CHAPTER IX

BANKING DEVELOPMENT IN THE UNITED STATES

67. Early state banks.-The early experiments in banking in the United States were concerned largely with the issue of circulating notes and with the fiscal operations of the Government. During colonial times several banks were projected in New England with the right to issue circulating notes based on the security of land. These early banking projects assumed that if such security were given for the ultimate payment of the notes, current redemption would be unnecessary. Usually they had no actual paid-in capital but depended upon mortgages as a basis for their operations. These "land bank" schemes to supply a circulating medium were suppressed by the colonial or the English governments.1

The first bank established in the United States was the Bank of North America in Philadelphia, which was chartered by the Continental Congress in 1781. It was planned by Robert Morris, the Superintendent of Finance, in order to give financial support to the Revolution. A little earlier a number of patriotic Philadelphia citizens had organized the so-called "Bank of Pennsylvania," which consisted merely of private subscriptions to provide supplies for the army. The Bank of North America took over its foreign bills and assumed its claims against the Federation.

The Bank of North America was capitalized at $400,000,

1 For a discussion of some of these Colonial banking schemes, see White: Money and Banking, Bk. III, Ch. IV.

of which the Government subscribed $250,000. There was so much doubt as to the power of the Continental Congress to charter a bank that a charter was secured under the laws of the State of Pennsylvania in 1782, and the bank operated under this charter until 1864, when it entered the national bank system. It also took out charters in several other states. The Bank of North America rendered an invaluable service by making loans to the government during the troubled years of the Revolution. About this time state banks were organized in Massachusetts and New York. The Bank of Massachusetts located in Boston was chartered in 1784. In the same year the Bank of New York began business under articles of association drawn by Alexander Hamilton, but it did not receive a charter until 1791.

Some of the restrictions imposed upon these early state banks are noteworthy. The charter of the Bank of Massachusetts limited its debts, except sums due to depositors, to twice the paid-in capital, and the debts of the Bank of New York, over and above deposits, were not to exceed three times the paid-in capital. This distinction between the bank's liability to depositors and to noteholders was due to the fact that deposits were not then created by loaning as they are to-day, but by the actual deposit of money. Actual money, not deposit currency, was used in making payments; hence deposits were distinguished from other liabilities in estimating the right to contract debts. Both banks were prohibited from dealing in merchandise. The Bank of New York was prohibited from dealing in the stocks (bonds) of the United States or any of the states, an evident attempt to separate banking and government. It was also prohibited from loaning on real estate or holding it except for banking purposes or when it was necessary to take it to secure the bank against debts previously contracted. This restriction was incorporated in the national bank law passed nearly eighty years later. The Bank of Massachusetts was also prohibited from dealing in bank stocks.

68. First Bank of the United States.-The first Bank of the United States was chartered by Congress in 1791, on lines laid down in a report by Alexander Hamilton, the first Secretary of the Treasury, as a part of the general scheme to support the public credit of the new Government.1 The establishment of the bank was opposed on the ground that Congress was not empowered by the Constitution to create banks. Hamilton contended that this power was implied and his arguments prevailed with Congress and the President. The bank, patterned largely after the Bank of England, was intended to provide a depository for public money, to act as fiscal agent of the new Government, and to be a regulator of the currency.

It was capitalized at $10,000,000, divided into 25,000 shares. The Government was to subscribe $2,000,000, payable in ten annual installments with interest at 6 per cent. The balance was open to public subscription and was to be paid one-fourth in specie and three-fourths in government securities. The bank was governed by twenty-five directors, of whom not more than three-fourths were eligible for election the next succeeding year. Each stockholder was entitled to cast one vote for one share, an additional vote for the next two shares and so on, but no stockholder could have more than thirty votes, and no foreign stockholder could vote by proxy. The bank was allowed to issue notes which were legal tender in payment of all debts to the United States. The maximum amount of debts which it might owe at any time, except for deposits, was never to exceed its capital, except by authorization of Congress, and in case of excess the directors were personally liable for the amount. It could not buy or sell goods, except forfeited collateral, under penalty of forfeiting three times the value of the commodities. It might sell, but not buy, United States stocks. It was permitted to hold only such real estate as it needed for banking purposes or such as had been mortgaged to it as security 1 See Holdsworth: First Bank of the United States (Nat. Mon. Comm.) for a full account of this bank.

or conveyed to it in satisfaction of debts previously contracted. Loans and discounts were not to be made at a rate above 6 per cent. It was subject to inspection by the Secretary of the Treasury. The charter was to run for twenty years.

It

The central institution was located in Philadelphia, having a capital of $4,700,000 assigned to it, and branches were established in New York, Boston, Baltimore, Washington, Norfolk, Charleston, Savannah and New Orleans. From the start the bank was in every way successful. carried the bulk, probably two-thirds, of all government money deposited in banks; it made loans to the Government whenever requested, collected the bonds of importers for customs duties, and made transfers of money at the order of the Treasury without charge. It refused to receive the notes of state banks which did not promptly redeem such notes in specie and so became a powerful influence in establishing a sound currency. It loaned to private individuals and firms and paid dividends for twenty years at an average rate of 8 per cent.

Within four years after its establishment the bank had loaned to the Government $6,200,000, nearly two-thirds of its entire capital. The loan of so large a proportion of its funds crippled its services to commerce and manufacturers and made it difficult to advance temporary loans to the Government. It therefore requested the Government to repay the loans. As there was no market for government bonds it became necessary for the Government to sell its holdings of bank stock. These sales extending over a period of five years were made at premiums of from 20 to 45 per cent. In 1802 the Government ceased to be a stockholder. In addition to dividends averaging about 83 per cent the Government made a profit of $671,860.

In 1809 the stockholders of the bank petitioned Congress for a renewal of the charter, and Gallatin, Secretary of the Treasury, strongly indorsed the petition. Unfortunately the question of renewal became a political issue and strong opposition developed against it. The Republican party.

which had come into power, believed in the strict construction of the Constitution and so opposed the bank on the ground that it was unconstitutional. They denounced the bank as being aristocratic and under foreign influence, eighteen thousand of its shares being held abroad, though the management was in the hands of the seven thousand stockholders living in the United States. The state banks, which in 1811 numbered eighty-eight, felt the competition of the great bank and its branches, and they united with the political enemies of Gallatin in opposing renewal. The bill to renew the bank's charter was lost by a majority of one vote in the House and a tie in the Senate, and the bank went into liquidation. The assets were purchased by Stephen Girard, the merchant prince of Philadelphia, who organized the Girard Bank with a capital of $1,200,000. The stockholders of the Bank of the United States received $434 for each $400 share.

69. Second Bank of the United States. During the War of 1812 with England the Government had to depend upon the state banks for financial aid and service. After the dissolution of the First Bank these state banks had sprung up in great numbers, and were poorly supervised and managed. The liquidation of the big bank caused a heavy drain of specie to pay European investors. In 1814 the banks all over the country, except in New England, suspended specie payments. The Government, whose funds. were deposited in the state banks, defaulted on the interest of the public debt, and the whole country was in a condition of financial chaos. In this emergency Secretary of the Treasury Dallas proposed a national bank, but it was not until 1816 that the Second Bank of the United States was established.

The charter of the Second Bank of the United States was modeled after that of the First Bank. Its capital was $35,000,000, of which one-fifth was subscribed by the Government, payable in cash or in five per cent government notes. Private subscriptions were payable one-fourth in coin and the balance in government securities. These