Triumphs and Wonders of the 19th Century: The True Mirror of a Phenomenal Era / A volume of original, entertaining and instructive historic and descriptive writings, showing the many and marvellous achievements which distinguish an hundred years of material, intellectual, social and moral progress

by James P. Boyd

III. EARLY BANKING IN THE UNITED STATES.

The first banks in the United States owed their origin to Robert Morris and Alexander Hamilton. Morris, as early as 1763, conceived the plan of a bank to assist in developing American trade, and in 1779, Hamilton proposed the organization of “The Company of the Bank of the United States.” These plans did not mature, but were followed, at the suggestion of Thomas Paine, by an association of ninety-two subscribers to a fund of 300,000 pounds Pennsylvania currency to support the Revolutionary army. This association became known as the Pennsylvania Bank. It commenced business July 17, 1780, and after a career of a year and a half, during which time it greatly aided the government in furnishing army supplies, its affairs were wound up.

On May 17, 1781, Hamilton presented the plan of a bank to Congress, which was to be truly national, and “created avowedly to aid the United States.” Its name was to be the Bank of North America, with a subscription of $400,000 in gold and silver, and its notes, payable on demand, to be receivable for duties and taxes in every State. Congress approved the plan, and Morris, then Superintendent of Finance, published it, with an address showing its advantages to the government and people, then suffering from the ill effects of a depreciated currency.

The Bank of North America was organized November 1, 1781, and began business January 7, 1782. It creditably fulfilled its mission “to aid the United States,” and, after the expiration of its charter, became a State institution. In 1864 it entered the national banking system, though retaining its old name. This bank was followed by the Bank of New York, which began business June 9, 1784, and by the Massachusetts Bank, which began business July 5, 1784.

First United States Bank.—This institution grew out of the recommendations of Alexander Hamilton, and formed a part of his scheme of strengthening the public credit and bringing about a closer union of States. His plan was incorporated into a bill which passed the Senate January 3, 1791, and the House, January 20, 1791. Washington signed it February 25, 1791. The bill was hotly opposed as unconstitutional by Secretary of State Thomas Jefferson, Attorney-General Edmund Randolph, and in general by representatives from the Southern States.

The capital of the bank was fixed at $10,000,000, one fifth of which was to be subscribed by the government. The remainder was subscribed by individuals, and two hours after the opening of the books the capital was oversubscribed to the amount of 4000 shares. The central bank was located at Philadelphia, and afterwards branches were established in New York, Boston, Baltimore, Washington, Norfolk, Charleston, Savannah, and New Orleans. Business was first opened in Carpenters’ Hall, Philadelphia, December 12, 1791. In July, 1797, the site was removed to a new building on Third Street, below Chestnut, and it remained there till the dissolution of the bank, with the exception of a brief removal to Germantown in 1798, during the epidemic of yellow fever. Though this bank proved a profitable enterprise for the government, it failed to secure a renewal of its charter in 1811, chiefly because so many of its shares had passed into foreign hands.

THE GIRARD BANK, PHILADELPHIA.

(Second Site of First United States Bank.)

Early State Banks.—From 1790 to 1811 the number of State banks increased from four to eighty-eight; their circulation from $2,500,000 to $22,700,000; their capital from $2,500,000 to $42,610,000. In the same time the metallic circulation of the country rose from $9,000,000 to $30,000,000. These banks failed to meet the monetary necessities of the War of 1812, and in 1814 practically all of them south of New England suspended specie payments. Their notes were poured out in all denominations from six cents upward, and, with coin redemption stopped, they depreciated rapidly. This led to great financial distress in 1818–1820, and to excessive bank failures. The seriousness of the general situation, and the declining credit of the government, led to the establishment of the second Bank of the United States.

Second Bank of the United States.—In October, 1814, Secretary Dallas laid a report before Congress, in which he deprecated the uncertain amount and value of the paper currency. “There exists,” he said, “at this time no adequate circulating medium common to the citizens of the United States. The moneyed transactions of private life are at a stand, and the fiscal operations of the government labor with extreme inconvenience.” He then recommended as the remedy the establishment of a national banking institution. A bill, based upon Dallas’s plan for such an institution, failed of passage in the House in 1814, and again in 1815, though passed by the Senate. It was, however, finally passed in an amended form, but was vetoed by President Madison.

On December 24, 1815, Mr. Dallas laid before Congress another plan for a national bank. A bill was framed authorizing such an institution, with a capital of $35,000,000, $7,000,000 of which were to be subscribed by the government, the central bank to be at Philadelphia, with power to establish branches, payments to be made in specie at all times unless otherwise authorized by Congress. This bill passed both Houses of Congress, and was signed by President Madison, April 10, 1816. When the subscription books of this bank were closed, it was found that the subscriptions fell short of the authorized $35,000,000 by $3,000,000, which amount was taken by Stephen Girard.

The bank could not lend more than $500,000 to the government without authority of Congress, was to be the fiscal agent of the Treasury, and to receive deposits of public moneys. No notes of a less denomination than $5.00 were to be issued, and the penalty for refusing to pay notes or deposits in specie on demand was twelve per cent per annum until paid. It began business January 7, 1817. Owing to the impending financial crisis and bad management, the bank verged rapidly toward insolvency, but was resuscitated under the vigorous management of a new president, Langdon Cheves, who was elected March 6, 1819. He was succeeded by Nicholas Biddle in 1823, who was destined to see the fall of the great institution.

The national bank incurred the hostility of the State banks, which called it a monster because it refused to allow the notes of the local banks to accumulate as deposits in its branches without redemption. Various States passed discriminating laws against it. Jackson, in his message to Congress in 1829, attacked the constitutionality of the law establishing it, and charged that it had “failed in the great end of establishing a uniform and sound currency.” At this time the Bank was an imposing institution with its capital of $35,000,000, its public deposits of six to seven million, its private deposits of a like amount, its circulation of $12,000,000, its annual discounts of $40,000,000, its annual profits of over $3,000,000, its palatial establishment in Philadelphia, its twenty-five branches throughout the Union, its five hundred employees, its stock distributed through nearly all parts of the world, and its notes current at par at home and abroad.

Jackson’s message was not received favorably by Congress. His aversion, it was thought, was due rather to his belief that the Bank was his enemy than to any dislike of a national bank. The growing hostility between him and Henry Clay induced the latter to make the renewal of the Bank’s charter a political issue. When the bill rechartering the Bank was passed in July, 1832, Jackson vetoed it, charging, in the main, that the Bank was a monopoly. This brought the question of the further existence of the Bank fully into the arena of politics, in the presidential election of 1832, with the “Hero of New Orleans” on one side, and on the other “monster monopoly,” “Old Nick’s money,” and “Clay’s rags.” Jackson won, and speedily decided to remove the public deposits from the Bank. This decision precipitated a bitter war between Jackson and Congress. But Jackson did not swerve from his purpose. By 1835 it became apparent that the Bank could not secure a renewal of its charter from Congress. As a confession of its defeat, and just thirteen days before the expiration of its federal charter, the Bank obtained from the State of Pennsylvania, February 18, 1836, a charter for the United States Bank of Pennsylvania, for a period of thirty years. Shorn of its importance, in a restricted field, yet with enormous capital, it fell into large bond and stock investments of questionable value. Its troubles were aggravated by bad management. It suspended during the panic of 1837 and the next year, and again for the last time in 1841. Biddle resigned the presidency in 1840, and four years later died poor and broken-hearted. Thus perished what is sometimes called the third Bank of the United States, its predecessor, the second Bank of the United States, having fallen a victim to political intrigue and loss of prestige. The shareholders lost their entire investment of $28,000,000, but the circulating notes were all paid, and also the deposits. The government got back its investment of $7,000,000, and made $6,093,167 besides, from its connection with the Bank.

SECOND UNITED STATES BANK, PHILADELPHIA. NOW CUSTOM HOUSE.

State Banks and Independent Treasury.—After the removal of deposits from the Bank of the United States, September 26, 1833, the public revenues were deposited in selected State banks, sometimes called “pet banks.” In 1836 eighty-eight State banks in twenty-four States held public deposits to the amount of $49,377,986. As the State banks had thrown their influence against the national bank, they were rewarded by allowing them to use the public money intrusted to them as a basis of extending their loans and for enormous issues of their own notes. Banks were started for the sole purpose of issuing notes which they could use in buying public lands. As a consequence the government lost heavily through the depreciation of these notes and the failure of the banks. On July 11, 1836, the Secretary of the Treasury issued a circular forbidding the receipt of anything but specie in payment for public lands. This caused a run on the banks and aided in hastening the financial crisis of 1837. An act of Congress of June 23, 1836, authorizing the calling in of $37,468,859 of the public funds deposited in the State banks, for purposes of distribution, forced the suspension of specie payments by all such banks, with very few exceptions.

The unsatisfactory trial of both federal and State banks as custodians of the public funds led to the establishment of what became known as the independent Treasury system, by which the government collects its money and keeps it in the hands of the United States Treasurer or sub-treasurers, making disbursements when required. An act putting this system into effect became law July 4, 1840, but was repealed the next year. It was repassed August 6, 1846, and remained in operation until the passage of the National Currency Act in February, 1863, which gave the Secretary of the Treasury the right to designate certain national banks as depositories of public funds. There were in such banks, on February 4, 1899, United States deposits amounting to $81,120,873, secured by United States bonds belonging to the banks and deposited in the Treasury, amounting to $89,100,240. Prior to the adoption of the national banking system the country had a somewhat disastrous experience with what has been known as “wild-cat” banks. Many of them were organized for the sole purpose of issuing notes they never intended to pay. While they were numerous and dangerous, it must be remembered that in a number of States the leading banks carried on only a legitimate business, and State banks as they exist to-day compare favorably in their management with the national banks.