A Short History of Paper Money and Banking

Chapter IV. Of the Bank of North America

CHAPTER IV. Of the Bank of North America.

It is a common opinion that the Bank of North America rendered essential service during our revolutionary struggle—that, without it, the achievement of independence would have been difficult, if not impossible. Assertions to this effect have been made with so much confidence that we once believed them to be well-founded; but on examination we find—

First. That the capture of Cornwallis, which is described by historians as the closing scene of the Revolutionary War, took place on the 9th of October, 1781, and that the Bank did not go into operation till January 7th, 1782.

Secondly. That the whole amount of expenditures of the U. S. Government in the year 1782, was only three million six hundred thousand dollars, and in 1783 only three million two hundred thousand dollars. Large loans were negotiated in Europe in these years; “and such a conviction of the necessities of public supplies generally took place through the States, that considerable sums were obtained by a tax on polls and real estates.”1

Thirdly. The whole amount subscribed by individuals to the Bank did not, as appears from the concurrent testimony of Mr. Robert Morris and Mr. Gouverneur Morris, exceed 70,000 dollars.

Fourthly. From statements made by Mr. Robert Morris, in public debate in the Legislature of Pennsylvania, in the year 1786, it appears that the advances made by the Bank to the Government, above the amount of silver money actually paid in by the Government, never did exceed 165,000 dollars, and for a part of the time did not amount to 50,000 dollars.2

The reader, on duly considering these facts, will probably be convinced that the services rendered by the Bank of North America, during our revolutionary struggle, have been grossly exaggerated.

From the beginning of the year 1780, till the close of the war, hard money was very plenty. This “was occasioned by large sums, by various means, coming from the English army at New York, and spreading through the States; also by large sums remitted by France to their army and navy here; also by large importations of hard money from the Havanna and other places abroad; so that hard money was never more plenty nor more easily collected than at that time.” In a note to an essay of later date, Mr. Webster says, “the States were really overrun with abundance of cash: the French and English armies, our foreign loans, Havanna trade &c., had filled the country with money.”

“It has been asked,” says Lord Sheffield, “what has become of the money which we have sent during the war to America? Some is come back—a considerable part is the circulating cash within our lines. Many British subjects in New York have very large sums in their possession. The Dutch and Germans, whose number is not inconsiderable, have hoarded up—and it is believed considerable sums are concealed.

“France sent (not included in the debt) above 600,000 pounds sterling in specie to America, being obliged to send cash.”3

The operations of the war caused such a drain of specie from Europe, that the Bank of England was brought into jeopardy, and the Caisse d’ Escompte at Paris actually suspended payment in 1783: and such a flux of specie into the United States, that, as Mr. Webster observes, “hard money was never more plenty or more easily collected.”

Such being the state of the money market, it is difficult to believe that the Government might not, if the Bank had not been established, have obtained a loan of 50,000 to 165,000 dollars from some other source. It does not appear that the Bank ever made advances to the Government, except on the best security. For at least 80,000 dollars of the amount, the State of Pennsylvania was guarantee. For the residue of the amount, the Government might have pledged the proceeds of the taxes, or bills on Europe: and on the same security, it is probable, individuals would have made the advances, especially as money was so abundant, and the news of peace confidently expected.

The truth is, that the project of establishing a Bank in Philadelphia had been conceived by Mr. Robert Morris, before the commencement of the war, as appears from his own declaration:4 and he had entered into negociations in Europe with a view to effect this object. But a project for a Bank about the year 1763, had been vigorously opposed on the ground that it would give a few men a monopoly of trade: and it is probable that Mr. Robert Morris’s project would have encountered severe opposition, if it had not been brought forward as a fiscal measure, and at a time when neither the Legislature nor the people could give it that consideration it deserved.

He submitted his plan to Congress in May, 1780, and on the 26th of the same month it was approved by that body. “Yet,” he says, “until the month of September or October following, there were not more subscriptions in the whole, than amounted to about 70,000 dollars. During the time, one of his most Christian Majesty’s frigates arrived at Boston, and brought a remittance in specie of about 470,000 dollars. The sum was brought to Philadelphia and deposited in the vaults of the Bank. I determined from the moment of its arrival, to subscribe on behalf of the United States, for those shares in the Bank which remained vacant: but such was the amount of the public expenditures, that notwithstanding the utmost care and caution to keep this money, nearly one-half of the sum was exhausted before the institution could be organized. In November, 1781, the president and directors of the Bank were elected: they obtained a charter of incorporation from Congress—and opened the Bank for transacting business in January, 1782. I subscribed the sum then remaining in the treasury, being about 254,000 dollars, into the Bank stock, per account of the United States, which became thereby the principal stockholder.”5

As is remarked by Mr. Gouverneur Morris, the sum subscribed by Government may be said to have been paid in with one hand, and borrowed with the other, leaving the Bank but 70,000 dollars at most for its proper operations. On this amount it undertook to make advances to the Government and to individuals; but as the experience of the evils of continental money was fresh in the minds of the people, some difficulty was encountered in giving currency to the notes of the Bank. To remove this “prejudice” the gentlemen who were interested in the institution, were, as we have learned from undoubted private authority, in the practice of requesting people from the country and laboring men about town, to go to the Bank and get silver in exchange for notes. When they went on this errand of neighborly kindness, as they thought it, they found a display of silver on the counter, and men employed in raising boxes containing silver, or supposed to contain silver, from the cellar into the Banking room, or lowering them from the Banking room into the cellar. By contrivances like these, the Bank obtained the reputation of possessing immense wealth; but its hollowness was several times nearly made apparent, especially on one occasion, when one of the copartners withdrew a deposit of some five or six thousand dollars, when the whole specie stock of the Bank did not probably exceed twenty thousand.

By these means, and by the assistance of the United States Government, the notes of the Bank became current; and so profitable was the business that the early dividends were at the rate of from 12 to 16 per cent. per annum. This naturally created a desire in others to share in so very lucrative a trade. A project was therefrom formed for establishing a second Bank, to be called the Bank of Pennsylvania. This, they who were interested in the Bank of North America strenuously opposed, fearing the effect of a rival institution in Philadelphia. To prevent its being established, they opened their books for additional subscriptions; but not without murmuring loudly at the hardship of receiving new partners.6

In the year 1784, the Bank did a very extensive business; and by the beginning of 1785, the effects of its operations began to be very apparent. They are such as Banking has always produced—a temporary plentifulness of money, followed by great scarcity, usury, ruin to the many, riches to the few. These effects were ably set forth in petitions to the Assembly, from the inhabitants of Philadelphia, and those of the counties of Chester and Bucks, presented on the 21st and 23d of March, praying for a repeal of the charter of the Bank. Those petitions were referred to a committee, who, in a report of the 25th of the same month, fully sustained the allegations of the petitioners, and recommended a repeal of the charter. This recommendation was carried into effect, at the ensuing session, on the 13th of September, 1785.

Thus we find that the first Bank established in this country produced so much evil, that its charter was taken from it in less than four years after it had commenced operations.

The Bank, however, claiming the right of prosecuting its business under the act of Congress, continued its operations, though on a more moderate scale. In 1786, an attempt was made by its friends to obtain a renewal of the charter from the State of Pennsylvania, but it was successfully opposed by Wm. Findlay of Westmoreland, Mr. Smilie of the same county, and other leading democrats. It is difficult, however, for the people long to withstand the efforts of a powerful monied interest: and it being pleaded, with some show of reason, that the forms of the Constitution had not been properly regarded in taking away the charter, and many persons fearing a return of the old paper money system, the Bank was re-incorporated on the 17th of March, 1787, with limited powers, and for fourteen years. By successive acts of the Legislature, it has been continued in existence to the present day.7

_____________

8 P. W.

9From the statements of Mr. Robert Morris, the accounts of the Government with the Bank were as follows:

				Cr.	Dr.
April 2d,	-	1782	-	252,918	300,000	-	-	-	47,082
July	-	1782	-	252,918	400,000	-	-	-	147,082
October	-	1782	-	253,394	400,000	-	-	-	146,606
January	-	1783	-	53,394	100,000	-	-	-	46,606
April	-	1783	-	53,394	100,000	-	-	-	46,606
July	-	1783	-		129,800	-	-	-	129,800
October	-	1783	-		164,781	-	-	-	164,781
January 1st. 1784, the debt was discharged.

The last column shows the amount in which the Government was in debt to the Bank, at the different periods mentioned.

10 Observations on the Commerce of the American States. June 21st 1783.

11 See Carey’s “Debates and Proceedings of the General Assembly of Pennsylvania, on the memorials praying a repeal or suspension of the law annulling the charter of the Bank.” Phil. 1786.

12 It may be made a question, whether the whole of the original capital of the Bank was not advanced by Government. Thomas Paine says, in one of his tracts, it is well known “that the Bank originated in another Bank called the Bank of Pennsylvania, which was formed in the spring of 1780. On the 17th of June, it was resolved to open a security subscription to the amount of 300,000 pounds Pennsylvania currency, in real money, the subscribers to execute bonds for the amount of their subscription, and to form a Bank for supplying the army.” He afterwards speaks of some of these subscriptions being transferred to the Bank of North America.

From the journals of Congress, it appears that the Board of Treasury was directed to deposite in this Pennsylvania Bond-Bank, “bills of exchange, in favor of the directors thereof, on the Ministers of the United States in Europe, or any of them, and in such sums as shall be thought convenient, but not to exceed in the whole £150,000 sterling.”

Were the 70,000 dollars which were subscribed by individuals to the Bank of North America, paid in bonds or in money? Was a part of the 470,000 dollars received by the French frigate, used in redeeming some of these bonds: and was it in this way subscriptions were transferred from the old Bond Bank to the Bank of North America: or were the 70,000 dollars paid in by individuals without any trafficking with Government? These questions are, perhaps, rather curious than useful: but our knowledge of the contrivances for forming Bank stock in our own day, makes us desire to see an explanation of the 70,000 dollars subscription by individuals.

13 The following is an extract from a pamphlet, published in 1785, entitled an “Address to the General Assembly of Pennsylvania, on the abolition of the Bank Charter.”

“After the peace, when the advantages of the Bank had been felt, and the property of the stock had become secure, an opposition was raised by some of the same persons who are now the opposers, but on grounds somewhat different. For then, instead of considering the Bank as pernicious, it was considered to be so highly beneficial that they must needs have two. They did indeed complain of the old Bank. But for what? Not because the capital was so large as to threaten general ruin: but because the directors would not open a subscription to make it larger. And what was the modest request of that day? Why, truly, such an extension of the capital as might enable those who had waited for events in perfect ease and safety, to enjoy the same advantages with those who had borne the burden, and run the risk of the contest. It was, indeed, a hard case that many worthy gentlemen who would not have given a shilling to save the State, should be obliged to pay either $500 for a share in Bank which had cost but four, or to lend their money on bond and mortgage to the farmers of Pennsylvania. A very hard case; And so loudly did they complain of it, that at last many sensible members of Assembly were prevailed on to believe it would be a good thing to have two Banks. Two shops to go to, for that was the fashionable phrase. And they were the more easily led into this opinion, because it was laid down by some in high stations, for whose sentiments they had acquired a habitual respect.

“The consequence of the noise made at the time, must be well remembered. The Assembly were plagued with long arguments on both sides which might have been spared, and then, all at once, the thing was hushed up and accommodated. Because, such of the promoters of the new Bank as had mouey, found out their new friends had none. Because they all found out the scheme did not promise so much either of security or profit, as was imagined. And because they had not too much confidence in each other, being (like Nebuchadnezat’s image) composed of discordant materials. They agreed, therefore, to abandon their project, on certain conditions acceded to by the old Bank, one of which was to extend the subscription, and this it is which has converted all the surplus money of the State into Bank stock. For otherwise, let the price of a share have risen ever so high, nay, had it gone to 4000 instead of 400 dollars, not one penny would have been added to the Bank capital. But in proportion as stock rose, the dividends would have been less valuable.

“It is notorious that if the Directors had not been under compulsion, they would not have extended the subscriptions beyond the first 400,000 dollars. It is notorious that any addition to the number of shares lessens the value of each.”

14 For further particulars respecting the early history of the Bank of North America, see Appendix.

1* Letter to Mr. Gallatin, by Publicola, New York, 1815.
2† Ib. Vol. II, p. 58.
3* See Say, Book, Chap. xxi, Section 2.
4* This is not the first time this remark has been made. In the British Bullion Report, made in 1811, the following passage occurs: “The wages of common country labor, the rate of which, it is well known, adapts itself more slowly to the changes which happen in the value of money, than the price of any other species of labor or commodity.”
5‡lb. Vol. II, p. 82.
6* They were those of Scott and M’Michael, Peter Baynton & Co., and of one other firm, the name of which is not recollected by our informant.
7* This opinion was sufficiently refuted by the Bullion Committee, so long ago as 1811 ; and the correctness of their conclusion is confirmed by those who have had the best opportunities for observing the operations of the Banking system. “I consider the opinion entertained by some,” says Sir F. B., “that the Bank ought to regulate its issues by the public demand, as dangerous in the extreme; because I know by experience, that the demand for speculation can only be limited by want of means.” The general practice in England is to discount only business paper, but this does not prevent the recurrence of evils similar to those we suffer in the United States.
8“In most disquisitions upon the noxious tendency of Banks,” says another writer* “much stress has been laid upon the injuries they have a power to inflict, by excessive loans and consequent bankruptcy, and by creating and circulating a permanent excess of currency. Could these two evils be avoided, many believe that Banks would be innoxious. I regret to differ. I am not of those who imagine that Banks incorporated with a liberal capital, will ever endanger their solvency by extending their loans; nor of those who believe that Banks controlled by specie payment, can circulate a permanent excess of paper. And yet, I think I can perceive a portentous power that they exercise over commercial enterprize. I am of opinion that they can circulate a temporary excess of paper, which, from time to time, finds a corrective, in a run upon the Banks for specie; that this temporary excess is succeeded by a temporary deficiency, one extreme invariably tending to another; that the consequences of this alternate excess and deficiency are, in the former case to impart an undue excitement, and in the latter an undue depression to commercial enterprize; that the effect of the former is to create an unnatural facility in procuring money, and to enhance unnaturally the price of commodities; while that of the latter is to produce an artificial scarcity, and to cheapen prices artificially; that the victims of these vibrations are the great body of merchants, whose capital and average deposits cannot always command discounts; that the gainers are a few intelligent and shrewd capitalists, the magnitude of whose deposits commands enormous discounts at all times, and who, being behind the curtain, know when to buy and when to sell. I am of opinion that these vibrations inflict evils which close not with mercantile speculation; that they tend to unhinge and disorder the regular routine of commerce, and introduce at one moment a spirit of wild and daring speculation, and at another, a prostration of confidence, and stagnation of business: that these feelings are transferred from the counting-house to the fire-side; that the visionary profits of one day stimulate extravagance, and the positive losses of another engender spleen, irritation, restlessness, a spirit of gambling and domestic inquietude.
9The ill-judged expedition of the Carolinians against St. Augustine, in 1702, entailed a debt of 6000 pounds on that colony, for the discharge of which a bill was passed by the Provincial Assembly for stamping bills of credit, which were to be sunk in three years by a duty laid upon liquors, skins and furs. For five or six years after the emission, the paper passed in the country at the same value and rate as the sterling money of England.†
10Because they are divisible into extremely minute portions, and capable of re-union without any sensible loss of weight or value; so that the quantity may be easily apportioned to the value of the articles of purchase.*
11Wages appear to be among the last things that are raised by an increase of Bank medium. The working man finds all the articles he uses in his family rising in price, while the money rate of his own wages remains unchanged. In the year 1831, which was a year of great expansion, rents rose enormously in many parts of the town, store goods advanced in price, and such fresh provisions as are sold in the market were higher than they had been at any time since the resumption of specie payments; but the money rate of wages was hardly affected.*
12To defray the expenses of an expedition against the Tuscaroras, and to accommodate domestic trade, the Legislature of South Carolina established a public Bank in 1712, and issued 48,000 pounds 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 4000 pounds 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 to 200 per cent.‡ By the year 1731, the rate of exchange rose to 700, at which, says Holmes, “it continued with little variation upwards of forty years.”
13We have become so accustomed to this system of breaking, that we begin to consider it a part of the system of nature. But it was not so always. Previous to the revolutionary war, there were but three bankruptcies among the large dealers in Philadelphia.* A bankruptcy in the olden time, spread as much gloom over a family as a death; and if the bankruptcy was the result of misfortune, the family had the sympathy of all their neighbors.
14A common opinion is, that, if the Banks would not discount accommodation notes, and if they would confine themselves to business paper of short dates, their operations would not be injurious to the community.* But, a little reflection may convince us, that, by discounting business paper, as much Bank paper might be set afloat, as by discounting accommodation notes. The same lot of goods might be sold to a dozen persons, and each might give a note, and each of these twelve notes might be discounted at Bank. The limit on Bank issues would be the same as at present—that is, the demand for specie for foreign trade. The anxiety of the Banks to extend their issues would be in no way diminished. The inducement, then, would be to buy and sell goods that notes might be discounted at Bank. Now, it is to have notes discounted at Bank, that goods may be bought and sold. The spirit of speculation being excited by any cause, notes would flow in for discount, and the Banks would, as at present, discount as many as they might deem prudent.