Twenty Years of Congress, Vol. 1 / From Lincoln to Garfield, with a Review of the Events Which Led to the Political Revolution of 1860

by James Gillespie Blaine

CHAPTER XXII.

National Currency and State Bank Currency.—In Competition.—Legal-
tender Bill tended to expand State Bank Circulation.—Secretary
Chase's Recommendation.—Favorably received.—State Bank Circulation,
$150,000,000.—Preliminary Bill to establish National Banks.—
Fessenden.—Sherman.—Hooper.—National Bank System in 1862.—
Discussed among the People.—Recommended by the President.—Mr.
Chase urges it.—Bill introduced and discussed in Senate.—Discussion
in the House.—Bill passed.—Hugh McCulloch of Indiana appointed
Comptroller of the Currency.—Amended Bank Act.—To remedy Defects,
Circulation limited to $500,000,000.—National Power.—State Rights.
—Taxation.—Renewed Debate in Senate and House.—Bill passed.—
Merits of the System.—Former Systems.—First Bank of the United
States.—Charters of United-States banks, 1791-1816.—National
Banks compared with United-States Banks.—One Defective Element.—
Founded on National Debt.

The Secretary of the Treasury had not failed to see that a constant conflict and damaging competition must ensue between the currency of the Nation and the currency of the State banks. It was the course of the banks more than any other agency that had discredited the "demand notes" and demonstrated to the Treasury Department and to Congress the absolute necessity of imparting the legal-tender quality to the paper issued by the government. As this paper took the place of gold and silver in the payment of every obligation, both corporate and individual,—except duties on imports and interest on the National debt,—it was made easy for the State banks to extend their circulation. It was quite practicable for them to keep a sufficient amount of legal-tender paper in their vaults to meet all the probable requirements of redemption, and they were thus tempted to expand their loans and issue their own bills to a dangerous extent. It was indeed hardly necessary to provide legal- tender notes to redeem their own bills. One kind of paper money, to a large proportion of the public, was practically as good as another. Coin redemption being abandoned, the banks in a certain sense lost all moral and legal restraint. The enactment of the Legal-tender Bill had not therefore given the control of the currency to the government. It had only increased the dangers of inflation by the stimulus it imparted and the protection it afforded to the circulation of State bank notes.

SECRETARY CHASE'S RECOMMENDATION.

Secretary Chase had grasped the situation earlier than the experienced financiers who assumed to be his special advisers, and while he was, in the opinion of unjust critics, completely in the hands of the State banks, he surprised the country by recommending in his report of December, 1861, the establishment of a National system that should give the General Government complete control of the currency. The State bank circulation in the loyal States he estimated at $150,000,000. "The whole of it," he regarded as "a loan without interest from the people to the banks." The secretary thought "it deserves consideration whether sound policy does not require that the advantages of this loan be transferred from the banks, representing the interest of stockholders, to the government representing the aggregate interest of the whole people." Attention was called to the fact that "the existing circulation depends on the laws of thirty-four States and the character of some sixteen hundred private corporations." It was somewhat startling to learn that "the circulation is usually furnished in greatest proportion by institutions of least actual capital and is commonly in the inverse ratio of solvency."

The bold and comprehensive recommendation of Mr. Chase was favorably received by many of the leading men in Congress and by many of the ablest financiers of the country. The committees of both Senate and House were well disposed, but preferred time for consultation and deliberation. The Secretary of the Treasury, with the aid of Mr. E. G. Spaulding, Mr. Sherman, and Mr. Samuel Hooper, engaged in the preparation of a bank bill which in due time was submitted to the Committee of Ways and Means. The committee was at that moment engaged on the Internal-revenue Bill, the important character of which absorbed the attention of Congress. The adjustment of the tariff duties to the excise taxes was also a serious labor which left no adequate time to mature a bank bill in season for its consideration at that session. Indeed the committee was not able to report the bill to the House until the 12th of July, 1862, when five thousand extra copies were printed for distribution among the financial institutions of the country. It was deemed wise to give the people time to consider so important a measure, and with that end in view all further action was postponed to the next session.

Meanwhile the bill was published in the leading papers of the loyal States and elicited the most diverse opinion. It was however received with favor by the public. Those interested in the State banks were at first exceedingly hostile to it. The proposition to tax their circulation two per cent. in addition to the three per cent. imposed upon incomes by the new law was considered harsh and unjust. The object was to compel the retirement of the State bank circulation. In no other way could a national system be at once generally instituted. The courts had repeatedly held the authority of the States to charter banks with power to issue and circulate notes as money, to be constitutional. Congress could not abridge this right in any way by direct legislation. Its power to tax was however undoubted. The friends of the State bank system claimed that the indirect method of destroying the institution by taxing its notes out of existence was an arbitrary exercise of questionable power.

The advocates of a uniform and stable system of banking to cure the manifold evils then prevailing, admitted that the prerogative of the States could not be questioned, but urged that the exercise of it had invariably increased and often produced the financial troubles which had afflicted the country in the past. If the States would not surrender their prerogative, the National Government would be compelled to exercise its larger prerogative embodied in the power to tax. The right of the nation to do this had been asserted by the head of the Treasury under a Democratic administration some years before. Recognizing as he did the necessity of a reform in the system of banking, Secretary Guthrie in his report to Congress in 1855 declared that "if the States shall continue the charter and multiplication of banks with authority to issue and circulate notes as money, and fail to apply any adequate remedy to the increasing evil, and also fail to invest Congress with the necessary power to prohibit the same, Congress may be justified in the exercise of the power to levy an excise upon them, and thus render the authority to issue and circulate them valueless."

THE SYSTEM OF NATIONAL BANKS.

During the autumn of 1862 the bank question was subjected to a thorough discussion among the people. The legal-tender notes had already become popular, and were evidently preferred by the public to the notes of local banks. The depression naturally incident to continued reverses in the field led to the defeat of the Administration in many of the State elections, but despite the operation of all adverse causes the general trade of the country was good. The crops had been abundant and prices were remunerative. All that had been claimed for the legal-tender bill by its most sanguine advocates had been realized in the business of the country. The one disappointment was their failure to keep at par with gold; but even this, in the general prosperity among the people, did not create discouragement. The Internal-revenue system had but just gone into operation, and the only feature embarrassing to the people was the requirement that the taxes should be paid in the legal- tender paper of the government. No provision of law could have operated so powerfully for a system of National banks. The people were subjected to annoyance and often to expense in exchanging the notes of their local banks for the government medium. The internal fiscal machinery of the government evidently required places of deposit. The tax-collectors could not intrust the funds in their hands to State banks except at their own risk. The money of the government was thus liable to loss from the absence of responsible agencies under the control of National power. The fact that the bills of State banks were not receivable for taxes tended constantly to bring them into disrepute. The refusal of the government to trust its funds in the keeping of the State banks was nothing less than the requirement of the Sub-treasury Act, but to the popular apprehension it was a manifestation of distrust which did the banks great harm. The total revenue of the National Government had before the war been collected at a few custom-houses on the coast, and the public had not been generally familiar with the mode of its safe-keeping. The system of internal taxes now reached the interior, and the people were made daily witnesses of the fact that the government would not trust a dollar of its money in the vaults of a State bank.

Under the influences thus at work, the friends of the State banks plainly saw that the National system was growing in favor, and they began to admit that its creation might facilitate the financial operations of the country. Many of them were willing to give it a fair trial. The advocates of the National system constantly pressed their cause among the people. The five-twenty six per cent. bonds, into which the legal tenders were convertible, offered, as they explained, an excellent basis for banking. Their absorption for that purpose would create not only a market for that class of securities but inevitably cause them to appreciate in value. The government would thus be largely benefitted, and its cause would be strengthened by the silent influence of self-interest which would certainly be developed by the general distribution of its bonds as the basis of a national currency. It was also urged that the existing banks could with great facility and without sacrifice re-organize under the proposed national law.

The popular mind having been thus favorably turned towards the system of national banks, the President specifically approved it in his message to Congress in December, 1862. Expressing his doubts "whether a circulation of United-States notes, payable in coin, and sufficiently large for the wants of the people, can be permanently, usefully, and safely maintained," Mr. Lincoln asked if there was "any other mode by which necessary provision for the public wants can be made, and the great advantage of a safe and uniform currency secured?" He declared that he knew of none "which promises so certain results, and is at the same time so unobjectionable, as the organization of banking associations under a general law of Congress well guarded in its provisions." Mr. Chase elaborated his recommendation of the preceding year to the same effect. He asked that "a tax might be imposed on the notes of existing banks such as would practically exclude them from circulation." In their stead the legal-tender notes would be used, but he preferred "a circulation furnished by the government but issued by banking associations organized under a general Act of Congress."

Mr. Chase said "the central idea of the proposed measure is the establishment of one uniform circulation, of equal value throughout the country, upon the foundation of national credit combined with private capital." He suggested that "these associations be entirely voluntary. Any persons desirous of employing real capital in sufficient amounts, can, if the plan be adopted, unite together under proper articles, and having contributed the requisite capital can invest such part of it, not less than a fixed minimum, in United- States bonds, and having deposited these bonds with the proper officer of the United States can receive United-States notes in such denominations as may be desired, and employ them as money in discounts and exchanges." As a further inducement, the secretary said "the stockholders of any existing banks can in like manner organize under the Act, and transfer, by such degrees as may be found convenient, the capital of the old to the use of the new associations. The notes thus put into circulation will be payable until resumption in United-States notes, and after resumption in specie, by the association which issues them, on demand, and if not so paid will be redeemable at the Treasury of the United States from the proceeds of the bonds pledged in security." The secretary thought it would be "difficult to conceive of a note circulation which will combine higher local and general credit than this. After a few years no other circulation would be used, nor could the issues of the national circulation be easily increased beyond the legitimate demands of business. Every dollar of circulation would represent real capital actually invested in national stocks, and the total amount issued could at all times be easily and quickly ascertained from the books of the Treasury."

SENATE DISCUSSES THE BANKING SYSTEM.

The bill to carry out these suggestions was introduced in the Senate on the 26th of January, 1863, by Mr. Sherman, and was reported from the Finance Committee on the 2d of February. On the 9th the Senate took it up for consideration. Mr. Sherman advocated the proposed system in an elaborate argument on several distinct grounds: "The banks would furnish a market for United-States bonds; they would absorb the circulation of the State banks gradually and without harsh measures; they would create a community of interest between the stockholders of the banks, the people, and the government, where now there existed a great contrariety of opinion and a great diversity of interests; adequate safeguards would be established against counterfeiting; the currency proposed would be uniform and would take the place of the notes of sixteen hundred banks, differing in style, and so easily imitated and altered that while notes of one-sixth of the existing banks had been counterfeited, 1,861 kinds of imitations were afloat, and 3,039 alterations, in addition to 1,685 spurious notes, in which hardly any care had been taken to show any resemblance to the genuine." The national banks would be depositories of public moneys and their notes would be receivable for taxes. He concluded by declaring that "we cannot maintain our nationality unless we establish a sound and stable financial system, and as the basis of it we must have a uniform national currency." Accordingly he deemed the passage of the pending bill "more important than any other measure now pending either in Senate or House."

—Mr. Henderson of Missouri sought to limit the system to banks with a capital not less then $300,000, and thought "it would be infinitely better that all the banks should be established in New York, Philadelphia, Boston, Cincinnati, St. Louis, and such cities as those." He said "they had had some experience in the West with banking laws which permitted the organization of banks in out-of- the-way places, obscure villages, and unknown cross-roads."

—Mr. Powell of Kentucky, who was most persistent in his advocacy of a currency based on gold and silver coin, moved to "strike from the bill the words which prevented the acceptance of the National bank notes for duties on imports." These duties were payable in coin in order to secure gold with which to pay the interest on the public debt. In supporting his amendment, Senator Powell said that if the bill became a law the fact that they could not be received for customs would tend to depreciate the notes, and he wanted the credit of the paper money kept up if the country was to have no other. His motion was defeated.

—Mr. Ira Harris of New York secured the adoption of three sections, to be added at the end of the bill, which would enable State banks to accept its provisions and become National institutions more readily and more easily. He said that he was not opposed to a fair trial of the new system, but he doubted very much whether the banks of New York could be induced to abandon their State charters. "The banking system of New York was the best in the world. The banks enjoyed privileges which they could not be induced to surrender and the people would be reluctant to trust any others."

—Mr. John Carlile of West Virginia voted against all amendment because he wanted the bill to kill itself, which would happen if it were not improved. He voted against Senator Henderson's amendment to limit charters to banks with $300,000 capital. If the bill passed as it came from the Finance Committee there "will be banks established at every cross-road in the country. The State banks will be destroyed, and widows and orphans whose all is invested in the stock of these institutions will be impoverished."

—Mr. Clark of New Hampshire thought the proposed system might be improved by providing "that there shall be a visitation on the part of the States." He thought it would give confidence to the banks if the States "had the right to know how they stood."

—Mr. Pomeroy of Kansas thought the right to organize with a capital as low as $50,000 was a good provision and would "tend to popularize and extend the National banks throughout the country."

SENATE DISCUSSES THE BANKING SYSTEM.

—Mr. Howard of Michigan opposed the bill because he thought its effect would be to "wage a very unnecessary and dangerous war upon the State institutions," and also because he deplored "the contest which will probably arise out of it in our local politics."

—Mr. Garrett Davis, avowing himself an advocate of the old United- States Bank which President Jackson destroyed, was opposed to the pending bill because "it does not provide for the convertibility of its paper into coin." The "system is based on government bonds, and they sold in New York yesterday at a discount of fifty-three percent."

—Mr. Chandler of Michigan corrected Mr. Davis. "Gold sold at fifty-three per cent. premium, but that did not mean a discount of fifty-three per cent. on the bonds."

—Mr. Wilson of Massachusetts pertinently asked Mr. Davis "if the credit of the government is not good enough, where is there left in the country any thing good enough to bank on? If the government goes down, there is not a considerable bank in America that does not go down with it."

—Mr. Doolittle of Wisconsin regarded it as "a necessity that the government should take control of the paper currency of the country. In some way we must restrain the issues of State banks. If we permit these banks to flood the channels of circulation, we destroy ourselves."

—Mr. Collamer of Vermont denied the right to tax the State banks out of existence, and to establish corporations in the State and Territories. Independently of the power of visitation by those States and Territories, he objected to making the government responsible for the ultimate redemption of the bills by the securities deposited. He inquired in what respect the promises of the National banks would be better than the notes of the government, and why should they be substituted for them?

—Mr. Chandler of Michigan claimed that when the whole system was in operation the government would borrow $300,000,000 at four per cent. per annum, because, while the bonds deposited with the banks would draw six per cent., the tax would bring back two per cent. He did not know how far the bill would go, but "all that is in it is good."

The bill came to a vote in the Senate on the 12th of February, and narrowly escaped defeat. The yeas were twenty-three, the nays twenty-one. The senators from Oregon, Nesmith and Harding, were the only Democrats who voted in the affirmative. Nine Republican senators voted against it.

The House of Representatives received the bill on the 19th. Mr. Spaulding of New York advocated it very earnestly. He stated that its principle was based on the free banking law of New York, which had been in successful operation since 1838. He dwelt upon the national character of the proposed notes, on their use in payment of taxes, and on the advantage to accrue from the exemption of the banking associations from State and United-States taxation.

—Mr. Fenton of New York expressed the belief that the measure would aid in extricating the government from the financial difficulties in which it was involved, and pronounced it "one of the most potent means by which the representatives could strengthen the government and the people in the struggle to put down the enemies of the country, and give hope and courage to the hearts of those brave men who have gone forth to battle." Considerable opposition was offered, chiefly on details and by amendments. But the House sustained the measure as it came from the Senate, and passed it on the 20th of February, by the close vote of 78 to 64, on the call of the ayes and noes. It was approved by the President on the 25th.

The Currency Bureau of the Treasury Department provided for in the National Banking Act was organized by the appointment of Hugh McCulloch, who was then at the head of one of the largest State banking institutions in Indiana. He was recognized as possessing executive capacity and large experience in financial affairs. He had originally been opposed, as were many others interested in State banks, to the National Banking Act, but, as he says, the more he examined "the system" the more it "grew into favor with him day by day." This appears to have been the result with all who gave the question a fair and candid consideration, even when biased by personal interests or political prejudice. The law was defective in many particulars and some of its provisions made it difficult for existing State banks to accept charters under it. The first annual report of the comptroller of the currency shows that by Nov. 28, 1863, 134 banks had been organized under the Act. Fourteen of these were in the New-England States, sixteen in New York, twenty in Pennsylvania, twenty in Indiana, thirty-eight in Ohio; New Jersey, the District of Columbia, and Kentucky each had one; Illinois seven, Iowa six, Michigan and Wisconsin four each, and Missouri two. Their total capital was $7,184,715. The bonds deposited with the Treasurer of the United States were $3,925,275, their deposits $7,467,059, and their loans and discounts $5,413,963.

THE AMENDED BANK BILL OF 1864.

In his report Mr. McCulloch pointed out defects of the law which had become apparent by the test of experience, and made many suggestions for its improvement. The whole subject was taken into consideration by the Ways and Means Committee of the House at the first session of the Thirty-eighth Congress. An amended bill, which repealed the Act of February 25, 1863, and supplied its place, was reported from the committee March 14, 1864. It was carefully considered in the committee of the whole, section by section, and against the protest of its advocates an amendment was ingrafted upon it giving to the States the right to impose taxes on the bank shares for State and municipal purposes to the same degree that taxes were imposed upon the property of other moneyed corporations. This bill was reported to the House from the committee of the whole on the 16th of April, when Mr. Stevens moved a substitute in which the tax amendment was left out. The substitute was defeated, and thereupon the immediate friends of the bill united with the opposition and laid the whole subject on the table. Mr. Stevens was totally opposed to the exercise of any power whatever by the States over banks established by National authority.

In the height of the war excitement, when men's minds were inflamed by a just resentment toward the Southern theory of States' rights, there was a tendency to go to extremes in the other direction. Some of the Republican leaders, notably Mr. Stevens, were very radical in their views in this respect, and would scarcely have hesitated at the abolition of all the checks upon Federal power which the Constitution wisely gives to the States. But apart from considerations of this character it was believed by many of the friends of the national banking system that the imposition of State taxes, in addition to those to be imposed by the General Government, would defeat the object of the bill. Others in their anxiety to strengthen the National Government were anxious to reserve to it exclusively the largest possible scope of taxation. It soon became apparent however that some concession must be made to those of both political parties who believed that the States could not constitutionally be deprived of the right to levy uniform taxes on property within their jurisdiction. To meet the views of these gentlemen the Ways and Means Committee reported a bill with a provision intended to reconcile all differences of opinion. This gave to the State the power to tax the capital stock, circulation, dividends, or business of national banks at no higher rate than was imposed upon the same amount of moneyed capital in the hands of individual citizens of the State, provided no tax was imposed upon that part of the capital invested in United-States bonds. This was adopted by a vote of 70 to 60 on the 18th of April, 1864.

The opposition to the bill in all other respects save this question of taxation was confined mainly to the Democratic members of the House. The measure was by this time regarded favorably by all Republicans. It was considered to be a part of the Administration policy, and one that would contribute largely to strengthen the government in its struggle. Its success thus far had demonstrated that under a perfected law it would soon become the general and popular banking system of the country. It was daily growing in favor with business men, and there was no longer doubt that a large proportion of the surplus capital of the nation would be invested in United-States bonds and in the stock of National banks. In the debate in the House which was prolonged, two speeches of particular interest were elicited. Mr. James Brooks of New York, as the leader of the Democratic minority on the question, ably summarized the objections of his party. He was a man of education and great intelligence. He had traveled extensively and was a close observer. He had been a writer for the metropolitan press for many years, and was familiar with the political and financial history of the country from an early period. He was an effective speaker. On the occasion he was in large part supplied with facts by Mr. James Gallatin, who as president of one of the principal banks of New- York City had unsuccessfully attempted to dictate the financial policy of the government in 1861. Mr. Gallatin had conceived an intense hostility to Mr. Chase, and inspired Mr. Brooks to make in the course of the debate on the bank bill some unfounded charges against the Secretary. The speech of Mr. Brooks was a general attack upon the financial policy of the administration directed principally against the Legal-tender Act, and at the same time a qualified defense of the State bank system. He asserted that the government could have successfully carried on the war upon a specie basis, but his authority for this claim was Mr. Gallatin. Mr. Samuel Hooper at the close of the debate defended the financial policy of the Administration and disposed of the argument of Mr. Brooks. He asserted that Mr. Gallatin had induced the banks of New-York City on December 30, 1861, to suspend specie payments, and briefly related his presumptuous attempt to dictate to the Secretary of the Treasury the financial policy of the Nation. He declared that the issue of legal-tender notes was the only resource left to the government, and "was wise as well as necessary." In his review of the financial history of the country he dealt unsparingly with the old State-bank system, and exposed in a masterly manner its inherent defects even in those States where the greatest care had been exercised by the Legislative power to hedge it about with limitations.

THE AMENDED BANK BILL OF 1864.

In the Senate the debate on the House bill was chiefly confined to amendments proposed by the Finance Committee. The provision incorporated by the House in regard to taxation was amplified so as to make it more specific and definite. Considerable opposition was shown to this action, but Mr. Fessenden, chairman of Finance, defended the recommendation of his committee and successfully replied to the arguments against it. An efforts was made by Senators Doolittle, Henderson, and Trumbull on the Republican side to prevent the establishment of any more banks under this law than were in existence in May, 1864, unless they redeemed their notes in coin. The banks then organized, possessed an aggregate capital of about $36,000,000, with bonds deposited to secure circulation to the extent of a little more than $33,000,000. The argument was that this addition to the legal-tender notes already in circulation supplied an ample currency for the business of the country. The issue of the whole $300,000,000 of National bank notes authorized by the bill, these senators claimed, would be such an expansion of the currency as would sink its value to almost nothing. They proposed also to compel the State banks to retire their circulation, but permitted them to organize on the specie basis as National banks. Mr. John P. Hale of New Hampshire thought that "it would be much simpler to incorporate in the bill a provision abolishing all such instruments as had previously been known as State constitutions." Senator Collamer proposed to require the banks to retain in their vaults one-fourth of all the gold they received as interest on their bonds deposited to secure circulation until the resumption of specie payments.

These amendments were voted down, and the bill finally passed the Senate on the 10th of May by a vote of 30 to 9, ten senators being absent or not voting. A conference committee of the two Houses agreed upon the points of difference. The report was adopted and the bill was approved by the President on the 3d of June, 1864. By the end of November 584 National banks had been organized, with an aggregate capital of $108,964,597.28, holding $81,961,450 of the bonds of the United States to secure a circulation of $65,864,650. These banks at once became agencies for the sale of the government's securities, and their officers being usually the men of most experience in financial affairs in their respective communities, gave encouragement and confidence to their neighbors who had money to invest. The sale of government bonds was in this way largely increased. The National banks thus became at once an effective aid to the government. By the close of the fiscal year 1864 $367,602,529 of bonds were disposed of by the banks. During the fiscal year 1865 bonds to the amount of $335,266,617 were sold over their counters. On the 1st of October, 1865, there were in existence 1,513 National banks, with an aggregate capital of $395,729,597.83, with $276,219,950 of bonds deposited with the Treasurer of the United States to secure circulation.

Experience has justified the authors and promoters of the national banking system. Originally the circulation was limited to a total volume of $300,000,000, apportioned, one-half according to representative population, and the remainder by the Secretary of the Treasury among associations with "due regard to the existing banking capital, resources, and business of the respective States, Districts, and Territories." Complaint arose that by such limitation and apportionment injustice was done and monopolies created. After the war this restriction was removed and banking under the national system became entirely free. The advantages of uniform circulation on a basis of undoubted strength and availability have won almost universal favor among business men and prudent thinkers. The restoration of the multiform State system, with notes of varying value and banks of doubtful solvency, would receive no support among the people.

The National bank system with all its merits has not escaped serious opposition. The Bank of the United States, as twice established, incurred the hostility of the Democratic party,—their two greatest leaders, Jefferson and Jackson, regarding the creation of such an institution as not warranted by the Constitution. A persistent attempt has been made by certain partisans to persuade the people that the national banks of to-day are as objectionable as those which encountered serious hostility at earlier periods in our history. An examination into the constitution of the banks formerly organized by direct authority of the General Government will show how wide is the difference between them and the present system of national banks. It will show that the feature of the earlier banks which evoked such serious opposition and ultimately destroyed them is not to be found in the present system and could not be incorporated in it. It was from the first inapplicable and practically impossible.

THE BANK OF NORTH AMERICA.

The most important financial institution established in the United States before the adoption of the Constitution was the Bank of North America, still doing business in Philadelphia, with unbroken career through all the mutations of the eventful century which has passed since it was called into existence. It had its origin in 1780, when certain patriotic citizens of Philadelphia resolved to "open a security subscription of three hundred thousand pounds in real money," the object being to procure supplies for the army, "then on the point of mutiny for lack of the common necessaries of life." The enterprising men who had the matter in hand addressed themselves to the task of providing three million rations and three hundred hogsheads of rum for the famished troops. The Continental Congress recognized their patriotic conduct and pledged "the faith of the government for the effectual reimbursement of the amount advanced." It fell to Robert Morris, Superintendent of Finance for the government, to organize the bank which owed its origin to these circumstances. While engaged in this arduous task he received two letters of advice from an anonymous source, ably written, and displaying considerable knowledge of the science of banking, then almost unknown in America. Indeed the methods of banking—it might be proper to say its secrets—were jealously guarded by the capitalists who monopolized it in the financial centres of Europe. Mr. Morris was struck by the ability and originality of his unknown correspondent, and was amazed to find that Alexander Hamilton, then but twenty-three years of age, was the author of the letters. It was the first exhibition of that mastery of finance which gave Mr. Hamilton his enduring fame.

When Mr. Hamilton assumed control of the Treasury Department under the Presidency of Washington he found that the Bank of North America had accepted a State charter from Pennsylvania and was not therefore in a position to fulfil the functions of a National bank which he desired to establish as an aid to the financial operations of the government. After his funding of the Revolutionary debt he applied to Congress for the charter of a National bank, with a capital of $10,000,000, twenty-five per cent. of which must be paid in coin and the remainder in the bonds of the United States. The government was to own $2,000,000 of the stock of the bank and was obviously to become its largest borrower. The measure encountered the determined opposition of the Secretary of State, Jefferson, and the Attorney-General, Edmund Randolph, and it finally became an almost distinctly sectional issue—the Northern members of Congress with few exceptions sustaining it; the Southern members under the lead of Mr. Madison almost wholly opposing it. It became a law on the 25th of February, 1791.

When the charter of the bank—which was granted for twenty years— expired in 1811 the administration of Mr. Madison favored its renewal. The eminent financier, Albert Gallatin, then Secretary of the Treasury, informed Congress that the bank had been "wisely and skillfully managed." The hostility to it originated in political considerations. It was regarded as an aristocratic institution, was violently opposed by the State banks which by this time had become numerous, and notwithstanding the change of Mr. Madison in its favor, the bill to re-charter was defeated. The contest however was severe. In the House the opponents of the bill had but one majority, and there being a tie in the Senate the re-charter was defeated by the casting vote of George Clinton the Vice-President. By this course Congress gave to the State banks a monopoly of the circulating medium. The war of 1812 followed, and in the sweep of its disastrous influence a large majority of these banks were destroyed, their notes never redeemed, and great distress consequently inflicted upon the people.

It was this result which disposed Congress, as soon as the war was over, to establish for the second time a Bank of the United States. The charter was drawn by Alexander J. Dallas who had succeeded Mr. Gallatin at the Treasury. In the main it followed the provisions of the first bank, but owing to the growth of the country the capital stock was enlarged to twenty-five millions, of which the government subscribed for one-fifth, payable wholly in its own bonds. Individual subscribers were required to pay one-fourth in coin and three-fourths in government bonds. The charter was again limited to twenty years. It was this bank which encountered the bitter opposition of President Jackson, and which was seriously injured by his order to the Secretary of the Treasury, Roger B. Taney, in 1834, to withhold the deposit of government funds from its vaults. The act of President Jackson is usually referred to as "a removal of the deposits." This is incorrect. The government deposits were not removed from the United-States Bank, except in the ordinary course of business for the needs of the Treasury. But the order of the President prevented further deposits of government money being made, and thus destroyed one of the principal resources upon which the bank had been organized. A short time before the charter of the United-States Bank expired, a State charter was obtained from the Legislature of Pennsylvania, under which the bank continued business until 1841, when its affairs were wound up with heavy loss to the stockholders.

THE UNITED-STATES BANKS,—1791-1816.

These brief outlines of the charters of the United-States banks of 1791 and 1816 show how entirely dissimilar they were in many essentials from the system of national banks established under the Acts of 1863 and 1864. In the first the government was a large stockholder and the officers of the Treasury practically directed all the operations and all the details of the bank. In the system now prevailing the government cannot be a stockholder, and takes no part in the management of banks except to see that the laws are complied with and that the safeguards for the public are rigidly maintained. An especially odious feature in the United-States Bank was the favoritism shown in its loans, by which it constantly tended to debauch the public service. Political friends of the institution were too often accommodated on easy terms, and legitimate banking was thus rendered impossible. No such abuse is practicable under the present system. Indeed there is such an entire absence of it that the opponents of the National banks have not even brought the accusation.

There was special care taken to place the Currency Bureau entirely beyond partisan influence. The misfortunes which had come upon the United-States Bank from its connection with party interests were fully appreciated by the wise legislators who drafted the National Bank Act. They determined to guard against the recurrence of the calamities which destroyed the former system. The original Act of 1863, organizing the National system, provided that the Comptroller of the Currency should be appointed by the President upon the nomination of the Secretary of the Treasury, and, unlike any other Federal officer at that time, his term was fixed at five years. This period of service was established in order that it should not come to an end with the Presidential term. It was also specifically provided, long in advance of the tenure-of-office Act, that the President could not remove the Comptroller unless with the advice and consent of the Senate. The Comptroller was thus excepted by statute from that long list of officers who were for many years subjected to change upon the incoming of each Administration. From the organization of the National Banking system to this time (1884) there have been four Comptrollers,—three of whom voluntarily resigned. The present incumbent of the office, Mr. John Jay Knox, has discharged his important duties with great satisfaction for twelve years, and with his predecessors has conclusively established in practice the non-partisan character which is indispensable to the successful administration of the Bureau.

The division and distribution of bank capital under the National system do not merely carry its advantages to every community, but they afford the most complete guaranty against every abuse which may spring from a large aggregation of capital. The Bank of the United States in 1816 had a capital of thirty-five millions of dollars. If a similar institution were established to-day, bearing a like proportion to the wealth of the country, it would require a capital of at least six hundred millions of dollars—many fold larger than the combined wealth of the Bank of England and the Bank of France. It is hardly conceivable that such a power as this could ever be intrusted to the management of a Secretary of the Treasury or to a single board of directors, with the temptations which would beset them. It is the contemplation of such an enormous power placed in the hands of any body of men that gives a more correct appreciation of the conduct and motives of General Jackson in his determined contest with the United-States Bank. His instincts were correct. He saw that such an institution increasing with the growth of the country would surely lead to corruption, and by its unlimited power would interfere with the independence of Congress and with the just liberty of the people.

MERITS OF NATIONAL BANK SYSTEM.

The single feature of resemblance between the Bank of the United States and the system of National banks is found in the fact that Government bonds constitute the foundation of each. But the use to which the bonds are devoted in the new system in entirely different from that of the old. The United-States Bank retained its bonds in its own vaults, liable to all the defalcation and mismanagement which might affect the other assets. In the present system the National Bank deposits its bonds with the Treasury Department, where they are held as special security for the redemption of the bills which the bank puts in circulation. The United-States Bank circulated its bills according to its own discretion, and there was no assurance to the holder against an over-issue and no certainty of ultimate redemption. The National Bank can issue no bills except those furnished by the Treasury Department in exchange for the bonds deposited to secure prompt redemption. In the former case there was no protection to the people who trusted the bank by taking its bills. In the case of the National Bank, the government holds the security in its own hands and protects the public from the possibility of loss.

The one defective element in the National bank system is that it requires the permanence of National debt as the basis of its existence. In a Republican government the people naturally oppose a perpetual debt, and could with difficulty be persuaded to consent to it for any incidental purpose however desirable. But so long as a National debt exists no use has been found for it more conducive to the general prosperity than making it the basis of a banking system in which flexibility and safety are combined to a degree never before enjoyed in this country and never excelled in any other. In no other system of banking have the bills had such wide circulation and such absolute credit. They are not limited to the United States. They are current in almost every part of the American continent, and are readily exchangeable for coin in all the marts of Europe.