes of failed banks, if the fund had been liable from the
beginning for notes only.c The comptroller, therefore,
a

Semiweeldy Argus, Oct. 2, 1846.
& For text of act in full see Semiweekly Argus, Apr. 29, 1842.
c Assem. Doc. 5, 1849, Vol. I, p. 29 et seq.




352

Safety-Fund

Banking

System in New York

concludes that the fund would have proved an ample indemnity to the bill holder. It will be remembered, from
the table of payments from the fund, before presented,
that the total amount of notes redeemed from the fund
was a little more than $1,600,000.
If the comptroller had been given power in 1840 to call
upon the banks for additional contributions as soon as the
fund was diminished by the payments to redeem the notes
of the City Bank of Buffalo, which failed during that
year and whose notes were promptly redeemed to the
amount of over $300,000, it would have added, at onehalf per cent on capital, over $150,000 to the available
bank fund in January, 1841. The contributions actually
amounted to about $914,000 at that date, because it was
not until January, 1842, that the solvent banks began
their additional contributions. a In a statement issued
from the comptroller's office, July 13, 1842, it was stated
that the total contributions to the fund to April 1, 1842,
had been $1,069,143.48; also that there had been paid
to redeem notes up to that date $918,949.h The amount
for notes up to September 30, 1842, is given in the report
for 1843 as $952,785.° If the legislature had done as
suggested above, the total contributions, instead of being
$1,069,143.48, would have been about $150,000 larger.
Then, in 1842, the solvent banks were permitted to pay
their future contributions in advance in the notes of the
failed banks, for four, five, or six years, as explained
before. This lightened the immediate payments in cash




a

Assem. Doc. 15, 1842, Vol. I, p. 34.
& Semiweekly Argus, July 19, 1842.
c Assem. Doc. 10, 1843, Vol. I, pp. 47-48.
353

National

Monetary

Commission

from the fund to the amount of almost $500,000 and spread
the burden of redemption of that amount of notes over a
period of years, when the contributions of the banks
would have come due. The whole amount of bills finally
redeemed from the fund, it will be remembered, was a
little more than $1,600,000. When the banks had paid
in the bills of the insolvent banks to the amount of almost
$500,000, on which they received 7 per cent interest until
their regular contributions would have come due, there
remained only a little more than $1,100,000 in general
circulation, which could have been promptly redeemed
out of the funds on hand from previous contributions.
But the charges, even for notes, upon the fund would
have been decreased if, when the law of 1829 was passed,
provision had been made for the registration of all notes
issued in the office of the comptroller. By this method
fraudulent overissues would have been prevented. In
discussing the causes of failure of the Buffalo banks we
have already alluded to the discovery of illegal issues.
These became a charge upon the fund and had to be
redeemed along with the other notes. As shown by the
table of payments for notes, before presented, there were
redeemed $317,107 in notes of the City Bank of Buffalo.
Now this bank was permitted under the law of 1837, having a capital of $400,000, to issue $300,000 in notes.
Therefore the comptroller actually redeemed $17,107 of
the notes of the City Bank in excess of the legal limit.
He redeemed $435,540 in notes of the Bank of Buffalo,
whose capital was $200,000, and whose legal limit of issue
was, therefore, $200,000. Here was an illegal issue of
$235,540. The total illegal issues of these two Buffalo
354




Safety-Fund

Banking

System in New York

banks amounted to $252,647, which became a charge
upon the fund. In April, 1843, to guard against more
overissues, an act was passed providing for the substitution of notes registered and countersigned by the comptroller for the hitherto unrecorded issues, and after this
date all new notes issued must come to the banks through
the comptroller's office. If this amendment had been
adopted in 1829, as was actually recommended in the
debate, it would have reduced the charges upon the fund
$252,647, and that, too, at the beginning of the period
of serious failures, for these two banks failed during 1840
and 1841.
Still other changes were introduced in the constitution
of 1846, which, if operative from the beginning, would
have still further reduced the burden upon the safety
fund. Two provisions incorporated in the new constitution were:
(a) Individual liability of stockholders, after January
1, 1850, for debts of banks contracted after that date, to
the amount of their stock. This is the same as found in
our banking law to-day.
(b) The first claim of notes upon the assets of an insolvent bank. This, too, is a part of the modern Canadian
safety-fund system. a
If the failures which occurred during 1840-1842 had
been settled under these provisions, and if the fund had
also been liable for notes only, the charges upon the safety
fund would have been greatly decreased. The table,
showing the assets of the failed banks and the amount
a The provisions constitute sec. 7 and sec. 8 of Article V I I I in the constitution of 1846 of New York State.




355

National

Monetary

Commission

realized up to 1845, indicates that the assets of the Commercial Bank of New York would have much more than
paid the note holders. This bank, as well as the Lafayette
Bank and the Bank of Oswego, which paid their creditors
out of their own resources, might, therefore, under section
8 of the constitution of 1846, be excluded because their
notes could not have become a charge upon the fund.
The eight other failed banks did not realize enough from
their assets to pay the note holders alone. In 1845 these
banks had realized, as calculated from the same table,
almost $700,000 from their assets. After this date the
remaining assets of these same banks yielded about
$130,000, if the payments into the bank fund are a correct
index of the amount realized. These receipts into the
bank fund from the assets will be found in the table showing the charges against the fund for notes and other debts.
So the entire amount realized from the assets of these eight
banks was over $800,000. All of these assets would have
been applied to note redemption under the constitution
of 1846. So Mr. Root estimates this as the decrease in
actual charges upon the fund if notes had been a first lien
on assets since 1829 and the fund only liable for notes. a
By actual charges we mean the amount which we have
estimated as the total redemptions of notes from the fund
on account of the insolvent banks—i. e., over $1,600,000.
We should exclude from this amount the circulation of the
Commercial Bank of New York, $139,837, because, under
the constitution of 1846, this would have been more than
redeemed from assets. The actual burden on the fund




a

Sound Currency, Vol. II, No. 5, p. 15.
356

Safety-Fund

Banking

System in New York

from the eight banks, therefore, was about $1,460,000 for
notes. If we diminish this by the aggregate assets, over
$800,000, we arrive at an estimate of the burden upon the
fund of about $650,000, provided notes had been a first
claim on assets. This estimate agrees essentially with the
figures of the report of the monetary commission of the
Indianapolis convention, page 240 (footnote). The correctness of this estimate of course depends upon whether
the receivers of the failed banks devoted any considerable
part of the amount realized from assets to the settlement
of the claims of note holders directly while the bulk of the
notes were being redeemed from the fund. From the
reports of the amounts redeemed from the fund this seems
quite unlikely.
If the individual liability of stockholders to the amount
of their stock had been in operation when the serious failures occurred, the claims upon the fund would have been
still further reduced; how much could be only a guess.
If the hypothecation of notes as security for loans had
been prohibited and prevented from the first, as was
attempted after the serious failures, the circulation of
some of the banks would not have been so large, and the
claims upon the fund would have been less. The policy of
an embarrassed bank would not have been so reckless,
and the temptation to overissue notes would not have
been so great.
After the serious failures the quarterly reports were
required to state separately the loans and discounts to
directors. If this had been required always, it might
have restrained many of the large individual loans on poor
security, and the loans for speculative purposes to some




357

National

Monetary

Commission

extent, all of which was so dangerous to the solvency of
the banks.
It is evident that if all the amendments had been adopted
in 1829 which were finally made to perfect the safety-fund
law the burden upon the fund would have been greatly decreased. In the first place, over $1,088,000, applied to
other debts than notes, would not have become a charge
upon the fund during the period when eleven banks failed,
1840-1842. From the $1,600,000, actually paid to redeem notes of insolvent banks which failed during this
period, the provision for registration of notes in the comptroller's office, would have deducted over 250,000, by preventing this amount of overissue. If the notes had been
made a first claim on the assets of a failed bank and our
estimate is correct, the charge upon the fund would have
been further decreased by about $800,000. Stockholders'
liability, enforced after January, 1850, would still further
have reduced the liability of the bank fund. The issue of
almost $1,000,000 in state 6 per cent stock would not have
been necessary, and thus almost $500,000 in interest
charges would have been saved. Assuming all these provisions in operation from the first, the final charge upon
the fund would have been probably less than $500,000 on
account of the failures of the period 1840-1842. There
were several failures later, during 1854 a n d 1857, but the
fund would have taken care of these without difficulty.
The comptroller could have met all claims for notes
promptly, and there would have been no depreciation of
notes. The fund would have afforded ample security for
notes, and, instead of being mortgaged during the remain-




358

Safety-Fund

Banking

System in New York

der of its existence to the full extent of the one-half of i
per cent annual contributions, would have been security
for the notes of banks which failed after 1842. Further,
the annual assessment to keep the fund good would probably not have averaged over one-fourth of 1 per cent on
capital, over the whole period from 1829-1866. This
estimate agrees with that of Mr. Root. a The Indianapolis monetary commission of 1898 estimated the average annual assessment necessary to meet the charges under
the above conditions as less than one-tenth of 1 per cent
on capital. b This much is certain that the original onehalf of 1 per cent assessment on capital would have been
more than sufficient.
5.

OPERATION OF THE SAFETY-FUND

SYSTEM

AND l8

1843-1866.

1848, 1854,
57The bank fund was mortgaged to the full extent of the
contributions until the charges incurred by the serious
failures of 1840-1842 should be paid by the redemption of
the 6 per cent state stock, issued to secure the immediate
funds, under the law of 1845. Therefore the creditors of
safety-fund banks, which failed after 1842, could not depend upon the fund for the redemption of notes or the payment of other debts. After 1843 the fund was responsible
for notes only. If a bank failed and the note holders
waited until the state stock had been all redeemed, and if
a surplus then remained after the settlement of these prior
claims, then the notes of the failed bank might be re-




FAILURES IN

a

Sound Currency, Vol. II, No. 5, p. 15.
& See Report, p. 242.

359

National

Monetary

Commission

deemed from this surplus. It is clear, therefore, that after
1842, the assets of a safety-fund bank were the only available security against losses to its creditors. It is true that
notes had been made a first claim on these assets in 1846,
and after January, 1850, stockholders were liable, for debts
contracted after that date, to the amount of their shares.
The first bank to fail, after 1842, was the Canal Bank of
Albany, in July, 1848. Its capital was $300,000 and its
outstanding circulation at the time of failure was $185,531.a
The comptroller in his report goes on to say that the bank
had been illegally conducted and that the quarterly reports had probably been false. The new constitution had
made the notes a first claim, so that the receiver was able
to redeem the notes of the bank promptly from its assets.
The safety-fund did not enter into the transactions at all.
We shall examine the reports of the receiver, however,
to find out the sort of assets possessed and the kind of
banking done. In 1849 the receiver reported the amount
of assets as $1,071,000 when he took charge July 17, 1848.
A large amount had been collected.b In another report he
stated that Edwin Croswell alone owed $163,744, o n which
he had paid $201, and $20,000 in securities. The Albany
Glass Company owed the bank $115,824, and had paid
$9,132.° It appears from the reports that the bank held
much "accommodation paper" and had made too large
loans to individuals, often on poor security.
The same was shown for the Watervliet Bank when the
receiver made his final report in 1849.^ This Watervliet




a Assem. Doc. 5, 1849, Vol. I, p. 35.
& Assem. Doc. 222, 1849, Vol. V, p. 2.
c
Assem. Doc. 185, 1849, Vol. I l l , pp. 4-5.
d Assem. Doc. 227, 1849, Vol. V.
360

Safety-Fund

Banking

System in New York

Bank, it will be remembered, failed in 1842, but its affairs
were very slowly settled. An examination of the records
in the Court of Appeals at Albany showed that there were
many suits for recovery by the bank of Watervliet against
individuals who had given poor security, in mortgages or
their own personal security, which proved worthless.
A select committee of the senate examined into the
affairs of the Canal Bank, They reported that the facts at
failure showed " neglect of duty, gross mismanagement,
and the violation of several statutes. " a The affairs of the
bank had been entrusted largely to the cashier. When, in
1839, a committee of directors examined the bank and
recommended to the board certain changes, intended to
check the discretion of the cashier, the cashier and his
friends took active steps to eliminate from the board two
members of this committee at the next election of directors, in 1840. August 3, 1842, a resolution was passed by
the directors ' 'that our cashier be, and he is hereby, authorized to purchase in his individual capacity, for himself and
such other members of the board as may wish to participate therein, the stock of this bank to the amount of
$60,000, and to loan to the parties on their individual
security the cost of the same." 6 This purchase of stock
seems to be connected with the purpose of the cashier and
his friends to control the board of directors. In May, 1846,
the cashier was authorized " to get rediscounted any paper
belonging to the bank." This showed that the resources
of the bank were greatly weakened. October 2, 1847, the
cashier was authorized to loan K. N. Pratt $51,000 when




a>$. Doc. 63, 1849, Vol. II, p. 2 et seq.
&Ibid., p. 4.
361

National

Monetary

Commission

the bank was in a desperate condition, and the cashier
certainly knew it. The bank for some time previous to
failure settled its daily balances with other banks, not by
drafts on New York, as was the usual method, but by using
almost the last penny of deposits gathered in during the
day from the confiding depositors. a
Some items of the $1,071,000 assets at failure are interesting :
Bills receivable (much of it worthless)
Stocks, bonds, mortgages, and Watervliet certificate
Cash in bills and specie

$780, 782
97, 091
2, 192

The last item is absurdly small.
There was due to—
Stockholders
Depositors
Other banks
Note holders

300,
196,
467,
192,

000
294
910
486

The committee found that from the debts due to the
bank, already settled by the receiver, the bank had lost
$109,074, and that $364,547 of the assets were considered
bad at present and $222,538 doubtful, making a total very
probable loss of $696,159 out of the $1,071,000 assets.
Out of the balance the circulation must be paid first.6
The cause of failure that appeared most prominent was
the secret appropriation of funds by the cashier for his own
uses, and his assent to large and irregular loans to directors
without adequate security. The directors were not diligent and their confidence was abused, where they were
not themselves guilty of misconduct. Frauds were concealed by false entries and oaths. There was a " Pratt




<*S. Doc. 63, 1849, Vol. II, pp. 5-6.
&Ibid., pp. 7-8.

362

Safety-Fund

Banking

System in New York

Bank special account" carried for the purpose of concealing the operations of the cashier (p. 16).
J. K. Paige was made director in 1841 and president of
the bank in 1843. At the failure he was indebted to the
bank as principal to the amount of $5,000, as surety for
$93,497, and overdrafts $542. He was also president of
the Albany Glass Company, whose paper the bank held to
the amount of $103,762, on which Mr. Paige was indorser
for $59,000. The effects of this company will not yield
over $10,000.
Edwin Croswell was one of the commissioners to distribute the stock of the bank and one of its first directors.
"His liabilities were very large, exceeding the amount
allowed by law to all the directors of the bank," onethird of capital (pp. 12, 13).
Theodore Olcott was the cashier and was most to blame
for the failure. At the time of insolvency, his liability
to the bank as principal was $59,006; for overdrafts,
$16,625, and as indorser for $107,103, making a total of
$182,734. Only $55,880 of this amount appeared on the
books of the bank. His acts constituted fraudulent embezzlements The design seemed to be deliberate to ruin
the bank. I have given these details to show what sort
of banking was still practiced.
The next safety-fund bank to fail was the Lewis County
Bank, in November, 1854. The immediate cause of action
was the failure to redeem its notes. It was almost purely
a bank of issue. Its capital was $100,000, and therefore
a

S. Doc. 63, 1849, Vol. II, pp. 9-19 for details of above.




363

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Monetary

Commission

it was authorized to issue $150,000 in notes. The special
agent, appointed to report on the bank's condition, reported as follows:
Specie
Bills receivable
Stanton and Wilcox debt
Real estate
Overdrafts
Property

$2
105, 488
117, 371
400
159
100

Total resources

223, 520

Capital
Profits
Circulation

100, 000
11, 689
125,283

Total liabilities

236, 972

The agent reported that the total debt of Stanton &
Wilcox to the bank was $221,310, which constituted almost
the entire assets of the bank. The only creditors of the
bank except its stockholders at the time of failure were
evidently the note holders. The last quarterly report did
not reveal the true condition of the bank, as shown by a
later examination of the books for that date. Design in
the false items was shown beyond a doubt. The examination showed fraud and collusion.0
It was evident that this bank could not pay its note
holders, but the safety fund was not available until about
twelve years later, when the state stock had been paid
and there was a surplus. Then an arrangement was
made to redeem out of this surplus any bills of the Lewis
County Bank still outstanding. The notes depreciated
and before the fund became available most of them had
disappeared. This failure, therefore, brought considerable
« Assem. Doc. io, 1855, Vol. I, pp. 110-135, for above details.




364

Safety-Fund

Banking

System in New York

loss to the public, and there was no adequate security
offered by the fund.
During the panic of 1857 three more banks, under the
safety-fund law, failed, as follows:a
Authorized
circulation.

Capital.
Bank of Orleans
Reciprocity
Yates County _ _

S>200, OOO
200,000
IOO,OOO

$200,000
200,000
150,000

Circulation
at failure.
$200,000

159.577
148.958

The assets, together with the stockholders' liability,
were sufficient to redeem, a much larger proportion of the
notes of these banks than of the Lewis County Bank.
The bank department, in its report 6 for 1867, gave the
outstanding circulation of the insolvent banks as follows:
Bank of Orleans
Lewis County
Reciprocity
Yates County

_
•
_
„ _.

Total

$10, 188
105, 211
12, 766
23, 322
151, 487

From the above statement it appears how complete had
been the losses of the bill holders of the Lewis County
Bank. At failure the outstanding notes were given by
the special agent as $125,283, as stated before, while in
1866 there were still unredeemed $105,211. Evidently
the assets of the bank were worthless. The circulation of
the three banks which failed last, however, had been reduced to a comparatively small amount by 1866. No
doubt there had been considerable loss to note holders by
depreciation and waiting for the affairs of the insolvent
a

Assem. Doc. 3, i860 Vol. I, Table 4, in Appendix.
& Assem. Doc. 4, 1867, Vol. I, p. 40.




365

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Monetary

Commission

banks to be settled. This would have been prevented if
the safety fund had been available to redeem the notes
at once and reimburse itself from the assets.
FINAL DISPOSITION OF THE SAFETY FUND.

The bank department reported to the senate in 1866
that the last contributions had now been made to the
safety fund by the solvent banks, since their charters all
expired in that year. All claims upon the fund had been
paid and there was a surplus of $88,048. This surplus
should be applied to the redemption of the notes of the
banks that had failed since 1842. But it was for the legislature to decide how it should be applied. The superintendent of the banking department recommended that it
be applied in equal ratio to the notes of the four banks. a
The legislature of 1866 authorized the bank department
to convert the assets of the safety fund into cash and
declare a dividend on the outstanding circulation of the
four insolvent banks whose notes had not been fully paid. b
This was done and a dividend of 40 per cent declared.
But so few of the bills still outstanding were presented that
the superintendent was able to pay in full all that were
presented for redemption. Many had been destroyed,
probably because of the belief that they were worthless,
especially of the Lewis County Bank, which had failed
twelve years before.
After paying all the notes presented, there was still a
surplus of $13,144.19 in the fund. This balance was paid
o S. Doc. 64, 1866, Vol. II, pp. 1-2.
6 Session Laws, 1866, chap. 564; also Assem. Doc. 4, 1867, Vol. I, p. vi.




366

Safety-Fund

Banking

System in New York

into the state treasury. Afterwards out of this sum
$3)959-75 w a s P a id by authority of the legislature to the
late Bank of Oswego "for interest upon an excess of its
contributions to the bank fund, erroneously paid in 1842.,,a
Thus was closed the operations of the safety-fund system.
It had furnished tardy and inadequate security for the
notes of banks failing after 1842. This was due to the
fact of its having been mortgaged during the early years
of its existence, because of certain imperfections in the law
itself which were later remedied. The experience of these
later years in no sense condemns the principle involved
in the completed law.
« A s s e m . D o c . 7, 1867, Vol. I, p . 7.

2

4635—io




2

4

3<57




CHAPTER

IV.

THE GENERAL BANKING LAW OF 1838; CONCLUSIONS.
1. T H E

ADOPTION

OF THE

SECURITY-DEPOSIT

SYSTEM

UNDER A GENERAL BANKING LAW.

The safety-fund system was not abandoned because of
its failure to provide the requisite security to the note
holder. Before 1838, whenever it had been called upon,
which had been the case in the redemption of the notes
of five different institutions, it had proved entirely adequate. All advances made out of the fund to redeem the
notes of these five banks either had been repaid to the
fund or were being returned rapidly. Nothing had been
finally lost on notes issued under the system during the
first nine years of its existence. And yet, in 1838, another
system was inaugurated and the method of special charters by legislative grant abandoned. What is the explanation for the change?
We have reviewed the abuses which were inevitable
under a system of special charters. The securing of the
charter through political influence and logrolling, the
distribution of the bank stock as personal or political
favors, the placing of the office of bank commissioner in
the field of political spoils, all have been described, and
it was these evils that brought the system into disrepute.
Therefore the system was abandoned in 1838, and a
general banking law enacted under which special charters
were not granted, but individuals or associations having




369

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Monetary

Commission

the required capital might do a banking business if they
first deposited with the comptroller certain approved
securities upon which notes might be issued.
Before 1838 banking was a monopoly, granted by legislative act. About this time there was a new faction
developing, called the "Locofocos." They adopted a
platform in which they declared their opposition to all
monopolies granted by legislation, on the ground that
they were violations of the equal rights of the people.®
With the aid of the Whigs, they carried the elections in
New York City in the autumn of 1836 and the spring of
1837. In the legislature this idea of monopoly became a
chief point of opposition to the safety-fund system. The
free banking act of 1838 was the result. Thus was
monopoly abolished from the banking business and the
principle of note issue changed.
The debates in the legislature from 1836 until the law
was finally adopted are interesting because they show the
growing antimonopoly spirit and the gradual departure
from the principles of the safety-fund law, which had
seemed to give general satisfaction so far as its principles
were concerned, to an entirely different principle of note
issue and security.
From the first the restraining acts of 1804 and '18,
previously described, had given dissatisfaction. To require special safeguards from banks issuing notes, which
must pass current as money, seemed reasonable and logical
to most at the time the law of 1829 was passed and even
before this time. But to prohibit private banks of defl Hammond: History of Political Parties, p. 493 et seq.




370

Safety-Fund

Banking

System in New York

posit and discount without special charters had seemed
from the first a suppression of competition and an interference with the rights of private business and the
employment of private capital.
The whole problem of private banking was the subject
of a report to the senate in 1825.° The report was upon
a resolution in regard to banking. Whether restraints on
private banking ought to be repealed was made to turn
upon the question of public welfare. The report claimed
that private banking would facilitate obtaining credit
and do away with many of the evils which we have
described as prevalent before the safety-fund law of 1829.
It claimed further that there was nothing to rely upon
for the good conduct of an incorporated bank but the
honesty of the directors. This we have found painfully
inadequate in actual practice. The report further pointed
out that a body created by the legislature thereby secures
a credit which enables it to circulate bills without question. The private bank would stand on its own record
and those who owned and managed it would be personally liable for the debts they might create. This would
promote prudence and caution. If this was not security
enough for the public, the legislature might require bonds
and mortgages to secure paper issued. The report
closed with the distinct antimonopoly expression that if
the restraints were removed, then " whatever advantages
are to be derived from banking operations all citizens
would be free to enjoy alike."
In 1826 the committee of the senate on banks made a
report which contains much interesting material on princ Sen. journal, 1825, pp. 99-103.
e




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Monetary

Commission

ciples of banking. They asserted that principles of
banking "will not submit to the control of arbitrary
direction" and advocated a standard of natural liberty
(p. 10). Abuses arising from the frauds of officers and
agents are fit and proper subjects of legislative interference; but evils ascribable to mismanagement, which
result in speculation or extending discounts and circulation beyond the wants of trade, are of another character
and "are perhaps entirely beyond the reach of direct
legislation for correction" (pp. 14-15). These latter
must be left largely to enlightened public sentiment and
the practice of business men interested in fair and sound
commercial policy. "Confidence, induced by the supposed sanctity of a charter, enables the unworthy and
dishonest managers of its (a bank's) concerns to flood the
country with a circulation far beyond what commercial
credit would have effected'' (p. 16). The committee further
declared that this state of affairs would not exist to any
great extent "if a monopoly, odious to the free spirit of
our civil institutions, did not exist" (p. 19),a These
reports were before the adoption of the safety-fund system of banking. Much that was claimed in them has
been shown to be true under the operation of the law
of 1829.
The issue was again taken up with vigor during the
session of 1836, when the repeal of the restraining law
upon private banks of deposit and discount was debated.
There appeared to be a general friendliness to the principle
of a safety fund as a protection to the note holder, but
» Report of the committee on banks and insurance companies on petitions, Albany, 1826, pp. 1-22.




372

Safety-Fund

Banking

System in New York

the opposition was concentrated upon the monopoly of
the deposit and discount business. There had been a
time when it was not dreamed that note issue could be
separated from the deposit and discount business, or
rather deposits were regarded as an insignificant part of
the banking business. Now the deposit business was
attaining considerable proportions, especially in the city.
But the advocates of private banks of discount and
deposit sought to adjust them to the existing safety-fund
system. More than once in the debates the safety-fund
system was declared to be the safest yet devised and
satisfactory.
A letter in the Albany Argus, December 24, 1836, over
the name "Franklin, " but written by Mr. Flagg, declared
that the existing law abridged fair business rights and
discountenanced the free use of capital. The law of 1829
was, in his opinion, the outcome of selfishness and rivalry
rather than for the public good. It was the age of
monopoly. He advocated allowing banks of deposit and
discount without the power of note issue, and favored a
general law instead of special charters. Nothing was
done at the session of 1836.
During the session of 1837 the antimonopoly feeling
increased. The debates show still a friendly spirit toward
the safety-fund system, but they advocate it under a
general law. Gallatin, in the Argus, January 14, 1837,
defended severe restrictions on the issue of paper money,
but opposed restrictions on deposit and discount by private bankers. Competition was desirable. Depositors
need no special protection since the transaction is en-




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Monetary

Commission

tirely voluntary and the depositor exercises judgment as
to where he shall place his confidence.
A report to the senate on the governor's message in 1837
pointed out that there was growing a popular sentiment
against banks, due to abuses in the granting of charters.
The committee considered it impolitic to grant to individuals the power of issuing bank notes, and commended
the safety-fund system as the safer for note issue. They
answered the objection that the system then in operation was a monopoly by saying that it was not a monopoly in an odious sense; that privilege was conferred
upon a part for the benefit of only a part. Note issue
and banking had been restricted for the protection and
benefit of all. Any person with the capital might buy
bank shares and thus participate in the profits of the
investment. The committee concluded by commending
the safety-fund system as better than any other that
they could suggest.0
The debate on the repeal of the restraining law against
private banks of discount and deposit was opened early
in January. Before the end of the month the senate
agreed unanimously to the repeal. Early in February
the house followed by passing the bill, with scarcely any
opposition. 6
Now, the subject under discussion, after the problem of
allowing private banks of deposit and discount had been
disposed of, was a general banking law, to remedy the
evils of special grants by charters. During this session
a S. Doc. 38, 1837, Vol. I, pp. 1-13.
& Semiweekly Argus, Feb. 3, 1837, gives vote in house.
law see Argus, Feb. 3.




374

For text of the

Safety-Fund

Banking

System in New York

of 1837 the discussion favored a general law which should
retain the safety-fund principle. Public meetings over
the State passed numerous resolutions to the same effect.
They approved the safety-fund idea but urged the remedy
for its defects by adopting a general law which would
abandon the monopoly features of the old system. 0 Local
papers took up the discussion with vigor. One paper
described the safety-fund system as the "noblest" ever
devised, but advocated the abolition of the "odious"
monopoly features. 5 A communication in the Argus
for March 21, under the title "The Times," declared
"No man can point to a state or county convention, a
town or village meeting, which has indicated the slightest
wish to abandon the system (the safety fund) or to
change any of its essential features." In the Argus for
March 28, a correspondent from Seneca Falls writes of a
convention of delegates from six counties at Geneva.
Resolutions were adopted approving a general law on
the plan of the safety fund. The western counties
seemed especially urgent. Like meetings were recorded
in the issue of the Argus, March 31, at Hudson, Auburn,
Batavia, and Albion. The sentiment at these meetings
favored the old system, as modified by desire to prevent
monopoly and abuses.
The select committee of the senate on banking law
recommended a system of private banking, not related at
all to the safety-fund principle. They proposed unlimited
personal liability, and a pledge of one and one-half times
a Semiweekly Argus, Mar. 14, 1837, Rochester meeting.
6 Semiweekly Argus, Mar. 17, 1837. The Argus for Mar. 21, 1837, gives
further extracts from many local papers in favor of a general safety-fund
law.
375




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Monetary

Commission

the capital in property, put under the care of trustees,
for the benefit of creditors. 0 When debate began in the
senate, the house bill, which had incorporated the safetyfund principle, was offered as a substitute for the bill
reported by the select committee. The debates seemed
to recognize that public sentiment inclined toward the
latter. 6 The outcry was against monopoly in banking
and yet the majority favored severe restrictions as to
note issue. The tendency in Europe has been steadily
toward centralization and monopoly in note issue. The
real contest was for freedom in deposit and discount
banking which is generally admitted to-day. The session
of 1837 closed with the problem still under discussion.
When the legislature met in 1838 there was evident a
change of sentiment as to the subject of a banking law.
The Democrats were in power and were determined to
inaugurate a system different from the one in operation.
To do this they were forced into hostile opposition to
the safety-fund system, partly from political motives.
But public sentiment also had evidently somewhat
changed in its attitude toward the safety-fund system.
The year 1837 was a time of investigation of banks.
Several committees spent the whole session of the legislature in probing the affairs of the individual institutions.
The charter of the Lockport Bank was repealed on account
of violations of law. The Buffalo banks were under
injunctions. Certain bad practices were discovered in
a number of the banks by a special committee, as we
have described in a previous chapter. The bank officers
o Semiweekly Argus, Apr. 4, 1837; S. Doc. 55, 1837.
& Semiweekly Argus, Apr. 7, 1837.




37<5

Safety-Fund

Banking

System in New York

were shown to be eager for profit at the expense of sound
banking and regardless of the public interests to a shocking degree. The system of supervision by commissioners
did not seem to work satisfactorily. The method of
their appointment had been changed in 1837, so that
all were appointed by the governor and senate, instead
of two of them being appointed by the banks themselves,
as in the original law. This change brought the office
within the field of political spoils. There was growing
in the minds of the people a distrust of the old system.
It was a favorable time for political motives and selfish
interests to accomplish their purposes. It was comparatively easy to ring the changes on the monopoly
features of the old system, which appealed to all, and
point to abuses which seemed to condemn even the principle of the safety fund.
Consequently, in the debates on the general law, in
1838, there was little attention to the safety-fund principle. The evils revealed by the investigations of the preceding session were emphasized and attributed to the
monopoly features of the old system. In the report of a
select committee to the assembly, the criticism was made
that the law of 1829 created more banking facilities in one
part of the State than another. The western part of the
State was demanding more banks, as shown by the map
in Chapter III. The legislature was slow to grant this
section its demands, as the map indicates. Therefore,
opposition was aroused, but chiefly against the monopoly
system of granting charters and not against the principle
of note security. Jealousies were aroused between different sections of the State. The committee felt that




377

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Monetary

Commission

throwing the business of banking open " t o all will give
the bill holder the necessary security/' and the jealousies
now existing will be overcome, and capitalists will place
their capital where it can most profitably be employed.
Competition will afford the borrower adequate accommodations. 0
The blame for the inflated currency, during the years
preceding the panic of 1837, was placed upon the monopoly system of banking. The evils of the panic were due
to this inflated currency, in the opinion of many. Therefore the monoply in banking must be abandoned in order
to avoid future panics. The conclusion was logical, but
the premise may not have been true. Speculation and
overexpansion would probably have occurred under any
system, and they did so occur in every part of the Union.
It must be admitted that the safety-fund system stood the
test of the panic year, 1837, remarkably well, and no
serious failures occurred until the process of liquidation,
following the panic, revealed the bad banking and worthless assets of previous transactions. Whether legislation
and a different system could have prevented these is at
least open to question. This much is known, that the
free banking system, adopted in 1838, was not able to
prevent serious losses upon securities deposited for notes
until experience had taught officials what sort of securities were safe. It may be remarked also that the panic
of 1857 came on with no less regularity than that of 1837.
The panic of 1857 occurred after the system of free banking and bond deposit for notes was in full operation and
aAssem. Doc. 122, 1838, Vol. I l l , for above report.




378

Safety-Fund

Banking

System in New York

after the safety-fund system had passed its zenith. It
does not, therefore, seem correct to blame the safety-fund
system or monopoly for panics, although some of the bad
practices under that system did promote panics. Some
of these evils were remedied by legislation and some
could not be reached.
In the debate on the general law, in the house, on February 19, an amendment was offered subjecting banks to
be formed under the law to safety-fund rules, but it was
lost.a The bill was amended finally so as to require each
bank to keep 12 }4 per cent of the circulation in specie as
a reserve for redemption of notes. The chief concern of
the bill was to protect the note holder. No mention of a
reserve against deposits was made in the debates. It was
not yet recognized what part deposits might play in a
panic. This was learned in 1857. The specie requirement was soon repealed. 6 The speech of Mr. Griffin in
the house on the bank bill asserted that the present banking law was contrary to our institutions and portrayed
the benefits of competition. He declared that if a man
should be denied a discount at the counter of an incorporated bank he could turn to others without falling into the
hands of usurers if free banking should be established by
the legislature. c It had been revealed by the inquiry of
1837 that some bank officers had been guilty of refusing
discounts and later lending the money at a usurious rate,
on their own account. " No longer shall legislative aid be
a

Daily Argus, Feb. 20, 1838.
& Daily Argus, Apr 19, 1838, for facts as to specie reserve.
c Daily Argus, Apr. 6, 1838.




379

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Monetary

Commission

extended to make the rich richer and the poor poorer,"
exclaimed Mr. Griffin in the same speech.
The bill finally passed the house by a vote of 86 to 29.°
The senate adopted it with little change, except the requirement of a specie reserve of 15 per cent, which was
later reduced toi2}4 per cent by conference. Both senate
and house refused to incorporate the principle of personal
liability in the bill. The senate vote was 20 to 8. h Under
the new law, individuals or associations were authorized
to engage in the business of banking, and to receive notes
from the comptroller, registered and countersigned, provided they first deposited with him stocks of the United
States, of the State of New York, or of any other State
approved by the comptroller, or bonds and mortgages of a
specific sort. By this general act each association was
authorized to fix its own name, to determine the amount
of its capital, provided always it had a paid-up capital of at
least $100,000, to fix the period of its existence, and to
designate the place of operation. No special charter was
required and no chance was given for "logrolling'' in the
legislature or favoritism in the distribution of bank stock.
In case of the failure of a bank to redeem its notes after
a ten days' notice the comptroller was authorized to sell the
securities and apply the proceeds to redemption. We
have already compared the safety-fund and free banks in
the preceding chapter as to the losses sustained by the
bill holders of each during the early years of their operation. The difficulty at first was in selecting such securities as would prove good under pressure of a forced sale.
a Daily Argus, Apr. 6, 1838.
b Daily Argus, Apr. 18, 1838. See text of bill in Argus, Apr. 20.




380

Safety-Fund

Banking

System in New York

Bonds and mortgages and state stocks did not prove adequate when a bank failed and they must be disposed of
on short notice. Therefore losses to bill holders occurred
under the general law until these imperfections were
amended. The comptroller, in his report for 1846, gives
the amount of depreciation upon the securities of 29 insolvent free banks which had to be sold to redeem notes,
up to 1846. These securities were state stocks and bonds
and mortgages. New York state stocks averaged 88.5
per cent of their nominal value. The stock of other
States ranged from 49 to 73 per cent. Bonds and mortgages averaged 70 per cent. This depreciation meant a
loss to note holders.a In the debates of the constitutional
convention of 1846 one member referred to the fact that
the safety-fund system had been in operation for sixteen
years with 11 failures, while the free-banking system had
been in operation for seven years with 29 failures. Each
had about the same number of banks. 6
Thus was a new system of banking and note issue put
in operation, partly from political motives, partly because
there had developed a distrust of the existing system, due
to certain evils connected with it, but mainly because
there had grown up an intense opposition to monopoly
grant of special privileges by legislative action which
made it possible for those who had political motives and
those who had selfish interests to point to the evils revealed in the old system and unite the opposition on the
principle of monopoly and natural liberty as opposed to
special privilege.
a

Assem. Doc. 25, 1846, Vol. I, Statement 16.
& Semiweekly Argus, Oct. 2, 1846.




38i

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Monetary
2.

WHAT

BEARING

HAS

Commission

CONCLUSIONS.
THE

OPERATION

OF

THE

SAFETY-

FUND SYSTEM, AS W E HAVE DESCRIBED I T , U P O N T H E
GUARANTY OF DEPOSITS?

In t h e first place, it must be remembered t h a t the fund
in New York State proved inadequate for b o t h notes a n d
deposits. The speaker of the house in 1829 h a d declared
it so, and had offered a substitute which provided for a
larger fund, b u t his a m e n d m e n t was rejected. PAew
realized the fact t h a t , as the years passed, t h e deposit
business would rapidly increase a n d t h e relative importance
of note issue diminish. When it was discovered t h a t t h e
other debts t h a n notes of the banks t h a t failed in 18401842 would require over $1,000,000 from t h e fund after
t h e application of all available assets, t h e n t h e legislature
hastened to relieve the fund from responsibility for deposits or any debts except notes. Therefore t h e safety
fund was only a security for deposits during 1829-1842.
After t h a t date t h e fund was only m e a n t t o secure notes
a n d did t h a t very inadequately, because of t h e mortgage
upon t h e fund already incurred from t h e responsibility for
all t h e debts of banks failing during 1840-1842. T h e
legislature did not discuss t h e question of guaranty of
deposits when it m a d e t h e change of law in 1842. I t was
confronted b y a condition. Besides, t h e deposit business
h a d not developed to t h e point where losses to depositors
from failure of banks outweighed or even approached t h e
losses to t h e public through b a n k notes of insolvent
institutions.




382

Safety-Fund

Banking

System in New York

The following table a will show the development of
banking through the entire State. All banks, both free
and safety-fund, are included, since it is the purpose to
show the growth of capital in banking and the corresponding increases in deposits, circulation, and specie,
with their relation to each other.
[ A m o u n t s a r e e x p r e s s e d in m i l l i o n s of dollars.]

Number
of b a n k s .

86

1836
1837
1838
1840
1843
1846
1849
1852
1853
1856
1857
1858.
i860

98
95
96
137
155
192
240
280
303

Capital.

43
43

79
96
107

301

no
in

Notes.

Specie.

72.5

19- 1

21. 1

19-3

24. 2

6.6

61. 0

15- 7

12.4

4- x

52.8

16. 1

10. 6

5-9

61.5

4

27-4

17. 2

u-5

6.2

72.0

30. 6

22.3

8.0

90. 2

0

45 5
59 7

Deposits.

79-3

3i-3
37 1
36 6
36 8

311

306

Loans.

38.2

24. 2

8.1

13-3

127. 2

65.0

0

145-9

78.1

4

183.9

96.9

27. 9
32.6
34.o

5

170.8

83.5

27. 1

14-3

3

192. 2

108. 2

28. s

28.3

8

200. 1

116. 2

3i-8

2!. 7

14. 1
12. 9

From the above table it will be clear that between 1836
and i860 the banking business had been rapidly changing
in character. The banking capital increased very slowly
up to 1850, and then with extreme rapidity up to the
panic of 1857. It w a s another period of speculation.
But the thing that appears most striking in this table is
the great increase in deposits and the relative decrease in
the use of bank notes. In 1840, when the serious failures
of safety-fund banks were taking place, deposits amounted
to 16.1 millions; in i860 they had increased over sevenfold, while the capital had increased only threefold.
oBankers' Magazine (N. Y.), Vol. XI, 3d ser., March, 1877, p. 665.
24635—10




25

383

National

Monetary

Commission

Circulation, on the other hand, had increased only threefold from 1840 to i860, or, since the circulation was very
small in 1840, if we compare 1837 with i860, the increase
is less than 50 per cent, as compared with over 700 per
cent for deposits and 300 per cent for capital. The specie
held in the vaults had increased about fourfold, but when
the great increase in demand obligations of depositors is
considered, this increase was entirely inadequate. It only
constituted in 1857, when the panic came on, about 13
per cent, or a little over one-eighth, of the combined obligations to depositors and note holders. That $1 in specie
should be considered sufficient basis for $8 in notes and
deposits was absurd. This amount, it will be remembered, was almost the exact amount of specie required in
the law of 1838 against circulation alone. Evidently
banks did not realize until the panic of 1857 that deposits
now constituted the danger point in banking and must be
covered by a reserve, as well as notes. In fact, the notes
of the free banks were covered by securities, but the depositors depended upon the available resources of the
bank for prompt payment. We are better prepared to
understand the serious panic of 1857 after the examination of the table.
In 1858 the report of the banking department stated:
''The error of the day has been in considering a specie
basis of, say, one to eight or nine of immediate liabilities
sufficient to sustain specie payments unless entire confidence was maintained between the debtor and creditor." 05
The report goes on to say that the banks suspended
because of the home demand for coin. "Experience, for




aAssem. Doc. 4, 1858, Vol. I, p. 8.
384

Safety-Fund

Banking

System in New York

the first time, has shown the bankers of New York that
there is such a thing as suspending specie payments from
an internal demand for coin" (p. 14). The pressure
caused large demands upon the country banks for redemption of their notes. Many of the free banks could
only do this by withdrawing their securities from the
banking department and returning their notes. They
had no adequate reserve from which to redeem notes, and
their capital was tied up in the securities deposited in the
banking department. There arose a distrust among the
banks themselves, and when a bank could not redeem all
notes presented at once it was posted as suspended. By
October there was a list of 30 such banks published as
failed in the papers. The public took alarm, depositors
started a run on banks, and suspension was inevitable,
since the reserve was not adequate for both notes and deposits. The report goes on to say that such a state of
things was new and had not been dreamed of by bankers
themselves. a The greatest danger to the banker, as well
as to the public, lay in the large amount of his deposits,
and the least in the currency he issued. This was a reversal of the situation in 1840-1842. The report claimed
that the situation had been aggravated by the banks paying interest on demand deposits and country-bank balances. The same is often claimed to-day. This makes
the banks borrowers as well as lenders and reverses the
system of sound banking. The report condemned the
practice as promoting speculation and curtailing banknote issues. The report concluded by recommending
that a 20 per cent specie reserve be required for deposits,




a Assem. Doc. 4, 1858, Vol. I, pp. 17-18.
385

National

Monetary

Commission

but that the country banks outside of New York, Albany,
and Troy be allowed to count as specie their balances in
the redemption cities (p. 31).
The need had now become clear of in some manner protecting depositors. The report above quoted recommended that this be done by requiring a specie reserve of
20 per cent. Already the constitution of 1846 had provided for the personal liability of stockholders to the
amount of their shares of stock. In our national banking system we require a specific minimum reserve and
provide for several examinations of each bank through
the year without warning, besides the liability of stockholders, detailed reports, and other restrictions to insure
the solvency of the banks.
The question recurs as to why bank deposits should be
guaranteed by a safety fund contributed to by all the
banks. A report of the committee on banks and insurance companies of the senate of New York in 1849
referred to the noteholders as "involuntary creditors'' of
a bank. They receive the bills that pass current as
money, and for the most part can not discriminate between the good and the bad. Bank notes pass current
more readily than checks because the bank is better
known over a wider area, and the note is, therefore, more
acceptable than a personal check; but its acceptability
depends upon its security. The same report referred to
depositors as voluntary creditors and therefore not in
need of the same security against loss as the note holders. 0
This was the trend of opinion at that period, but at that
o Bankers' Mag. (N. Y.), vol. 3, May, 1849, p. 687.




386

Safety-Fund

Banking System in New York

time deposits had not yet assumed their present importance and therefore the issue was not so urgent.
On the other hand it has been shown that if the law of
1829 had been from the first responsible only for notes
and amended as it was after 1846, it would have been
entirely adequate to protect the note holder. The assessments to keep it good would have been much less than
they actually were. It might be said that the assessment should, logically, be levied on the average circulation rather than on capital, as was the case in New York
State. It is so levied under the Canadian system, which
operates successfully.
The safety-fund idea was adopted by. other States than
New York. In Ohio the branch system of banking was
used. After the law of 1845 was passed, each branch was
required to deposit with a central board of control 10 per
cent of the amount of its notes in circulation, either in
specie or in bonds of Ohio or the United States, as a protection for the note holders of any or all the branches.
Each branch was liable for the notes, but not the general
debts, of the other branches. In case of the failure of a
bank to redeem its notes the board of control assessed
the other branches pro rata to pay the note holders.
The branches were reimbursed from the assets of the
safety fund as soon as they could be converted into cash,
and the fund, in turn, was reimbursed out of the assets
of the failed bank before any other creditors were paid.
The system worked successfully in Ohio as in several
other States. 0 It is to be noted that the size of the
fund in this case was 10 per cent, and that it was levied




387

National

Monetary

Commission

upon the average circulation. This itself was somewhat
of a check upon excessive circulation. In New York
State the assessment on capital had no relation to the
amount of notes issued and therefore did not afford this
check. Besides, the method of levying upon capital excited the opposition of the city banks, which had large
capitals and relatively small circulation, while the country banks had small capitals and relatively large circulation.




388