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law, but a violation of the law." — Cong. Globe, January 24, 1870, p. 699.

2 Bankers' Magazine, July, 1865, p. 54.



Quota if


Amount


apportioned


issued


In millions


In millions


$45-7


$103.5


94-9


124.2


28.3


30-7


37-7


18.9


22.


3-6


66.2


6.9



348 ESSAYS

more than take precautions against overrunning the aggregate of
$300,000,000. Apparently not all of the circulation, applied for
and at first allotted in these hasty proceedings, was actually issued ;
but a startling result showed itself in October, 1866, when $292,-
673,000 of notes had finally been given out for circulation. The
allotment between certain groups of states then stood as follows i^ —



Of states having an excess :

Six New England

Five Middle ....

Ohio, Indiana, Minnesota .
Of states deficient :

Six Western ....

Kentucky, Tennessee, Arkansas .

Nine Southern, Atlantic, and Gulf

It is probable that in this remarkable disregard of the rule of
apportionment laid down by Congress, both the Secretary of the
Treasury and the Comptroller of the Currency were taken by sur-
prise by the extent and rapidity of the movement for the conversion
of state banks, and that they also had a mistaken belief that, after
all, the resulting disproportion would not be of long duration. The
fact already noticed, that a large number of the Eastern banks
applying to be admitted as national banks late in May, 1865, were
induced to agree to a reduction in the amount of circulation which
they could claim, indicated that the demand for the right of circu-
lation by the Eastern and Middle states had gone beyond the
amount which could be readily used. For several reasons, more-
over, the authorities at the Treasury may have underrated the real
importance of the inequality which they were sanctioning. It was
the opinion of the Comptroller that the establishment of an effec-
tive system of central redemption for national bank-notes would
materially curtail the issue, and would destroy the interest of
many banks in keeping up a large circulation.^ An active move-

1 The quota for every state, if ^300,000,000 of circulation had been apportioned
according to the act of Congress, is shown in 7 Home Exec. Doc. No. 33 of 1865-1866.
The amount issued to banks up to October i, 1866, in the aggregate, ;?292,673,ooo, is
given for every state in the Cojnptroller' s Report for that year, p. 66.

2 See Comptroller's Report for 1865, p. 6 ; and also a letter by the Comptroller,
dated July 15, 1865, in the Bankers' Magazine for September, 1865, p. 205. Mr. Hurl-



THE CIRCULATION OF THE NATIONAL BANKS 349

merit was then in progress for establishing such a system, and for
maintaining assorting houses in New York, Boston, and Phila-
delphia, from which all notes of banks not providing for the par
redemption of their notes in one of these three cities should be
promptly sent home for payment.^ The general principle of this
scheme appears to have been sanctioned by the Secretary, and the
expectation of some such action was assigned by the Comptroller
as a ground on which some banks, unable to secure any part by
the right of issue, might hope to obtain a share at a future time.
The effect of a system of real redemption in sending home the
notes of any bank after a brief currency, may therefore very well
have been counted upon as a probable discouragement of weak
banks, and as likely to make the original allotment of the right of
issue, in part at least, merely provisional.

It must also be borne in mind that in the spring and summer of
1865, the expectation of an early movement toward specie pay-
ment was general. The Secretary of the Treasury was strongly
in favor of such a movement, and in his report in December even
fixed upon January i, 1868, as the date at which he believed redemp-
tion practicable.^ Although in the winter of 1 865-1 866 he had
the mortification of seeing developed in Congress a serious opposi-
tion to his efforts in this direction, and was forced to submit to a
jealous limitation of the powers which he thought necessary for
his purpose, still, for many months after the close of the war in
April, 1865, he was strong with the public and confident in his
policy, and he even appeared to have the support of Congress
when it met in December. With the expectation then that specie
payments were not far distant, he may easily have believed that
the bank circulation would soon right itself by the disappearance
of all provisions for any limit of the total amount of bank-notes.
The national bank act was so drawn as to adapt itself in all other
respects to the state of things in which coin should become the
only legal tender, and Mr. McCulloch therefore not improbably
believed that free banking would soon supersede the embarrassing

burd, who was Deputy Comptroller in 1865, and afterwards Comptroller, urged the im-
portance of the central redemption and its restrictive influence in all his reports from
1866 to 1870.

^ For the action of the banks of the three cities on this subject, and for a letter by
Mr. McCulloch, see Bankers' Magazine, 1865-1866, pp. 193, 401, 415.

2 See Finance Report, 1865, p. 36.



350 ESSAYS

provisions of the existing act. Entertaining such a belief, he was
not by nature the man to be strict as to the precise terms of the
authority upon which his powers rested. It may also have been
thought that the agricultural states of the South and West would
not be able to use their quota of circulation without a good deal of
delay, and the relief of resumption would be early enough to meet
their needs. Considerations of this nature were no doubt strength-
ened by the fact that to limit the circulation of banks in the East-
ern and Middle states to the proportion required by Congress would
have caused a heavy reduction of the bank circulation enjoyed by
those states for many years under the system of state banks.

The attainment of the limit of aggregate circulation instantly
checked the growth of the national banking system, as regards the
number and capital of the banks organized. 1644 national banks
reported to the Comptroller October i, 1866; the number rose
slightly the next quarter, and then fell off, became stationary, and
at last declined, until in October, 1870, it was 161 5, sixty banks hav-
ing in the meantime gone into voluntary liquidation. The capital
of the banks rose from ^415,050,000 to the neighborhood of
^420,000,000, where it stood until near the middle of 1 869. These
figures sufficiently show the restraint upon the organization of new
banks, at a time when dividends averaging ten per cent and a con-
siderable increase of surplus showed that the banks organized
under the system were in the main prosperous. But this restraint
was felt in different parts of the country in very unequal degrees.
In the Eastern and Middle states, although the wealth and activity
of the community gave them a wide field for the employment of
banking capital, the large share of circulation which they had ob-
tained under the national act gave them a provision adequate to
their needs for several years. The greater density of their popu-
lation, moreover, would have made it easier for them in any case
to supply deficiencies by banks of deposit and discount under
state laws or by trust companies, the convenience of which for
some banking purposes was then beginning to be understood.
But in the West and Northwest the condition of things was far
different. Those sections felt the keen stimulus to enterprise
which the restoration of peace had brought with it. Their popu-
lations were once more rapidly increasing by immigration ; their
railway systems were opening up new territories with feverish



THE CIRCULATION OF THE NATIONAL BANKS 351

haste ; and there was every presage of a period of wonderful
growth. But the increase of banking which should normally
attend and foster this development was practically impossible.
For the multiplication of banks of issue there was no room under
the national system, and mere banks of deposit and discount
under that system neither answered the needs of the community,
nor presented attractions to capital. In the group of Western
states already noticed as deficient in bank circulation in October,
1866, there was, therefore, a gain of only three national banks in
the next four years. The gain in circulation in the same states
was for the same period only $5,000,000, in spite of the most
ingenious and sometimes costly efforts to secure the rights sur-
rendered by banks going into liquidation or contracting their
business.^

With the central Southern states and those of the Southern
Atlantic and Gulf group, the case was even worse. Many of those
states had been devastated by the war and all of them had suffered
heavy losses of property. Their social and industrial systems had
been overturned and, with everything to be reconstructed, they
were harassed by misfortune, political as well as economic. In
any case, they must have been slow in rebuilding their banks and
probably dependent in good degree upon the reluctant aid of out-
side capital. It is doubtful whether, if entire freedom of organiza-
tion had then existed, the South could in those years have done
much toward the extension of its banking upon any sound basis.
Before this could be accomplished time was needed, not only to
repair the losses of the war, but to secure political peace and con-
fidence in the future, and to enable the South, moreover, to regain
possession of its own state governments. There is little question,
however, that the process of financial reconstruction was made
slower and more difficult by the impossibility of securing any rea-
sonable share of the right of issue. In the four years from Octo-

1 Mr. Sherman asserted in the Senate in June, 1868, that " there are banks in exist-
ence in the Western states that have paid from ten to forty thousand dollars in New
England and New York for the privilege of starting banks whenever banks there have
failed." Mr. Pomeroy added that " the banks of the West have been compelled to buy
the circulation of New England and New York and pay three and four per cent for it."
Co7ig. Globe, 1867-1868, p. 3187. In 1872 the rate paid to brokers for notes of banks
closing or insolvent, was said to be " from four to six per cent." — Finance Report, 1872,
p. 74.



352 ESSAYS

ber, 1866, the nine Southern states on the coast lost five of their forty-
eight banks, and gained less than $2,000,000 in circulation. The inte-
rior group, Kentucky, Tennessee, and Arkansas, gained nine banks,
chiefly of small capital in Tennessee, but with an increase of circula-
tion of only $700,000. Whether the South could otherwise have
availed itself of the national system to any great extent or not, it
appeared to be practically cut off from making the trial, by the
absorption of the right of issue in the North and East.

It must not be forgotten, however, that even if the apportion-
ment had been carried out in strict compliance with the terms
of the law, the evils complained of would only have changed their
place without being prevented. The theory on which Congress
proceeded, of allotting the right of issue, in proportion partly
to population and partly to an indefinite basis of estimated capital,
could never have distributed the note issue in the proportion in
which it would have distributed itself if left entirely free. Probably
the existing banking capital and surplus would have made a much
nearer approach to a natural allotment than the basis proposed by
Congress, since it represented more nearly the essential needs and
capacities for banking as they then existed in the several parts
of the Union. The allotment of a limited amount of circulation
upon the basis adopted by Congress would have given the South
and West freedom for bank expansion, which they might or might
not have used, but would have compelled a heavy reduction of
banking facilities in the Eastern and Middle states, not only
checking their natural growth, but causing a positive diminution
of existing financial machinery. The conditions of the case pre-
sented a dilemma, therefore, from which there was no escape so
long as the limit upon the aggregate issue of bank-notes should
remain.

The course pursued by the Comptroller, as has been seen, threw
the pressure of a limited right of issue upon the South and West.
The sections thus harshly treated were not slow in making their
complaints heard. Little notice was taken of the subject in the
reports of the Secretary and Comptroller for 1865, but some effort
was made in Congress at the session of 1 865-1 866 to find a remedy.
The choice lay between an increase of the aggregate issue and the
withdrawal of circulation from states having an excess under the
rule established by Congress, and its distribution among those found



THE CIRCULATION OF THE NATIONAL BANKS 353

deficient. The latter expedient met strong opposition from the
states which would have been drawn upon for the supply of the
others ; and an increased total issue was also opposed as threaten-
ing a multiplication of the obstacles to early specie resumption.
Congress found it impossible, either at that session or at several
succeeding sessions, to act upon a question thus beset with dififi-
culties. At the session of 1 867-1 868 a bill passed the Senate,^
withdrawing and redistributing ^20,000,000 of bank circulation ;
but the House at the next session substituted for this plan a pro-
vision for the allotment of ^150,000,000 of circulation according
to the appraised value of property in the several states,^ and the end
of the session found the two Houses in hopeless disagreement.^
At the spring session of 1869 the Senate passed a bill redistribut-
ing ^30,000,000,* but no action was taken upon it in the House.

At the session of 1 869-1 870 the subject again came up and,
after much debate and a series of disagreements between the two
Houses, a bill was framed to reconcile the differing opinions of
those who agreed as to the necessity for some action for the relief
of the South and West. Under two acts passed in 1867 and 1868
Congress had authorized an issue of temporary loan certificates, to
be used in redeeming certain legal-tender compound-interest notes
issued in the latter part of the war. These certificates, bearing
interest at three per cent, by the terms of the act authorizing their
issue could be held by banks as part of their reserve, and were still
outstanding to the amount of $45,500,000. The withdrawal of this
amount of paper serving one of the purposes of money was accord-
ingly proposed as an offset for an increase of national bank-notes,
and upon this basis Congress passed the act of July 12, 1870.^ This
act provided that 1^54,000,000 of bank-notes might be issued to
banks in states having less than their due proportion under the
act of 1865, and that the three per cent certificates should be
called in and redeemed as fast as the bank-notes should be issued.
This operation completed, a further amount of $25,000,000 was
then to be withdrawn from states having an excess of bank cir-
culation, and issued to banks in states having less than their due
proportion ; and provision was also made by which, in addition,

1 Cong. Globe, 1867-1868, p. 3222. * Ibid., 1869, p. 371.

2 Ibid., 1868-1869, p. 1333. 5 16 " Statutes at Large," p. 251.

3 Ibid., p. 1897.

2 A



354 ESSAYS

banking associations might be moved from any state having an
excess of bank circulation to any state found deficient.^ The same
measure provided for the estabhshment of gold banks, issuing
notes redeemable in gold coin upon the security of United States
bonds, and in other respects carrying on their business upon a gold
basis. This addition to the national system was made in view of
some supposed needs in the Atlantic ports and also of the anoma-
lous condition of the Pacific states, where, by popular will, aided
by local legislation, the gold standard had been retained during and
after the war.^ It was in fact an experiment in free banking on the
specie basis.^ The gold notes to be issued were not subject to any
aggregate limit, and their introduction was not looked upon as hav-
ing any relation to the questions raised by the mass of inconvert-
ible paper. The establishment of such a system carried with it,
however, some implication that the redemption of the remainder
of the national currency in specie was now felt to be too remote
to be counted upon. This impression was confirmed by the course
of debates on the various plans for a redistribution of the national
bank issues, and by the strength of the minority which favored the
plan of giving relief to the South and West by some form of paper
expansion.

There was no delay in taking advantage of the act of 1870.
When the Comptroller made his next report, dated November 7,
1870, thirty-one banks had already been organized under the new
law, and two hundred and fifty applications were on file. Many
of the latter were believed to be speculative or unsupported by
capital ; but it was clear that a considerable movement had
started."^ Of the banks organized twenty were in the Western
states, eight in Kentucky and Tennessee, and only three in Vir-

1 The Senate had proposed an increase of $45,000,000, and the House $95,000,000.
The Senate conferees agreed to $54,000,000 as the equivalent of $45,000,000, and of the
reserves, estimated at 20 per cent, which the banks would have to keep ; and this calcu-
lation was accepted on the part of the House. — Cong. Globe, July 6, 1870, p. 5285.

'^ See an article by Professor Moses, " Legal-tender Notes in California," in the
Quarterly yournal of Economics, October, 1892.

8 The bill as passed by the Senate provided that the notes should be redeemed in
" gold or silver coin." " But," said Mr. Garfield, one of the conferees on the part of the
House, " we strike out the words ' or silver,' so that there shall not be two metals named
as the money in which the notes shall be redeemed. Silver is not, under our laws, a
legal tender except for sums of five dollars or less. To this modification the Senate
agreed." — Cong. Globe, June 28, 1870, p. 4949. * Comptroller's Report, 1870, p. 25.



THE CIRCULATION OF THE NATIONAL BANKS 355

ginia and Georgia ; but of the applications nearly one-fourth,
representing one-third of the capital called for, were from the
Southern coast states. The movement thus begun went on, until
at the close of 1873 Mr. John Jay Knox, who had then become
Comptroller of the Currency, reported that all but a small fraction
of the additional $54,000,000 had been issued or authorized, and
that he should next proceed to the withdrawal of $25,000,000 of
circulation from the banks of Massachusetts, the city of New
York, the city of Providence, and Connecticut, and its allotment
among banks in states having a deficiency. This allotment it was
necessary to make, under the terms of the act of 1870, on the basis
afforded by the census of that year, and the Comptroller had already
given a table in his report for 1872, showing the circulation then
actually authorized and the allotment of $354,000,000 which would
be required under the law of 1865.^ This table and the returns for
1870 and 1873 enable us to make the following comparison : —

Of states having an excess in 1866:

Six New England .

Five Middle ....

Ohio, Indiana, Minnesota
Of states deficient in 1866:

Six Western ....

Kentucky, Tennessee, Arkansas

Nine Southern, Atlantic, and Gulf . 6.1 16.6 47.8

These figures show plainly the strength of the demand for
banking facilities in the deficient sections. They also show the
singular crudity of the expedients by which Congress had under-
taken the apportionment of bank circulation. Upon a mixed
basis of population and resources the West, even with the relief
afforded by a fresh allotment under the new census, was sure to
find its proportion under the law too narrow for it ; and the South
was as certain to find it impossible to use its quota, even when

^ The acts of 1863 and 1865 called in identical words for the apportionment of half
of the issue, " having due regard to the existing banking capital, resources, and business "
of the states. In 1872 Mr. Knox, after consultation with the Secretary of the Treasury,
contented himself with using the reported valuations of the states found in the census, in
satisfaction of the above requirements. See Finance Report, 1872, p. 72. In 1865
Secretary McCuUoch made an allotment which is not to be reconciled with the valua-
tion of i860.



Circulation


Circulation


Circulation


October i, 1870


November i,


1873


if Apportioned


. 104.5


no. 5




39-8


. 125.4


124.6




115. 2


• 31-


41.9




43-9


• 24.7


42.5




43-9


4.1


II. 2




21.5



356 ESSAYS

reduced in accordance with the diminished importance of those
states. It is easier, however, to see the defects of the method
adopted than to imagine a substitute which would have made any-
satisfactory allotment of a limited right of issue. As regards the
mere use of the bank-notes as currency, they flowed like the legal-
tender notes with the current of mercantile payments, and the place
of issue was as little important in the one case as in the other.
Once in circulation, a bank-note passed from hand to hand without
inquiry as to the particular bank from which it was issued. Its
source was easily seen, but in the absence of any effective redemp-
tion there was no motive for returning it thither, and so it passed
as an undistinguished drop in the ocean of paper currency. As
early as 1868 the Comptroller complained that even the notes of
banks in liquidation were not presented and that the owners of
such banks were able to reap all the benefit of their circulation
after they had ceased to carry on any real business ; and it was to
meet this evil that the act of July 14, 1870, was passed, requiring
all banks in liquidation to deposit lawful money and withdraw their
bonds from the Treasury within a fixed limit of time.^ This legis-
lation hastened the settlement between the issuing banks and the
Treasury, but the notes, whether issued by active or by defunct
banks, still gravitated as slowly as ever toward the place of redemp-
tion. In short, the bank-note was nearly as destitute of any domi-
cile as coin itself, and therefore it followed that, of the whole mass
of currency afloat at any given moment, any particular state en-
joyed only such proportion as it was entitled to by its financial
relations with other states and sections, as it might in the case of
coin or of legal-tender notes. The debtor states were deficient in
anything that could serve as a medium of payment, and the creditor
states found currency abundant. It is not to be supposed then that
the South or any part of the West really had less currency for use
by reason of their failure to obtain their proportion of the right of
issue.

Those states undoubtedly suffered from a lack of general bank
accommodation. The requirement made by the law that every
national bank, whether issuing notes or not, should qualify itself
for issue by a deposit of bonds equal to at least a third of its
capital, was by itself a serious drawback for banks in most parts

1 16 "Statutes at Large," p. 274.



THE CIRCULATION OF THE NATIONAL BANKS 357

of the North and West, for it diverted an important fraction of their
scanty capital from its primary function as a supply of loans for
the local demand. For city banks, deriving any considerable aid
from deposits, this locking up of capital might not be a serious
difficulty, but for banks in sparsely settled districts it made the
situation difficult. When failure to obtain the right of issue was
added to the diversion of capital from loans to bonds, the country
banks found themselves practically excluded from the national
banking system and sometimes from all banking except as private
banks. State banks under imperfect regulation or private bankers
were then the chief resort for the deficient states and sections.
Hampered in some degree these states and sections probably would
have been in any case, being poor in capital and, at least in the
South, unable for a time from poHtical causes to secure a free
supply of capital from outside; but their situation, unfavorable
in any case, was made far worse by the singular manner in which
the law had been made to operate upon them.

With the great financial revulsion of 1873 the national banks
and the legislation of Congress for their regulation entered upon



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