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was added the method of incorporation by general act, partly as
the result of a desire to systematize banking and partly under the
influence of a growing preference for general legislation rather
than special in all possible cases. New York had undertaken in
1829 the doubtful experiment of estabhshing a safety fund, to be
fed by annual contributions from all banks organized under the
system, and to be used for the payment of the debts of any such
bank becoming insolvent. Without waiting for the catastrophe
which ultimately disclosed the weakness of this system, the legis-
lature in 1838 adopted the expedient of requiring any bank sub-
sequently established to deposit with the State Comptroller
securities of specified kinds, in amount sufficient to cover the notes
to be issued by the bank. Making this provision for the safety of
the circulation, it was easy to provide also by general law that any
body of applicants, upon complying with the terms of the act,
should be organized with banking powers ; and thus New York
set on foot what became known in many states as the free banking
system, as distinguished from the system of special charters. The
plan for a secured currency might easily have been grafted upon
the regulations for banks under special charters ; but in fact this
seldom took place, and the line of demarcation between the free
banks and the charter banks was in most states maintained to the
last as it had been first drawn. The free banks were organized


under a general law, with some plan for a uniform secured circu-
lation, while the charter banks, organized by special acts, presented
no such uniformity of security.

It was in New England that the chartered banks were strongest
in i860. Having a comparatively dense population, active manu-
facturing and commercial interests, and large accumulations of
capital, several of those states had provided themselves with banks
early and rapidly. The legislatures had for the most part granted
charters with great freedom, but had surrounded the banks by
rather elaborate general regulations, which on the whole conformed
to a common type. The New England chartered bank was an
incorporated company, having tolerably ample banking powers,
using its funds chiefly and often exclusively in the purchase of
commercial paper, and depending for its strength on the solidity
of this investment. In Maine and Massachusetts the expansion of
its credit by any bank was limited by the prohibition of loans in
excess of double the capital, and by a limit upon the debts due by
the bank. In most of the New England states, however, the
chief effort of legislation was to restrict circulation, this form of
liability still continuing, down to i860, in all these states except
Massachusetts, to be more important in amount than the deposits.
In pursuance of this policy New Hampshire, Massachusetts, and
Rhode Island limited the circulation of the bank to the amount
of its capital, and Rhode Island in 1859 limited it to sixty-five
per cent of the capital ; Vermont limited all debts except for de-
posits to twice the capital ; and Maine limited the circulation to
the amount of capital and also required that all circulation in
excess of one-half of the capital should be protected by a reserve
of one-third its amount in specie. In addition, New Hampshire
and Massachusetts gave to the notes of any bank a first lien on
its assets, and Maine made the stockholders individually liable in
proportion to their stock for unpaid notes.

In every New England state the legislature had placed the
banks under the supervision of one or more Commissioners, armed
with certain powers of inspection and investigation, and had provided
for returns of the condition of every bank to be made to the state
authorities. As to the frequency of such returns, however, there
was no uniformity, and the requirements varied from the moderate
demand of Vermont for a full exhibit of affairs to the Commis-


sioner at his annual visit, to the requirement of Massachusetts for
sworn returns to be given in weekly by Boston banks and monthly
by all others, and then to be published in abstract by the Secretary
of the Commonwealth. The great concentration of the business
interests of much of New England in the city of Boston, however,
made up in part for the laxity of the provisions for publicity made
by some of the states. The great majority of the New England
banks were under some pressure from Boston correspondents,
prompt to require payment and keen to discern signs of weakness.
There had grown up, moreover, the system of the Suffolk Bank,
so often described, under which the New England banks found
themselves compelled to provide for the daily par redemption of
their notes in Boston.^ This system, originally introduced in
order to free the city circulation from the excessive issues of
country banks, and maintained for nearly forty years, had finally
become more efficient than any legislative provision in keeping
the currency of New England sound and uniform.^ Country banks
were often made uneasy by the strict requirements of an extra-
legal arrangement, forced upon them by an irresistible power ;
but the result was that their issues, being kept within legitimate
limits, had unquestioned credit throughout New England, were at
no greater discount in New York than the secured notes of the
country banks of that state, and were even taken to the West to
be used in making purchases of produce in the fall of the year.

It cannot be said that the New England system was at any
time strong in specie. In the years 1859 ^"^ i860 the specie in

1 An account of the Suffolk Bank system is given by Knox, " History of Banking in
the United States," published in 1900. D. R. Whitney, "The Suffolk Bank " (1878), is
a full account, from official sources, by the president of the bank. Nathan Appleton,
"Remarks on Currency and Banking" (1841), compendiously describes the method
followed : " The country banks are invited to keep a fund in deposit at the Suffolk bank
for the redemption of their bills. If they decline, the bills are sent home for payment,
in which case nothing but a legal payment in coin will be received. The trouble attend-
ing this mode of payment soon induces the bank to yield to its true interest and keep up
the deposit. . . ." The deposit required over $2000 for banks with capital not exceeding
;?ioo,ooo, with an increase for larger capital. At its height the daily redemption by the
Suffolk Bank averaged not far from $1,300,000. The establishment of the Bank of Mutual
Redemption in 1858, having country banks among its stockholders, compelled a division
of the business, which finally came to an end with the disappearance of notes issued
under state legislation.

2 The Massachusetts law of 1843, which forbade any bank to pay out notes not its
own, no doubt strengthened materially the system already established.


New England banks amounted to less than one-eighth of their
liabilities, and the holdings of single banks were often pitiful in
amount. And yet the system was strong in credit. Excessive
issues were quickly and rigidly checked ; the commercial relations
of the region did not subject it to sudden or intense demand
from outside ; and the community felt confidence in the value
of assets which were made up of the paper created in a regular
and prosperous business. The use of specie was economized
almost to the last degree, a smoothly working credit, produced
in response to the regular demands of business, was substituted for
coin, and yet the whole was kept at the specie standard by the
influence exerted at the central point. The system was not strong
enough to stand by itself when the credit system in other parts
of the country gave way, and still less to give any effective sup-
port to others under such conditions, as was shown by the suspen-
sion of the New England banks immediately following the
suspension of those in New York City, both in 1857 and in 1861.
But leaving out of view the failure on these two occasions, of
which one was a world-wide financial catastrophe and the other
was the crisis of a nation's history, the people of New England
found themselves in general well served by their banks, and felt
little disposition for change. The free banking movement, to
which New York gave so strong an impulse, had never made any
strong impression in the New England states. Vermont and Mas-
sachusetts had passed general banking laws providing for secured
notes in 185 1, and Connecticut in 1852, but their example was not
followed by their neighbors. Moreover, in each of these states the
legislature continued to grant special charters upon application,
and no free bank was established in Vermont or Connecticut. Mas-
sachusetts established none until i860, when seven banks under
the general law went into operation, six of which were placed in
Boston and one in Cambridge. Whatever this sudden movement
may have betokened, it was speedily lost sight of in the greater
changes brought by the war, and the fact remains that the
chartered banks of New England retained almost exclusive posses-
sion of the field of banking in those states, until they were
replaced by national banks under the acts of Congress.

Most important of all the states, as regards the number and
capital of its banks, was New York. The Manhattan Company


and the New York Dry Dock Company, incorporated near the
beginning of the century with perpetual charters, continued their
business in i860, under the general regulations imposed upon all
banks by the statutes; banks incorporated before 1829 with char-
ters for limited terms were still in existence ; banks incorporated
between 1829 and 1838 issued notes under the Safety Fund system,
imposed in the former year upon banks thereafter chartered. This
system, requiring of every bank a contribution equal to three per cent
of its capital for the establishment of a common fund, to be made
good by renewed contributions if impaired, was intended to secure
the notes of the contributing banks by giving them a lien on the
fund. It was found in 1841, however, that by a singular oversight
the law had been drawn so as to charge the fund with all the debts
of an insolvent bank, and not with the notes only, and before the
legislature was ready to apply a remedy, ten banks had failed and
had left to their creditors claims upon the Safety Fund. The legis-
lature, in 1842, changed the liability of the fund so as to give the
note-holders a preferred claim upon it ; the state undertook, more-
over, to meet the claims left behind by the insolvent banks, pro-
viding for its own reimbursements out of the future contributions
of the banks ; but the Safety Fund system had lost its vitality, and
in i860 was little more than a name. A few banks remained, hold-
ing charters which were to expire not later than 1866, but the larger
number had taken refuge under the free banking system.

The " free banks," or banks organized under the general bank-
ing law of 1838, and its amendments, had come to hold in i860 by
far the most important place in New York. Of the banking capital
of the state, amounting to nearly $1 12,000,000, more than ninety per
cent was organized under the general law ; and of the 1^70,000,000
of this capital, belonging to the banks in New York City, more than
ninety-two per cent. As the limited charters of the incorporated
banks expired free banks filled the place, and thus, omitting the
two cases of perpetual charters, the banking system of the state
promised in a few years to pass under the general law.

The details of the New York free banking system require
little description or comment, except in two or three particulars.
The fundamental idea of the law, as has already been seen, was to
insure the solvency of all bank-notes issued under its provisions,
by compelling the deposit of sufficient security in the hands of a


public officer. For this purpose the law, in i860, after some sin-
gular changes of policy, admitted stocks of the United States and
of New York, and also mortgages upon real estate to the extent
of one-half of the amount to be secured. Uniformity of security
naturally carried with it the idea of unrestricted circulation within
the limits of the state, and the law therefore contemplated the in-
discriminate use of each other's notes by the free banks, allowing
any bank to pay out the notes of any other which it was willing to
receive at par. A safeguard against the risks involved in these
arrangements was provided, however, by the early requirement of
the redemption of notes in the principal cities, and by the final
establishment in New York City of a system similar to that of the
Suffolk Bank.i

In its earlier years this system passed through some trying
periods. In 1844, out of ninety-three banks organized under it,
twenty-six had failed, and their circulation had been redeemed at
an average discount of about twenty-five per cent. But as early as
1850 the law of New York had become a model for other states, and
in i860 the banks organized under it had a credit which carried
their notes easily into adjoining states, and often in the course of
trade into the Northwest. This credit was probably due, not so
much to the terms of the law, which (as in the admission of mort-
gage security) sometimes passed the bounds of prudence, as to the
reenforcement of the law by a generally strict and vigilant admin-
istration, and to the influence exerted by the city banks. As early
as 1 85 1 the banks of New York City found it for their interest to
organize thoroughly the system of central par redemption of coun-
try bank-notes; and in 1853 they established the Clearing-house
and thus brought every one of their own number to a strict daily

The free banking system, with provision for a bond-secured
note issue, was followed in other states in such rapid succession
in the later fifties as to suggest the probability that had not the
normal course of development been interrupted, the system might
soon have become general.^ At its best in New York, the system

1 A similar step was taken by the Philadelphia banks in 1S58, but it was given up
after a short trial. Ba7ikers' Magazine, 1859-1860, pp. 13, 149.

2 The following states had passed free banking laws down to 1S60 : Vermont,
Massachusetts, Connecticut, New Jersey, Pennsylvania, Virginia, Tennessee, Florida,
Louisiana, Ohio, Indiana, Illinois, Wisconsin, and Iowa.


was from its nature defective, since under its provisions real elasticity
of note issue was nearly if not quite impossible. In many of the
states, moreover, and particularly in the Northwest, it did not even
secure that safety which is the sole virtue of a bond-secured circu-
lation. It is not possible to determine how many of the seventy-
four banks of Illinois and the one hundred and nine banks of
Wisconsin were really at the beginning of i860 anything more
than establishments for the issue of notes upon speculative securi-
ties.^ In each case the law of the state allowed the issue of notes
upon the bonds of any state paying its annual interest, and in each
the banks had convinced the state officers as to the soundness of a
great variety of bonds. The favorite security for this purpose was
for the time the six per cent bond of Missouri. That state was
issuing its bonds in payment for railway construction, and the
rates in the market, which early in i860 were not far above
eighty, indicated that the supply was not easily absorbed. To
make a deposit of the bonds under the Wisconsin law and
to take out an amount of notes equal to their average value in
New York for the preceding six months, appears to have been
an easy method of obtaining an advance, which might be left to
throw the burden on the note-holder in case the bonds fell still
further. Other issues of Southern and Western bonds appear to
have been used in the same manner, bringing into existence a mass
of currency protected by no real redemption by the issuing bank,
and with doubtful security in the hands of the state. Public
indignation found its vent in epithets of great freshness and vigor
applied to the notes, but the notes continued to circulate. It was
generally recognized that Illinois and Wisconsin did not use a
currency of specie value; it was hard even in Chicago to buy gold ;.
and the propositions made at intervals for some scheme of redemp-
tion were generally limited to redemption in exchange upon some
more fortunate state at "reasonable rates." The free banks in
Indiana were apparently disposed to follow the example of those

1 It was stated in a circular of Chicago bankers in i860 that more than half of the
Illinois banks were banks of circulation only, doing no business in their nominal
location. Bankers' Magazine, January, 1861, p. 585. The Comptroller of Wisconsin,
in January, i860, named 15 banks in that slate as irresponsible, 13 having no place of
business and the other 2 being apparently mere places of issue. That these were the
only Wisconsin banks having little or no foundation in legitimate business is highly


in Wisconsin and Illinois, They, too, held Missouri and Southern
bonds freely, and sought to devise some plan for preventing the
frequent return of circulation for redemption, but could agree upon
nothing except common hatred for the Bank of the State of
Indiana, which pushed them hard by the regular return of their
notes.i As for Missouri itself, the currency there was freely recog-
nized as inconvertible. The bank commissioner of the state early
in i860 reported that bank-notes were at a discount of one or one
and one-half per cent compared with gold, and one per cent below
the notes of the state banks of Indiana and Ohio and the banks of
Kentucky, Tennessee, and Louisiana. The state itself had paid
one and one-half per cent for exchange in order to remit money
for its annual interest due in New York ; and in March the
Chamber of Commerce of St. Louis resolved that it was necessary
to return to the specie basis.^

The difference in the value of local currencies, which thus
culminated in the West, necessarily showed itself in published rates
of discount on " foreign " notes in most of the principal cities. In
some cases notes were sent in large sums to be put into circulation
at a distance from home ; in other cases they found their way to
distant places, in small amounts in the pockets of individuals. In
either case they often fell into the hands of the dealers in " uncur-
rent money," who carried on a profitable business in buying such
notes, often at low rates, and either selling them for remittance, or
sending them home, to be redeemed or to be put into circulation
anew, as the case might be. But notwithstanding the discount
upon " foreign " notes when bought or sold, they made their way
into circulation, and sometimes to a serious extent, whenever the
local banks failed to enforce a rigid exclusion. Complaint was
made that Missouri notes accumulated in Cincinnati,^ the banks
there preferring to pay them out rather than incur the expense of
sending them home, and Illinois and Wisconsin notes overran the
whole Northwest.* That all this confusion implied great in-
convenience and certain loss for the unwary, even in dealing
with genuine notes, is clear. But there was also an added dan-
ger arising from the multitude of counterfeited notes. The art

1 Bankers' Magazine, 1859-1860, p. 913. 2 JUd., pp. 811-S17.

3 Ibid., p. 152.

* " Iowa State Bank and Western ]5anking," in Bankers' Magazine, 1859-1860, p. 609.


of bank-note engraving was then well advanced, as the natural
result of the needs of a multitude of banks having different plates.
The business of engraving had been concentrated in a few hands,
and much highly creditable work was produced. The counter-
feiter found his opportunity, however, in the vast variety of the
notes in use, and in the probability that no person would be
familiar with the appearance of many issues. Only the expert
could know the characteristics of a multitude of plates, and detect
at sight the variation from the original, which might be as difficult
of precise definition, and yet as real, as the difference in the features
of two brothers. A pamphlet bank-note detector was a part of the
outfit of every well-provided counting-room. The published detect-
ors rivalled each other in the completeness of their information,
and the test of latest counterfeits was a valuable contribution regu-
larly made by the financial publications. The New England banks
had an efficient Association for the Suppression of Counterfeiting,
and another went into operation in i860 in Philadelphia. ^ But no
small part of the people found themselves frequent losers by imita-
tions of a currency to which they could apply no certain test and
for which they could obtain no substitute.

The free banking system, in some of the Western states, found
a formidable rival in the state banks organized on the model
adopted by Indiana in 1834. After some unsatisfactory adventures
in banking, Indiana, in that year, in view of the probable disappear-
ance of the Bank of the United States, instituted a system under
which local banks established in different parts of the state, as
branches of an organization to be known collectively as the State
Bank of Indiana, were to be placed under the supervision of a
central Board of Control. The capital of any board was to be
subscribed in equal parts by the state and by individuals, the state
also lending its credit to enable individuals to make full payment
for their shares in cash. Prudent management of an essentially
sound institution brought the State Bank safely through the re-
vulsion of 1837, though, like banks throughout the country gen-
erally, it was obliged to suspend specie payments, and it carried

^ The New England Association for the suppressing of counterfeiting " paid for
sentencing" two hundred and twenty-eight persons during the four years 1858 to 1861.
It received an annual subsidy from the state of $1500. For its report for 1859, see
Bankers' Magazine, 1 859-1 860, p. 705.


on a profitable business, enjoying high credit and performing valu-
able public service until the expiration of its charter in 1857.

To take its place a new bank was chartered in 1855, organized
upon a similar plan, but having all its capital suppHed by indi-
viduals, and went into operation at the beginning of 1857, under
the name of the Bank of the State of Indiana. The act of incor-
poration provided for opening fifteen to twenty branches ^ in dif-
ferent parts of the state, every branch to have a capital of at least
$100,000 and the aggregate being limited to $6,000,000. Every
branch had its own board of directors and its own stockholders,
among whom its profits were to be divided ; but although distinct
from each other the branches were not independent. Over them
all was the bank, supported by proportional assessments upon the
branches, represented by a board of directors, of whom four were
elected by the legislature and one by every branch, and existing
for the purpose of inspecting and controlUng the branches. The
directors of the bank fixed the number of directors for every
branch and appointed two among them. They could also restrict
the discounts of any branch to one and a quarter times its capi-
tal ; and although they could not compel the transfer of capital
from one branch to another, they had authority to close any branch
after the first year, if it did not earn six per cent. In addition to
these guarantees against mismanagement and to the further secur-
ity afforded by ample provision for reports from all and for both
stated and discretionary examinations by the central board, the
branches were made liable for each other's debts, and the stock-
holders were also made personally liable to an amount equal to
their stock. Notes for circulation were supplied to the branches
by the parent bank, the issue being limited to twice the capital of
the issuing branch ; and the suspension of specie payments was
forbidden under a penalty of heavy interest to the holder of notes
on which payment should be refused or delayed. The average dis-
counts of any bank were limited to the amount of its deposits, and
two and a half times its capital and some strict regulations were
prescribed as to the kind of loans to be made.

The Bank of the State of Indiana was therefore a cluster of

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