CHAPTER II. FUNDS-FREE BANKS. it did the former. This was followed by a resolution of the Bank of England to cut off credits to American merchants, and the revulsion was precipitated. The charter of STATE BANKS-SUFFOLK SYSTEM-SAFETY the United States Bank was not renewed by Congress, but the same institution obtained a charter from the State of Pennsylvania, THE growth of state banks has fluctuated February 18, 1836, under the name of the from time to time, under different circumUnited States Bank of Philadelphia. The stances of local trade, and the general nature terms of this charter were very onerous, such of banks has changed in obedience to similar as no institution could pay from profits; the conditions. The nature of the banking sysbank consequently failed, in common with tems of each locality has, however, underall others in the Union, in 1837. It resumed gone repeated modifications, and the general its payments, following those of New York, tendency is to the circulation of less paper. January, 1839, and struggled on until Octo- We shall endeavor to give a sketch of each. ber 1839, when it finally failed. On The first attempt at banking in New England going into liquidation, it was found that was the creation of a land bank in 1740. more than the whole of its large capital, At that time about eight hundred persons $35,000,000, had been swallowed up, sub-subscribed a capital in real estate, and havjecting the stockholders to a total loss. This disaster was no doubt brought about by its abandonment of sound principles in the vain hope of compelling the government to recharter it. But the institution had outlived its usefulness; the country had outgrown the circumstances for which such a bank was fitted. We have thus sketched the outline of that bank before glancing at the progress of the state institutions, because, up to 1840, that bank was the controlling power. The progress of banking among the states has been step by step with the growing wealth, population, and commerce of the country. This growth was manifestly too vigorous to permit of the continued existence of any regulating power. The relative growth of the state banks, and the business of the country proportional to the national bank, was as follows: National bank. No. State banks. 1791, 3 2,000,000 10,000,000 1811, 89 52,601,601 10,000,000 1817, 246 89,822,422 35,000,000 1837, 634 290,772,091 1860, 1,562 421,880,095 35,000,000 ing appointed ten directors, agreed to issue one hundred and fifty thousand pounds in paper, to circulate as money. This was dissolved by Parliament, and the stockholders held individually liable for the bills. In 1784 a bank was chartered by the Massachusetts Legislature, and the other New England states followed the example from time to time. In 1805 there were in existence forty-seven banks in the six New England states, with an aggregate capital of $13,353,000. In 1815, at the close of the war, these had risen to sixty-three banks, and $19,053,902 of capital, and the circulation had become large. In 1860 the number of banks in those states had risen to five hundred and five, with a capital of $90,186,990. In the course of this increase, the system of banking there had undergone less changes than in other states The paper currency of New England was generally of small denominations, and emitted by a larger number of banks with small capitals than that of most other sections. These institutions were scattered over the six New England states, and the bills of each bank forming the currency of its neighThus the national bank, which began borhood, would, in the course of trade, ultiwith a capital five times as large as all the mately find their way to Boston, the comstate banks, was only one-fifth of their mon centre of business. There being no aggregate in 1811. In 1817 the state capi- provision for their redemption, they circutal was two and a half times the new Na-lated at a discount, and this discount was tional Bank capital, and in 1886 it was eight times that capital. Had it then been rechartered, with the same amount, it would now have been but one-twelfth of the capital of the state banks. increased in proportion to the issues of each bank, inflicting loss upon the community, To remedy this, the Suffolk Bank of Boston, in 1825, undertook to receive all the bills and send them home by an agent to the issuing bank, requiring each to redeem in specie at its own counter. This compelled honest and well-conducted banks to pay the each bank to keep a large amount of specie debts of the dishonest ones. It is hardly on hand, at an expense which ate up the worth while, in a short history like this, to profits of the circulation. They all agreed, enumerate all the restrictions as to discounts, in consequence, to keep at the Suffolk about specie on hand, and emission of bills, that three thousand dollars deposited, to redeem the various states have incorporated in bank any balance of notes that might be there laws. It may suffice to say, that all are found against them. To keep down that powerless to prevent evil. On the failure of balance each was then compelled to restrict the safety fund system of New York, howits circulation to the actual business wants ever, a radical change took place in the policy of its locality, that there might be no surplus in regard to banks. The privilege of issuing currency; in other words, that the course notes to circulate as money at their own will of trade might carry to Boston no more of and pleasure, had been found to be dangerits bills than would be paid by the produce ous to the public, and the law of April, 1838, of the locality sent thither for sale, and also called the "free banking law," was passed, to send promptly to the Suffolk any bills of by which the power to issue bills directly other banks that might come into its hands, was taken from the banks. Under that law, as an offset to its own balances. Thus all the Comptroller of the state prepared the the banks in New England were actively en- plates, and delivered the bills to the banks, gaged in running each other, and five hun- upon their lodging with him such securities, dred streams poured country money daily mostly state stocks, as amply secured the reinto the Suffolk receptacle, to be assorted demption of the bills. The name, “free and sent back to the issuers. This kept down banking," was given to the law, because it rethe volume of the currency in that section. moved from the banks the restrictions relaAfter the creation of railroads and tele- tive to discounts, and the necessity for a chargraphs, the difficulty of keeping out an excess ter. This law was altered in some respects of circulation was greater. To be "thrown almost every year of its existence, but its out of the Suffolk," or, in other words, not main features remained the same, and it bebe able to meet a balance there, was fatal came in New York the sole law to regulate to the reputation of a bank. The system banking. All the old banks, as their charters worked well up to the civil war. It was expired, reorganized under it, since the state the case, however, that although those insti- constitution provided that no new charters tutions could not put out an excessive cir- could be granted or old ones renewed. The culation in New England, many of them working of this law was so efficient and poplent their notes on securities, on condition ular, that it spread into most of the northern that the notes should be paid out at the far and western states. The progress of bankwest, whence they would be very slow in re-ing in New York has been as follows: turning for redemption. The Suffolk mode of regulation by the laws of trade was, upon the whole, very successful. NUMBER OF BANKS AND AGGREGATE CAPITAL. Capital. 4,720,000 7,522,760 18,766,756 31,281,461 94 36,401,460 1857, 294 107,449,143 1860, 303 111,441,370 1863, 309 109,258,147 1861 302 109,982,324 1801, In New York the same evils manifested them- 1811 1816, selves as in New England, and in 1829 a rem- 1836, 86 edy was attempted in the shape of the " 1838. "safety fund." This did not undertake to restrain the issues of the banks, but to protect the public from loss by failure. Under it all the banks doing business in the state were required to contribute one-half of one per cent of their aggregate circulation to a fund to be called the "Safety Fund," out of which the notes of a broken bank were to be paid in full. This worked very well during a number of years of prosperity, but in the revulsion of 1837 a number of banks failed under disastrous circumstances, and the fund was found to be entirely insufficient-besides being wrong in principle, since it called upon the The New York law requires the banks to issue the bills at the place of their location, and to redeem them at not more than onehalf per cent. discount in the city of New York. These institutions, however, have an arrangement with the Metropolitan Bank, in New York, by which they are redeemed at Pennsylvania, in the early part of the century, was slow to create banks, and it had but three up to 1814, in which year 41 new 1861, 89 25,843.215 1863, 94 26,561,337 Expiration of U. S. bank. Recovery from panic of 1857. Organization Nat. banks. There was, up to 1830, a great number of unauthorized banks doing business in Pennsylvania, and they presented a constant succession of bankruptcies. The authorized capital down to the present time has not kept pace with that of other states, taking the wealth and population of Pennsylvania into consideration. 1849 1859, 1862. Ohio has been, of all the states, the most diversified in its policy in regard to banks. Its first bank was chartered in 1803, but it did not increase charters much until migration set thither after the war of 1812, when the new United States Bank established two licothe. branches, one in Cincinnati and one in Chil rapid up to the explosion of 1837, when about The progress of banks was then 36 of the banks of that state failed, under disastrous circumstances, leaving but few in existence on the resumption of specie payments in 1840. In 1845, a new system of banking was introduced, designed to restore that confidence in banks which had been so rudely shaken by the previous failures. It was called the "safety fund system," being composed of thirty-six banks which, together, form the State Bank, under a board of control, composed of delegates from each bank, which furnishes the notes to all for circulation. Each bank must deposit with the board 10 per cent. of its circulation in securities. Of 42 banks started under this law, 36 remained with capital of $4,034,525. The same law created the "independent system," by which the banks doing business under it must deposit Ohio or United States stock with the State Treasurer to secure the circulation. There were 7 of these banks. There remained the old chartered banks, of which the Ohio Life and Trust-whose explosion in 1857 precipitated the panic which had been prepared for the public mind-was the last. In 1851, the free banking law of New York was adopted; under this 13 banks were started. In the same year, by the new constitution of the state, the legislature was deprived of the right to grant banking powers until the law for so doing should be approved by the people. The general progress in Ohio to 1862, was as follows: The multiplication of banks in New Jersey 1805, under the new law, was mostly for the benefit of circulating their issues in New York at a discount, and they were of but little service to New Jersey. Delaware has created banks in proportion to its size, in the following ratio: 1811, 4 895,000 1816, 21 2,061,927 1837, 32 10,870,089 8 2,171,807 1851, 56 1854, 66 1859, 53 1862, 56 7,129,227 Free law. Indiana became a state in 1816, and in | number of small banks authorized by the 1819 there were two banks, with a capital territorial legislature. These rapidly multiof $202,857, and so continued until 1834, plied under the state, during the speculative when the State Bank of Indiana was created, year 1837. In the early part of that year capital $1,600,000, and with ten branches, there existed 20 banks, with a capital of which were mutually liable for each other's $1,918,361. These were a total wreck, and debts, and notes under $5 were prohibited. in March, 1838, a general banking law The bank stopped, partially, in 1837, and was passed, in order, as was alleged, to throw resumed payment October, 1841. In 1852 the business open. In one year, 49 banks, the general banking law of New York was with a capital of $3,915,000, were projected. adopted, and under it ninety-four banks were Of these, 42 went into operation. Those speedily organized, and fifty-one of them soon banks were not required to redeem their failed. The charter of the State Bank of issues on demand. The result was utter inIndiana having expired, the legislature char- solvency, inflicting a heavy loss upon the tered a new one, with capital of $6,000,000, public. In 1849, the "free banking law” and twenty branches, which bought out the was adopted, with personal liabilities to stockstate interest in the old bank, the charter holders. The progress was as follows being paid up to January 1, 1857. The progress of the state has been as follows. Capital. $658,980 Territorial government. 1,400,000 State and general law. 2,317,765 Revulsion. 1819, $202,857 State bank. 202,650 Liquidation. Suspension. 392,530 Free law. Resumption. Free banking law. Eighteen of these free $1,203,454. War in progress. 755,461 786,455 Iowa was admitted into the Union in 1846. It had at Dubuque the Miners' Bank, chartered by Wisconsin before the erection of Iowa territory, in operation since 1888. In 1858 it adopted the free banking law, and authorized a State Bank, which, with its branches, organized in 1859. In 1862, the State Bank and its 15 branches had $720,890 capital. Wisconsin was admittted into the Union in 1848. It had, during some ten years, two banks, that of Mineral Point and the Bank of Wisconsin; these failed, and in 1851 a new bank was started at Milwaukee. In 1854 the free banking law was adopted; since that time the progress has been as follows:— Illinois came into the Union in 1818, and in 1819 there were two banks, capital $140,910—one of which had been chartered in 1813, under the territory. It stopped in 1815 and remained so until 1835, when the legislature revived it and increased its capital to $1,400,000. The constitution of the state in 1818 forbade the creation of any new banks except a state bank, which was chartered in 1819, with a capital of $4,000,000. This was repealed and a new bank chartered, which speedily failed. In 1835 a new bank was chartered, capital 1837, $1,500,000 to $2,500,000. These banks suspended in 1837, going into liquidation in 1842, and no banks existed in the state until the adoption of the free banking law in 1851. The general progress to 1862, was as follows: Minnesota has made, as yet, little prog, Michigan was admitted as a state in Jan-ress in banking. It adopted the free bankuary, 1837, but there had been already a ing law in 1858, and several banks were |