in addition to which there were occasional issues for the relief of the treasury which were not loaned out as were the "banks." Pennsylvania in 1723, issued 15,000 pounds, which was loaned out at five per cent. upon landed security or upon plate deposited in the loan office; the bills were made a legal tender, and their gradual reduction provided for by enacting that oneeighth of the principal as well as the whole of the interest should be paid annually. They seem to have maintained their value much better than the most of the colonial issues. New Jersey. Here may be found instances of the "loan banks" issued on the pattern of Rhode Island and Pennsylvania. Georgia also, between 1755 and 1760 issued a small amount of circulation under the loan bank scheme. In 1760, and even as late as 1786, further issues of the same kind were authorized. South Carolina, in order to defray the expenses of an expedition against the Tuscaroras, and to accommodate domestic trade, in 1712 established a public Bank, and issued £48,000 in bills of credit called Bank bills, to be lent out on interest on landed and personal security, and to be sunk gradually at the rate of £4,000 a year. Soon after the emission of these Bank bills the rate of exchange and the price of produce rose, advancing in the first year to 150, and in the second year to 200 per cent. In 1736 a further emission of £210,000, to be loaned at 8 per cent., took place. By 1740 exchange on London had risen to 800:100. STATE EXPERIENCE. VERMONT. In 1806, after repeated unsuccessful attempts on the part of individuals to secure the incorporation of a bank, the Legislature (for the purpose of superseding private applications and, as was supposed, securing to the State the whole profits of banking) created the Vermont State Bank, with one branch at Woodstock and another at Middlebury. The first section enacts that "all the stock in said bank, and all the profits arising therefrom, shall be the property of this State, and be under the sole direction and disposal of the Legislature of this State forever." The bank was to be managed by 13 directors chosen by the Legislature-six on each side of the mountain-attached to the branch in their respective sections-and one at large. The directors chose from among their number the president, who signed all the bills and was er officio a director of each branch. Discretionary power was given to the branches to borrow money, each on its own credit, but at an interest not exceeding six per cent.; and no bills were to be issued at either branch in excess of the specie on hand until that should amount at such branch to $25,000; after which it was authorized to issue not exceeding three times the amount of specie until it amounted to $300,000. The treasurer of the State advanced about $500 to buy plates and paper, which seems to have been the extent of the actual capitalization of the institution. The manner in which the bank went into operation seems to have been by exchanges of specie for notes, dollar for dollar, made by prospective borrowers until the required $25,000 specie was obtained, and then loans were made in the bills of the bank to those persons in several instances with the understanding that the borrower should keep in bank or market a fund sufficient for the redemption of the bills taken by him. In their first report to the Legislature, in 1807, the Directors state that they commenced the issue of bills in February, and by Sept. 30th there was due the bank $139,757.23 The bills were of the denominations of 50c, 75c, $1.00, $1.25, $1.50, $1.75, $2.00 and $5.00. This report closes with the following: "The obstacles which were inseparable from an institution established on principles hitherto unattempted in the banking system have been happily surmounted and the practicability of those principles established. The high credit and extensive circulation of our bills, we trust, are sufficient to inspire the public confidence, and to insure a continuance of their patronage. Under the fostering care of the Legislature, we are induced to believe that this institution may become highly conducive to the convenience of the citizens, and a productive source of revenue to the State." The scheme worked so well at the outset that in 1807 two other branches were established-one at Burlington and the other at Westminster-and three of the directors assigned to each. To give confidence to the holders of the bills, the treasurer was directed to deposit in the branches all the funds of the State, which, in fact, consisted almost exclusively of the annual taxes for the support of the State government; and provision was made that if any person recovered judgment against the bank, the court rendering the same was empowered to draw for the amount, in favor of the plaintiff, on the State treasury. By these enactments the credit of the State became fully pledged for the redemption of the bills of the bank, which seem to have had about the same freedom of circulation as the notes of other incorporated banks in the interior of New England. But having in other respects no real capital, it was soon found that the bank was in danger of suffering from the want of punctuality on the part of debtors, and the slow process of collections in the ordinary course of law; to remedy which, in 1809, the cashiers were virtually constituted a court of record and authorized to enter up judgment summarily and issue execution on all debts due more than three days to their respective branches. In 1810 the State government found further cause for alarm, and restricted the loans to twice the amount of specie on hand, and in no case to exceed $1,000 to any one person or company; and the directors were ordered to report the names of all delinquent debtors, and publish in the newspapers the names of such as were in default more than eight months. The bills were also made a legal tender for taxes and in redemption of property sold for non-payment of taxes. All this availed nothing, however; neighboring banks were failing, or fast becoming bankrupt; and in 1811 the Assembly prohibited the reception of the bills of other banks in payments to the State, and appointed a committee to inspect the condition of the State bank, which was evidently in a fair way to follow the foreign banks into a state of insolvency. One of the branches had already been closed. In 1812 a land tax was assessed upon the State of one cent per acre for the purpose of raising funds with which to redeem the bills of the bank, the affairs of which were then closed as speedily as possible. The amount of loss to the State treasury was never definitely ascertained. All other creditors of the bank were paid in full. About $230,000 of the bills received by the treasurer of the State were never redeemed by the bank-viz.: $130,000 received in payment of taxes prior to the imposition of the land tax, and about $100,000 raised by the land tax for the redemption of such as were then outstanding. The assets of the bank were reported as being available for about $30,000; but whether more or less was realized is not apparent. Accepting this estimate, it would seem that the State lost about $200,000 on the venture. From the following statements of the condition of the bank upon different dates, much can be gathered as to the gradual winding up of the institution : Notes discounted OCTOBER, 1808. * State orders, accounts and receipts.. .$429,893 89 Bills in circulation.. $687,722 00 $548,305 75 49,227 84 79,016 97 11.171 44 $687,722 00 Up to September 30, 1809, bills to the amount of $760,825.50 had been issued, of which $404,599.75 were still in circulation. The profits at that time amounted to $22,412.48. Bank committee reported that on October 11th there were bills of the bank unredeemed outstanding amounting to $66,522.25; of which sum the State treasurer * Geo. B. Reed: Sketch of the Early History of Banking in Vermont, 1879. held nearly half. The specie and current bills on hand in the bank at the same time amounted to $2,671.07. $77,550 00 The property belonging to the bank, consisting of bonds and debts due, amounted to The property of the bank in 1822 consisted of: 1822. Lands and farms in several towns of the State taken on execution, at.. Notes Notes doubtful and bad. $21,685 00 9,263 94 9,161 43 $40,110 The State had redeemed all of the outstanding bills and checks of the bank, receiving them in payment for taxes. The affairs of the bank were not all settled up until about the year 1845. KENTUCKY. The second State which really ventured so far into the field now under discussion as to inaugurate under its own auspices a fully equipped banking institu tion was Kentucky. For ten years after the admission of Kentucky into the Union, there was nothing within its limits that would answer to the name of banking. In 1802, however, a charter was granted to the Kentucky Insurance Company which carried with it the right to issue notes payable to bearer. The company did a large and very profitable banking business, the success of which led four years later to the favorable reception by the Legislature of a proposition to charter a bank, professedly such. The result was the incorporation of the first or old Bank of Kentucky, December 27, 1806. "The capital stock was fixed at $1,000,000, of which one-half was reserved for the State. The State also had the right to name the president and six of the twelve directors who were to manage the bank; the right was reserved to the Legislature to increase the number of directors from twelve to twenty-four, so that in case of refractory members they could be outvoted by pliant minions installed in behalf of the State. In this reserved power of the State over the bank were the seeds of its ruin. The bank was made a political rather than a financial institution, and for this reason more than any other failed in the end. At almost every session of the Legislature after the original charter there were acts concerning the bank, and most of them were hurtful instead of beneficial. Acts were constantly passed authorizing the bank to do or not to do what was forbidden or authorized by the terms of its original charter. "In 1808 an act authorized the bank to pay all warrants of the auditor that he had not funds to pay, and to pay them in specie, thus discriminating against the notes of the bank, and in favor of specie, when the State had agreed to take the notes of the bank for all dues. In 1815, when the bank had been driven to the suspension of specie payments in common with other banks in the country, the Legislature increased its capital stock to $3,000,000, and authorized the county seminaries to sell their educational lands and invest the proceeds in the stock of the suspended bank. In 1817 the Legislature legalized an agreement between the mother bank and its thirteen branches to the effect that neither was to be bound to take the notes of the other, and thus made it appear that the State was inducing its citizens to take the notes of banks that would not take each other's notes. In 1819 the charter was extended to 1841; but again, in 1820, it was reduced to 1829, and finally, in 1822, repealed. "If the old Bank of Kentucky had been left to itself and not been presided over by the Legislature, there can be little doubt that it would have been a success instead of a failure. It had thirteen branches in the State, and they were so distributed as to have been of great advantage if properly managed. The capital stock of the mother bank at Frankfort, and of its thirteen branches, amounted to $2,726,100. Of this the State held $586,400, and individuals $2,139,700. The aggregate capital of the thirteen branches was $1,955,198, and that of the mother bank $770,902. After the repeal of its charter in 1822 the Legislature extended enough of its franchise from time to time to enable it to wind up its affairs." * In January, 1835, there were still $31,070.89 of the notes of the old Bank of Kentucky reported as "in circulation, or lost or destroyed; " but the president adds "not more than ten per cent. of which it is confidently believed will ever be presented for payment." In 1817-18 the feeling against permitting this institution to continue longer to enjoy its monopoly took tangible form, and forty-six independent banks were chartered, with an aggregate capital of $8,270,000, their bills being redeemable in those of the Bank of Kentucky or of the Bank of the United States, as well as in specie. They were allowed to issue these demand notes to an amount over and above the specie in their vaults equal to three times their capital stock less their debts. These charters were issued January 26, 1818, but in November of the same year a pressure for specie on the part of the Bank of the United States caused them all, as well as the Bank of Kentucky, to suspend--though the last named bank resumed on December 10th of the same year. The directors of the newly created banks were, it is said, men destitute of experience or knowledge of financial affairs, and in some instances devoid of commercial honesty. During the summer of 1818 the State had been flooded with their paper, and the action of the Bank of the United States, rendered necessary by its own instinct of self-preservation, in calling in its loans and presenting bills for redemption in specie, gave the impulse which caused these banks to collapse like bubbles, carrying with them the speculations based upon their loans.† But even before the final repeal of the charter of the Bank of Kentucky, the Legislature, November 29, 1820, chartered for a period of 20 years the Bank of the Commonwealth of Kentucky, with a capital stock of $2,000,000. A supplemental act, December 22, 1820, authorized the bank to issue circulating notes to the amount of $3,000,000. The public faith was pledged for the redemption of its circulation and certain lands south of the Tennessee river were set aside as a guaranty. This paper was not made a legal tender, but was made payable and receivable for all public debts, dues and taxes; and if a creditor refused to receive its bills he became exposed to the operation of the replevin or stay law. Loans to single individuals were limited to $2,000. "The bank was to be managed by a president and twelve directors chosen by the Legislature. The main bank was located at Frankfort, but it was to have a branch in each of the thirteen judicial districts in the State. All debts due to the State could be paid in the notes of this bank, but, strange to say, while its charter required its own notes to be paid in specie, it permitted those who owed the bank to pay what they owed in the notes of the Bank of Kentucky. There is no way of accounting for this strange provision of the charter except upon the assumption that it was then the fixed purpose of the Legislature to withdraw the State stock, money and business from the Bank of Kentucky and to concentrate them in the Bank of the Commonwealth. And such in fact was afterward done as fully and as rapidly as they could be drawn from one bank and placed in the other."* "At the time of the establishment of the Bank of the Commonwealth the Bank of Kentucky was in good condition, well managed, paying its notes in specie, and its stock was at par. By the terms of its charter, as already noted, the right was reserved to the Legislature of electing such number of directors as would ensure control of the Board. Fearing that the experienced and conservative President and Board of Directors. who had hitherto so prudently managed the Bank of Kentucky, might feel it their duty to reject the issues of the new institution, the Legislature exercised its right and superseded the old Board by men pledged to receive the notes of the new bank for debts due the Bank of Kentucky. This action effected the ruin of the latter bank, depreciating its stock fifty per cent. and compelling it to suspend specie payments."+ On the 18th of December, 1821, an amendment to the charter of the Bank of the Commonwealth set aside one-half of the profits of the State in the bank to be devoted to public instruction-a promise, however, which was not fulfilled, if indeed there were any profits to be so appropriated. January 7, 1824, an act of the Legislature turned over to the revenue whatever there was of the literature fund, as it was called, after which nothing further is heard of the bank as a contributor to public instruction. "The bank soon found that some of its branches were at places where banking could not be made profitable, and in 1830 the Legislature authorized the mother bank to dispense with any branch that did not pay its way. This was but the beginning of the end, for neither the mother bank nor any one of its branches R. T. Durrett: Early Banking in Kentucky, in Kentucky Bankers' Association Proceedings, 1892. J. J. Knox, in Rhodes' Journal of Banking, September, 1892. was in a prosperous condition. Its stocks and its notes were at 2 fatal discount and no act of the Legislature could inspire confidence in them. The bank was first restricted to the issue of notes of denominations between $1 and $100; but it was not long before many persons did not want so much as $100 or even $1 of its paper, and notes for the fractions-shinplasters-in denominations of 64, 121⁄2, 25 and 50 cents were made, many of which were never redeemed."* By March 22, 1822, the notes of the Bank of the Commonwealth had fallen to 62 cents on the dollar, and they continued to fall in value until they passed at a small fraction of their face value, and creditors were left to accept a fraction of their debt in full payment or go without payment for two years, running the risk of further delays and perhaps ultimate failure of payment. Meanwhile the Circuit Court, and later, the Court of Appeals, decided against the constitutionality of the replevin feature of law. Thereupon ensued a fierce and long continued struggle between the Legislature and the judiciary, involving the attempted abolition of the existing Court of Appeals and the creation in its stead of a new Court, with three justices with salaries of $2,000 each, payable in Bank of Commonwealth notes. In 1827 the controversy was closed in favor of the old Court. In connection with the Bank of the Commonwealth of Kentucky the question whether the bills of this bank were such bills of credit as are forbidden by that clause of the Constitution of the United States which provides that States shall not emit bills.of credit, came before the United States Supreme Court. The charter of the bank provided that it should be established in the name and in behalf of the Commonwealth of Kentucky, and should be under the direction of a President and twelve Directors, to be chosen by the Legislature, and, moreover, that it should be exclusively the property of the Commonwealth. The Supreme Court had previously, in the case of Craig vs. State of Missouri, decided that bills of the State issued through loan offices were unconstitutional, and the question here arising as to whether the bills of the Bank of the Commonwealth, a creature of the State, with a capital subscribed wholly by the State and managed by State officers, the profits from which were to accrue to the State, did not come under the same rule, it was held that the law was not unconstitutional, and that the notes issued by the institution were not bills of credit of the State. In 1830 the bank, by authority of the Legislature, ceased to loan money, and for the simple reason, though not so stated, that nobody wanted to borrow its money. Its charter expired in 1841, but such of its franchises as were necessary to wind up its affairs were from time to time extended by the Legislature, and, like the old Bank of Kentucky, it continued for many years trying to collect its assets and pay its debts. It may, however, be considered as having closed its banking business when it ceased to loan money.* The State of Kentucky seems by this time to have learned that a controlling interest in a banking institution was not always an advantageous condition, either for the bank or for the State. It was not, however, yet ready to withdraw entirely from banking ventures. In 1833-5 three banks were incorporated, the Bank of Louisville, the Bank of Kentucky, and the Northern Bank of Kentucky. The second of these was chartered February 22, 1834, for thirty years, with a capital of $5,000,000. Of this amount $2,000,000 was reserved for subscription by the State. In 1843 the State stock in the bank was reduced to $1,000,000. The State subscriptions were paid for by the issues of bonds, a part of which were held by the bank as an investment and the remainder sold. The management was through eleven directors, eight chosen by the stockholders and three by the State. The bank was authorized to open a principal office at Louisville and six branches, including one "to be located and continued at the seat of government, unless the Legislature shall otherwise direct, to aid in the management of the fiscal affairs of the State.' The branches first established were at Frankfort, Lexington, Maysville, Greensburg, Bowling Green, and Hopkinsville. The amount of notes originally issued was Frankfort, $241,000; Maysville, $126,000; Lexington, $200,000; Greensburg, $60,000; Bowling Green, $60,000; Hopkinsville, $60,000. These limits were subsequently raised, and by May, 1837, the issues of the principal bank appear to have been $2,430,000, and of the branches $1,505,000. In 1837 the treasurer was directed to use a certain proportion of the revenues received from the U. S. in paying up some of the shares in the bank subscribed for by the State; in return for which the bank opened an additional branch at Danville. The course of the bank was marked by a thoroughly conservative and able management which earned for it a well deserved success. The years of the war interfered somewhat with its business, and resulted in the closing of all the branches, except that at Frankfort. In 1877 the Bank purchased, at an estimated valuation * Durrett : Early Banking in Kentucky." |