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investment by them in United States bonds of but $41,175,100.
At this time, however, the importance of the new system as a
market for government securities had pretty well disappeared.
The desire of the administration, expressed on every occasion,
was that the great mass of state banks, and especially the strong
institutions in the older states, should be reorganized as national
banks. These banks had already become large holders of govern-
ment obligations, for reasons quite unconnected with any possible
future reorganization under the national system. The depression
of business which continued through the years 1862 and 1863 had
diminished the demand for regular commercial loans, and many
banks with large resources at command found it difficult to
procure the usual amount of business proper. Tempted by the high
rate of income which securities bearing gold interest began to
pay, and anxious to employ their funds, banks were investing



338 ESSAYS

freely in bonds of the United States and also in one-year certificates
of indebtedness issued by the Treasury. In November, 1863, the
banks of Massachusetts, though but three among them were
national banks, owned government securities to the amount of over
$53,000,000; and the banks of New York, city and country,
probably held similar investments to an amount not far below their
capital of $109,000,000. These holdings were unequally distributed,
no doubt, but they far exceeded in the aggregate the amount of
securities which the banks would have been required to deposit
under the national bank act, so that the absorption of the exist-
ing banks by the national system then promised to create little
additional demand for bonds.

The interest in the new system had in fact been concentrated
entirely upon its practical merits and upon the expediency of substitut-
ing it for the state system. From the passage of the act of 1863
the Treasury had pursued the policy of actively stimulating the
adoption of the national system. By a fortunate choice Mr. Hugh
McCulloch, president of the Bank of the State of Indiana, had been
appointed Comptroller of the Currency, — a gentleman widely
known as an experienced and prudent manager and a strong
advocate of a sound currency, originally opposed to the passage of
the act, but finally convinced of its expediency and the wisdom
of its leading provisions. It was characteristic of the policy of
the Treasury as administered by McCulloch, that while the conver-
sion of state banks into national was urged by every argument and
persuasion, those sections of the bank acts which allowed the
deposit of bonds and issue of notes without the abandonment of
state charters remained dormant. The Comptroller, in a public
circular, discouraged the use of these provisions, and although he
admitted that if applications were made he "must obey the law,"
it is probable that his discouragement was in every case as emphatic
as he found necessary for complete effect. It was his opinion
that the state systems and the national could not long coexist ; " one
or the other will fully occupy the field," and he had no doubts
which would and should be the survivor. The issue was made up,
then, in 1863, and the real object of public debate was hencefor-
ward the national system, its merits, and its general adoption.

The year 1863 was therefore a year of discussion, fruitful in
pamphlets, criticisms, and propositions for amending the act. In



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 339

some cases writers, representing large existing interests, showed
a deep distrust for the whole scheme, and were ready to see state
bank issues withdrawn and the field of circulation temporarily-
occupied by Treasury notes, rather than embark the whole banking
capital of the country in an experiment. On all sides defects in
the act were pointed out which justified the reluctance of solid
banks to take out new charters under it. It was urged that the
redemption of bank-notes at convenient centres was absolutely
necessary in order to hold individual banks to any responsibility
whatever and as a safeguard against general overissue. Provision
for requiring the accumulation of surplus, omitted in the act of
1863, was called for to insure* the strengthening of weak banks.
It was pointed out that the act did not make the government
responsible for the safety of the bonds deposited with it, and that
the banks were therefore called upon to entrust a vast amount of
securities to the fidelity of agents over whom they had no control.
The act had authorized the Secretary of the Treasury to employ
national banks as depositories of the public moneys at his discre-
tion, but without any requirement as to security ; and it was
urged that although with proper provisions of this kind the banks
could be used as depositories freely and the proved inconveniences
and evils of the Independent Treasury greatly mitigated, any
system of deposit banks without such provision must be liable to
abuse and would probably be found dangerous. The act had
also made no provision for the voluntary winding up of banks, so
that the extrication of capital from an unprofitable business
appeared to be impossible. In much that was written in that year
it was either assumed or advised that the provisions for the issue
of secured national notes by state banks, contained in the act of
1863, should be retained and brought into use; and the policy of
discouragement pursued by the Comptroller of the Currency,
already referred to, did not escape sharp criticism. There was
also very general condemnation of the practice adopted by the
Comptroller, apparently without warrant of law, of requiring all
banks reorganizing under the national act to give up their dis-
tinctive names and become simply the First, Twentieth, or Fortieth
National Bank of some town or city, as might happen. The
names of established banks represent a good will and an earned
reputation and credit. They are also a security for the public,



340 ESSAYS

who know banks by name for good or ill, but cannot have
an equal familiarity with a list of mere numbers. The Comp-
troller had urged as a reason for requiring the use of numbers
instead of names by reorganized banks that all who came under
the system had an interest in " making it symmetrical and harmo-
nious, as well as national," but it was difficult to believe that this
was all ; and, with the strong objection to partial loss of identity felt
by the banks, there was also a certain vague impression that
something more than met the eye was implied in the proposition
to make them all indistinguishable members of a vast system hav-
ing its centre of control at Washington.

At the session of 1 863-1 864 Congress proceeded to revise the
whole system in the light of the year's experience. A bill for that
purpose was reported March 13, 1864, and from that time the
subject was before Congress, in one form or another, until the
final votes of the two Houses on May 31 perfected the measure,
under which the national banking system was at last fully estab-
lished. ^ Many of the suggestions brought forward in popular dis-
cussion had been adopted by the Comptroller and recommended in
his annual report at the beginning of the session, and others were
adopted by Congress upon advice received from other sources.
The law was completely recast. The provision for apportioning
the ^300,000,000 of circulation among the states was repealed ; it
was provided that only registered bonds should be deposited as
security, and that the property of the banks should thus be made
safe while in the hands of the government ; redemption of notes
by every bank in some reserve city, as well as at its own counter,
was provided for ; the accumulation of a surplus equal to at least
one-fifth of the capital of any bank was required ; provision was
made for requiring full security from banks used as depositories by
the Treasury ; the provisions as to the amount of capital and the
terms on which a bank could begin its business were somewhat
strengthened ; and in short the whole system was made firmer and
more harmonious. Without entering into the details of the legisla-
tion, it is enough to say that in the act of June 3, 1864, the na-
tional banking system took the form which in essentials it still
retains.

In its provisions with respect to the state banks the act of

^ 13 " Statutes at Large," p. 95.



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 341

1864 made two significant changes. It provided expressly that
state banks reorganizing under the national system might come in
under their former names and without change in the amount of
their shares. Special provision was even made for the exemption
of stockholders from personal liability, under conditions intended to
meet the case of the Bank of Commerce of New York and in fact
applicable to no other.^ The sections, however, which allowed the
issue of secured national currency to state banks were omitted in
the revised act, and thus Congress planted itself finally on the
ground of an exclusively national system, and invited the adhesion
of all existing banks, but rejected any connection short of complete
responsibility to national authority. No special taxation was pre-
scribed for the purpose of compelling the adhesion of distrustful
or reluctant banks, but the language used by the advocates of the
new law left little room for doubt that such measures would follow.
For the present it was enough that the current of public opinion
was setting in favor of the national system, and that many who had
once opposed it now accepted the settled policy of the government,
and withdrew their opposition.

The hesitation of the state banks as to reorganizing under the
national system began to give way in the summer of 1864. The
discussion of the system in Congress and the adoption of the amended
act removed many special objections to the law, and made it cer-
tain that final acquiescence would be the only condition on which
the right of issue could be enjoyed. The financial strain of the
war and the depreciation of the currency, shown by the price of
gold, which fluctuated violently between 200 and 285, had put an
end to all probability of an early recovery, and made a long de-
pendence on legal-tender paper of uncertain value altogether
likely. To adjust themselves to the present state of things began
then to be thought wise by many who had hitherto maintained a
merely expectant attitude. The announcements of intention to
reorganize began to be frequent in June and July. At the close
of November the Comptroller reported that 584 national banks
were in existence, of which probably about one-third were reorgan-
ized state banks ; and he was able to say that of the last 100
banks organized, 6y were state banks, that nearly all the bank-

1 This exemption applied to existing state banks having a capital of not less than
^5,000,000 and a surplus of twenty per cent.



342 ESSAYS

ing capital of Philadelphia had then been reorganized, and that
of the numerous apphcations then coming in most were for the
conversion of old banks. It was noticeable, however, that at
that time only one of the banks in New York City had reorganized,
although several new banks had been established under the
national system. Indeed, the Comptroller was plainly embar-
rassed by the hostile influence of the banks in New York ; for
after noticing the fear of some that the national banks might
reproduce the evils of the weaker state banks, he remarked in
thinly veiled language that these apprehensions, entertained " or
professed to be entertained by the bankers of a state, in which a
system similar in some of its main features was in practical opera-
tion, intimidated for a time the capitalists of other states, and
retarded the reorganization of state banks." A group of New York
banks, however, took steps looking in the direction of reorganiza-
tion in December;^ by the end of that month 21 of the Boston
banks had reorganized, and the stream of applications soon be-
came so strong that nearly 500 banks were chartered in the five
months from December i, 1864, a large proportion of them being
state banks reorganized. The change from the old system to
the new went on throughout the year 1865, and at the close
of December was nearly complete, 1582 banks then reporting
to the Comptroller, of which more than 900 were formerly state
banks.

Several influences had expedited this change. In the states
having a large amount of bank capital, enabling acts had been
passed in many cases, authorizing incorporated banks to exchange
their state charters for those of the United States without disso-
lution or winding up, thus preventing the expense, interruption to
business, and loss incident to the collection and distribution of
assets which would otherwise have been necessary upon the cessa-
tion of corporate existence under state laws, and making the reor-
ganization a merely formal proceeding which left the identity of
a bank unchanged. Acts of this sort were adopted in 1863 and

1 The Fourth National, the first bank with large capital to be organized in New
York under the national system, was due to the influence of Jay Cooke ; and the fear of
the formation by him of a bank with a capital of ^50,000,000 is said by Mr. Cooke to
have been a factor in the change of policy of the other banks. See " A Decade of
American Finance," North American Review, November, 1902. — Editor's Note.



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 343

1864 by Massachusetts, Connecticut, and Pennsylvania, and early
in 1865 by Maine, Rhode Island, New York, New Jersey, Mary-
land, and Indiana, In some states, also, as in Massachusetts, the
neglect or disinclination of the legislature to repeal the special tax
laid by the state upon its banks had a serious effect in turning
the scale in favor of change.

Far more important, however, was the influence exerted by the
belief that Congress would take steps to drive from the field all
notes issued by state banks, and the passage of a measure for this
purpose, to take full effect in 1866. The Comptroller of the
Currency, in the first year of the new system, had refrained from
advising any such action, but in his report of 1864 he clearly
expressed the opinion that the time had come for Congress to
compel the withdrawal of all state issues.

When the bill amending the internal revenue act came
before the House at the session of 1 864-1 865 this subject
was discussed in a somewhat desultory manner, and opinion
was found to be evenly divided, but the House finally, on February
18, by a vote of 68 to ^y, inserted in the bill a section im-
posing a tax of ten per cent on all state bank notes paid out
by any national or state bank after January i, 1866.^ The bill
then went to the Senate, and on March i a motion to strike
out this section was refused by a vote of 20 to 22. On the next
day the section was amended by substituting July i for January i
as the date when the tax should take effect, and a motion to
strike out was then refused, 17 to 21. This amendment was
assented to by the House upon the report of a committee of con-
ference, and the section accordingly became a part of the internal
revenue amendment act, approved March 3, 1865, It was looked
upon by all parties as the natural sequel of the national bank acts,
delayed by doubt or policy for a time, but in fact a vital part of
the scheme. It suppressed the state bank notes by destroying the
profit of issue, but it avoided the severity of some propositions for
the same object, which would have taxed outstanding circulation,
or would have taken effect earlier ; and this degree of moderation
was apparently necessary for the success of the measure in either
House. Adopted at a moment when the establishment of the
national system was well advanced, the section stood as a threat

^ 13 " Statutes at Large," p, 484,



344 ESSAYS

for the next sixteen months ; and when at last it took effect, the
state bank issues were rapidly disappearing.

There is no doubt also that the high premium on gold from
the spring of 1864 to the spring of 1865 had an important influ-
ence in bringing many banks to an immediate decision of the ques-
tion of reorganization. When the suspension of specie payments
took place, the banks in twenty-two loyal states, excluding those
on the Pacific coast, held not far from $76,000,000 in specie, of
which the banks of Boston, New York, and Philadelphia held
$33,000,000. During the year 1862 the holdings for all the states
referred to were above $81,000,000, and the banks in the three
cities at the end of the year had a specie reserve of $48,000,000.
The high rates for gold which prevailed throughout 1863 tempted
many banks to sell their coin, and probably caused a considerable
redistribution of that which remained; but in January, 1864, the
banks in the three cities still held $37,000,000. Gold was then quoted
at one hundred and fifty-one, but it soon began to advance rapidly.
On the 2 1st of June it passed two hundred, and with violent fluctu-
ations remained above this point for most of the time until March,
1865. There was plainly a strong inducement for banks holding
large stocks of gold but carrying on their business upon the paper
basis, obliged to receive legal-tender notes in all payments, and
not bound to make payment in any other medium, to sell their
specie for legal tender at these high rates. So long as any need of
preparation for eventual specie payments had been felt to exist, or
so long as further advance in the premium on gold was looked for,
the specie might well be held; but as affairs stood in the summer
of 1864 it is not surprising that the disposition to collect the profit
to be made by the sale of gold began to strengthen.

Not a few of the more conservative managers of the banks
saw with regret this tendency to place the whole business of
banking upon the paper basis and were reluctant to admit that
all the responsibility for facilitating an ultimate return to the
specie standard could be thrown upon the government. From
several quarters the proposition was made that the national banks
should be required to accumulate as a specie reserve some part
of the coin interest received by them on the bonds deposited to
secure their notes. The New York Clearing-house banks pro-
posed a small accumulation of this kind, which was rejected by



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 345

the House without a count. In the Senate, Mr. Collamer of
Vermont proposed that one-half of the coin interest should be
added by the banks to their reserves until the entire reserve
required by law should consist of coin. Amended so as to require
but one-fourth of the coin interest to be so retained, Mr. Col-
lamer's proposition was rejected by a vote of 15 to 20; and thus
the amended law of 1864 went into effect in a form which com-
pletely ignored the question of providing for a return to specie.
The banks sold their gold freely as a preparation for reorganizing
under the national system, and the gold thus released swelled the
strong current of exported metal, forced out of the country by the
paper currency in the years 1864, 1865, and 1866. By July, 1865,
the specie held by the banks in the three cities, Boston, New
York, and Philadelphia, had sunk to ^20,000,000, and by January,
1866, the aggregate of specie held by the 1582 national banks of the
United States was under $20,000,000, and so far as shown by the
quarterly reports it remained below this point until 1868. In some
cases the profit reaped by the banks from the sale of their specie,
with other undivided profits already in hand, was paid out as an
extra dividend to stockholders upon the surrender of the state
charters ; in others it was used as the foundation for the surplus
which national banks were required to accumulate to the extent
of one-fifth of their capital, or was added to surplus funds already
held ; and in others still the opportunity was taken to increase
capital by making stock dividends.



THE CIRCULATION OF THE NATIONAL BANKS,

1865-1900^

The effects of the rapid conversion of state banks into national
were visible for many years, in the unequal distribution of capital
under the national system between the several states and sections.
The amended bank act of 1864 repealed the provision for ap-
portioning the $30o,ooo,ocxD of bank circulation among the states,
and early in 1865 it began to be seen that, by the conversion en
masse of the banks in states well provided with banking capital,
the limit of aggregate circulation was likely to be reached so
soon, as to leave little opportunity for the enjoyment of the
right of issue in states where the number of banks already
organized was small. By a mistake of administration, an effort
made by Congress to provide for this possibility only hastened
the absorption of the right of circulation by the states which
could most easily make use of it at short notice. A clause
in the act of March 3, 1865, for amending the bank act, re-
vived the provision by which circulation should be allotted to
banks in the several states, one-half according to population
and one-half according to existing banking capital, resources, and
business.'-^ In the internal revenue amendment act of the same
date, however, a section was inserted providing that any state
bank having a capital of $75,00x3 or more, applying before the
first day of July, 1865, for authority to become a national bank
and found to be in good credit, should receive such authority in
preference to new banks applying for the same.^ It was clearly
possible to interpret the two provisions so as to give effect to
both, by simply giving the banks already existing in any state
the preference in allotting the circulation apportioned to that
state ; and the two acts being of even date and neither provision
purporting to limit or control the other, it was plainly the duty
of the treasury authorities to execute both.

1 See note, p. 314 above. 2 j-^ « statutes at Large," p. 498. ^ I/>id., p. 469.

346



THE CIRCULATION OF THE NATIONAL BANKS 347

Mr. Clarke, the Comptroller of the Currency, however, with the
approval of Mr. McCulloch, who had then become Secretary of
the Treasury, adopted a course which rendered the provision for
apportionment entirely nugatory. Starting from the correct
assumption, that it was the purpose of Congress as well as of the
administration to effect the general conversion of the state banks,
the comptroller proceeded to give to existing banks coming under
the national system authority for the issue of currency, as fast as
they applied, without regard to the provision of law limiting the
amount to be allowed to any one state. The states, which already
had much banking capital and were ready to move at once, had
therefore the good fortune to see their banks easily provided with
the right of issue, while the states which came later, or which had
to organize new banks, soon found the aggregate so far filled up as
to leave little or no room for them. The fact that the preference
allowed to existing banks was confined to such banks as should
apply before July i hastened the applications, and therefore some
time before that date was reached the elaborate apportionment of
circulation contemplated by Congress had been buried beyond the
possibility of resurrection. ^ As early as June 10, 1865, more than
^250,000,000 out of the aggregate of 1^300,000,000 had been author-
ized. Massachusetts, Rhode Island, and Connecticut, where the
existing banks had gone over to the national system almost in a
body, were entitled under the legal apportionment to less than
$34,000,000, but had received authority for $85,000,000. New
York, New Jersey, Pennsylvania, and Ohio had more than filled
their legal quotas ; the West and Northwest, Indiana and Minnesota
excepted, generally were still short of theirs ; and the states in
the South and the states and territories west of the Missouri en-
titled to nearly $100,000,000 had received authority for only about
$5,000,000, of which nearly three-fourths was in Kentucky and
Missouri.^ From the 22d of May, banks in New York, Philadel-
phia, Providence, Boston, and Hartford, applying for conversion,
were called upon to waive their rights to ask for currency in excess
of one-third of their capitals ; but it was then too late to do much

^ In a debate in the Senate, a few years later, Mr. Sherman declared " that this
whole difficulty grew out of a disregard of the law ; that it was not the defect of the



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 36 of 40)