the bank and the final redemptions from the Safety Fund fell within the prescribed limit.

But the most flagrant violation in the way of fraudulent over-issue occurred in connection with the Bank of Buffalo. This bank, having a capital of $200,000, was lawfully entitled to issue notes only up to that amount. The discovery that its issues were $13,000 in excess of this was one of the causes of the injunction granted in November, 1841. A thorough examination of the books and accounts of the bank led to the belief that there were about $290,000 outstanding. The exact amount was never definitely ascertained, but aside from any amounts that may have been lost or that received by the bank itself in the settlement of its affairs, the Comptroller redeemed from the Safety Fund no less than $435,540—$235,540 in excess of the maximum prescribed by statute.

The over-issues of these two banks alone-the City Bank of Buffalo and the Bank of Buffalo-cost the Safety Fund $252,647 more than the maximum circulation to which they were entitled; while an examination of the affairs of all the insolvent banks showed that their actual outstanding circulation at the time of failure amounted in the aggregate to $600,000 more than that stated in their last annual returns, a difference much too great to be due to any actual increase in the circulation. The act of 1843 corrected the defect noted by providing for issue by the Comptroller in blank and registry of all State Bank bills.

Application of the Safety Fund.

The experience in this regard has been too fully given above to make it necessary here to do more than note how illogical was the original use of the Safety Fund to pay local depositors as well as note holders; how disastrous in practice was the result, and how this was remedied.

Mistaken Basis for the Assessment.

The Safety Fund was to be made up and kept good by an assessment (whenever required) of one-half of one per cent. per annum upon the capital of the cooperating banks. It was only in the most imperfect way that in the case of each bank, after 1837, its capital corresponded to its authorized circulation; while almost exclusively it was the smaller banks which, deriving from their circulation the greater proportion of their profits, continually kept near the limit in this regard. As a consequence, not merely were the strong banks unduly burdened to guarantee the notes of the weak ones, but, since the assessment to be paid by each was unaffected by the amount of its outstanding notes, such assessment was no obstruction to increase of circulation. Had it been based instead upon the average amount of outstanding circulation, not merely would the law more promptly have provider against over-issues, but to some extent the tax itself would have been a brake upon excessive issues. Such were among the considerations which, at the very outset, were the grounds for complaints by the larger New York banks, and which would doubtless have been remedied had not an entirely different system been adopted before the safety fund plan itself had been perfected.

RESULTS.

As the weak points noted became apparent the Legislature was prompt to apply remedies. as noted in the chapter on legislation at pages 288-290 How appropriate and effective were the means thus adopted can perhaps be so well illustrated in no other way as by the calculations below of what would have been the actual experience of the Safety Fund Act had it included from the beginning the features which, on the suggestion of experience, were adopted by amendment.

In actual practice the Safety Fund was depleted by drafts not consistent with proper legislation; and which were actually stopped by amendment of the lawtoo late, however, to prevent serious results:

First.-As to obligations of banks accrued before April, 1842, the Safety Fund was used to pay depositors and other creditors, as well as to redeem outstanding circulation; and $1,088.000 was thus used to pay debts other than circulation.

Second.-Prior to 1843 there was no registry of notes or safeguards against overIssues. As a consequence there were redeemed from the Safety Fund $252,647 of notes in excess of legal issues, and a much larger amount in excess of reported

issues.

Third.—On account of these illegitimate drafts the Safety Fund had to be made good by loans, the interest on which before they were repaid from the proceeds of the annual % assessments on bank capital was $500,000.

Eliminating these alone, the following is a statement of what the results of the experience with the Safety Fund system would have been had the legislation before the failures of 1840-42 taken the form of the act as perfected by subsequent legislation

Aggregate demands upon the fund: Circulation, $1,615.000, less $255,000 overIssues (which would then have been impossible), or $1,360,000. This demand, however, would not all have accrued at once. $413,000 was on account of banks failing

prior to January 1, 1841; $1,100,000 on account of banks failing prior to January 1, 1842; and $1,360,000 for banks failing prior to January 1, 1843. Annual contributions being resumed as soon as the fund was in any way depleted, in January, 1841, it would have amounted to $1,076,000; $1,238.000 January 1, 1842, and $1,400,000 January 1, 1843. The Comptroller, being hampered by no necessity for reserving a part of the fund to pay general creditors, would have been free to redeem the outstanding notes of each bank immediately upon the granting of the injunction against it. There would, therefore, have been no cause for depreciation of the bills of any of these banks; but all would have been promptly redeemed at par. And after all note-holders were paid there would still have been a small surplus, which the regular one-half per cent. contributions of the banks would soon have raised to the required three per cent. Not only, therefore, would the fund have been adequate to meet, as it was presented, the circulation of the banks that failed in 1840-42, but would have afforded ample security for the circulation of the remaining banks until the expiration of their charters, redeeming at once and in full the notes of the four banks which failed in 1854 and 1857, and still leaving a surplus to be returned to the contributing banks upon the expiration of their charters.

In this summary nothing is said of the first lien given the notes of an insolvent bank by the constitution of 1846, which alone would have reduced the charge upon the Bank Fund by more than $800,000.

Nor has the effect of the individual liability of bank stockholders, under the Constitution, accruing after 1850, been taken into account.

And a most important factor is still to be noted. The natural effect of a system can be seen only when it is allowed its natural development. Had not the "Free Banking" system been adopted in 1838, the Safety Fund assessments would have been based on a constantly widening basis. As it was, they were paid on a constantly diminishing capital, as the charters of the Safety Fund banks expired.

Taking these considerations into account, it is plain, as the result of calculation from experience of 36 years (1829-1865), that, had the Safety Fund system-as perfected prior to and in the constitution of 1846-been left untouched as that upon which New York State bank currency was based, not merely would every dollar of circulation have been kept good, but the total assessment to keep the fund good would have averaged less than 4% on the banking capital, or about 3⁄4%%% on the average circulation outstanding.

Why the Safety Fund System was Superseded.

The system of granting special charters had given rise to such abuses, both in the distribution of the stock of the safety fund banks and in their subsequent management by bank commissioners, whose appointment was within the field of political spoils, that the whole system was abandoned and in 1838, a general banking law enacted, under which individuals or associations with requisite capital might engage in the business of banking by depositing with the Comptroller certain specified securities upon which circulating notes were issued. After the passage of this general law no new special charters were granted, though two of the older chartered banks after this entered the safety fund system with extended charters.

The safety fund system was thus the banking system of the State during the years 1829-38-all the charters granted in this period being under it; while from 1838 until 1866, when the last charters expired, it was an organized, working system, existing alongside the banks incorporated under the general law. It is a fact perhaps worthy of notice that this abandonment of the system took place before any real failure had occurred to try its strength, and was not due to any failure of the safety fund to afford the requisite security to the bill-holder. On the contrary, upon each of the occasions when its assistance had been invoked-involving the redemption of the notes of five different institutions-it had met every requirement; all advances on account of the suspensions had either been entirely restored or were fast being repaid; and not a dollar had been finally lost on any bank note issued under the system during the nine years it had then been in force.

BOND DEPOSIT SYSTEM-“ FREE BANKING.”

For years prior to 1838 the political situation in New York had been such as to tempt criticism of Safety Fund banking as something for which the Federalists were responsible, and now the Democrats, after having made the question an issue for several campaigns, found themselves in a position to put into legislation the counter theories they had advocated. The Free Banking Act of 1838 was the re sult; to the perfection of which was devoted such of financial experience and tact as could then be utilized in behalf of a special security system.

The Safety Fund law had been a comparatively novel application to banking of principles long familiar in the conduct of other business; the Free Banking Act was the development of the rival principle of special security, which had maintained from time immemorial in the banking business as well. Had the Safety

Fund not been pre-empted by their political opponents there was no reason why the free banking advocates should not have adapted it to their plaus. As it was, however, their criticism had been too universal to make it easy for them to adopt any part of the system they had denounced. As a result, the Free Banking Act was carefully drawn, not merely to do away with the "monopoly" which had been denounced as an incident of the Safety Fund system, but to exploit as far as possible the theories opposed to those upon which it was based; and, since the Safety Fund system still continued in operation, a most instructive experience, under similar conditions, of contrasting systems was the result,

LEGISLATION.

1838. The Free Banking Act, based upon a bill drawn by Abijah Mann, bears date of April 18, 1838. Under it individuals or associations were authorized to engage in the business of banking, and to receive from the Comptroller circulating notes in blank, duly registered and countersigned, upon depositing with him the stocks of the United States, of the State of New York, or of any other State approved by the Comptroller, made equal to a five per cent. stock of the State of New York, or bonds and mortgages on improved, productive, and unincumbered real estate, worth double the amount secured by the mortgage, and bearing interest at not less than six per cent. per annum. The banks might deposit stocks only, in which case the notes were printed in a manner to indicate that they were so secured; or they might deposit half stocks and half bonds and mortgages, when that fact was likewise shown by the notes.

By this general act each association desiring to operate under its provisions was authorized to fix its own corporate name; determine the amount of its capital, and the period of its corporate existence; designate the place where its banking operations shall be carried on, and to provide by its articles of association for an increase of its capital, should it be so desired.

Associations were required to have a paid up capital of $100,000. Individuals, being subject to unlimited liability in any event, were not required to show evidence of any special amount of paid up capital; and neither associations nor individual bankers were required to deposit any specified amount of securities.

In case of failure or refusal on the part of the association or individual issuing notes to redeem them on demand at the place where they were made payable, after ten days' public notice of protest for nonpayment, the Comptroller was authorized to apply the trust funds deposited for their security to the payment and redemption of the notes. The State, however, was liable for nothing beyond the proper application of the securities pledged.

Detailed semi-annual reports were required to be made.

The act of 1838 also provided for a specie reserve of not less than 12 per cent. to be kept by each association, against its circulating notes.

1840. By the act of May 14, 1840, all banks, banking associations, or individual bankers, except those located in New York, Brooklyn or Albany, were required to arrange for the appointment of agents in the city of New York or Albany for the redemption of their notes at a discount not exceeding one-half of one per cent.

A wave of repudiation, or semi-repudiation, of State indebtedness having begun in 1839, as a result of which attention was drawn to the uncertainty and undesirability of stocks of other States as security for notes issued under the General Banking act, the Legislature, by the act of May 14, 1840, excluded from future deposits all stocks except those issued by the State of New York. This, however, did not require the stocks of other States already on deposit to be replaced by New York State stocks.

This same act provided that no association should commence the business of banking until it had deposited with the Comptroller the securities required by law to the amount of $100,000, and effectually cut off the issue of post notes-a practice which was becoming quite prevalent-by an express inhibition against any banking association or individual banker issuing any bill or note "unless the same shall be made payable on demand and without interest."

The 121 per cent. specie reserve requirement was repealed by this act. 1841. The provisions of the original act in regard to the application of "the said trust funds belonging to the makers of such protested notes to the payment and redemption of such notes" having been held to authorize payment in full of the holders of protested notes at the expense of the holders of the remainder of the circulation, the act of March 15, 1841, was passed, providing for the "payment pro rata, of all such circulating notes, whether protested or not."

By the act of May 26, 1841, annual reports to the bank commissioners were substituted for the semi-annual reports to the Comptroller theretofore required. Provision was also made that any bank having redeemed 90 per cent. of its circulation, after two years' published notice, should receive from the Comptroller any securities he may hold for the payment of its unredeemed notes.

1843. The "act to abolish the office of Bank Commissioner," April 18, 1843, substituted for annual reports detailed quarterly reports to the Comptroller.

NEW YORK BANK CURRENCY.

1844. To guard more carefully the business of individual bankers it was provided by the act of May 6, 1844, that no individual banker shall receive circulating motes until he shall have deposited with the Comptroller the securities required by daw to the amount of $50,000; that every such banker shall state in his reports what persons, if any, are interested with him; and shall file with the Comptroller "a certificate, stating the town, city, or village, in which he resides; and thereafter it shall not be lawful for such individual banker to transact business under said act in any other place than in which he resides."

1846. The new State Constitution required that provision should be made by daw for all notes circulating as money, and for ample security for their redemption in specie; also that shareholders of note-issuing banks should be individually responsible to the amount of their respective shares for debts contracted after January 1, 1850; also that in case of insolvency bill holders should be entitled to preference in payment over all other creditors of the bank, etc.

1847. By the act of December 4th, 1847, the method of calling for quarterly reports was so changed as to require them to be made out after the first of each quarter for some day during the preceding quarter, then designated by the Comptroller.

1848. By the act of April 12, 1848, it was required that "all banking associations or individual bankers," organized under the general banking law, "shall be banks of discount and deposit as well as of circulation, and the usual business of banking shall be transacted at the place where such banking associations or individual bankers shall be located," as designated in certificate, and not elsewhere;" and in each report it is required to be stated that "the business of said association or banker has been transacted at such location."

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This same act required that New York stocks thereafter deposited should be, or be made equal to, six per cent. stock, instead of 5 per cent. as theretofore. The basis of mortgages was at the same time raised to seven per cent., in amount not exceeding two-fifths the value of the lands exclusive of buildings, and no mortgage to be for a greater amount than $5,000.

1849. The Legislature in 1849 (April 5) passed a comprehensive act providing for the enforcement of the double liability of stockholders of banks and banking associations subsequent to Jan. 1, 1850, in accordance with the Constitution of 1846.

By the act of April 10th, 1849, United States 6 per cent. stock were admitted for deposit on equal terms with New York stocks, except that at least one-half of the stocks deposited must still be New York State stocks.

1850. By the act of April 10, 1850, the method of final distribution of funds arising from sale of securities deposited by associations or individual bankers which shall have failed, was more definitely prescribed. After the expiration of six years after sale of the securities, the balance of the fund remaining after six weeks' published notice, was to be put to the credit of outstanding certificates if the notes previously redeemed had not been redeemed at par; otherwise, turned over to the association by which they had been deposited.

1851. By the act of April 12, 1851, "To organize a Bank Department," the appointment of a Superintendent of Banking was authorized, to whom all reports were thereafter made.

By the act of April 15, 1851, the city of Troy was added to the redemption cities, and the maximum discount at redemption agencies reduced to one-fourth of one per cent.

1863. By the act of April 29, 1863, bonds and mortgages were finally discarded as a basis for circulation, and securities for disposit restricted solely to stocks of the State of New York and of the United States, not more than two-thirds of which might be United States stock.

EXPERIENCE.

By January 1, 1839, 48 persons or associations had filed the requisite certificates in the office of the Secretary of State. The amount of capital subscribed by them was $10,838,175, the total amount of stocks transferred as security for circulating notes by the 16 associations which had commenced operations was $1,170,090, and the total amount of mortgages transferred was $422,910; about $75,000 were rejected as unsatisfactory. The amount of circulation actually issued at that time, however, was but $396,300. By December 1, 1839, the number of associations had increased to 133, of which 76, with a total capital of $21,000,000, and circulation of about $6,000,000, were in full operation.

Already, however, it was evident that all would not be smooth sailing. The Comptroller, in his report for 1840, called attention to the fact that a sort of banking mania seemed to prevail, at the extent and possible results of which the community was becoming alarmed. One bank had already been wound up during the year, fortunately without loss to the bill holders; and similar results in the case of two others were in prospect. The Comptroller, realizing that if in these early cases of failure the securities proved adequate to meet the circulation, additional confidence in the circulation would result, made every effort to secure that end.

Before the first of January, 1841, eight banking associations had ceased to do business. Four of these,* discontinued without loss to the holders of their circulating notes. The securities of one other-the Tenth Ward Bank-were sold and produced sufficient to pay 94 cents on the dollar. In the case of the bank of Tonowanda the depreciation in the value of the securities was such that the dividend on the notes was but 68 per cent. Each of the other banks-The Farmers' Bank of Seneca County and The Millers' Bank (Clyde)-had two classes of bills in circulalation; those issued on the security of State stocks alone, and those based on State stocks and mortgages. In the case of each bank the proceeds of the securities were sufficient to redeem in full the notes issued upon the pledge of State stocks alone; but of those secured by stocks and real estate, the notes of the Farmers' Bank were redeemed at 74 per cent. and those of the Millers' Bank at 94 per cent.

This, however, was only a beginning of the failures. Eighteen more followed in the course of the next year. Those notes secured by deposit of State stocks were redeemed at an average discount of 20 per cent., and those secured by stock and real estate at a discount of about 25 per cent.

In 1844, the Comptroller reported that, up to that date, 93 free banks had deposited securities and received and issued circulation. Of these, eight had voluntarily closed business and retired their circulation. Twenty-six had failed, and their circulation, amounting to in the aggregate to $1,197,547, was taken up by the Comptroller at an average of 76 cents on the dollar. The remaining 59 associations and individuals had on deposit with the Comptroller, New York State stocks amounting to $1,774,434; stock, $52,000; cash, $17,731; stocks of Mich., Ind., U. S., Ill. Ark., Ala., Ky., and Me., of the nominal value of $3,744,829, but then valued by the Comptroller at $2,745,156.†

By 1848 the number of free banks was fifty-three, and of individual bankers fifty-one, with an aggregate circulation of $9,993,762 against securities amounting to $10,640,182. Of these securities, $7,627,092 were New York State stocks, $114,000 United States stocks, $1,514,979 bonds and mortgages, and the remainder, except $49,906 cash, consisted of stocks of Illinois, Arkansas, Indiana, Alabama and Michigan. In 1848 the Legislature, admonished by the insufficiency of the security in the case of earlier failures, made a change in the law, requiring that thereafter only New York stocks, made equal to six per cent., and bonds and mortgages bearing seven per cent. interest on real esta te to the extent of two-fifths of the value of improved real estate, exclusive of the buildings thereon, could be received as security for circulation.

Millard Fillmore, Comptroller, in his report dated December 30, 1848, made just after his election as Vice-President of the United States, states that the average amount for which bonds and mortgages beld as security for circulation had sold during the previous ten years was 67.71 per cent., while five per cent. New York State stock had sold at an average of 92.86 per cent. He recommended legislation providing for the gradual withdrawal of the bond and mortgage security and the substitution of New York State stocks.‡

In his report for 1844 the Comptroller called attention to the fact that "during the past year a number of applications have been made for the establishment of individual banks at points remote from the general channels of business, and where no necessity seemed to exist for banking facilities. Many of these individual banks have originated in the City of New York, and some in Albany. The redemption at a discount of one-half of one per cent. allowed by law is probably one of the principal inducements for establishing ban! s of this description. The notes are signed and circulated in the City of New York, and by fixing the place of redemption at some inaccessible point, the holder is compelled to go to the office where the note was really issued in Wall Street, and pay half of one per cent. for its redemption. If all the banks in the State were required to redeem their notes at par in the City of New York, the motive for multiplying these shaving shops would probably be removed."

Considerable importance attaches to the practice which had thus developed of establishing banks for circulation purposes only, which did no real banking business. In a report made by a Senate Committee in 1845 the names of eight such associations are given, whose combined capital amounted to $377,000; loans and discounts, $37,920; and circulation, $545,000. "It really could never have been the intent of the Legislature," continues the report," to authorize the creation of such banks as

*The Willoughby Bank (Brooklyn); The Farmers' Bank of Penn Yan; The N. Y. City Trust and Banking Co., and The Chelsea Bank. Finding the small banks unsafe, the Legislature in 1844 required individual bankers to deposit securities to the amount of at least $50,000; and associations to the amount of $100,000, before they were entitled to any notes for circulation.

The Superintendent of Banks, in his report for 1854, savs upon the same subject: It is believed that all the bonds and mortgages that have been sold under the provisions of the free banking law, since the passage of the Act of 1838, have not produced over 75 per cent., in cash, on their par value.

"The experience of sixteen years has, therefore, demonstrated the fact that bonds and mortgages do not prove to be a certain and ample security to bill holders, and it cannot be supposed that bonds and mortgages can be negotiated or converted into cash, on short notice, by the superintendent at their par yalue.'