A Short History of Paper Money and Banking
Chapter XXIII. Extent of Banking Operations at different periods
For many years a veil of mystery was thrown over the operations of the Banks. Mr. Bland, a member of Congress from Maryland, in a speech made previous to the dissolution of the old Bank of the United States, said, “The nature of the loans, the deposits, and all the bargains, dealings, and contrivances, between the Government and the Bank, are wholly invisible to the public.”
Dr. Bollman, who undertook the defence of the Bank, after mentioning that the nature of Banking operations was but little understood, spoke of “an idea prevailing with those whom curiosity and a turn for research has led to investigate the subject more deeply, that the interest of of these institutions, as well as their usefulness, required the preservation of what they deem salutary prejudices concerning them.” The Doctor justified such revelations as he made by the necessity of the case.
“I have labored,” says Mr. Carey, who was embarked in the same cause, “under a most discouraging destitution of materials. Those whose province it was to furnish them, have most cautiously forborne from the communication, in the most extraordinary manner.”
In another sentence he says, “The obligation of secrecy in Banking transactions, precludes a writer who undertakes the defence of such an institution, from many of the most important data, on which his reasoning may depend. * * * Were I possessed of a statement of the specie in the different Banks of Philadelphia—and were it proper to disclose it.”
For many years this veil of mystery was not removed; if, indeed, it can now be said to be removed. “I have found “said ‘A Frienly Monitor,’ writing in 1819, “considerable embarrassment in obtaining the most simple information in relation to the Bank (i. e. the present Bank of the United States.) If I ask a director, the seal of his finger is significantly impressed on his lips. There is a species of masonry in Banking which to a certain extent is highly proper and necessary. It implies a mutual pledge among the directors, that nothing shall be divulged which may be prejudicial to the interests of the Bank.”
Before the suspension of specie payments, no regular returns were received by the Legislature of Pennsylvania from the Banks in this Commonwealth. Since that time, accounts have been published annually: but as the Bank of Pennsylvania and the Bank of North America have in many years made no returns, it is impossible to give a general table from which indisputable conclusions might be drawn.
In some of the other States, the difficulty of obtaining satisfactory accounts of the extent of Bank operations, is more difficult than in Pennsylvania. During the great excitement of 1818–19, Mr. Niles made an effort to collect information respecting all the Banks then in existence; but, though his correspondence was very extensive, he does not appear to have succeeded in his object; for the tables which he gave notice of his intention of publishing, do not appear in his Register.
In 1820, Mr. Crawford, who was then Secretary of the Treasury, made a report on the state of currency, in connexion with which he gave a table intended to show the amount of capital paid in, the notes in circulation, the public and private deposits, and the specie in the Banks in 1819. Mr. Niles, on publishing the table said, “it will be seen the preceding returns are very imperfect—as, for instance, the capital paid in, in Maryland is given at 86,290, whereas it is nearly eight millions of dollars. Several of the other items I know, from various documents in my possession, are pretty nearly correct; yet some are also much deficient.”
Mr. Gallatin, who was for many years Secretary of the Treasury, published in 1831, “Considerations on the Currency and Banking System of the United States.” A comparison of his estimates with those of Mr. Crawford, will show the difficulty there is in arriving at a satisfactory conclusion.
Mr. Crawford’s estimate of the amount of notes in circulation, is as follows:
| 1813, | - | - | - | - | $62,000,000 |
| 1815, | - | - | - | - | 110,000,000 |
| 1819, | - | - | - | - | 45,000,000 |
Mr. Gallatin’s estimate is as follows:
| 1811, | - | - | - | - | $28,000,000 |
| 1815, | - | - | - | - | 45,000,000 |
| 1816, | - | - | - | - | 68,000,000 |
| 1820, | - | - | - | - | 44,863,349 |
| 1830, | - | - | - | - | 61,323,898 |
Mr. Gallatin appears to have had more data than Mr. Crawford, but still his tables are so imperfect that variations of from 5 to 25 per cent. may take place in the amount of currency, which they afford no means of ascertaining.
To collect and arrange the accounts of five or six hundred Banks which are, or which have been, scattered through twenty-four States and two or three Territories, would be no easy task.
If we had all these accounts collected and arranged to our hand, a question might arise as to the sense in which they should be understood. There is an ambiguity in many Bank statements which renders them useless. The word “cash” under the pens of some Bank officers, contracts and expands its meaning with as much facility as Bank medium contracts and expands its amount. Sometimes it includes “mint certificates,” because cash can be got for them in the market. Sometimes, in the case of a country Bank, it includes city Bank notes, because they are to the country Bank “.as good as cash.” Sometimes cash and “bills of exchange” are given together.
If all ambiguity were removed from Bank statements, another question might arise, and that is, how far they are to be depended upon. We have seen a committee of the Legislature of North Carolina accusing one of the Banks of that State of rendering a false account of the amount of specie in its vaults: and a committee of the Legislature of Connecticut accusing one of the Banks of that State of rendering a false account of the amount of notes in circulation.
No doubt, the accounts of many Banks are fairly rendered, but it is impossible, in a general view of the subject, to say how many Bank returns are faithful and how many are not. There may be a literal exactness in the returns, and yet some fact may be suppressed, which, if generally known, might entirely change the impression the public receives from a Bank statement. “I could,” says a writer in a Portsmouth, New Hampshire, paper, “name more than one Bank in this State, where a considerable portion of the debts mentioned in the return, were worth nothing; and much of the specie was borrowed from individuals or Banks, laid in the vaults those two days, and then returned to the owners with the seals unbroken.” The author of a pamphlet published at New York, in 1828, entitled a “Peep into the Banks,” objected to a new law of that State, requiring the Banks to make semi-annual returns of the amount of specie in their vaults, for the following reasons. “It is well known, that institutions which, heretofore, have been required to make these exhibitions, have prepared, previous to the period of making them, to present as favorable statements as possible. If all the Banks in the State are to do so, it will produce a semi-annual pressure for money. Paper, payable a short time previous to these periods, will be discounted freely, when a general curtailment will be made. The notes and bills payable out of the State, will obtain a preference, that thereby funds of specie, in Philadelphia, Boston, &c., may be made for a few days the property of Banks in this State. In this and other contrivances, the officers will be employed to make a a display of that which has no permanent existence.”
There is another question. Do even the directors know, in all cases, what is the exact state of a Bank?—There are not in the city and county of Philadelphia, any men more astute in what regards their own interests, than some of the Directors of the Bank of the Northern Liberties; yet a sum equivalent to the whole capital of the Bank, was taken from it by some of its clerks and their coadjutors out of doors, without any of the Directors, the President, or Cashier, being aware of the fact. The case of the City Bank of Baltimore, was still more remarkable. It had what was called a “solid” capital of 800,000 or 900,000 dollars, and its credit was good. But, about the time Mr. M‘Culloh was removed from the cashiership of the United States’ branch, the Cashier of the City Bank found it necessary to resign. An investigation was then made by a committee of the stockholders, and it was found that all the persons employed in the Bank, with the exception of one clerk and the porter, had made free with its funds. The over-drafts of the Cashier amounted to $166,548 85: those of his particular friend to 185,382 dollars; those of one clerk to about 30,000 dollars; those of a second clerk to $15,082 70; and those of a third clerk to $6,324 991
It is to be hoped that most Bank officers are every way worthy of the trust reposed in them; but. even then we cannot be sure of the accuracy of their accounts. As is remarked by Governor Wolcott, “The stations of President, Cashier, Teller and Book-keeper, are incompatible, and yet some two or more of them are united in the same persons, contrary to established maxims of accountability, prudence, and even justice to the individuals who are so entrusted. If, at the close of the hours of business in every day, full accounts of all the funds issued and of securities obtained and discharged, are not immediately stated, their accuracy ascertained, and their results extended into records, which are regularly continued, by persons whose peculiar duty it is to note all these facts, according to established forms; then the transactions of different days will be blended, and soon all individual responsibility will be irrecoverably lost.”
While so much obscurity and so much uncertainty hangs over Bank accounts, the reader will be content with a mere abstract of the tables and statements of Mr. Gallatin. We have been for seven years collecting the accounts of the Banks, but so little success has crowned the labors of Mr. Crawford, Mr. Gallatin, and Mr. Niles, that we do not think it worth while to arrange our own materials.
Number of Banks in operation at different periods, and number of Banks that failed or discontinued business, from 1st January 1811, to 1st January 1830.
| 1811. | 1815. | 1816. | 1820. | 1830. | Broken Banks. | ||
| Massachusetts, | - | 15 | 21 | 26 | 28 | 66 | 6 |
| Maine, - - | - | 6 | 8 | 14 | 15 | 18 | 8 |
| New Hampshire, | - | 8 | 10 | 10 | 10 | 18 | 2 |
| Vermont, - | - | 1 | 10 | ||||
| Rhode Island, | - | 13 | 14 | 16 | 30 | 47 | 1 |
| Connecticut, - | - | 5 | 10 | 10 | 8 | 13 | 2 |
| New York, - | - | 8 | 26 | 27 | 33 | 37 | 10 |
| New Jersey, | - | 3 | 11 | 11 | 14 | 18 | 7 |
| Pennsylvania, | - | 4 | 42 | 43 | 36 | 33 | 16 |
| Delaware, - | - | 5 | 5 | 6 | 6 | 1 | |
| Maryland, - | - | 6 | 17 | 20 | 14 | 13 | 9 |
| District of Columbia, | - | 4 | 10 | 10 | 13 | 9 | 4 |
| Virginia, - | - | 1 | 4 | 12 | 4 | 4 | 10 |
| North Carolina, | - | 3 | 3 | 3 | 3 | 3 | 2 |
| South Carolina, | - | 4 | 5 | 5 | 5 | 5 | 2 |
| Georgia, - | - | 1 | 2 | 3 | 4 | 9 | 1 |
| Louisiana, - | - | 1 | 3 | 3 | 4 | 4 | 2 |
| Alabama, - | - | 3 | 2 | 3 | |||
| Mississippi, - | - | 1 | 1 | 1 | 1 | ||
| Tennessee, - | - | 1 | 2 | 4 | 8 | 1 | 92 |
| Kentucky, - | - | 1 | 2 | 2 | 42 | 43 | |
| Ohio, - - | - | 4 | 12 | 21 | 20 | 11 | 20 |
| Indiana, - | - | 2 | 2 | ||||
| Illinois, - - | - | 2 | 2 | ||||
| Missouri, - | - | 1 | 2 | ||||
| Michigan, - | - | 1 | 1 | ||||
| Florida, - | - | 1 | |||||
| 88 | 208 | 246 | 307 | 330 | 165 |
“We have another list, which contains the names of twenty-eight broken Banks not mentioned in Mr. Gallatin’s table, viz. one in Massachusetts, one in Maine, three in New York, three in Pennsylvania, one in Delaware, one in the District of Columbia, two in Virginia, one in Georgia, four in Kentucky, eight in Ohio, one in Indiana, one in Illinois, and one in Michigan. Even this, however, does not appear to be complete. No list has yet been published of the number of Banks in operation in the first six months of 1818, which was the time the mania reached its height; and Mr. Gallatin, with all his industry, has not been able to give a complete list of all the Banks which were in operation in the years mentioned in the above table. There were, for example, two if not three Banks in Missouri in the year 1820.
Mr. Gallatin’s estimate of the capital of the Banks, the notes in circulation, and specie in their vaults, at different periods, is as follows:
| Capital. | Circulation. | Specie. | ||
| 1st. Jan. 1811, | - | 52.610,601 | 28,100,000 | 15,400,000 |
| 1815, | - | 82,259,590 | 45,500,000 | 17,000,000 |
| 1816, | - | 89,822,422 | 68,000,000 | 19,000,000 |
| 1820, | - | 137,110,611 | 44,863,344 | 19,820,240 |
| 1830, | - | 145,192,268 | 61,323,898 | 22,114,917 |
In making these estimates, Mr. Gallatin was forced to guess at the amount of specie possessed by, and the amount of notes circulated by, thirty-eight Banks in 1811, eighty-eight Banks in 1815, one hundred and twelve Banks in 1816, ninety-five Banks in 1820, and forty-nine Banks in 1830. Where he had returns they were not all of the same dates, and in some years the returns were from but little more than half the whole number of Banks. After all, his guesses may be as near the truth as some Bank statements.
Nothing is more certain than political economy. Nothing is more uncertain than political arithmetic.
Bank statements, taken by themselves, are too vague to be made the basis of an argument. We have, however, throughout this book, received them without dispute, because we believed them to approximate sufficiently near the truth to serve the purposes of illustration. Abstract signs would, if generally understood, answer the same end. Bank statements may be used with this view, though, taking them in the aggregate, they may not be worthy of implicit confidence. That the Banks should make such reports as will place their operations in the most favorable light, is natural.
If any think differently, and are disposed to reason a priori with Bank statements for their basis, we hope they will avoid the error of some modern writers, who have represented an increase of some eight or ten millions in the circulation of a single Bank in a year or two as quite gradual and moderate. If Mr. Gallatin is correct in his conjecture, that the whole amount of medium, Bank notes, Bank credits, and specie in circulation, is but one hundred and ten or one hundred and twenty millions, an increase of ten or twelve, or fifteen per cent., in one of these components of the currency, must have a very considerable effect on prices. This able writer is confident that the amount of notes in circulation did not exceed thirty millions in 1811, forty-seven millions in 1815, and seventy millions in 1816: yet this he thinks, and he probably thinks justly, is quite sufficient to account for the depreciation of the currency. He agrees with Mr. Crawford in the opinion that the notes in circulation were not reduced to a less amount than forty-five millions in 1820: yet his judgment is, that the numerous failures which preceeded the year 1819, or which have since taken place, have been principally owing to the operations of the Banks.
Full and correct accounts of the amount of notes in circulation, and of the amount of deposits, would gratify curiosity: but, for practical purposes, they are not necessary. The effects of Banking are inscribed on every page of our country’s history, from the year 1783 up to the present day. Those who have been in business can speak of these effects from their own experience. Those who have never been in business, have only to open their eyes, and they will behold the effects of the system in the condition of different classes of society.
Many of the operations of the system are such that they cannot be embraced in the annual reports made by the Banks to the Legislature. Fluctuation of prices is but one of the evils of paper money Banking, and that not the greatest. If it were possible for a metallic currency to vary in amount as Bank medium varries, such variations would be limited in their effects, for they would not operate on a false and super-extended system of credit, nor would the evil be aggravated by the machinations of irresponsible Boards of Directors. Paper money must be regarded as the foundation of the American Banking System, since the founders of Banks would not, if they were prevented from issuing paper money, accept of charters: but this paper money does less evil as an uncertain medium of commerce, than is produced by its being made the instrument by which the foundation is laid for a false and super-extended system of credit, and by its giving to corporations a power which enables them to exercise an influence on society nearly as great as that which was exercised by feudal lords in the middle ages.
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3 Niles’ Register, October 30th, 1819.
4 Including five Branches.
- 1* Letter to Mr. Gallatin, by Publicola, New York, 1815.
- 2* See Say, Book, Chap. xxi, Section 2.
- 3“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.
- 4Because 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.*
