A Short History of Paper Money and Banking

CHAPTER X. Of Banking from 1816–17 to 1817–18.

During the year ending December 31st, 1816, the re venue of the United States’ Government amounted to the enormous sum of forty-seven millions of dollars, or to two millions more than the total of the national debt on the first of January, 1812. The appearance of increasing riches, and the general rise of prices produced by the free use of paper money, had caused a consumption of foreign commodities, the effect of which was felt by Government in the great increase of its revenue.

But, with all this income, our fiscal affairs were not free from embarrassment. “The public treasury exhibited a phenomenon in finance. Many millions of surplus revenue, with as many different values as there were offices of collection, constantly accumulating at those ports of entry where it was least valuable, and applicable only where it was collected, while the great mass of public debt and expenditures was at those places where the public moneys were least available: even the quarterly interest on the public debt, due where the currency was most valuable, could not be discharged but by the evidence of a new debt, in the form of seven per cent. treasury notes. Thus creating an invidious distinction as well between the debtors as the creditors of the public, in many cases exceeding twenty per cent. on the amount of their respective claims. The market value of the currency paid to the Government, was made to fluctuate according to the arbitrary decisions of Banks, and intrigues of brokers.

“In this situation, the State Banks which had been employed as depositories of the public money, withheld the indispensable facilities of exchange, for the payment of the public creditors, and finally refused to pay the balances due by them, but in the ordinary course of public expenditure; at their respective places of location claiming, under various groundless pretexts, the indulgence of Government, while the immense sums received by them on account of the United States in the paper of the Banks which did not participate in the public deposits, enabled them to control those Banks and protract their efforts to resume specie payments.”1

Such was the state of affairs, that, though there was a balance of twenty-two millions in the treasury, the Government was compelled to borrow five hundred thousand dollars from the United States Bank, in anticipation of its regular operations, to pay the interest due on the public debt at Boston on the first of January, 1817.

The Bank of the United States opened its doors at Philadelphia on the 1st of January, 1817. Its capital then consisted of one million four hundred thousand dollars in specie, and fourteen millions in public stocks. About this time a second instalment in specie, of the amount of two millions eight hundred thousand dollars, was due: “but it is clear,” says a Friendly Monitor, “that the Bank having commenced operations, and put its paper in circulation, could not enforce the payment of the specie part of the second and third instalments of the capital in new acquisitions of specie. They would be paid either in the notes of the Bank, or in the specie which they would draw out of the Bank, or with checks drawn on the credit of the discounts, or not at all: for if the Bank had ceased to furnish facilities in the vain expectation of coercing payment, no dividend could have accrued * * * * The directors therefore acted wisely in discounting the notes of the stockholders payable in specie sixty days after date.”

From the documents laid before Congress in 1819, it appears that the directors did not wait till the second instalment was due: but passed a resolution in December, before any notes of the Bank were in circulation, authorizing discounts on a pledge of stock. Such “facilities” enabled the stockholders either to comply with, or to evade, the requisitions of the law, as the reader is disposed to interpret its terms. A large part of the second instalment was not paid till months after it was due, and instead of two millions eight hundred thousand dollars, only three hundred and twenty-four thousand can, according to the report of a committee of Congress, be fairly presumed to have been paid in coin.

A third instalment, of two millions eight hundred thousand in coin, and of seven millions in Government stock, was due after the 1st of July. But the committee of Congress say that, “of the two million eight hundred thousand dollars which was to have been paid at the third instalment, it is believed that a very trifling amount was paid in coin, and as little of the funded debt, but that nearly the whole were paid by the proceeds of notes discounted on stock.”2

To be brief, the capital of the United States Bank, when all paid in, consisted of about two millions in specie, instead of seven millions, and of about twenty-one millions in funded debt, instead of twenty-eight millions, and of about twelve millions in the stock notes of the original stockholders. Mr. Mann had predicted that the stock would be completed in this way, and it being the way in which Bank stock is usually completed, the result ought to occasion no surprise.

The manner in which the discounts on pledges of stock of the Bank were conducted, was very beneficial to some of the original shareholders. “The directors did not confine themselves to the amount prescribed in the resolution of December 27th, that is, to the proportion of the coined part of the second instalment, but discounted to the full par value of the stock which was paid for by the proceeds of the same discounts; and the discounts, the payment of the second instalment, the payment of the price to the owner, the transfer, and the pledge of the stock, were, as it is termed, simultaneous operations. All the discounts on stock after the 20th of February, 1817, were made at the par value of the shares, which enabled the discounter not only to pay the whole of the instalments, including the specie part, and the funded debt part, but also to draw out of the Bank the amount which might have been paid in on his shares. * * * The effect of these discounts was, very obviously, to enable those who had made large purchases, to retain their stock without paying for it, and to derive a benefit from its probable advancement in price. Had the Bank rigidly required the payment of the instalments, the large stockholders must have sold that portion of their shares which their real means did not enable them to hold. Or, if the Bank had not exacted the instalments, and had not afforded the means of substituting credit for payment, the stock would not have advanced materially in price, and the large holders of it would have had no inducement to retain it. In either event, a more equal diffusion of shares would have been the consequence, and it would have reached the hands of solid capitalists, who would have held only what they could pay for.”3

In August a resolution was adopted to grant discounts on Bank stock, at the rate of 125 for 100 paid, with an indorser for the excess. “And in order to insure the greatest amount of such loans, and at the same time afford facilities to the prompt purchase and sale of stock,” the President and Cashier were authorized, “to discount all stock notes that should be offered between discount days, to a certain amount. Stock-jobbing to an immense extent, and wagers on the price of shares, were the inevitable consequences of this system. It gave equal facilities to the bankrupt, who had not credit enough to obtain an indorser, and to the capitalist. Stock could be, and was, purchased without the advance of a cent by the purchaser, who had only to apply to the directors, or to the President and Cashier between discount days, for a loan on the shares about to be bought, and, by what is termed a simultaneous operation, he obtained the discount, and with it paid for his stock. A rise in the market would enable him to sell his shares, pocket the difference, and commence operations anew. The loans actually made were most of them unreasonable, and excessive in their amount: they were not made to the merchant and trader, but to a few persons consisting of directors, brokers, and speculators: and have been renewed and continued almost invariably at the option of the borrower.

“One of the arts obviously intended to give the Bank stock a high price in the European market, was the establishment of an agency there to pay the dividends. On the 28th of November, 1816, a resolution was passed by the casting vote of the President, and against the report of a committee who had been appointed to consider the subject, authorizing John Sergeant, Esq., to make arrangements in Europe, for the payment of the Bank dividends at the par of exchange, and at the risk and expense of the Bank. When the committee find among the eleven who voted in the affirmative, the names of some directors who have been constantly and largely engaged in the purchase and sale of stock; and that of the ten who voted in the negative, not one has been ascertained to have dealt in those transactions, they are almost irresistibly impelled to the conclusion, that the measure was adopted more with a view to enhance the price of shares, than for the permanent benefit of the institution.

“The root and source of all these instances of misconduct, was the illegal and reprehensible division of the stock. By the first fundamental article of the charter, no person, co-partnership, or body politic, shall be entitled to more than thirty votes: and yet, in violation of this provision, it was a common and general practice, well known to the judges of the election and to the directors, to divide shares into small parcels, varying from one to twenty shares to a name, held in the names of persons who had no interest in them, and to vote upon the shares thus held as the attorneys of the pretended proprietors. By some of the witnesses it is avowed that their object was to influence the election. Mr. Leiper, one of the judges of the first election, states that he did so himself. The effect was, that Baltimore, which had about one-seventh of the shares owned by individuals, gave more than one-fourth of all the votes that could be given. In that place there were 1172 shares taken in 1172 names, by George Williams, as attorney, the whole of which, it appears from his examination, he owned. At Philadelphia nearly one-third of the shares was owned, and the votes given at that place were about two-ninths of the whole authorized. The same persons who thus held the power of appointing directors, are found to have the greatest loans on stock.”4

It is time now to turn our attention to other operations of the Bank.

In January, a convention of delegates from the Banks of New York, Philadelphia, Baltimore, Richmond, and Norfolk, met, in Philadelphia, and resolved to resume specie payments on the 20th of February, on certain conditions, one of which was, that the payment of the balances which might accumulate against these Banks, should not be demanded by the Bank of the United States, until the said Bank and branches should have discounted for individuals (other than those having duties to pay) 2,000,000 in New York, 2,000,000 in Philadelphia, 1,500,000 in Baltimore, and 500,000 in Virginia.

The Bank of the United States acceded to this arrangement, and thus engaged to extend its credit dealings as the other Banks contracted theirs.

A favorite object was “the equalization of exchange between different parts of the Union.” This was unfortunately sought to be effected, not by compelling the local Banks to redeem their extra issues, and thus bring the currency in every part of the country to a level with specie; but by issuing notes payable at all the offices, and by a system of drawing and re-drawing carried on by the mother Bank and its branches. The directors of the branches at the South and West, especially those at Baltimore, had their own speculations to promote, and issued their notes and drafts in so great quantity, as to cause no little embarrassment to the Bank at Philadelphia, and the branches to the North.

The Secretary of the Treasury increased the inducements of the Bank to multiply its discounts, by redeeming with a portion of the public deposits, eleven millions of the funded debt which formed part of the capital stock of the Bank.

The effect of these various operations was, that the discounts of the Bank, which were less than 3 millions on the 27th of February, were increased to 20 millions by the 30th of April, to 25 millions by the 29th of July, and to 33 millions by the 31st of October. At the close of the year, the amount of unsound credit dealings was, taking the country throughout, greater than it was at the begining: for the “contraction ” made by all the local Banks, did not equal the “expansion” made by the United States’ Bank.

The Committee of the Seriate of Pennsylvania,5 describe it as only a nominal resumption of specie payments that was effected in this year. “Had the United States Bank,” they say, “been conducted with the discretion and wisdom which were essential to so powerful a machine, its influence might have been productive of the most happy consequences. The public was aware that the currency of the State Banks was still depreciated from excess, and that nothing but a further reduction of their issues could remove its unsoundness; and yet, with this fact evident to the most limited capacity, the directors of the new Bank fancied, that if they could only persuade the city Banks to call that a sound currency which was in reality an unsound one, the evil of depreciation would be cured; and they accordingly proposed to them to enter into an arrangement to resume specie payment on the 21st of February following. The city Banks, sensible that their power over the community was so great that few individuals would have the boldness to make large demands on them for coin, and relying upon the forbearance that had hitherto been extended to them by an injured public, who had been for two years and a half paying them six per cent. per annum for their dishonored bills, consented to the arrangement, and specie payments were nominally resumed on the appointed day. We say nominally, because, in point of fact, a bona fide resumption did not take place, as is evident from the well-known circumstance, that, for a long time after that period, American as well as foreign coins would command on the spot a price in city Bank notes above their nominal value. Depreciation can as well result from the forbearance of the public to demand their rights, as from the refusal of the Banks to pay their engagements; and the arrangement alluded to, was not any real resumption of cash payments, but a mere change of one species of inconvertibility for another. No sooner, however, had the directors of the National Bank succeeded in the desirable object of rendering depreciated paper an equivalent for their own convertible notes, than, instead of reflecting, from an acquaintance with general principles and from the experience of the past, that the channels of circulation could contain only, without depreciation, but a limited amount of paper credits, and that that amount was already in these channels, they began to add to the mass already redundant, by emissions of their own notes: and in the course of a few months, added to the mass of Bank loans an amount greatly beyond the reductions which had been made. By these means the currency, although nominally convertible, was depreciated below its former low state, and was thrown back instead of being advanced on the road restoration: and ,thus was rendered nugatory, all the pain and embarrassment which the public had suffered from the former curtailments of the State Banks.”

In the Southern and Western States, the operations of the United States’ Bank caused the local Banks to extend their issues. The Bank, say the committee of Congress, “improvidently afforded a temptation to the western Banks particularly, to extend their circulation of notes, by insisting on its branches paying out their own notes in preference to those of the State Banks, and on their delivering drafts on the eastern cities, whenever it could be done, to prevent the remittance of their own notes. The branch notes and the drafts issued in consequence of these instructions, were swept away by the facility of remittance thus unwarily given, as well as by the ordinary balance of trade. A vacuum in the circulation was thus produced, which could be supplied only by the local notes, which were readily received by the offices of the Bank of the United States, and were retained by them as a fund upon which interest was paid by the State Banks. The committee are of opinion, that instead of conducting with the alleged rigor towards the State Banks, the Bank of the United States is liable to the more serious charge of having increased the amount of notes in circulation, by its acceptance of them in those places where it was known they would not be redeemed in specie, and by making them, in the manner before mentioned, the only circulating medium in that part of the country. So long as the notes of each office were payable at all the others, and the office issuing was not exclusively liable for their redemption, the discounts at those places against which there was a balance of trade, became larger in proportion to their indemnity against demands. As the notes of the offices were rapidly carried off, the payment of those discounts was necessarily made in the notes of the local institutions. And thus it was one of the inevitable effects of the old system, to increase the debts of the State Banks to the offices of the United States Bank at those places.”

 

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6 “A Friendly Monitor.” Philadelphia, December, 1819. Rep., September, 1822. Mr.Gallatin says “it is well known that this pamphlet came from an authentic source.” We have been told it was written by W. Jones, the first President of the United States Bank.

7 Report to Congress, January, 1819.

8 Report to Congress, Jan. 1819.

9 The effect of these different proceedings was, that on the last of December, 1816, Bank of the United States stock was at 41 7–8, for 30 paid, in April at 81 for 65 paid, in May at 98, on the 20th of August at 144 for 100 paid, on the 30th of August at 156½, at which price it remained for some days, and then began to decline.

Report to Congress, Jan. 16th, 1819.

10 Report on the Public Distress, January 29th, 1820.

• 1* Letter to Mr. Gallatin, by Publicola, New York, 1815.
• 2* See Say, Book, Chap. xxi, Section 2.
• 3* 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.”
• 4* 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.
• 5* 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.
• 6“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.
• 7Because 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.*
• 8Wages 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.*
• 9We 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.
• 10A 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.