A Short History of Paper Money and Banking

CHAPTER XVI. Of Banking in the Southern States.

The Banks of the South found it convenient to suspend specie payments, soon after this measure was resolved on by the Banks of Philadelphia; and an extension of Banking operations in that quarter was the necessary consequence. Without resorting to other evidence, the following tabular view of the amount of Bank capital in the four Southern States, in two different periods, will be sufficient.1

	1814	1816
Georgia,	623,580	1,502,600
South Carolina,	3,730,900	3,832,758
North Carolina,	1,576,600	2,776,000
Virginia,	3,592,000	5,521,415
	9,523,080	13,632,773

According to Mr. Gallatin’s tables, there were fourteen Banks in these States on the first of January, 1815, and twenty-three on the first of January, 1816. Two of the Banks of Virginia had, in this interval, increased their circulation from 4,616,240, to 6,031,446 dollars. Of the circulation of the other Banks in the South, we have no returns. The aggregate increase was, no doubt, very considerable, but it was not sufficient to bring down the currency to a level with that of Maryland and Pennsylvania. In the tables appended to Mr. McDuffie’s report, it is stated that, on the 1st of July. 1816, when subscriptions were made to the stock of the United States’ Bank, specie was, at Philadelphia, at 17 per cent. advance, and at Washington, at 20 per cent., while it was only 9 a 10 at Norfolk, and 6 a 8 at Charleston. The price of specie in North Carolina and Georgia is not mentioned, but North Carolina notes bore a premium of four per cent. at Philadelphia on that day, and New York notes were at a discount of 5 a 9 per cent. at Savannah.

The comparative moderation of the southern Banks is to be ascribed to the fact, that, as but a small portion of the revenue from the customs is collected in the South, they did not get many of the treasury notes which were issued in the year after the war.

When the United States’ Bank began operations, it did not include the offices at Charleston and Savannah, in the plan for the “equalization of exchanges.” It however gave these offices authority to do an extensive business. By the 29th of July, 1817, the branch at Charleston had made discounts to the amount of 850,000, and that at Savannah to the amount of about 300,000 dollars. On the 23d of June, 1818, the total of discounts at Charleston, including bills of exchange and stock notes, was about $2,700,000 at Savannah $1,000,000, at Fayettville $500,000, at Norfolk $1,400,000, and at Richmond $3,000,000.

This increase of credit dealings in the South did not improve the state of the currency: and the attempts that were made to support excessive issues of paper, by importing specie, proved utterly unavailing. The directors of the Bank of the State of South Carolina say, that “in the first six months of 1818, it is probable that upwards of $800,000 in specie were thrown into general circulation in the city of Charleston. It is probable that by the the first of November in that year, not 50,000 dollars of the whole sum remained in the State; we are confident that not $10,000 could have been found in Charleston.”

The Bank of the United States was, to promote its own views, very indulgent to the Banks of the South, at the commencement of its operations. Without being so, it could not, as its specie capital was inconsiderable, and as the deposits of public money were small in that quarter, have done much business at Savannah and Charleston. It freely received the notes of the local Banks, and as it did not press for immediate payment, it encouraged them to make additional issues. The Bank of the United States could not, however, defer its demands forever, and when it called for payment, a conflict commenced between it and the local Banks, which was not fairly terminated for several years.

As some movements in the Legislatures of Georgia and South Carolina had, at an early period, indicated a disposition to embarrass its operations, the United States’ Bank did not deem it prudent to use the most rigorous measures with the Banks of Charleston and Savannah. Fully aware of this fact, the Banks south of Virginia began, in the crisis of 1819, boldly to evade specie payments, if they did not make a full and formal suspension.

The Bank of Darien, Georgia, for example, adopted the following course of procedure, as is described by an eye witness: “Persons making demands on the Bank of Darien must swear before a justice of the peace, in Bank, to each and every bill presented that it is his own: that he is not agent for any other person; and that oath must be made in the presence of at least five directors and the cashier: it also makes the person so demanding specie subject to a charge of $1 37½ on each bill, which must be paid on the spot, and unless you find five directors and the cashier together, you cannot make a demand.”2

As the United States’ Bank could not easily get payment from the local Banks, and as specie was almost immediately demanded for such of its own notes as it issued in the South, it found it politic, if not necessary, to receive what was due on account of the imposts in North and South Carolina, and Georgia, in notes of the Banks of those States. So far as it traded, it traded on these notes, issuing none of its own. This arrangement gave the southern Banks a monopoly of the profits deriveable from the circulation of paper: but they were not satisfied, because they had not also the profits deriveable from the use of the public deposits. When the United States’ Bank, in the spring of 1820, made a demand on the Banks of Savannah, for payment of a considerable amount of notes, which had been received principally in payment of duties, those Banks refused either to make payment in specie, or to allow interest on the sum which was unliquidated. The United States’ Bank then protested a large amount of their notes: and soon afterwards, five hundred dollars in notes of the State Bank of Georgia were advertised to be sold by auction, for specie, in lots to suit purchasers, in front of the Exchange at Savannah.

In August the Banks of Savannah had again the reputation of specie paying Banks: but they refused to give money to individuals for their paper, unless those applying for it would agree to take half the amount in bills of the Darien Bank. It cannot, however, be said that they refused all kinds of accomodation to the public, for while they would not pay cash for their notes, they would oblige a holder of them by giving him a draft on New York at three per cent. advance.3

In this contest the local Banks enlisted the feelings of the Legislature of Georgia in their favor: and an act was passed in the beginning of 1821, to repeal the law allowing twenty-five per cent. damages on non-payment of notes, so far as it might operate in favor of the United States’ Bank. Such a disposition in the Legislature, was an encouragement to the Banks to evade payment to individuals: and we read, without feelings of surprise, that on a demand being made in April on the Planters’ Bank of Georgia for 30,000 dollars in specie, the cashier replied that he would pay in cents only: and that, when a gentleman of Augusta made a demand for specie in June, cents were tendered to him and counted out at the rate of sixty dollars a day.4

From that time to this, the people of Georgia have suffered the evils of irregular Banking, sometimes in one form and sometimes in another. The paper of their Banks is usually at a discount in the Philadelphia market, exceeding the natural rate of exchange, that is, the cost of transporting specie. In 1824, complaints were made that “change” bills, issued by individuals and corporations, were in circulation. In the same year we find the Governor declaring “that all the Banks should resume specie payments without delay.” If they all resumed them, they could not all maintain them, for Mr. White, of Baltimore, in a letter to the Secretary of the Treasury in 1830, speaks of “intelligence having just been received of the failure of some of the principal Banks of Georgia to redeem their notes with specie.” Complaints of sufferings by the people of the State have been frequent. In 1824 and 1828 these complaints were very loud. When the Legislature attempted to relieve the planters, by establishing a Bank on the funds of the State, called the “Central Bank,” and opened that Bank for business at Milledgville in 1829, “the rush for money was tremendous.”

In South Carolina a disposition was evinced by a part of the population, to make the suspension of specie payments perpetual. Full proof of this is to be found in a long and elaborate report by the directors of the Bank of the State, dated October 1st, 1819, in which all the arguments of the English Anti-Bullionists are placed in prominent relief. The prosperity of the country from 1815 to 1817, is depicted in glowing colors. The effects produced by the resumption of specie payments are deplored as unnecessary evils. “It becomes necessary to inquire,” say the directors, “whether, in the present state of the world, a metallic currency, sufficient for the wants of our country, is attainable, and whether, if it be obtained, it will be worth the necessary cost: whether, in fact, a currency equally good, perhaps better, may not be established, without any of those sacrifices which our country has already been obliged to make, and which it must for a long time make, to secure this fugitive and evanescent object. * * * In Great Britain, where alone, in modern days, gold and silver have for a short time been left freely to find their value in an unshackled market; they have been known to fluctuate in value nearly 50 per cent. in the course of a few months: a fluctuation which no paper currency has ever undergone, excepting such as has been issued by the mandates of arbitrary and necessitous governments, where no value is received for it on its emission, no pledge given or secured for its redemption.”

The Bank of the State of South Carolina did not pay specie regularly till the year 1823, and the United States’ Bank at Charleston, as it is stated in Degrand’s Weekly Report, “fostered the irregularity by aiding the circulation of State Bank paper which was not convertible.” Since that time, Banking does not appear to have been less “regular” in South Carolina than in Pennsylvania: but as “regular” Banking by corporations and with paper money may produce great evils, it might be worthy of inquiry if part of the sufferings of the people of that State have not their origin in this cause. The excitement, however, at this moment, appears too great to permit such an inquiry to be made.

Virginia has the honor of being the first State that took effectual measures towards reforming the currency. This she did in 1820, when she passed an act to prohibit the circulation of notes of a less denomination than five dollars. Her Banking operations have never been less regular than those of the Middle States: and she will probably be one of the first to establish a perfectly sound system of credit and currency.

Of the condition of affairs in North Carolina, the reader may judge, by the following extract from a report made to the Legislature, at the session of 1828–29.

“The Legislature having laid down, in the charters of the several Banks, certain fundamental articles for the government thereof, the committee assumed these articles as the basis of their investigations, and proceeded accordingly to inquire, in the first place, whether the stock of the several Banks had been raised in the manner required by their charters?—The evidence received by the committee on this point, shows that the charters of the Banks were disregarded and violated in the very creation of their capital.

“The charter of the Bank of Cape Fear, enacted in 1804, authorized that corporation to raise a capital stock of $250,000; and the charter of the Newbern Bank, enacted in the same year, authorized that Bank to raise a capital stock of $200,000; both charters directing the capital to be paid by the stockholders in gold or silver. The undersigned have received no evidence as to the mode in which these Banks got into operation. It would seem, however, that they contemplated, at the outset, an evasion of the provisions of their charters. It is in evidence to the undersigned, that soon after they went into operation, they contrived to get possession of nearly all the paper money which had been issued on the faith of the State, which, being at the time a legal tender, enabled them to evade demands for specie, which they did, by thrusting this ragged paper at those who presented their notes for specie. In 1807, $25,000 was added to the capital stock of each of these Banks; in 1814, their charters were extended, and they were authorized to increase their respective capitals to $800,000 each, viz. the Newbern Bank was authorized to raise an addition to its stock of $575,000, and the Bank of Cape Fear, an addition of $525,000. It is in evidence to the undersigned, that the whole of this additional stock was manufactured by the Banks themselves, and that, in many instances, favored individuals were permitted to acquire stock by subscribing their names, and putting their notes into Bank, without advancing a single dollar of actual capital. It follows, that the whole amount of the interest drawn from the people, on the loans made on this fictitious capital, was a foul and illegal extortion. The effect of the transaction was the same as if the pretended stockholders had individually executed their notes of hand, without interest, to the amount of the notes which they issued from the Bank, and exchanged them with the people for their notes, bearing interest, and renewable every ninety days. Taking the issues made on this fabricated capital to be in proportion with those made on the former capital, they must have put into circulation, on the faith of the assumed stock, between 3 and 4,000,000 of notes; and thus, a parcel of individuals, under the name of stockholders, but who, in fact, held no stock, contrived to exchange their notes, without interest, to the amount of 3 or 4,000,000, for the notes of the people, bearing an interest of more than 6 per cent.; and while the property of the people was pledged for the payment of the notes they had given to the stockholders, there was not a dollar or an atom of property pleged to them for the payment of the notes they had received from the stockholders; so that for the use of their notes, which, intrinsically, were of no value at all, the stockholders of these two Banks have drawn from the people, by way of interest, something like $200,000 annually.

“The charter of the State Bank, enacted in 1810, authorized that corporation to raise a capital stock of $1,600, 000, and directed books to be opened to receive subscriptions for that sum, requiring, at the same time, that individuals subscribing for stock, should pay three-fourths of the amount subscribed in gold or silver, and the other fourth in the paper currency issued on the faith of the State. Books were accordingly opened, and the sum subscribed, including the subscription of $250,000 for the State, amounted to $1,175,600. Of this sum, only $500,000, or thereabouts, was paid into Bank, as required by the charter, in gold or silver. The balance was paid in Bank notes. Upon the capital thus constituted, the Bank went on to operate till November, 1818; at which time, the proportion between the notes in circulation and the specie on hand, was nearly 12 to 1. In other words, the Bank had largely upwards of 11 and nearly 12 dollars of their notes in circulation, for every dollar of specie in their vaults. The directors then ordered books to be opened to receive subscriptions for the $424,000 which remained unsubscribed when the books were first opened; and it forms a part of the order by which this additional subscription was authorized, that the subscribers might pay it in the notes of the Bank. The reason assigned for this operation of the directors, is, that they were desirous of applying the sponge to a part of their outstanding debt, and by way of calling in $224,000 of their notes, they authorized individuals who held them to subscribe for stock in the Bank to that amount, and pay for it in their notes. Thus, at a time when they had in circulation nearly 12 dollars in notes for every dollar of specie in their vaults, and when most obviously they were unable to redeem their notes with specie, they purchased them from the holders by the sale of stock which they themselves created by the mere act of subscription. This the undersigned conceive to have been a most flagrant and fradulent violation of their charter. The charter only authorized the Bank to operate on a real and intrinsic capital, and directed that the capital should be paid into the Bank by the stockholders. In the transaction alluded to, the Bank itself, by a scribbling process of its own, created the capital, and paid off a portion of its debt, by the very act by which it also increased its capital. A circumstance, too, which greatly adds to the enormity of the transaction, is, that before all the instalments became payable, the State Bank, the Bank of Newbern and Bank of Cape Fear entered into a formal resolution, through their delegates assembled at Fayetteville, in June, 1819, not to pay specie: and their notes immediately fell to to 15 per cent. below par. Then commenced the system of usury and extortion, which has since been carried on with such unparalleled audacity, under the name of exchange. Up to this time, viz., 1819, the high tide of commercial prosperity enjoyed by the country, enabled the Banks to keep afloat, notwithstanding the artificial character of their capital, without resorting to this daring and dishonest expedient. They had kept pace in their operations with the increasing resources of the country, so as to absorb, by way of interest on discounts, nearly all the profits on the immense business then doing; and having raised against the people a debt equal to the vast resources which, from 1815 to that time, they had derived from their foreign commerce, as soon as the alteration occurred in our foreign relations and those resources were cut off, the business of the country, unable any longer to employ the immense circulating medium which had been created by the Banks, and their notes returning upon them for redemption, they determined to extort from the people additional premiums on loans in order to enable them to meet the demands of their creditors. A scene of extortion and usury ensued, which has no parallel in the annals of avarice—the strange spectacle of moneyed institutions exacting specie in exchange for their notes, which they themselves refused to redeem with specie. To show the gross character of the usury thus carried on, the undersigned will suppose a case: An individual applies to the Bank for a loan of 1000 dollars, and offers his note to be discounted for the amount. He is told by the Bank that his note cannot be discounted, unless he will exchange with them 1000 dollars of specie funds, for 1000 dollars of their notes. Taking their notes to be 5 per cent. below par, 1000 dollars of their notes would in fact be no more than 950 dollars. So that the substance of such a proposition would be, that the borrower should give the Bank fifty dollars as a premium for the loan of 1000 dollars: which, added to the legal interest received in advance, would amount to something more than 11 per cent. In some instances, the usury has been still more rank. Quantities of their notes have been loaned to individuals on condition that the whole amount should be returned in ninety days in specie funds. At the rate of depreciation before stated, such a transaction would be equivalent to the exaction of 26 per cent. The evidence received by the committee, shows that the State Bank and Bank of Newbern have been guilty of such practices since the summer of 1819. There is no evidence that the Bank of Cape Fear has. It appears in aggravation of the guilt of these practices, that, in the case of the State Bank, the specie funds thus extorted from the people in exchange for their depreciated notes, have been employed by the Bank in purchasing back those notes at a discount: That they have, at times, employed agents in New York and Petersburg, to buy up their notes: and that about twelve months since, a parcel of their notes was bought up by their agent at Petersburg at 8 per cent. discount. It is stated by the President of the Bank of Cape Fear, for whose testimony too much respect cannot be expressed, that the notes of that Bank have, at different times, been bought up at a discount by the Bank. That, a quantity of its notes were so purchased in anticipation of the late call of the stockholders; and that during the panic occasioned by that call, something like 500 dollars of their notes were bought up by the Bank at a discount of 5 per cent. The depreciation of the notes of all the Banks, occasioned by the refusal of the Banks to make good their notes with specie, has been productive of incalculable mischief to the community; and it is no inconsiderable aggravation of the mischief to know that, in the case of the State Bank, large quantities of their notes have occasionally been thrown into circulation by themselves in the purchase of cotton. It is in evidence to the undersigned, that they laid out at one time 30,000 dollars of their notes in the purchase of cotton, on which they made a profit of more than 8,000 dollars. Another remarkable fact in the history of the State Bank, which the undersigned will notice in passing, is, that to protect themselves from demands for specie, they determined at one time to administer an oath to an individual, presenting their notes for specie, in which he was compelled to state that he was not a broker. It further appears to the undersigned, that all the Banks have bought up United States’ Bank notes, for which they exchanged their own notes at a discount; and the State Bank and Bank of Cape Fear, in direct violation of their charters, have purchased stock to a considerable amount in the United States’ Bank. The State Bank appears to have made a most convenient use of this arrangement. It appears from the evidence of the late President of that Bank, that they have been in the habit of rendering false statements to the Legislature; and that in May last, when they stated in their exhibit that they had on hand 214,000 dollars in specie, 140,000 dollars of it consisted of stock in the United States’ Bank. So that, instead of keeping the specie in their vaults to take up their paper, they have vested it in the stock of another Bank, and were deriving interest from it. It further appears, from the evidence of the same person, that the amount of actual specie now in the State Bank at Raleigh, is not more than 300 to 400 dollars: at any rate, not exceeding 1000 dollars.

“The undersigned have now gone through the details of the evidence, and stated all the essential facts collected in the course of their examination. Having thus embodied a simple statement of the facts, they would here close their report, and leave the conclusions and arguments to the Legislature; but they feel themselves impelled, by a solemn sense of the duty which they owe to the Legislature and the country, to take a brief view of the present relation between the Banks and the people, and the consequence which must ensue if the Banks are permitted to continue their operations; and, in doing so, to advert to the report of the committee of the stockholders of the State Bank at their late general meeting. It appears that the people of North Carolina, having already paid to the Banks, since they went into operation, a profit of about 4,000,000 dollars on their stock—stock, too, three-fourths of which was manufactured by the Banks themselves in a fictitious and fraudulent manner—that having paid this immense sum, exceeding four times the amount of the actual capital stock ever paid into Bank according to law, they still hold the notes of the people for more than 5,000,000 dollars, about four times the amount of the whole circulating medium of the State. Thus it is in the power of the Banks absolutely to extinguish the currency of the country, and when they have taken every dollar out of circulation, still to have a debt against the people to the amount of about 4,000,000 dollars. We say it is in their power to do it; and they intimate pretty plainly that they will do it. The communication from the stockholders of the State Bank, now before the committee, expresses the opinion that it is for the interest of the stockholders to withdraw their money from the Bank, and take it under their own management; and contains a resolution by which they have proclaimed their, resolution to assemble in June next, in order to determine whether they will proceed to wind up their affairs; and, consequently, the affairs of the people of North Carolina. Thus having for years contrived, by illegal and fraudulent practices, to draw from the people all the profits of their labor, and having by these practices placed the people in an impoverished condition, where they can no longer pay them large profits, they are now preparing, by one fell swoop, to extort from them the actual means of subsistence. But the question occurs, will you permit it? Will you permit a parcel of men, who have long set the laws of the country at defiance, to go on and complete the ruin they have already so nearly accomplished? Will you not bring them to the observance of the law? Will you not at length cause them to feel the rod of that law they have so long despised and violated? These questions, your committee conceive, answer themselves. When the Legislature is called upon to determine whether their constituents shall live under a government of laws, or a government of corporations, it cannot be difficult to decide. The undersigned, therefore, recommend to the Legislature the adoption of the following resolution:—

“Whereas it appears to the Legislature that the State Bank of Newbern, and the Bank of Cape Fear, have violated their charters and committed great frauds on the people of North Carolina, whereby said Banks have forfeited the powers and privileges granted in their charters: Therefore,

“Be it Resolved by the General Assembly of the State of North Carolina, That the Attorney General be, and he is hereby, directed forthwith to institute a judicial inquiry into the conduct of the said Banks: and that he prosecute such inquiry by writ of Quo Warranto, or other legal process.”

No such judicial inquiry appears to have been instituted. The practical sovereignty remains with the Banks of North Carolina: and they respect the laws and public opinion, just so far as they believe to be conducive to their own interest.

 

_____________

5 See Mr. Crawford’s Report in 1820.

6 Nile’s Weekly Register, August 14th, 1819.

7 Niles, August, 26th, 1820.

8 United States Gazette of April 30th, and June 22d, 1821.

• 1* See Mr. Crawford’s Report in 1820.
• 2* Nile’s Weekly Register, August 14th, 1819.
• 3* Niles, August, 26th, 1820.
• 4† United States Gazette of April 30th, and June 22d, 1821.
• 5The Banks of the South found it convenient to suspend specie payments, soon after this measure was resolved on by the Banks of Philadelphia; and an extension of Banking operations in that quarter was the necessary consequence. Without resorting to other evidence, the following tabular view of the amount of Bank capital in the four Southern States, in two different periods, will be sufficient.*
• 6The Bank of Darien, Georgia, for example, adopted the following course of procedure, as is described by an eye witness: “Persons making demands on the Bank of Darien must swear before a justice of the peace, in Bank, to each and every bill presented that it is his own: that he is not agent for any other person; and that oath must be made in the presence of at least five directors and the cashier: it also makes the person so demanding specie subject to a charge of $1 37½ on each bill, which must be paid on the spot, and unless you find five directors and the cashier together, you cannot make a demand.”*
• 7In August the Banks of Savannah had again the reputation of specie paying Banks: but they refused to give money to individuals for their paper, unless those applying for it would agree to take half the amount in bills of the Darien Bank. It cannot, however, be said that they refused all kinds of accomodation to the public, for while they would not pay cash for their notes, they would oblige a holder of them by giving him a draft on New York at three per cent. advance.*
• 8In this contest the local Banks enlisted the feelings of the Legislature of Georgia in their favor: and an act was passed in the beginning of 1821, to repeal the law allowing twenty-five per cent. damages on non-payment of notes, so far as it might operate in favor of the United States’ Bank. Such a disposition in the Legislature, was an encouragement to the Banks to evade payment to individuals: and we read, without feelings of surprise, that on a demand being made in April on the Planters’ Bank of Georgia for 30,000 dollars in specie, the cashier replied that he would pay in cents only: and that, when a gentleman of Augusta made a demand for specie in June, cents were tendered to him and counted out at the rate of sixty dollars a day.†