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Among upwards of fifty banks, it was certain that, if expansion



THE CRISIS OF i860 307

should be undertaken without some practically binding arrange-
ment, some would be found to adopt the selfish poHcy of leaving
the burden of expansion upon their neighbors and using the oppor-
tunity to strengthen themselves; and that others would hesitate
to go forward from fear of not being supported by their neighbors.
In short, the banks felt the same necessity for some sort of disci-
pline, which should hold in check the individual instinct of self-
preservation, which a regiment feels when it is about to charge in
battle.

The existence of the Clearing-house Association offered the
means of establishing this unanimity of action which should make
the banks one for the time and enable each to act in full confidence
of support. The vast amount of exchanges made by the banks
through the Clearing-house, and the immense advantage of mak-
ing these exchanges by the mere offset of mutual accounts and
settlement of balances, instead of doing it by the laborious process
of collection by each bank from every other, made the possibility
of exclusion from the Clearing-house a severe penalty which few
would care to brave. A plan of operation was therefore settled
upon which should become binding upon all the banks in the Asso-
ciation when adopted by three-fourths of them. By this plan, to
which all the banks in the Association save one finally gave their
adhesion, the banks agreed that for the purpose of enabling them
to expand their loans, the specie held by them should be treated as
a common fund, and if necessary should be equalized among the
banks by assessments upon the stronger for the benefit of the
weaker, and that for the purpose of settling balances between
the banks, a committee should be appointed with power to issue
certificates of deposit to any bank depositing with them adequate
security in the shape of stocks, bonds, or bills receivable, and that
these certificates should be received in payment by creditor banks.
The effect of this arrangement was that any bank which experi-
enced an unusual demand for specie was supported in meeting it
by the whole of the common stock, and that the debt which it thus
incurred it could meet by a pledge of its securities. Whatever
course might be taken, each bank was as strong as the rest in
specie, nor could any bank, by holding back its loans, strengthen
itself at the expense of the others, since the specie which it might
thus collect must by the agreement be held for the general benefit.



308 ESSAYS

And finally it was provided that after the ist of February, 1861,
any bank whose specie fell below one-fourth of its liabilities should
cease discounting until that proportion was recovered, under the
penalty of expulsion from the Clearing-house.

Although this arrangement was favorably received by the
public, and was indeed rightly regarded as the turning-point in the
panic, it was the subject of much criticism. It was declared by
many to be equivalent to the suspension of specie payments, since
the debts of the banks to each other were not to be settled by the
payments of specie but by the pledge of securities. But it was
answered triumphantly by the bank managers that the power of
the public to obtain payment of deposits or redemption of notes in
specie remained unimpaired. So long as the convertibility of the
bank-note was maintained, how could it be said that specie pay-
ments were ever virtually suspended, although the banks should
mutually forbear to demand specie from each other.? The
arrangement was in fact a temporary fusion of the fifty banks of
the city in their relations with each other, but without prejudice
to the rights of the public. If an analogy for it were sought, it
might be found in the suspension of the act of 1844 for the relief
of the Bank of England, and the consequent substitution of gov-
ernment securities for bullion in the dealings between the two
departments of the bank, the bank-note remaining convertible as
before.

All of the New York banks entered into this arrangement,
except the Chemical Bank, an institution with remarkably large
and steady deposits and small circulation, which preferred to be
cut off from the privileges of the Clearing-house, rather than
throw its large reserve of specie into the common stock. The
effects of the combination were instantaneous. In the next week
the banks increased their loans so rapidly that the average for
the week rose by $7,000,000, and the panic, strictly speaking,
came to an end. Nearly the whole of the additional loans
went to swell the mass of deposits, with only an inconsiderable
loss of specie. The expansion continued at a more moderate
rate for four weeks longer until on the 2 2d of December the aver-
age of loans for the week stood at $132,000,000, with rapidly
increasing deposits and specie. From that point, under the
natural influence of the revulsion, the demand for loans diminished



THE CRISIS OF i860 309

and specie accumulated rapidly, this movement going on far into
the year 1861. The Boston banks on the 24th of November fol-
lowed the example of the banks in New York so far as to agree
in general terms to discount as freely as possible and to provide
that banks owing balances in settlement at the Clearing-house
might pay in their own bills to the extent of fifty per cent of the
balances due, provided the bills paid did not exceed a certain
amount, fixed in proportion to the capital of each bank, varying
from one-tenth for the smallest banks to one-twentieth for the
largest. The expedient of throwing their specie into a common
fund was rejected by them, and they therefore failed in securing
the unanimity of action which distinguished the conduct of the
New York banks ; some of the Boston banks attempted to expand,
but others contracted, and the result was a slow diminution of
loans for some weeks, which bore with great severity on the mer-
cantile public. With some loss of specie, however, and with the
aid, it was said, of some forbearance by New York creditor banks
in calling for balances due to them from Boston, the banks of
Boston went through the panic without suspending specie payment.
It was too late, however, or was for other reasons impossible,
for banks in other sections to adopt the same course. On the 21st
of November the Farmers' Bank of Virginia, a large institution
with numerous branches, suspended specie payment and was fol-
lowed by its neighbors on the next day. The Baltimore banks,
which had been severely pressed for some days and had felt the
symptoms of a run by their note-holders, suspended on the 22d, and
the Philadelphia banks on the same afternoon resolved to take the
same course. The St. Louis banks suspended with one exception
on the 28th, the South Carohna banks on the 29th, and the Georgia
banks on the 30th. Of these suspensions those of the Southern
banks were in part the result of political calculation, it being
desired to retain within control the specie which they held, and
in part the result of the absorption of specie by individuals which
had been going on through the South for some weeks. The
Baltimore banks were driven to the same course by the action of
the banks of Virginia which cut off a large share of the specie
collections of the Baltimore merchants. Whether the Philadelphia
banks could have held out longer or not may be a question, but it
seems that their suspension, when it occurred, was more the result



3IO ESSAYS

of a want of concert than of special weakness at that moment. The
banks of Kentucky continued specie payments throughout this
period of difficulty ; those of New Orleans did not suspend until
September i86r, and then only, it was said, at the request of the
Confederate government.^

The free banks of the Northwest suffered instant discredit from
the development of the secession movement and the consequent
decline of the securities upon which their circulation was founded.
From July to December, i860, the bonds of several of the Southern
states showed a loss of twenty to twenty-five per cent ; Missouri
bonds in particular dropped from eighty to sixty-one; and the whole
range of these securities, after a reaction in the early part of 1861,
continued to fall without hope of recovery. The Auditor of Illi-
nois refused in November, i860, to receive any more Missouri
bonds as security for notes, the Chicago bankers began to throw
out the notes of country banks known to have large deposits of
Southern bonds, and the Bank Commissioners called upon thirty-
three banks to deposit additional security — a demand which could
not be complied with. Exchange upon New York rose in Chicago
to eight or ten per cent, declining to five or six in the early part
of 1 861. In May of that year the notes of nearly half of the Illi-
nois country banks had been thrown out in Chicago and the dis-
count on their notes ranged from twelve to twenty per cent. The
legislature had already voted to receive only Illinois stocks on
deposit from free banks in the future ; but this change came too
late to save the people of Illinois from what Governor Yates, two
years after, described as immense loss. The Wisconsin banks
were also thrown into indescribable confusion by the collapse of a
large part of their securities. In May, 1861, the Bank Comptroller
of Wisconsin sold in New York for redemption purposes Missouri
bonds at thirty-seven and one-half, Tennessee at forty-five and one-
eighth, and North Carolina at fifty-six. Banks were closed in quick
succession, leaving their notes outstanding, and in 1863 the comp-
troller was redeeming — at rates under par and ranging as low as
fifty — the notes of thirty-seven Wisconsin banks. Neither in
Ohio nor in Indiana did the banks with secured circulation suffer
as in Illinois and Wisconsin, although of the Indiana free banks
many had to increase their securities to make good the loss on

1 Bankers^ Magazine, 1861-62, p. 393.



THE CRISIS OF i860 311

Missouri and Louisiana stocks, which were largely held by them,
and as many as sixteen proceeded to withdraw their notes, a
small number suspending altogether. In Missouri also, notwith-
standing the loss of credit by the state and the depreciated local
currency already noticed, the banks were able to meet the strain of
the revulsion with a good face. They held a relatively strong coin
reserve, and although their suspended debt was of serious amount,
they were able to reduce their circulation and thus to bring their
business into a condition in which they could await the issue of
the war.

The specie movement occasioned by the crisis in this country
was larger in amount, but less serious in its consequences than that
of 1857. It has already been remarked that so early as the middle
of October exchange had fallen below the point at which specie
could be profitably exported. Although there was a rally in the
last part of the month, exchange was still heavy and shipments
finally came entirely to a stand. The gold exported from New
York, the chief point of specie shipments and imports, was only
;^ 740,000 for the months of November and December, i860, and
;^23,ooo in January, 1861, against $7,190,000 in the same three
months of the previous year. The decisive turn was given to the
exchanges by the news carried to Europe by the Atlantic, which
sailed on the 17th of November, when five days of panic had
completely paralyzed the market for exchange in New York.
The Atlantic reached England on the 30th, and on the next day
the Europa sailing from Liverpool took as freight to New York
1^540,000 in specie. The tide soon began to flow with great
strength, the Persia which sailed a few days later bringing over
^^^3,000,000. In the three months after the flow of specie began the
receipts of gold in New York from Europe amounted to $12,725,000,
and the importation continued until the fall of 1861. The aggregate
of specie imported in the fiscal year ending with June, 1861, was
over $40,300,000, so that deducting the $23,800,000, exported
chiefly in the earlier part of the year, the United States on the
whole drew from abroad in this year $16,500,000 of gold. In
no other year since the product of California became important
had this happened.

The first effect produced in New York by the measures taken
by the banks of that city was to cause a general sense of relief



312 ESSAYS

and of returning hope, manifesting itself in greater ease in the
money market and improved prices for stocks. Had the crisis
been of the ordinary type, recovery would no doubt have dated
from this point as in 1857. The period of revulsion must of
course have been gone through, but, with the accumulation of
capital, prices of good securities must have begun to rise at once
and credit to regain its healthy condition. But the crisis of
i860 was not of the ordinary type, and this fact the public
were every day learning to comprehend more fully. The
confidence imparted by the action of the banks was then
but temporary. It was soon felt that the losses already ex-
perienced from the secession movement in the South, and the
greater ones yet to be expected, were not to be cured or averted
by the mere expansion of loans. They involved a real loss of
capital, and how far this might go could not be guessed. It
was only certain that the movement was gaining ground, and
that a revolution in the business of the country as well as its
government became daily more imminent. After a few days,
therefore, the advance in stocks which followed the union of the
banks was lost under the increasing pressure in the money
market, and prices then continued to decline until the early part
of December, when they "touched bottom." Merchandise also
suffered the same fall in the few weeks after the action of the
banks.

This continuous fall of prices after the 21st of November, it is
to be observed, was not accompanied by any panic. Though the
demand for loans was great, and private lenders were extremely
reluctant to act, the banks were lending freely, and the appre-
hension now felt was not that the means of payment should be
unavailable, but that they should not exist. Assets of real value
could now be used, though at some sacrifice ; but what assets were
of real value was a matter of doubt. Settled gloom, therefore,
took the place of that peculiar tension of feeling which is known
as panic, and the country entered upon a revulsion in both domestic
and foreign commerce, of distinctly different character from that
which would have followed the panic under ordinary circum-
stances. This difference was owing to the steadily increasing
mass of Southern indebtedness, either repudiated or suspended in
consequence of the movement for secession. The panic, although



THE CRISIS OF i860 313

short, had been of frightful severity, and recovery from its
paralyzing effects must have been slow. It had not been caused,
however, by any general unsoundness of business, the commercial
and manufacturing interests had withstood the strain with some
success, the demoralizing effects of specie suspension had been
averted in the great financial centres, and if nothing more had
happened, the return to a prosperous, although a reduced business,
would have followed early and naturally. And there is evidence
in the publications of the day that the observers of financial
affairs were slow to admit that such a course of affairs was no
longer possible. As winter advanced, however, the unwelcome
truth forced conviction upon every mind that the business of one
whole section must be struck out from all calculations of payment
for the past and of production for the future. This was not the
mere " shrinkage " in transactions caused by revulsion of the
usual type, but the annihilation of resources belonging to mer-
chants and manufacturers to the extent, as has been estimated, of
more than ;^200,ooo,ooo. The pacification of political troubles
might have checked and cut short this destruction ; their progress
made it inevitable. The causes now at work, therefore, although
connected with these from which the panic had sprung, were
political and not financial.

It is useless then to attempt to trace farther the course of
recovery from the panic of i860. The steadily increasing effect
of new and extraneous influences after the early part of December
disguised the operation of the ordinary laws of finance and distorts
their results.



STATE BANKS IN 1860I

The fifteen years which preceded the Civil War saw the currency
of the United States estabHshed completely, and to all appearance
firmly, upon the theories involved in the Independent Treasury
system. A long period of fierce debate and struggle had ended
with a declaration by the federal government, in the act of
August 6, 1846, that in all its transactions specie alone should be
received or paid out by its officers after April i, 1847, and that no
public moneys should thenceforward be deposited in banks. This
absolute prohibition of all use of banks or of bank currency, fol-
lowing the repeated and decisive defeat of projects for establishing
a Bank of the United States, impHed the renunciation of all
responsibility for the banking system, on which the mercantile
community continued to depend. The theory of the Whig leaders
" that there are duties, devolving on Congress, in relation to cur-
rency, beyond the mere regulation of the gold and silver coins," ^
was rejected, and all except gold and silver was left to be regu-
lated by the states at their discretion. It had become the estab-
lished order of things, then, that the government should use coin,
leaving the people to use either coin or such substitutes as they
might prefer, and that the government should rely upon its own
strong box, leaving the people to set in operation such local insti-
tutions of credit as necessity or ingenuity might suggest. The gold
of California and the rush of industrial growth stimulated by it
came in good time to support this crude arrangement, and in i860
it appeared, like many other things in our system, if not beyond
criticism, at least safe from attack.

1 The last three essays included in this volume are a fragment of a larger whole de-
signed to present a history of the national hanks. The survey of state banks in i860
would probably have been somewhat expanded, if we may judge from the absence of
reference to the banking system of Louisiana. In scope as well as in other respects the
essays on "The Establishment" and on "The Circulation of the National Banks" were
left by Professor Dunbar in a state more nearly approaching completion.

3 Webster, " Works," iv. 328.

314



STATE BANKS IN i860 315

Under such circumstances the legislation of the states with
respect to banks lost none of the variety which had characterized
it from the first. From 1846 to i860 the state legislatures con-
tinued to act upon this important subject without concert and upon
no common principle, but simply as they happened to be moved
by the traditions, habits, or supposed needs of any particular com-
munity, sometimes under the stimulus of party prejudice and
sometimes in obedience to the local craze of the moment. In
some sections groups of states finally adopted tolerably similar
systems, showing progress toward the formation of a consistent
policy over considerable areas ; in other sections no such crystal-
lization was visible. The history of the state bank systems, there-
fore, is a mass of disconnected details, from which a movement of
some importance within narrow geographical limits is evolved here
or there, but with no important general trend. For the purpose
of making a general survey of the state bank systems, then, it is
convenient to confine ourselves to a survey of those banks at some
given epoch. The beginning of the year i860 is selected as the
best date for such a survey, because a costly experience had then
brought state banking on the whole to its best condition prior to
the Civil War. The wreckage of the revulsion of 1857 had then
been cleared away, the business of the country had resumed its
activity, and the sinister influence of the impending political crisis
was not yet felt.

It is probably impossible to obtain at this date precise informa-
tion from all of the states as to the number and condition of the
banks then existing. Some states maintained a careful supervision
over their banks, requiring the collection and publication of accounts
at stated times, but others made no such requirements, and in others
still the publication was made too negligently to be satisfactory.
The Secretary of the Treasury had been required ever since 1832
to lay before the House of Representatives annually such returns
of state banks " as may have been communicated " to the state
governments during the year, and in default of such statements to
present " other authentic information " ; but the returns thus com-
piled, although exact for some of the states, do not command con-
fidence as regards others. The returns published by the Treasury
may, however, be corrected and completed in some cases by the
figures collected and periodically revised for the Bankers' Maga-



3l6 ESSAYS

sine, that publication having special reasons for securing absolute
accuracy if possible.^ From these sources it appears that in Janu-
ary, i860, there were at least 1590 banks in twenty-nine states and
the District of Columbia, besides seven in the territories of Kansas
and Nebraska. No banks then existed in Arkansas ; and the consti-
tutions of Texas, California, and Oregon forbade the establishment
of any bank of issue. The distribution of these banks among the
states points plainly to differences of legislative policy, as well as
to differences in population, wealth, and economic conditions ; but
the most striking facts in this respect are the concentration of
more than half of the banks, both in number and in capital, in
New England and New York, the small number of banks in the
planting states, and the great irregularity of their distribution in
the West and Northwest.-

When we examine the laws under which the several states had
organized their banks, it is difficult to find any basis for systematic
arrangement and review. Not only did the legislation of one
state differ from that of another in its general effect, but, taking
the states individually, there were in some states banks established
under several different systems, and in others, where the legislation
permitted a like diversity, the banks had, in fact, organized wholly
or chiefly under some one preferred system. The tedium of an
examination of the laws, state by state, may, however, be avoided
in part, if we begin by noting the fundamental distinction between

1 See table in Bankers' Magazine, April, i860, p. 764, giving figures for all the
states for January, i860 ; observe also the remarks on page 763. Page 975 gives also,
for June, i860, a list of all the banks by name, the names of their officers, and the
amount of their capital, showing the precision of the information collected.

Capital
No. OF Banks 000,000 omitted



2 New England .... 507 $123

New York ....
Middle and District of Columbia
South Atlantic
North Central
South Central and Missouri .



162 55

Total 1590 Jf4lo



301 III

180 48

153 48

287 25



Wisconsin had 104 banks, Illinois 72, Ohio 53, Indiana 37, Iowa 13, and Michi-
gan 4. Of the banks in the South Central states, those of Kentucky and Louisiana
represented ^33,000,000 of capital. — Bankers' Magazine, 1859-1860, p. 764.



STATE BANKS IN i860 317

the banks organized under special charters and those which were
generally known as free banks.

In the earlier part of the century the only method of in-
corporation practised by any legislature was incorporation by
special charter. This method implied the exercise of legisla-
tive judgment as to the need for the establishment of a bank
in the particular locality and as to the fitness of the persons
applying, and in many states it continued to commend itself to
public approval down to the Civil War. The state, thus incorpo-
rating its banks singly and after inquiring as to the merits of each
one, in many cases established general regulations applicable
to all its charter banks, prescribing the limits within which the
business of each should be confined and the measures to be taken
for supervision or public information, and strengthening its system
by such other safeguards as the particular constituency demanded
or would bear. To this method of incorporation by special charter



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 33 of 40)