A Short History of Paper Money and Banking

“Let the Americans,” said Wm. Pitt, “adopt their funding system, and go into their Banking institutions, and their boasted independence will be a mere phantom.”

No small number of Americans were of a similar opinion: but it was contended by others, that if the revolutionary debt was not funded, injustice would be done to the public creditors. Out of this funding system sprung the old Bank of the United States, for three-fourths of its capital consisted of public stocks. The Bank, its friends averred, was necessary to support the public credit, and aid the fiscal operations of the Federal Government. Its opponents contended that it was anti-republican in its tendency, and that the Constitution gave Congress no power to establish such an institution.

The period immediately succeeding the Revolutionary War, was, in a peculiar sense, an age of speculation. Trafficking in soldier’s certificates, in the public lands, and in the various evidences of the public debt, was the business of many who had money, and of many who had not. Perhaps the fortunes some thereby acquired, may have excited envy, and thus increased the opposition to the system which had its origin with some in political, and with others, in moral reasons. Be this as it may, the Bank of the United States was regarded as the cap-stone of a policy which was viewed as very objectionable: and the democratic journals of the day abounded in what one of our most respectable authors calls “abuse of the Banking and funding system.”

Mr. Jefferson’s opposition to Banks was of the most decided character. In his preface to Destutt Tracy’s Political Economy, he denounces them as parisitical institutions: and he seldom let slip an opportunity of expressing his abhorrence of their whole scheme of operations. His objections to the Bank of the United States on constitutional grounds were equally strong. “I consider,” he says, “the foundation of the Constitution as laid on this ground, that “all powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States or the people.” To take a single step beyond the boundaries thus specially drawn around the power of Congress, is to take possession of a boundless field of power, no longer susceptible of definition. The incorporation of a Bank, and other powers assumed by this bill, have not, in my opinion, been delegated to the United States by the Constitution.” After showing that the powers were not among those specially enumerated, nor in any of the general phrases, he says “It is known that the very power now proposed as a means was rejected as an end by the Convention which formed the Constitution: a proposition was made to them to authorize Congress to open canals, and an emendatory one to empower them to incorporate; but the whole was rejected, and one of the reasons urged in the debate was, that then they would have power to create a Bank, which would render the great cities, where there were prejudicies or jealousies on this subject, adverse to the reception of the Constitution.”

The Bank was not established by a strict party vote, for eleven out of thirty-nine who voted for it were democrats, and six out of twenty, who opposed it, were federalists; but it afterwards became, as Mr. Niles says, one of the landmarks of party, and, in the second Congress, a resolution declaring the Bank charter unconstitutional, was within one vote of passing the House.

The hostility of the democratic party to the Bank, was but little abated for many years; but, as the time approached for the expiration of the charter, enmity to the institution gave way, in a great degree, to fear of the distress which the winding up of its affairs would produce. The pens of numerous scribes were employed in portraying the manifold evils which must come upon the country, and deputations of merchants and mechanics were sent from Philadelphia to Washington, to beg Congress to avert the impending danger.1

The predictions that were so confidently made of the ruin that would overspread the land, if the charter were not renewed, had their intended effect on some of the democratic members. But, after a full discussion, the bill was indefinitely postponed on the 24th of January, 1811, in the House of Representatives, by a vote of 65 to 64. The National Intelligencer said, on recording the vote, that if the question had not been on the indefinite postponement, but on the passage of the bill, the majority would have been much greater.

Another bill was brought before the Senate; but, on the 20th of February, the first section was struck out by the casting vote of the Vice President, George Clinton.

The Senate gave this vote, which was equivalent to a rejection of the bill, only eleven days before the charter expired. The Bank made application in this interval for such an extension of its charter as would enable it to wind up its concerns. But the Committee of the House to whom the memorial was referred, reported, through their Chairman, Mr. Henry Clay, “that, holding the opinion, (as a majority of the Committee do,) that the Constitution did not authorize Congress originally to grant the charter, it follows as a necessary consequence of that opinion, than an extension of it, even under the restrictions contemplated by the stockholders, is equally repugnant to the Constitution.”2

Trustees were then appointed, and they proceeded so rapidly in winding up the concerns of the Bank, that on the 1st of June, 1812, they paid over to the stockholders 70 per cent. of the capital stock, and 18 per cent. more on the 1st of October.3

This was a rapid collection of the debts due to the institution, inasmuch as it enabled the trustees to pay 88 per cent. of the capital stock, in about a year and a half; but it did not produce the universal ruin with which the country had been threatened. “Many persons” said Dr. Seybert, writing in 1816, “viewed a dissolution of the late Bank of the United States as a national calamity; it was asserted that a general bankruptcy must follow that event. The fact was otherwise: every branch of industry continued uninterrupted—no failures in the mercantile community were attributable to that occurrence.”4

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5 See the public papers of the day.

Of the feeling with which a portion of the community regarded the prospect of a non-renewal of the Bank charter, an opinion may be formed from the following extract from a pamphlet, by Mr. Carey, entitled “Desultory Reflections upon the Ruinous Consequences of a Non-Renewal of the Charter of the Bank of the United States,” published in May, 1810.

“In the history of nations, as well as of individuals, there are to be found occasional moments of frenzy, in which every movement baffles the calculations of the politician, the moralist and the philosopher. To the distractions and derangements of our affairs with the European world we are, with almost incredible folly, preparing, by allowing the charter of the Bank of the United States to expire, to add an awful scene of internal disorder and confusion, of private and public bankruptcy. I have gone over my calculations anew; sifted the facts on which my opinions are founded: turned them in every possible point of view, to discover errors if any there were. But the result of every examination has been an invariable conviction of the reality of the danger, the momentary frenzy of too many of my fellow-citizens, and the awful consequences of the prevailing apathy, if it should continue.”

By the next session of Congress, Mr. Carey’s fears were in no degree abated, as will be seen by the following extract from another pamphlet, published December 15th, 1810, and entitled “Nine Letters to Dr. Adam Seybert, Representative in Congress for the City of Philadelphia.”

“Never have I addressed my fellow-citizens with more solicitude than I feel at present. The question at issue, respecting the renewal of the charter of the Bank of the United States, in its consequences upon the character of the country, and upon the prosperity and happiness of a large portion of its most valuable citizens, I conceive to be of more importance than any one that has been agitated for twenty years.” He then intimates to members of Congress from parts of the country remote from the operations of Banking, “that they are liable to be bewildered and led astray; to be instrumental in dashing the Bank of public credit upon rocks and quicksands, and producing an awful scene of destruction, the consequences or terminations of which elude the power of calculation. At such a crisis, it behoves every man whose experience in any degree qualifies him to shed light upon the subject, to step boldly forward, and use his endeavors to preserve so many vital interests as are at stake from the destruction which menaces them. In such a cause, indifference and guilt would perhaps be synonymous. Influenced by these motives, and unalterably convinced of the reality of the impending ruin, I resolved, at the risk of the abuse, the calumny, the malignity, and the persecution, to which every man is liable, who, on such occasions, takes an active part, to raise my feeble voice in defence of a good cause. I fully resolved that, come the calamity when it might, I should be able to wash my hands from any participation in the guilt, even by neutrality.”

6 Legislative History of the Bank of the United States.

7Another instalment, amounting to 7 per cent., was paid on the 1st of April, 1813. An additional payment of 5 per cent. was made in April, 1815, and another of 5 per cent. in December, 1817. Two or three small payments, of the exact amount of which we are not informed, were subsequently made. Some years before the expiration of the charter, the stock sold at 156.

8Statistics, pp. 522.

• 1* Letter to Mr. Gallatin, by Publicola, New York, 1815.
• 2* See Say, Book, Chap. xxi, Section 2.
• 3† Ib. Vol. II, p. 58.
• 4‡lb. Vol. II, p. 82.
• 5“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.
• 6Because 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.*
• 7The 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.†
• 8To 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.”