A Short History of Paper Money and Banking

CHAPTER XI. Of Banking from 1817–18 to 1818–19.

In the first part of the next year, the Bank of the United States conducted operations on the same principles that had governed it in 1817. In January and February, 1818, the amount of its discounts and exchange dealings was swelled to forty-two millions, and in March and April to upwards of forty-three millions.

During all this time the Bank had not succeeded in getting notes to the amount of ten million dollars in circulation, but this appears to have been owing not to any disinclination of the directors to issue paper in abundance, but to a physical inability on the part of the President and Cashier to sign as many notes as were wanted. To get over this difficulty, application was made to Congress to grant authority to the President and Cashiers of the Branches to sign notes. One of the objects in establishing the United States’ Bank, was to substitute a uniform paper currency for that variety of notes which made it difficult for many persons to distinguish between the genuine and the counterfeit. An objection was therefore made to granting the officers of the branches power to sign notes, as the variety of signatures would increase one of the evils the Bank was intended to remedy: but a bill was passed by the Senate to authorize the appointment of a Vice President and Assistant Cashier, whose special duty it should be to sign notes for the mother Bank and all its branches. When the bill came before the House on the 18th of April, much praise was bestowed on the Bank for the excellent manner in which it had been conducted, and the propriety of taking measures to enable it to circulate more paper was warmly urged. Mr. Smith, of Maryland, said, “one great object of the Bank was to afford an adequate circulating medium, that would be uniform throughout the Union. To effect this, it is necessary to have a sufficient number of notes signed to enable the Bank to put twenty millions of dollars in circulation. The President and Cashier cannot, (having their other business to attend to,) sign more than 1500 notes each day. At that rate it would require more than four years to sign the number and kind necessary for circulation.” The bill was negatived by the House, chiefly from a fear, as would appear from the debates, that it would give the United States’ Bank too much power over the local Banks.

In its charter, in the preference given to its notes by the Government, and in its being made the depository of the public revenue, the United States’ Bank had great power. It was thus it was enabled to make discounts in little more than a year to an amount exceeding forty-three millions, including eleven or twelve millions on pledges of stock, though the specie part of its capital was hardly two millions.

To sustain its operations, the Bank exchanged part of its funded debt for specie in Europe, and purchased a large amount of coin in the West Indies and other places. Between July, 1817, and July, 1818, upwards of seven millions of specie were imported by the Bank, at a cost of five hundred thousand dollars. But the original cause of the specie’s leaving the country, viz: the excess of paper issues, still continuing to operate, the money was exported by individuals faster than it was imported by the Bank. “I myself have seen,” says a Friendly Monitor,” a detailed statement of five millions dollars, exported in twelve months from the ports of Boston and Salem alone, and from this data the aggregate amount exported in twelve months from the United States, could not have been, during the same period, short of twelve million of dollars.” This estimate is probably below the real amount, and the result would have been the same, if the Bank had imported seventy millions instead of seven millions. If we had mines as rich as those of Potosi, and paper should be issued in excess, we should not be able to retain in the country even that small amount of silver which is necessary to keep Bank notes convertible.

Notwithstanding the importation of specie made by the Bank, the amount at any one time in its vaults did not rise to three millions—an amount which, divided among the mother Bank and eighteen branches, was quite insufficient to sustain its operations.

In July the Board of Directors found it absolutely necessary to change their policy. A sudden reduction of discounts to the amount of two millions at the Bank in Philadelphia, two millions at Baltimore, seven hundred thousand at Richmond, and five hundred thousand in Norfolk, was then ordered to be made before the 1st of November, and it was resolved to require the payment of the balances due by the Banks of Cincinnati and of the District of Columbia.

By the 30th of October, the reduction of discounts at Philadelphia had exceeded the prescribed amount in the sum of five hundred thousand dollars. In Baltimore, Richmond, and Norfolk, the deficiency was one million seventy-seven thousand five hundred. The total reduction in the four cities was nearly four million five hundred thousand: yet an additional reduction to the amount of one million, was deemed necessary in Philadelphia; and a committee of investigation was constrained to urge a steady perseverence in the curtailments of the discounts of the Bank and its offices, wherever it might be practical and useful. One of the reasons for this course of procedure, was “the premium paid at this time for specie, which is said to be ten per cent. on Spanish dollars, and a considerable though less premium for other coins.”

“When, in July last,” says the Committee of Congress, “the Board directed a curtailment of discounts, it fell in almost all cases on the business paper, while the immense amounts loaned on stock pledges were but little affected, excepting at the offices at Richmond and Washington, where the curtailment appears to have fallen equally on all the notes. But the discounts at these places on stock were very small, particularly when compared with Baltimore, where the loans were such, and so long continued, as to receive the animadversions of the parent Board.”

A reduction of discounts to the amount of four million five hundred thousand dollars in four cities, in the short space of three months and ten days, had a very disastrous effect on the merchants, and through them, on the rest of the community. Their sufferings were increased by the order not to receive on deposit at Philadelphia any notes except those of the mother Bank, or at any one of the branches, any notes except those of that one branch. Heretofore the mother Bank and its branches had paid and received indiscriminately, all their notes, without regard to the place of issue. By the new arrangement, paper which was received from the Bank on one day was on the next no longer available in paying debts to the Bank. In other words, the merchants were called on to pay four or five millions, and were not allowed the privilege of paying debts due to the Bank itself in the paper of the Bank.

The local Banks, when a sudden demand was made on them for balances due to the United States’ Bank, had no way of meeting those demands but by pressing on their own customers. The pressure thus became general throughout the country.

The Committee of Congress say, that the demands of the United States’ Bank against the local Banks, “were suffered to accumulate improperly, instead of being gradually reduced as specie was required at other offices, and in small quantities that would not have been felt. Their reduction was not insisted upon sufficiently early; and when the Bank began to call for specie, its demands were so considerable as not only to expose the local Banks, but the citizens in their vicinity, generally, to very severe pressure.”

The situation of the community was very alarming. Mr. Niles, in his Register of October 3d, intimates that “a grand scheme was maturing ‘for keeping the paper-mill a going.’ The first part of the scheme is to prepare the members of Congress to vote as directed at the ensuing session of Congress. Of what is designed to be done, when a sufficient number of members are secured, we are almost wholly in the dark at present: but we believe one of the things proposed is, the substitution of a paper currency as a LEGAL TENDER, instead of coin, which is frequently hinted at in certain newspapers, as if to feel the public pulse.” In his Register, of November 7th, he says, “We have several times darkly hinted at a great intrigue which was going on to relieve the Banking system, generally, and especially to subserve the grand views of the Bank of the United States. I am just now informed of what this intrigue is: but private honor will not permit me to mention it, at present. The object is, by bits of paper to prevent the Banks from being compelled to pay their debts. This is the long and the short of the whole affair. Aye, and the pretence is most specious, the appearance most seducing: but the instantaneous effect will be to banish money, and bring about those happy times when lordly Banks issued notes for six and a quarter cents, and a copper coin was a rarity. To effect this arrangement, many of the local Banks will co-operate—to seal their own ruin; for the bits of paper above alluded to, will immediately centre in the Bank of the United States. Perhaps, as the people are alarmed on this subject, the project may not be pressed; though we have reason to believe that much exertion has been made to convince certain members of Congress of the propriety of it: and we were astonished to learn that a distinguished gentlemen, of whom, indeed, we expected a different conduct, had boldly predicted the triumph of the United States’ Bank over the local institutions. Upon my conscience, I would rather agree to have a hereditary President and a Senate for life, than that this thing should happen. In the latter case, our President and Senators might be influenced to good actions by a sense of individual shame, or a love of true glory, and the choice of representatives would be left free to us: but in the other, an unknown and irresistible aristocracy would be raised up, secret as the “council of ten” and remorseless as the “holy inquisition.” Give me to live under any despotism but that which springs from the command of money: for it is the most base and unprincipled of all.

“But Congress will not, cannot, dare not, pass the law, proposed to pamper speculation. They may prohibit the exportation of coin, if they please; still they cannot substitute a paper medium for it, and compel me to take it in payment of debts justly due me. And this it is which is fondly designed to be attempted—for the benefit of the rag-barons.”

It is certain that letters were received at Washington from Philadelphia, in the early part of December, urging an emission of treasury notes; and that, on the 7th of December, a meeting was held in Philadelphia, Mr. Matthew Carey in the chair, by which a committee was appointed to draft a memorial to Congress to prohibit the exportation of specie. Some of the members appointed on the committee declined acting, and no memorial appears to have been prepared; but a member of the Senate actually brought before that body a resolution to prohibit the exportion of the precious metals! What despotic Spain could never accomplish, was attempted in free America.

Towards the close of this year, public opinion became so adverse to the Banks as to call forth strong denunciations of them from some of the high officers of State. De Witt Clinton, the Governor of New York, in his Message to the Legislature, reprobated the system in strong terms. “The embarrassments,” he said, “arising from the disordered state of our currency, have increased instead of diminishing, since I had the honor to address the Legislature on the subject. And unless efficient preventives are adopted, and suitable remedies applied, the evil will be in a state of progressive augmentation. A proposition to invest Banks with a power of coining money, would have no advocates, and yet it might not be so pernicious as the authority already granted of emitting Bank notes. Having uniformly opposed the multiplication of Banks, I now only express opinions formed for many years, after mature deliberation, and which are every day sanctioned by the progress of time and the voice of experience.”

Governor Worthington, of Ohio, said, “The disordered state of the currency will claim your attention. The good people of the State look to you, gentlemen, for such remedy as may be within your power. The obstacles you have to encounter in effecting an object of so much importance cannot be disguised: indeed, 1 fear it may be found impracticable, under existing circumstances, to answer public expectation.”

Gabriel Slaughter, the Governor of Kentucky, was very emphatic in his denunciation of the system. “I am indeed,” he said, “ready to confess before my countrymen, that my sentiments, or perhaps prejudices, ever have been, and still are, strongly against the Banking system. Time and experience, instead of conquering these prejudices, have tended to confirm them. I have ever viewed these moneyed corporations with jealousy. I consider the corporate powers and privileges conferred on them, as so much taken from the power of the people, and a contrivance to rear up in the country a moneyed aristocracy. Money is power, in whatever hands it is placed: but it is less dangerous when divided among individuals, than when combined and organized in the form of Banks. In vain did the American people, during their struggles for liberty and independence, destroy the landed aristocracy, then existing under the law authorizing estates to be entailed, if a moneyed aristocracy is to be substituted. Instead of having our National and State Legislatures filled with men representing the feelings and interests of the great agricultural class of the community, I fear we shall see these Banking aristocracies greatly preponderate on the legislative floor. I must ever be opposed to any system of policy, which, independent of its pernicious and corrupting influence in other respests, tends to diminish, if not destroy, the weight and influence of the farming interest, upon whose virtue and independence the duration of our free institutions so essentially depends.

“While this system exists in other States, Kentucky can do little to rescue the country from the evil and anti-republican tendencies of these moneyed corporations. Let us therefore invite a co-operation in some plan, co-extensive with the Union, to redeem this young and rising Republic from the mischief and dangers of this paper system, before it is too late. If permitted to progress and interweave itself with all the interests and concerns of society, it may, in a more advanced and dense state of our population, explode in a convulsion of the Government. The disease, it is true, has taken deep root, but the American Republic is young, and by a vigorous and determined effort, may, in a few years, exterminate it. Some time may be necessary to enable these institutions to wind up. To effect so desirable an object, I would recommend to the Legislature, to propose an amendment to the Federal Constitution, providing, that, after a certain period, no incorporated Bank should exist in the United States, or, if this should be thought going too far, and Banks in any shape, or to any extent, are useful and necessary, let the Banking powers be limited, and the system so regulated and restricted, as to secure the community against the wide spread ruin and mischief with which we are threatened.”

These views appear to have been adopted by some members of the Legislature, for on the 4th of January, 1819, Mr. Bledsoe submitted the following resolutions:—

1. Resolved, by the General Assembly of the Commonwealth of Kentucky, that the establishment of a moneyed monopoly is hostile to republican liberty.

2. Resolved, That Banks are such a monopoly, and do not depend for their profits upon the correct employment of the products of industry.

3. Resolved, That as the products of the labor of a nation are the only genuine sources of national wealth, any corporation or institution which tends to substitute speculation instead of the proper and valuable fruits of this labor, must be pernicious, and ought to be abolished.

4. Resolved, That any corporation not promotive of, or essential to, public good, ought not to exist.

5. Resolved, That all Banks wherein individuals are interested, are moneyed monopolies, tending to make profit to those who do not labor, out of the means of those who do: not tending to increase the means of industry, but to profit of those means unjustly: tending to tax the many for the benefit of the few: tending to create a privileged order, unuseful and pernicious to society: tending to destroy liberty, and create a power unfriendly to human happiness: tending inevitably to an unfeeling moneyed aristocracy, more to be deprecated than monarchy itself: tending to the destruction of the best hopes of man here and hereafter.

6. Resolved, That it becomes the duty of the General Government, and of every individual State composing it, (gradually if necessary, but ultimately and certainly,) to abolish all Banks and moneyed monopolies, and if a paper medium is necessary, to substitute the impartial and disinterested medium of the credit of the nation or of the States.”

We know not if these resolutions were adopted.