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banks submitting to mutual inspection and control, — for the

1 The law j^rovided for the division of the state into " not less than fifteen nor
more than twenty districts," and the larger number was in fact taken.



STATE BANKS IN i860 327

parent bank was in fact the representative of all, — and accepting
mutual responsibility for debts. The organization, then, was
essentially conservative, and its cautious movement lost nothing
in steadiness under the firm hand of Hugh McCulloch, its first
president. It passed through the crisis of 1857 without discredit,
and in i860 was recognized as a sound and valuable system,
under which healthy business and prudent management supplied
all needful guarantees for every class of creditors,

Ohio followed the example of Indiana in 1855, by incorporating
the State Bank of Ohio, also a group of closely allied banks, with
a maximum capital of $6,150,000. In its general characteristics
the Ohio State Bank differed but little from the Indiana model,
except that instead of making the branches liable for each other's
obligations, the Ohio system instituted a Safety Fund, to be held
by the central Board of Control and supported by a contribution
required from every branch to an amount equal to ten per cent of
its circulation. The branches were required to receive each other's
notes at par ; the issue of each branch was limited to twice its
capital if this did not exceed $100,000, and in a descending ratio
for any additional $100,000; and the Board of Control could
require any branch to reduce its circulation within safe limits. The
liability of stockholders was limited to an amount equal to one-
third of the capital paid in. To these regulations and to some
restriction upon the indebtedness of any branch beyond its circu-
lation and deposits, the Ohio system added the requirement of a
reserve of thirty per cent of the amount of notes outstanding.
Of this reserve at least one-half was required to be in coin and for
the remainder the branch was allowed to count cash deposits in
New York, Boston, Philadelphia, or Baltimore as the equivalent of
coin. Organized upon this plan the State Bank of Ohio had in
i860 thirty-six branches. The system was in strong condition and
good credit, and well able to resist the approaching convulsion.

Iowa began its life as a state in 1846 under a constitution
which in one section forbade the creation of any corporation with
the privilege of issuing notes " to circulate as money," and in
another forbade the creation of any " corporations with banking
privileges." The necessities of modern life, however, and the
example of Indiana and Ohio wrought so powerfully upon Iowa,
that in the revised constitution of 1857, after providing for the sub-



328 ESSAYS

mission of all acts relating to banking corporations to popular
vote, express authority was given to establish a state bank with
branches, to be founded on a specie-paying basis and with a
mutual responsibility among the branches for each other's circu-
lating notes. Under this authority the legislature in 1858 incor-
porated the State Bank of Iowa, with a possible aggregate capital
of 1^6,000,000, with the capital of each branch limited to ^50,000 as
its minimum and $300,000 as its maximum, and with the same
concentration of supervisory power in a central board of directors
as in the State Banks of Indiana and Ohio. A Safety Fund,
amounting to one-eighth of the circulation, was established in the
hands of the parent bank, and the circulation of every branch was
limited in proportion to its capital, — on the first $100,000 to
double the amount, and so with a descending scale for additional
amounts of capital. A reserve of coin equal to one-fourth of the
circulation was required, and also a similar reserve in current funds
for the deposits. Any branch refusing to pay its notes in coin on
demand was to be declared insolvent, and the State Bank was
at once to take possession of its effects, in order to apply the
Safety Fund, or enforce the mutual responsibility of the branches.
Behind this responsibility lay the personal Hability of all stock-
holders to an amount equal to their stock. As a security for gen-
eral soundness the law limited the indebtedness of any branch
beyond its circulation and deposits, and forbade loans upon paper
having more than four months to run. It forbade any branch to
issue the notes of any other, and required all to take each other's
notes at par ; but it permitted the circulation of notes received in
payment of debts, if redeemable in gold and silver and received in
the regular course of business, although issued by banks out of
the state. In many particulars the Iowa law followed closely pro-
visions of the laws of Indiana and Ohio, and, as in those cases, the
result was the establishment of a solid institution maintaining its
own credit and strengthening that of the community in which it
was established.

So strong was the impression made by the group of state banks
on what we may call the Indiana model, that in 1861 the legisla-
ture of a fourth state, Illinoi-s, prepared to adopt the system, hav-
ing apparently lost all hope of a thorough reform of the free
banks. The act for the establishment of the Union Bank of



STATE BANKS IN i860 329

Illinois, passed February 20, 1861, proposed a group of banks
collected around a central board with mutual responsibility and
with strict provision for specie payment. Many of its sections
were taken from the Indiana statutes with little change, and in
general promised the same rigorous and prudent management.
It failed, however, to secure a majority when submitted to popular
vote in November. The people of Illinois at that juncture felt
a reluctance, perhaps reasonable under the circumstances, to
commit themselves further on the subject of banking.



THE ESTABLISHMENT OF THE NATIONAL BANK-
ING SYSTEM 1

The plan of establishing a system of national banks, whose
notes should take the place of those issued by the state banks, was
first presented in definite shape in the report of the Secretary of
the Treasury, at the beginning of December, 1861. Mr. Chase
started in his discussion of the subject from the consideration
that by some process the advantage of issuing a paper circulation,
amounting to not far from ^150,000,000 in the loyal states, ought
to be transferred from the issuing banks to the government, and
that the moment was opportune for such a change. He referred
to the lack of system in the existing circulation, the insecurity of
the bank-notes, the heavy losses suffered by the public, and espe-
cially to the recent misfortunes of banks in the Mississippi Valley,^
to enforce upon Congress the duty of protecting the public from
such evils in the future. Two methods were suggested by him,
in which all the objects aimed at in the proposed reform might
be attained, — first, the issue of United States notes in place of
bank-notes ; and second, a national system for the issue of bank-
notes, to be redeemed by the issuing banks, but secured by the
pledge of United States bonds. The plan of issuing United
States notes Mr. Chase rejected, believing that its possible dis-
asters far outweighed its probable benefits. It is interesting to
observe, in view of what soon followed, that the possible disasters
which so powerfully affected his judgment were, the issue of notes
under great temptation without adequate provision for redemption,
the risk of " a depreciated, depreciating, and finally worthless
paper money," and "the immeasurable evils of dishonored public
faith and national bankruptcy," all then being " possible conse-
quences of the adoption of a system of government circulation."^
Mr. Chase turned, therefore, in accordance no doubt with some

1 See note, p. 314, above. ^ JUd,^ p. 310. ^ Finance Report, 1861, p. 18.

330



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 331

predilections as well as with logic, to the second plan, a secured
national bank currency, and recommended this for adoption by
Congress.

A bank currency thus secured, Mr. Chase was careful to point
out, besides its advantages of uniformity and security, would also
offer the further advantage of a large demand for government
securities and of facilities for obtaining the loans required by the
war. In addition it would strengthen and diffuse the interest in
preserving the Union, by making the government stocks the
basis for the circulation in general use, and would also secure
equality of value for the paper currency in every part of the
Union. The device of securing bank-notes by a pledge of public
stocks had been shown to be practicable and useful by the experi-
ence of New York and of some other states, and notes issued upon
this system would now have a solid basis, in the large amount of
specie retained in the United States by the requirement that
duties on imports should be paid in coin. To these considerations
it was wisely added that by offering inducements to existing sol-
vent institutions to adopt the national system, the transition from
a heterogeneous and unsafe currency to one which should be
uniform and sound could be effected almost imperceptibly and
the evils of a great and sudden change could be avoided.

But although Mr. Chase believed that this plan might be per-
fected and passed by Congress before the end of the session of
1861-1862, and that it might be serviceable in obtaining the loans
needed for the current year, it was after all a leisurely expedient
for filling the treasury of a country in the throes of civil war, and
events were already moving too fast for his calculations. Although
his report made no reference to any immediate pressure on the
Treasury and no suggestion of any new expedient for its rapid
replenishment, the suspension of specie payment had already
become as nearly certain as any future event can be. By some of
the bank managers suspension had been contemplated for many
weeks as the probable result of the locking up of their resources
in government bonds and the gradual dissipation of their reserves
by payments to the Treasury. By the first week in December this
double process was so far advanced and the public disquiet was so
great as to leave no doubt as to the issue in the minds of cool
observers. The shock to credit was precipitated by a sudden alarm



332 ESSAYS

as to possible war with England, and after some struggle the banks
suspended on the 30th of December — earlier than they might
have done had no special strain come upon them, but, after all,
under the pressure of an irresistible movement, of which the cause
was to be found in the policy pursued by the government in its
dealings with them.

As a consequence of the suspension of specie payments, Mr.
Chase found himself confronted by the demand for an issue of gov-
ernment notes, as a ready source of supply for the Treasury, before
it was possible for him to draft a bill for a bank system. Interest
at once centred upon this apparently unexpected demand, and the
discussion had its issue in the first legal-tender act, approved Feb-
ruary 25, 1862. By this act Congress, with a recommendation
reluctantly given by the Secretary, adopted the expedient rejected
by Mr. Chase in his report of December 9, and established a govern-
ment currency, giving it, moreover, the quality of legal tender,
which was probably not contemplated by him as possible, or as
admissible even if possible. The plan of a bank currency, favored
by Mr. Chase, then took the second place, and was finally thrown
over to the next session of Congress.^

It was pointed out at the time, and there seems to have been
great force in the suggestion, that all the advantages of a secured
currency could be gained by a method much more expeditious than
the elaboration of a complete system of national banks. A com-
paratively simple measure, by which existing banks should be
required to secure their notes by the pledge of United States bonds,
to be placed in the custody of the Treasury, would have made their
issues uniform and safe, and would have made them large perma-
nent investors in government bonds. The banks of the three cities,
New York, Boston, and Philadelphia, taken by themselves, had at
the date of the suspension of payments an aggregate capital of
^1,200,000,000, and against their liabilities for deposits and circula-
tion amounting to ^181,600,000 held a specie reserve of $44,000,-
000, or twenty-four per cent. The issues of these banks, it was
pointed out, if secured by bonds, could be used by the government

^ A bill framed by E. G. Spaulding and Samuel Hooper was introduced on July il,
read twice, and referred to the Committee on Ways and Means, but a resolution to print
6000 copies was laid on the table July 15, and the bill was dropped. — Cong. Globe,
3258, 3293, 3362, 3370.



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 333

as safely as its own notes ; the banks could be used as general
depositories by the Treasury without risk ; the inconveniences of
the Independent Treasury, which adjusted itself with difficulty to
the new conditions created by war, could be avoided ; and the sys-
tem which thus embraced the banks of the great cities could include
without difficulty any bank anywhere that was strong enough to
comply with the terms of such an arrangement. But whatever the
financial merits of such an improvised national circulation may have
been, it was not politically feasible. The existing banking interests
were not then agreed as to the larger questions involved in their
relations with the government ; the public were not prepared for a
revolution in the policy of the government with respect to banks;
and finally the Secretary himself, having in mind the comprehensive
scheme of a permanent national banking system, was little inclined
to adopt a measure which, falling short of his aim, might be found
ultimately to stand in his way. The proposition had little strength
then and attracted but little attention.

When Mr. Chase again brought forward his plan,^ at the begin-
ning of the session of 1862- 1863, it was under greatly altered con-
ditions. Two legal-tender acts had been passed, giving authority
for the issue of $250,000,000 of United States notes, and of this
amount all but 1^27,000,000 had been paid out. The price of gold
had been rising through the year and now stood above 130, and
the prices of merchandise were advancing. It was estimated by
the Secretary that the banks of the loyal states in the course of
twelve months had increased their circulation from $130,000,000 to
$167,000,000, and their deposits from $205,000,000 to $354,000,000,
making an increase of liabilities under both heads of about thirty
per cent, and had increased their investments by not far from
$70,000,000. With great ingenuity of reasoning he contended
that nearly the whole increase in the volume of the currency was
" legitimately demanded by the changed condition of the country,"
but that if there were any redundancy it was due to the issues of
the banks and not to the new element added to the circulation
by the government.

In this state of things, with what appeared to most observers
an alarming depreciation well under way, the need of funds for
the immediate wants of the Treasury was again pressing. The

1 Finance Report, 1S62, p. 17.



334 ESSAYS

sale of the bonds authorized by the legal-tender acts had been
trifling, and comparatively little was to be counted upon from that
source. Indeed, Congress had blocked the way to any important
sales, by providing that the bonds should be sold by the Treasury
at the market price only,i and that legal-tender notes should be
exchangeable for bonds at the pleasure of the holder, thus in effect
limiting the price of bonds to par, and leaving purchasers little
chance for a profit. The repeal of these provisions Mr. Chase
asked for and secured at the end of the session, together with
authority for borrowing in other forms to a vast amount. It was
not by his advice,^ however, that Congress at the same time made
its third resort to an issue of legal-tender notes, authorizing an
increase of the active legal-tender currency to $400,000,000, and
the issue of an equal amount of legal-tender notes in other forms.
He still maintained that an issue of government notes as a per-
manent system was open to grave objection, and that if it were
used for temporary relief, it must be with a sparing hand ; and he
was more firmly persuaded than ever that the cure for the increas-
ing disorder of the currency must be found in the resort to national
bank-notes as the substitute for all other paper issues. He therefore
pressed upon Congress at some length the considerations which
weighed with him in favor of immediate legislation for this
purpose.

A comparison of the reasons urged by Mr. Chase in 1862
with those briefly indicated by him in 1861 shows little change in
his general estimate of the advantages promised by a permanent
system of national banking. He adds in 1862 the consideration
that under such a system the banks could be used safely as
depositories in connection with the Independent Treasury, with
advantages which perhaps experience had finally led him to rate

1 Chase construed the provision of the statute authorizing the sale of bonds " at
the market value thereof" to prevent sales below the current New York quotations,
though in Congress the view was expressed that market rate signified whatever price the
government could secure. Chase was clearly right, for otherwise the provision in question
would have had no reason for its insertion.

^ As in the case of the earlier legal-tender acts, Chase readily acquiesced in the
views of the majority in Congress. In January, 1863, he prepared a bill, in response to a
ref|uest from the Senate Committee on Finance, as a substitute for a pending measure
authorizing a further issue of greenbacks, and his substitute accepted that proposal,
merely adding provisions to facilitate the sale of bonds. — Cong. Globe, p. 270.



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 335

more highly than at first. He also declares his opinion that in
no way can the ultimate resumption of specie payment be made so
certain as by the conversion of the entire paper circulation into
an issue of bank-notes, secured by bonds bearing coin interest.
On the whole the suggested advantages of the sy.stem, although
substantial, are remote. Even the direct gain expected from the
absorption of bonds by the banks is described as a sale amounting
to ^250,000,000 or more " within a very few years," promising,
however, very little aid during the current year, and perhaps not
much for the next. In this part of his recommendation, Mr. Chase,
in December, 1862, was looking far beyond the wants of the mo-
ment, to the time when the legal-tender notes, after serving their
temporary purpose, should have disappeared, and the bank-notes
should have become the sole and permanent currency ; and so far
did he carry his forecast of the future in this respect that he even
took note of the probable payment of the national debt, and the
necessity in this case of finding some new basis for the bank circu-
lation, " But these considerations," he said, " may be for another
generation."

The national currency bill, which by the strong influence of
Mr. Chase and his supporters was passed by Congress and be-
came a law February 25, 1863,^ was framed on the familiar lines
of the New York system, with details perfected by comparison
with the banking systems of other states. It prescribed no limit
for the number of national banking associations, but fixed the
aggregate of notes to be issued by them at $300,000,000. Of this
aggregate one-half was to be apportioned among the states, terri-
tories, and the federal district in proportion to population, and
one-half to have due regard to " existing banking capital, resources,
and business." The notes were to be issued under the superin-
tendence of a Comptroller of the Currency, to be secured by
interest-bearing bonds of the United States, and to be redeemable
in "lawful money," this term including legal-tender notes as well
as specie. The banks were not required, however, to redeem
their notes anywhere except at their own counters. Provision was
made for the organization of banking associations by any appli-
cants who should comply with certain conditions named in the
act, and also for the conversion of state banks into national bank-

1 12 "Statutes at Large," p. 665.



336 ESSAYS

ing associations upon application in due form. By a provision
inserted upon motion of a Senator from New York and but little
discussed,^ it was also provided that any state bank, holding
United States bonds to the extent of one-half its capital, might,
upon transferring the bonds to the Treasurer of the United States,
be authorized to issue notes to the amount of eighty per cent of
the bonds transferred, the notes thus issued being supplied by the
Comptroller of the Currency and payable at the Treasury in case
of the failure of the issuing bank, in the same manner as other
notes issued under the act.

This bill did not pass without difficulty. In the Senate the
vote upon its passage was 23 yeas to 21 nays and in the House
78 yeas to 64 nays. These votes did not closely represent either
political or sectional divisions, members of the same party from
the same state being in some cases upon opposite sides. The
bill had to encounter objections resting upon several different
grounds. Not only was it opposed by some for political reasons
and merely as a measure of the administration, but it was also
viewed with great distrust by others, as a proposition for a vast
financial consolidation, incomparably more formidable than the
former Bank of the United States. The friends of the state banks
eyed it with special jealousy, believing that the two systems,
national and local, could not long stand side by side ; and in this
they were justified by the avowed purpose of Mr. Chase, and by
the strong language of some of his adherents. And among those
who might not have been averse to a national banking system
under some conditions, there was doubt and apprehension as to the
opportuneness and the details of this particular measure. While
the bill was under discussion. Congress was maturing the third
legal-tender act, and the premium on gold, which had passed thirty
in December, was rising from fifty to sixty, passing the latter point
before the vote on the bank bill was taken in the House. The
Secretary had seen in the bill a means for prescribing more surely
for ultimate specie payment ; but, it was asked, what safe reliance
could there be upon a system under which solvency meant sim-
ply payment in depreciating paper and the security against
insolvency was found in bonds which were sinking with the
paper.'' In ordinary times the bill probably could not have made

^ Cong. Globe, February, 1863, p. 850.



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 337

its way against these various elements of opposition ; but no incon-
siderable part of its strength was due to the gloomy circumstances
of the winter of 1862- 1863. In Congress as well as among the
people at large the resolution to stand by the government carried
many to the point of relinquishing private objections to a measure
declared necessary by the administration ; and so the bank bill
gained a majority, not resting altogether upon conviction.

Capital showed but little alacrity in organizing under the bank
act of 1863. Seven months after its passage only 66 banks, with
a capital of little over $7,000,000, had begun operations, and ten
months from its passage only 139, with a capital of $14,740,000,
reported to the Comptroller. The six states, Ohio, Indiana, Illinois,
Michigan, Iowa, and Wisconsin, supplied 35 out of the 66 banks
reporting in October, 1863, and 79 out of the 139 reporting in
January, 1864. At the latter date New England had organized but
14 national banks. New York 16, and Pennsylvania 20. The
Comptroller of the Currency regretted the opening of so many new
banks in states where there was no deficiency of banks already. In
general, in the first year under the new act, a few strong banks had
been established, as the First and Second National Banks of New
York, the First of Philadelphia, the First of Pittsburg, the First of
Cincinnati, and the Plrst of Chicago ; but the existing banks for the
most part held aloof, and new capital came in but sparingly. The
report of the banks in the beginning of April, 1864, showed an



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 35 of 40)