A History of Banking in the United States/Chapter 7

by William Graham Sumner

CHAPTER VII.

The Crisis on the Atlantic Coast.

T

HE Bank of the United States, in its internal administration, was found to be approaching a crisis in July, 1818.^[1] On the 20th, the directors ordered a reduction of discounts at Philadelphia, Baltimore, Richmond, and Norfolk, to the aggregate amount of $5 millions. Amongst the reasons given, the delinquency of the State banks in paying their balances is one of the foremost. October 30th, a report was made to the directors that these reductions had been only partially carried out.

The Bank resolved to insist upon further reductions, to get specie from abroad, silver being then at ten per cent. premium, and rapidly exported, and to draw $550,000 in specie from the West. The local currencies being now very unequal again and the Bank itself falling into distress, the task of equalizing the currencies was given up. August 28th, it was resolved to take no branch notes save at the branch which issued them; but the use of branch drafts was extended, with the same effect. They led to the device of drawing and re-drawing between the branches what were called "race horse bills," which combined the qualities of accommodation paper and endless renewals. They tended to draw the capital of the Bank away from the sounder and more conservative branches to the weaker and more reckless ones.

The directors ordered, October 20th, that all discounts on stock above par should be reduced, as to that excess, 25 per cent. every sixty days, and that in the meantime collaterals should be demanded for the excess. Nevertheless, on the 6th November, another vote was passed in the interests of stock jobbing, which allowed the president and cashier to accept the note and hypothecation of the buyer in place of those of the seller. During November and December, the discounts were greatly reduced.

It appears that there was a scheme on foot for an irredeemable government issue.^[2] Niles became convinced that there was such a scheme, and in the following April he said: "To speak plainly, let who be offended that may, let any power be exerted against us that can, we express an entire conviction of the belief that certain great proprietors of the stock of the Bank of the United States, with other speculators having a powerful influence on money affairs, aided perhaps by certain officers of government, are enrolled for a common exertion to bring about a suspension of specie payment by the establishment of a paper medium." Such a national currency of paper he called "the consummation of evils." December 7th, a meeting was held in Philadelphia, Matthew Carey in the chair, which appointed a committee to draft a memorial to prohibit the exportation of specie. It fell through and nothing was done, but a resolution to that effect was introduced in the Senate.^[3]

January 13, 1818, the Bank petitioned for an amendment to the charter to relieve the president and cashier from the labor of signing the notes. This was not granted because, as the session went on, more and more dissatisfaction was felt with the action of the Bank, and the growing disorder of the currency. The Senate passed a resolution, April 15th, that the Secretary of the Treasury should inquire and report at the next session in what manner the installments had been paid. Numerous other propositions for investigating the Bank were made, but they came to nothing. The one just mentioned produced little result, for the Secretary replied, in December, by simply enclosing a letter from Jones, the president of the Bank, which contained little information.

Spencer of New York introduced a resolution, in the House of Representatives, November 25, 1818, for a Committee to investigate the Bank and learn whether it had violated its charter. Such a Committee was appointed, and at once entered on an energetic investigation. It reported, January 16th, giving a history and criticism of the Bank, and laying before Congress a mass of documents and statistics which embodied the results of the investigation as to the facts. The Committee found that the charter had been violated in four points: 1.—The Bank, having sold $2 millions of public stocks in England in order to buy specie, and the Secretary of the Treasury desiring to redeem the stocks, the Bank had bought in the market and delivered to him that amount at a loss of $54,264, rather than disturb the arrangement in England.^[4] 2.—The installments had not been paid as the charter provided that they should be. 3.—Dividends had been paid to stockholders who had not paid the installments on their shares. This was forbidden by the charter. 4.—Persons had been allowed to cast over thirty votes each by the device of proxies. The Committee proposed no legislation except an act requiring that any person who offered over thirty votes at an election in the Bank should make oath that he was not the owner of the shares. Such an act was passed March 3, 1819.

Spencer proposed resolutions to withdraw the public deposits from the Bank, to refuse to receive its notes at the Treasury, and to order the Attorney-general to cause a scire facias to be issued for the revocation of the charter, unless the Bank should, before July 1st, accept twelve important amendments of it. Various other propositions of greater severity and more peremptory action against the Bank were proposed, but they all failed to pass. The opponents of the Bank claimed that over forty members of Congress were stockholders, and that a far greater number were interested on the side of the Bank.

At a stockholders' meeting in November, a committee recommended that the branches should be diminished in number, as the advantage of the Bank might require. In the following spring, J. Q. Adams expressed the opinion that the government was the party most interested in the continuance of the Bank and that the interest of the stockholders would be to surrender the charter.^[5]

On the receipt, in Philadelphia, of the report of Spencer's committee, William Jones, the president of the Bank, "fled in affright from the institution."^[6] Langdon Cheves of South Carolina was elected president March 6, 1819. In September, 1822, he laid before the stockholders at their triennial meeting an exposition of the state of the Bank as he found it, and a history of the steps by which he restored it. "It was not" he says, "until the moment I was about to commence my journey to Philadelphia, that I was apprised by a friend, who had been a member of the preceding Board, that he feared that, in a few months the Bank would be obliged to stop payment." "In Philadelphia it was generally expected." Curtailments were at once ordered everywhere except at New York and Boston, where there was no room for them, but the branches at those places were obliged to reduce their business, being overwhelmed by the issues of the South and West which were not restrained. "The debt due in Kentucky and Ohio, instead of being reduced, was within this period [winter of 1818-9] actually increased upwards of half a million of dollars."

At the parent bank "all the funded debt which was salable had been disposed of and the proceeds exhausted. The specie in the vaults at the close of the day on the 1st of April, 1819, was only $126,745, and the Bank owed to the city banks, deducting balances due to it, an aggregate balance of $79,125. It is true there were in the mint $267,978, and in transitu from Kentucky and Ohio overland $250,000, but the Treasury dividends were payable on that day to the amount of nearly $500,000 and there remained at the close of the day more than one-half of the sum subject to draft, and the greater part, even of the sum which had been drawn during the day remained a charge upon the Bank in the shape of temporary deposits which were almost immediately withdrawn. Accordingly, on the 12th of the same month the Bank had in its vaults but $71,522, and owed to the city banks a balance of $196,418, exceeding the specie in its vaults $124,895. It must be again remarked that it had yet the sum before mentioned in the mint as well as the sum in transitu from Ohio and Kentucky. This last sum, $250,000, arrived very seasonably on the next day or a day or two after. The Bank in this situation, the office at New York was little better and the office at Boston a great deal worse. At the same time the Bank owed to Baring Brothers & Co. and to Thomas Wilson & Co. nearly $900,000 which it was bound to pay immediately, and which was equivalent to a charge upon its vaults to that amount. It had, including the notes of the offices, a circulation of $6 millions to meet." "In the office at Baltimore, of which James A. Buchanan was president and J. W. McCulloch was cashier, there were nearly three millions of dollars discounted or appropriated without any authority, and without the knowledge of the Board of the office, or that of the parent Bank. S. Smith and Buchanan, of which firm J. A. Buchanan was a member, James W. McCulloch, and George Williams (the latter a member of the parent Board by the appointment of the government) had obtained of the parent Bank discounts in the regular and accustomed manner to the amount of $1,957,700 on a pledge of 18,290 shares of stock of the Bank. These men, without the knowledge of either Board, and contrary to the resolve and orders of the parent Bank, took out of the office at Baltimore under the pretense of securing it by pledging the surplus value of the stock already pledged at the parent Bank for its par value and more, and other like surpluses over which the Bank had no control, the sum of $1,540,000. * * * When this stupendous fraud was discovered, attempts were immediately made to obtain security, and it was nominally obtained to the amount of $900,000. It was probably really worth $500,000. * * * The losses sustained at the office in Baltimore alone, the great mass of which grew out of this fraud, and others connected with it, have been estimated at the immense sum of $1,671,221. The aggregate of the losses of the institution growing out of the operations which preceded the 6th of March, 1819, exceed considerably $3.5 millions. The dividends during the same time amount to $4,410,000. Of this sum, $1,348,558 were received as the interest on the public debt held by the Bank, which leaves as the entire profits on all the operations of banking the sum of $3,061,441, which is less by at least half a million of dollars than the losses sustained on the same business."

Of the measures taken by himself he says: "The southern and western offices were immediately directed not to issue their notes and the Bank ceased to purchase and collect exchange on the South and West. * * * A correspondence with the Secretary of the Treasury was commenced entreating his forbearance and his aid." This correspondence was personal, and does not seem to have been published except in the appendix to Cheves's report of 1822. He made known to the Secretary the position of the Bank, and asked that notice should be given in advance of Treasury drafts, and also information of probable disbursements at designated places. He also asked for the use of a ship of war to bring specie from the West Indies, and for advance information of intention to pay the Louisiana debt. The Bank had three grievances: 1.—The receipt of notes for duties issued by other branches than the one at the place of receipt. 2.—The obligation to pay Treasury drafts on demand at any place. 3.—That debentures must be paid in coin while duties were received in notes. His counsel had advised him that the Treasury was obliged by law to receive any notes of the Bank at any place. Crawford assented to all his requests, and expressed the opinion that there must be either a great bank contraction or suspension, and that the Bank would be obliged to retire nearly all its circulation. Cheves thought that the Bank had too many branches and that its greatest difficulty was that it had not competent officers.

In April the directors passed a resolution to inform the Secretary that the Bank could not engage to meet the Treasury drafts without notice at other points than those at which the revenue was received or the notes were payable.^[7]

By continuing the curtailments, restraining the southern and western branches, collecting bank balances, demanding time for the transfer of government funds, paying debentures in the same currency in which duties were paid, and obtaining a loan in Europe of $2.5 millions, Cheves claimed to have "lifted the Bank, in the short space of seventy days, from the extreme prostration which has been described, to a state of safety and even some degree of power." The Dividend Committee, in 1822, found that the aggregate of the losses was $3,743,899.

The steps which Cheves took to draw the Bank back from the verge of bankruptcy precipitated a panic out of doors. They were resisted and criticised by the opponents of the paper money system as much as by others. Niles strongly denounced the contraction. "A policy directly opposite to that of the original makers of the Bank was speedily adopted and was still persevered in. It now issues none of its own notes. Present pecuniary profit is sacrificed to concentrate a power to command it hereafter; to regulate the transactions of individuals; to govern the money matters of the nation; to elect Presidents of the United States and enact laws for the government of the people."^[8] "What is the secret motive of the present proceedings of the Bank of the United States is not yet clear to us. It is possible it may grow out of its necessities from the losses and difficulties which it has encountered; but this is certain, that instead of equalizing the exchange, it has disordered it most severely, and that the present state of things cannot be permitted to endure if we can help it. The people cannot bear such a rapid retirement of the representatives of money as the proceedings of the Bank of the United States command."

In these passages we see already by what a direct transition the misfortunes and misbehavior of the Bank, at this period, entailed upon it that political suspicion and hostility which were the moving forces in the Bank war of Jackson's time. The two chief expectations of the public from the Bank,—the equalization of the exchanges, and the prompt performance of fiscal services for the government,—had proved so onerous to the Bank that it had given up the attempt to satisfy them. The bitter disappointment and dissatisfaction of the public in respect to these matters are also expressed in the passages just quoted. The concessions which Crawford had made in April to the petitions of Cheves became known in August.^[9] A particular refusal by the branch at Chillicothe to honor a draft of Governor Cass of Michigan for $10,000, which he needed in order to fulfill the stipulations of an Indian treaty, occasioned especial bad feeling. All the old fashioned, Jeffersonian republicans, who had suppressed their prejudices and convictions in obedience to expediency, now turned fiercely against the Bank. What had they obtained for their violation of "principle"? The germ of the great Jackson anti-Bank party was planted here. "It is now talked of as rank nonsense to expect that this institution should give us a currency of equal value in all parts of the republic; but who will be bold enough to say that, without an expectation and a promise of doing this, the Bank would have been chartered? It was this and this only which dragged the act through Congress, over prostrate consciences, if I may be allowed the expression, and the Constitution of the United States."^[10]

The whole local bank interest seized upon this dissatisfaction and fanned it zealously. Also the would-be popular leaders came forward with their quack remedies. "The political empirics," said Adams, "are already as busy as spiders in weaving their tangles for Congress and the national Executive."^[11] The banks seized eagerly upon the chance to turn attention from their own misdoings by complaints of the tyranny of the great Bank. One outcome of this feeling and these efforts was that several States tried to tax the Bank of the United States out of existence. February 11, 1818, Maryland laid a stamp tax on notes of any bank doing business in the State and not by or with the authority of the same. The tax was ten cents on a $5 note and varying amounts on other denominations. It might be commuted for $15,000. The Bank of the United States paid no heed to this law. In the case at law which resulted,^[12] the tax was held to be unconstitutional by the Supreme Court of the United States. It was held that the Bank was constitutionally endowed with a right to establish branches in any State. These branches were not taxable by the State, but real estate owned by the Bank, or the proprietary interest of citizens of the State in it, might be taxed like other property; Congress has power to charter a national bank as one means of carrying on the fiscal operations of the national government; the States cannot by taxation impede Congress in the exercise of any of its constitutional powers; if the end is legitimate and within the scope of the Constitution, any means may be employed which are appropriate and not prohibited. It remained uncertain whether the operations of discount and deposit were included under the affirmation of this decision. In Osborn vs. the Bank of the United States,^[13] this point was discussed, and it was held that, although it was only as an aid to the national fiscus that a national bank was constitutional, yet it might be a true bank, adopted and used for this purpose, and hence endowed with the power of banking, and protected in the same. Kentucky and Ohio levied taxes on the branches in those States^[14] and Tennessee established a tax as a barrier to keep a branch out.^[15] In joint resolutions of the Georgia Legislature, December 18, 1819, it was affirmed that the law of the State taxing banks applied to the Bank of the United States, but the Treasurer was directed to suspend the execution of the law as to that Bank for the present.^[16]

In the spring of 1819 the exchanges rapidly grew worse, and so continued through the summer. The quotations at Baltimore in August were, in the local currency: Specie at a small premium; Boston, one or two discount; Massachusetts country banks, one to eight discount according to their repute in the city; Rhode Island and Connecticut, two to six discount; New Jersey, "specie paying," one or two discount; Philadelphia, par to a quarter premium; country notes, from one to sixty discount; "specie paying," one to five discount; Delaware, "specie paying," one discount; the rest eight to fifty; Maryland country notes, "specie paying," three to six discount; others, twelve to forty; District of Columbia, one discount; old banks of Virginia, one and a half to two discount; Bank of the Valley, two and a half to three; unchartered, seven and a half to twenty-five; North Carolina, twenty to twenty-five discount, nominal; South Carolina, eight to ten discount; Georgia, seven to eight discount; old banks of Tennessee and Kentucky, fifteen discount, nominal; new ones, twenty to twenty-five; Ohio, the best, ten discount, generally fifteen to twenty, many forty to fifty; the rest of the Mississippi Valley, fifteen to sixty discount.^[17]

Adams' notes in his Diary, June 10, 1819, a conversation with Crawford about the "operations of the Bank and the gigantic frauds practicing upon the people by means of these institutions. The banks are breaking all over the country; some in a sneaking, and some in an impudent manner; some with sophisticating evasion and others with the front of highwaymen. * * * * Crawford has labors and perils enough before him in the management of the finances for the three succeeding years."^[18] This prediction was soon amply fulfilled. The Secretary of the Treasury was drawn into most serious difficulty by attempting to exercise those powers of supervision of banks and arbitration between banks which have been noticed above.^[19] In order to help the banks of the District of Columbia to resume, he distributed public deposits amongst them.^[20] Elsewhere from one end of the country to the other, he acted on the same policy, endeavoring to coax or help or reward and perhaps punish. He had bitter experience of the return which such action would obtain. Generally speaking the banks took everything they could possibly extort from him by any arguments or motives which they could bring to bear upon him, and they yielded nothing to him because he had no power of coercion, and they paid no heed to his remonstrances, pleading, or reasoning. The inducements which were offered to the western banks to resume specie payments and transfer public money to the place where it must be expended, "were believed to be both justifiable and sufficient to insure success, and the result has proved that nothing was necessary to the most complete success but the want of integrity in those who had the direction of some of those institutions."^[21] In 1823 an attempt was made to ruin him politically, by charging him with having acted corruptly in this matter. Although it did not succeed, it left behind an impression which undoubtedly hurt him politically. For our purpose this incident is chiefly important because it led to the production of a vast amount of correspondence which reveals the operations of the banks in 1819, and also because it furnishes some more links in the series of precedents by which the usage was established of arbitration by the Secretary between banks. Crawford, justifying himself for what he had done, referred back to action by Gallatin, in 1813. Gallatin was a strong name, but the precedent proves to have been an act by William Jones, acting Secretary of the Treasury; in the name of Gallatin, it is true.^[22] May 27, 1813, Jones wrote to Girard, referring to measures taken by Gallatin, in respect to the public deposits in Girard's bank, to shield Girard against the attacks of the incorporated banks: "It is a particular province and it has been the practice of the Department of the Treasury of the United States to direct the moneyed operations of the public to the preservation of credit, by maintaining the equilibrium between the moneyed institutions of the country; and as it has protected your institution by the arrangement alluded to, so it will guard those institutions against any undue pressure which the public funds in your vaults may enable you to direct against them. I am informed that you have made some very heavy and unnecessary drafts of specie from several banks, particularly from the Pennsylvania and Farmers' and Mechanics' Banks, with indications of a disposition to interfere, which has excited considerable apprehension. I therefore deem it necessary to inform you that a continuance of that system will induce the prompt application of a specific remedy." February 13, 1817, Crawford wrote to the president of the Mechanics' Bank of New York: "The Secretary of the Treasury will always be disposed to support the credit of the State banks and will invariably direct transfers from the deposits of the public money in aid of their legitimate exertions to maintain their credit; but as the proposition of the Bank of the United States excludes the deai of pressure on its part, no measure of that nature appears to be necessary at this time."^[23] It is evident that the precedent was marching on very steadily. In the hands of Jones it had been formulated into a principle.

After speaking of the distress in England, April 10, 1819, Niles goes on to describe the condition of things here: "From all parts of our country we hear of a severe pressure on men of business, a general stagnation of trade, a large reduction in the price of staple articles. Real property is rapidly depreciating in its nominal value, and its rents or profits are exceedingly diminishing. Many highly respectable tradesmen have become bankrupt, and it is agreed that many others must go." He goes on to say that confidence is destroyed and that three per cent. per month is the rate for good commercial paper.^[24] May 22d: "There is no remedy, but the reaction is hard to be borne. The plain fact is that wherever there is one bank that attempts to pay its debts, there must be great distress; but in those places where there are two or more, God help the people! The curse of borrowing, of suffering 'paper to do our business,' is falling heavily upon us." "With nearly $500 in notes of different sizes, and of many old and respectable banks, in his pocketbook, the writer of this article was compelled, on Saturday last, to borrow market money." "Misery abounds and the neighborhood of every bank is a neighborhood of bankrupts, positive or anticipated." Smith & Buchanan failed in June, "with a crash which staggered the whole city of Baltimore and will extend no one knows how far. * * * The affairs of the house appear to have been desperate for many years, but they were Tyrian merchant princes and princely expedients have they taken to save themselves from sinking." They had controlled Baltimore, socially, politically, and commercially.^[25]

Matthew Carey stated that of thirty-seven merchants who signed a policy of insurance at Philadelphia in 1799, twenty-seven had become bankrupt in 1822.^[26] If the writers of the time were at all correct in their opinion that prices responded promptly to the inflation and contraction of the currency, how was it possible for anyone to do business?

Of course all this was attended by great suffering amongst the wages class. August 7th Niles says: "It is estimated that there are 20,000 persons daily seeking work in Philadelphia; in New York, 10,000 able-bodied men are said to be wandering the streets looking for it; and if we add to them the women who desire something to do, the amount cannot be less than 20,000." October 23d, he said that there were 7,288 persons idle in Baltimore. In the report of a Committee on Manufactures of the city of Philadelphia, quoted by him on that date, it is stated that trades which employed 9,672 persons in 1816, employed only 2,137 in 1819. "It is a singular fact, which conclusively shows the pressure of the times, that our master mechanics, even of the most necessary callings, such as shoemakers, hatters, and tailors, are not doing more than one-half or two-thirds of the business which they did three or four years ago."^[27] Many artisans returned to Europe.^[28] As late as August 3, 1822, Niles said, "almost everybody is wondering how other people live" in Baltimore. Evidence of the fall in prices is equally plentiful. In July, 1820, it was stated that houses which rented for $1,200 before the crisis, then rented for $450; fuel had fallen from $12 to $5.50; flour, from $10 to $4.50; beef, from twenty-five cents to eight cents.

At this point we must recall the fact that the return of peace in Europe, after twenty-five years of war, had had great effect on commerce and industry. The English hoped, upon the return of peace, to recover all their old markets. They made very large shipments to this country. Here, also, the peace had been fatal to a great many manufacturing industries which had grown up under seven or eight years of embargo, non-intercourse, and war. The tariff of 1816, which was intended to save them, did so only to a limited extent. These new elements of trouble and confusion were complicated with those already mentioned. It was the large imports which furnished the revenue which enabled the Secretary of the Treasury to pay off a part of the public stocks in the capital of the Bank. The Bank had sold $2 millions of these stocks in England, and was compelled to buy so much in order to put it at his disposal, which was a technical violation of the charter.^[29] Crawford stated that the reason for not letting the Bank buy public stocks, or sell them, beyond a small limit, was to prevent it from being able to control the credit of the government.

Niles had commenced a general onslaught on the "rag system" in his "Register" in the spring of 1818, and he seems to have had no little influence upon public opinion, in connection with banks and the great Bank. Banks were being multiplied on every hand and those which existed were growing worse and worse. We have here the explanation of the fierce denunciations of banks in which many men who lived through that period indulged, and of the suspicion and prejudice against them, which they never overcame. Niles's expressions about banks are almost fanatical. He talks of them as one would talk of gambling hells. It is impossible to understand this without observing what the institutions were which he knew under the name of "banks," and how they were treating the public. He states that four banks in Maryland, whose notes were at from six per cent. to ten per cent. discount, had eight hundred foreclosure suits on the docket.^[30] He mentions going to a broker's office to exchange some notes issued at a distance, and meeting a man who was trying to buy bank notes, and grumbling that they were not cheaper. This grumbler was the president of the bank whose notes he was trying to buy.^[31] He thus describes in a supposition the actual customs of banking at the time: "Let us suppose, and after what we know of banks, we may suppose anything! a majority of the board at Philadelphia, only thirteen men, resolve to get rich, or if rich, to get richer. They agree among themselves that the Bank shall lend to each of them, the moderate sum of $200,000, as a permanent accommodation for twelve months. Well, the amount being passed to their credit, they issue a peremptory order to the officers of the Bank, and its offices, that they shall not issue any more of their own notes. Within two months, money becomes scarce to those accustomed to a sufficiency of it—for all the prudent State banks are justly alarmed and know not what to do, except to get in their debts as rapidly as they can; and in two months more every species of property has a diminished nominal value compared with what it was, of thirty-three and one-third per cent., and lawyers and sheriffs are 'over head and ears' in business. The gentlemen then buy whatever they choose to speculate in, and getting all things snug, they discount freely, and seem almost to throw their bank notes about in the street. The State banks, anxious to retrieve lost time and make a good dividend, do the same thing, and money becomes instantly plenty. Property speedily assumes a price beyond what it had before its fall; the house or piece of land, which sold, 'a little month ago' for $1,000, is valued at $1,500, and the gentlemen speculators then sell; offering to purchasers assistance from the Bank, if needful to make a good bargain for themselves."^[32]

Among the petitions presented to the Pennsylvania Legislature, in January, 1819, were several about banks. Amongst the rest, one "to annihilate the charters of all the banks in this Commonwealth; to make the property of the stockholders liable for the debts of the company, and to tax the Bank of the United States and branches."

The country bank notes of Pennsylvania were contracted as follows: 1816, $4.7 millions; 1817, $3.7 millions; 1818, $3 million; 1819, $1.3 millions.^[33] The consequence was that farms and houses were being rapidly transferred to the banks which had made loans upon them. The ground of exasperation was that the banks had loaned upon them nothing but bits of paper, multiplied until all prices had risen, so that now, in the revulsion, the transfer of the property appeared as the consequence of a mere financial thimble-rig. Indeed it was little else. The system was not even honest gambling. It was gambling in which one party had never put up any stakes. The banks had adopted all sorts devices to avoid any risk of being obliged to redeem their issues, and had indeed employed in banking, devices which belong only to gambling. Then when the trouble came, they "suspended"—that is to say, they withdrew from the performance of their obligations while insisting on the payment of debts to them. The Vincennes Bank of Indiana issued notes payable nine months after date at Vevay. "Nine months" was printed at the top in small letters, so as not to be noticed. The report of a Committee on Currency to the New York Legislature, February 24, 1818, described some of the devices by which banks had evaded their responsibilities, as follows: "By adopting a variety of schemes to get their notes into circulation, such as placing a partial fund in a distant bank to redeem their paper, and after the fact becomes generally known that their paper is at par in that quarter, issuing an emission of notes signed with ink of a different shade, at the same time giving secret orders to said bank not to pay the notes thus signed, and subjecting the owners of them to loss and disappointment." "Others * * * have issued a species of paper called 'facility notes,' purporting to be payable in either money, country produce, or anything else that has body or shape, and thereby rendering their name appropriate only by facilitating the ruin of those who are so unfortunate as to hold them." "A person this day paid us," says Niles, "a note which he received as having been issued in Philadelphia, and so it was; but unfortunately for him it was 'New Philadelphia' the 'New' printed very small and the 'Philadelphia' very large."^[34] One of the commonest abuses in the banks was that the directors were supposed to have a right to large loans. In cases where the banks had been organized in the way which has been above described, this was a matter of course. The men who formed the bank, and gave their stock notes for the stock, borrowed the circulation as soon as it was printed, and had the advantage of holding it in the first hand; hence Niles says, apropos of the City Bank of Baltimore, in which all the officials, except one clerk and the porter, had taken out loans amounting to $426,083, and where, if the loans to the directors were included, the whole group had borrowed $100,000 more than the whole capital: "This is the great principle of modern banking; a cheat, a bubble, a machine for the exclusive benefit of a few scheming men."^[35]

The bank which Niles was fond of using as a proverb was the Owl Creek Bank of Ohio, or, as he nicknamed it, the "Hoo Hoo Bank." This bank gave notice that, in order to counteract the injurious tendency of the United States branch banks in that State, it had thought proper to follow the example of other banks and suspend payment.^[36]

The Bank of the State of North Carolina tendered an oath to all persons who demanded specie of it that the notes had not been exchanged or bought up for the purpose of making the demand. The Bank of Darien, Georgia, forced everybody demanding specie to take an oath before a justice of the peace in the Bank, to each and every note, that it was his own, that he was not an agent for any other person, and this oath must be taken in the presence of at least five directors and the cashier. If they could not be found together, the demand could not be made. The sum of $1.37 1-2 on each note must also be paid on the spot by the person making the demand.

A volume might be filled with facts and incidents of this kind from this period. They account for language like the following about the abuse of banking: "We have had melancholy proof of this at the sacrifice of millions on millions of dollars, by the industrious poor, to pamper the pride and glut the inordinate appetites of speculating scoundrels. I use these words deliberately. Notwithstanding all the shavings, quirkings, twistings, and fraud, which the people generally are acquainted with, I feel authorized to say, that the history of modern banking, particularly in the middle and western sections of the United States, is as yet but very imperfectly known. The imagination of an honest man can hardly conceive the stupendous villainies that have been contrived, and which must, and will forever exist in every country where paper can be forced upon the people in lieu of money."^[37] And again: "It has always been my opinion that of all evils which can be inflicted upon a free State, banking establishments are the most alarming. They are the vultures that prey upon the constitution and rob the body politic of its life blood."^[38] "I have a letter from an honest man who was coaxed to his ruin by a bank. * * * Driven to the wilds of the West, he laments the friends of his youth and loss of society, details the hardships that belong to a new settler, and enumerates many privations, but 'blesses God that he is out of the reach of a bank.'"^[39]

Let it not be supposed that the passages which have been quoted contain the rant of a crank or an agitator. Niles often dogmatized about things which he did not understand. He was opinionated and prejudiced, but of his absolute integrity of mind and heart there is no question. He uttered the moral indignation of an honest man. The writers of the time exhaust the adjectives of disgust in their attempts to describe the filth and raggedness of the notes. The banks reissued them and kept them in circulation because, if they were worn out, or became illegible, or were lost, that meant that the public, which had borrowed them out of the bank, had to pay back to the bank true value for them. This state of things also gave the counterfeiter his chance, and the literature and the laws prove that counterfeiting was one of the most lucrative industries of the time. There were three kinds of paper afloat 1.—Notes of regularly incorporated banks, with more or less pretense to solvency. 2.—Notes of banks which had no other existence than an office, room with furniture, an engraved plate, and a bundle of paper. Their notes were kept out at as great a distance and for as long a time as possible; also in as great an amount. When they came home, the bank ceased to be. 3.—Counterfeits in enormous amount; although they differed from the second class only in borrowing a name which somebody else had invented, instead of inventing a new one.

The instances which have been mentioned are the more striking ones of abuse and outrage and are, perhaps, in so far, exaggerated. There were good banks, but such made little noise and have made little mark on the record. They also were exceptional. The most interesting record of one of them which we have found is the following. It is entitled "An Anonymous Communication containing the History of Some Bank from 1806 to 1837, which at first was Managed very Conservatively; No Renewals, No Accommodation Paper, etc." "It was ascertained soon after the Bank was fairly in operation that its ability to discount had no sort of connection with or dependence on the amount of its capital." It required punctual payment by other banks of their notes, and so maintained its circulation by new discounts, while they, as they gave extensions, could not circulate their notes except by giving them to agents who forced them into circulation by exchanges. "The possession of capital was of no use except to inspire confidence." This being once fully established, the capital was an inconvenience. It was a trouble to invest it. The stockholders could have done it better individually. Therefore, in July, 1816, half the capital was paid back to the stockholders in specie. Still it suffered from the annoyance of unemployed capital. "To employ it in discounting commercial paper, experience had shown was not sagacious, as the bank's credit, which cost nothing, already supplied all the demands of trade." It therefore lent $25,000 of its remaining capital on mortgage in 1821. The remaining capital was $100,000, of which one quarter was thus invested. Subsequently a large part of the remaining $75,000 was lent on mortgage.^[40]

The banks brought loans to every man's door. When a bank was established in a country town it became the current fashion to get a loan and undertake some enterprise. The need for a loan did not arise from a growth of affairs up to the point where a need of more capital was experienced. Not every man is fit to have credit. It is far from being a blessing to every one. An education in the use of capital is needed before one is fit to use credit. This was illustrated by the colonial banks; it accounts for such diatribes as we have just read, and we shall see it illustrated later in the history of the great banks of the South and West.

1. In the history of the Bank, which is here given, we follow the report of 1819 and Cheves's report of 1822, presenting the internal history of the Bank in its chronological position, although it must be remembered that the facts were not known to the public until those reports were published.
2. See Niles, October 3d, and November 7th. Perhaps his exposure of it helped to frustrate it.
3. Gouge; Journal of Banking, 288.
4. See page 104.
5. 5 Adams Diary, 39.
6. Gouge; Journal of Banking, 299.
7. 4 Folio Finance, 873.
8. 16 Niles, 417.
9. 16 Niles, 417.
10. 19 Niles, 317.
11. 4 Adams Diary, 370.
12. McCulloch vs. Maryland, 4 Wheaton, 316.
13. 9 Wheaton, 860. See p. 154.
14. See pages 109, 153.
15. See page 146.
16. An act of South Carolina, December 18, 1830, laying a tax of one per cent. on the dlvidend of the Bank of the United States and all other banks, not chartered by the State, was sustained by the State Supreme Court. (a Bailey, 654.)
17. 16 Niles, 434.
18. 4 Adams' Diary, 391.
19. See page 11.
20. 4 Folio Finance, 302, 361.
21. Secretary Crawford; 1823. 4 Folio Finance, 262.
22. 4 Folio Finance, 266, 279.
23. Quoted in the Treasury Report on the removal of the deposits, December 3, 1833.
24. 16 Niles, 114.
25. 4 Adams' Diary, 383.
26. 23 Niles, 130.
27. 18 Niles, 435; August 19, 1820.
28. 16 Niles, 435.
29. 4 Folio Finance, 532.
30. 14 Niles, 140.
31. 14 Niles, 135.
32. 16 Niles, 290.
33. Raguet's Report on the Distress.
34. 15 Niles, 261.
35. 17 Niles, 138.
36. 16 Niles, 131. In 1837, he reacalled a story of a mysterious individual who entered the Owl Creek Bank and demanded to have some notes redeemed in specie. He was told that the bank had neither. He then demanded Eastern funds. "No Eastern funds on hand," was the brief reply. "Can you," says the mysterious person, "give me tolerably well-executed counterfeited notes on solvent banks? I would prefer them to this trash." They stared to expel him, when he threw down a hoot owl, saying that he had just killed their president. (52 Niles, 85.)
37. 16 Niles, 130.
38. 17 Niles, 19.
39. 14 Niles, 140.
40. In the inflation in 1855, the management of this bnnk was denounced as "old fogy" and the president was obliged to sell out and resign. He told the discontented stockholders that "of the two, he would rather find a counterfeit than an accommodation note among the bills receivable." In about four years the bank became insolvent. (Gouge, Journal of Banking, 210.)