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a new stage of development. The complete prostration of busi-
ness from the latter part of September, 1873, instantly checked
the establishment of new banks, so that a comparison of the
returns of September 12, 1873, and June 26, 1874, shows an
increase of only seven banks and an absolute loss in both capital
and circulation. A comparison by states shows that the sudden
loss of inducements for the investment of capital in banking was
universal. To a large party in Congress, however, this continued
depression appeared to be the result of a deficient circulation, and
not of that loss of confidence which must follow a panic under any
system of currency whatever ; and the assembling of Congress
was the signal, therefore, for a multitude of propositions for the
increase of paper issues, for their extension, especially in the states
poor in capital, and for warding off the supposed evils of contrac-
tion and approach to the specie basis. On the other hand, the
advocates of specie payments found the moment opportune for
pressing the argument that the destruction of credit and the depres-
sion of prices by the financial panic had already done the worst
that could be feared from contraction, and that there was neither
excuse for delaying resumption nor safety to be found without it.



358 ESSAYS

A wearisome debate of several months produced a bill for increas-
ing the issue of legal-tender notes and of bank-notes to $400,000,000
each, and this measure was vetoed by President Grant, after some
vacillation which had nearly caused his approval of the measure.
Congress, then, after two months of further consideration, passed
a bill which became a law June 20, 1874, by which $30,000,000 was
added to the sum of $25,000,000 which, under the act of 1870, was
to be withdrawn from banks in states having an excess of bank
currency under the legal allotment and distributed in states found
to be deficient.^ The act further provided for discontinuing the
redemption of bank issues by agents in the redemption cities, and
substituted the method of actual redemption at the Treasury of
the United States, every bank being required for that purpose to
maintain in the Treasury a deposit of cash equal to five per cent
of its outstanding circulation.^ The law also made an important
provision for the relief of banks which found the right of issue
unimportant, by authorizing any bank, upon the withdrawal or
reduction of its circulation, to reduce its deposit of bonds to any
amount not less than $50,000.

Of these provisions of the act of 1874, those relating to treasury
redemption and to reducing the deposit of bonds are still in force
and have never ceased to be regarded as valuable improvements,
defective only from their failure to go far enough. Although suc-
cessive Comptrollers have seen in treasury redemption only a pro-
vision for securing a physically clean issue of notes, it has been
the means of sifting out from the mass of notes somewhat more
certainly and expeditiously the issues of insolvent or closing banks,
and has also done something to maintain the theory of a system
of central redemption, which a turn of affairs might almost any day
have made important. The diminution of the compulsory invest-
ments in United States bonds was a step toward freeing the banks
from making more use of the right of issue than their business
naturally required. Banks of small capital, required to invest one-
third of it in bonds, were left under the necessity of using the
credit which so large an investment would afford.^ Still, the act

1 18 " Statutes at Larj^e," p. 123.

- The notes ceased to be subject to the general reserve requirements which had
hitherto applied to them as well as to deposits.

^ Mr. Knox, the Comptroller, had advised, in 1872, that the rc(]uirement be reduced
to a deposit of ;?io,oop of bonds.



THE CIRCULATION OF THE NATIONAL BANKS 359

of 1874 left the larger banks, for whom ^50,CK)0 invested at a low-
return was not so serious a matter, more freedom of action than
had been allowed them before, and so had some tendency to dimin-
ish issues in the important banking centres, and, therefore, to
make room for increase of issues elsewhere.

So far as the act of 1874 provided for the redistribution of a part
of the bank circulation, it followed the Hne marked out by previous
legislation, and endeavored by small and temporary adjustments to
arrive at such an apportionment of a limited issue as should satisfy
the most clamorous of present needs. If the new provisions
had been long-lived, the question of some fresh adjustment must
have come before Congress before long in the familiar form of a
contest between the thriving younger states and the richer banking
communities of the East; but happily the moment was near when
decisive measures for the return to specie payment destroyed all
anxiety as to the allotment of bank issues. In fact, the stress of
the times began to narrow the field for circulation even before the
passage of the resumption act. The returns of the banks for
October and December, 1874, showed a loss in circulation of more
than $7,000,000 for the last half of the year. This was the net
result of new or increased issues of notes on the one hand, and of
still more important surrenders of issue on the other, irregularly
distributed, and showing important changes of banking conditions
in particular states. Down to November i, New York and
Missouri each surrendered more than $2,000,000; Kentucky, Indi-
ana, and Illinois together received more than $2,000,000.^ The
Comptroller reported at the beginning of the session that the with-
drawals of notes by some banks and the liquidation of others placed
at his disposal $14,200,000 of circulation, probably enabling him
to satisfy demands from new banks for some months to come.^

The demand for the right of issue was declining, therefore, when
Congress, by the resumption act of January 14, 1875,^ providing for
a return to specie payment in 1879, repealed all provisions of law,
fixing a limit to the aggregate of bank circulation, and thus intro-
duced free banking from the date of the act. The present narra-
tive does not call for any review of the circumstances under which
the resumption act was passed, or any estimate of it as a measure

1 Comptroller s Report, 1874, p. 128. ^ Ibid,, p. 129.

^ 18 "Statutes at Large," p. 296.



36o ESSAYS

for carrying out a great reform. It succeeded, and by making the
greenback redeemable in coin brought the banks also to a coin basis
on the day appointed. The introduction of free banking was an es-
sential part of the plan of operations by which this was to be effected.
The act contemplated the substitution of national bank-notes for
greenbacks and the possible reduction of the latter by this process
to ;^300,ooo,ooo, as a preliminary for the safe resumption of pay-
ment on the remainder. The issue of bank-notes was made free,
therefore, with the cautious provision that as fast as notes should be
issued to new banks or to banks increasing their circulation, legal-
tender notes should be withdrawn to the amount of eighty per cent
of the bank-notes thus issued, this arrangement resting on the
calculation that an issue of bank-notes would in its practical work-
ing imply a reserve of not far from twenty per cent, so that the
effective addition to note circulation by the banks would be toler-
ably well offset by the withdrawal of greenbacks, and no important
change be made, therefore, in the amount of paper in circulation.

The course of affairs in the next few years defeated many pre-
dictions as to the operation of the resumption act. The depression
which had followed the great revulsion of 1873 continued and even
deepened in the years from 1875 to 1878. The loans of banks
fell off somewhat in the general stagnation of business, and it was
not until 1879 was well advanced that the banks again had full
employment for their funds. But these discouraging conditions did
not act uniformly upon all sections nor upon all localities or banks in
any one section. In some cases additional banking capital and cir-
culation was called for, and in others banks reduced their circula-
tion as allowed under the act of 1874, or even went into liquidation ;
and thus the actual change which took place was the net result of
two opposing movements. For the last half of 1874 the issues of
new circulation somewhat exceeded the withdrawals; but in 1875
the withdrawals exceeded the new issues, and in 1876 the decline
of bank circulation was strong. For the year ending November i,
1876, with issues of new circulation amounting to a little more
than $7,000,000, the amount retired under the act of 1874 was over
$24,392,255, the amount retired by banks in liquidation was $3,1 14-
726, and $4,022,883 was surrendered by banks not rehnquishing
the right of issue. This made a net loss of circulation of about
$24,000,000, in which all the sections and nearly all the states par-



THE CIRCULATION OF THE NATIONAL BANKS 361

ticipated, although in unequal proportion. ^ The year ending No-
vember I, 1877, also showed some excess of withdrawals, although
a considerable increase was shown by New York and New England.
The tide turned in the year ending November i, 1878, and in 1879
the national bank circulation had its part in the general activity.
That its inability to grow under the freedom of the resumption act
was in part the result of general business conditions is clear from
the fact that the dividends of the national banks fell from 10.96
per cent of capital and surplus in 1873 to 5.49 per cent in 1879 ;
and that the aggregate surplus of all the banks in the system,
which had steadily gained until the middle of 1875, from that
point fell as steadily until the middle of 1879, declining from
^133,000,000 to $114,000,000.

But besides the discouragement which the banks at this time
felt in common with all business interests, they had begun to suffer
from one special depressing influence, which was destined to have
a lasting effect on their gains from the right of issue. In 1870,
of the bonds deposited by the banks to secure their circulation,
nearly three-quarters bore interest at 6 per cent and the remainder
at 5 ; by 1876 the refunding of the former had gone so far that
less than one-third of the bonds on deposit were 6 per cents ; by
1879 rnore than one-third of the bonds were at 5 per cent; and
in 1883 the deposit of $348,000,000 was made up of $41,000,000
at4|-, $106,000,000 at 4, and $201,000,000 at 3. The circulation of
the banks, which from the end of 1879 to the end of 1881 had fluctu-
ated between $300,000,000 and $325,000,000, began to decHne in
1882 and was withdrawn with some regularity until in the first
half of 1 89 1 it stood at about $123,000,000. The turning-point
was reached when in the summer of 1891 the price of the United
States 4 per cents fell enough to return to the purchasers of bonds
nearly 3 per cent and the circulation slowly increased until in May,
1893, it had reached $ 1 50,000,000. During the summer many banks
took out further circulation to supply the demand for money suitable
for everyday use, the dearth of which was one of the most striking
features of the crisis of 1893, and by October the total note issue
stood at $183,000,000.

^ The New England and Middle states lost in circulation ;?i 1,800,000; the Central
states, ^7,300,000 ; the South and Southwestern states, ^4,300,000. — Comptroller' s Re-
port, 1875, p. 253, and 1876, p. 262.



362 ESSAYS

In the disturbed years which followed the issue fell slightly,
then rose to nearly $211,000,000 at the end of 1896, with a further
increase of the earning power of the investment in bonds, and dur-
ing the three years following fluctuated between $191,000,000 and
$2 1 5,000,000.^ The experience of these years proved that the expan-
sion or diminution of national bank currency was powerfully affected
by an influence quite distinct from the need of bank currency for use
by the public. Mr. Chase, when advocating the adoption of the
national system, had foreseen the possibility that payment of the
public debt might compel " a future generation " to find for
the bank-notes some security other than United States bonds,^ but it
probably did not occur to him or the other founders of the system
that the rise of public credit by itself might cause the curtailment
and even threaten the extinguishment of the note issue.

The unexpected results of the bond requirement were of course
moderated by the wise provision of the act of 1874, referred to
above, making $50,000 the maximum amount of bonds which a
national bank is compelled to deposit. But even with this mate-
rial modification the bond requirement has been a serious element
in determining the geographical distribution of the national banks.
The causes which to a considerable extent excluded many states
in the South and West from taking any important share in the
system down to the passage of the resumption act in 1875 have
already been stated.- In the years of depression which followed,
ending with the actual resumption in 1879, these sections suf-
fered serious losses in national bank capital and circulation, los-
ing far more than their proportion of the total diminution in the
United States. The great revival of business which began in 1879
and the improved political and industrial condition of the South in-
creased the need of banking facilities and made it easier to provide
the necessary capital, but any considerable expansion of national
banking in the South and West, except in a few of the wealthy
and rapidly growing states of the Middle West, was then checked
by the rising value of government securities and the consequent
low return afforded by them. The distribution of the national
banks therefore underwent little change. The system continued

1 See a table giving the investment value of United States bonds, in the Report of
the Complrolley of the Currency, 1899, p. 41 1.
"^ finance Report, 1862, p. 20.



THE CIRCULATION OF THE NATIONAL BANKS 363

to thrive in the great belt of states north of the Potomac and
Ohio rivers, finding increasing difficulty as it crossed the Mis-
sissippi. The sparsely settled states, having in the nature of
the case the strongest need of banks of issue, still found them-
selves practically cut off from the advantage of the national
system.

Some relief from this difficulty might have been obtained, per-
haps, from the estabhshment of branches by the banks of urban
communities, but this practice is not now permitted by the statutes
of the United States,^ and, although it has always existed in this
country to some extent as in the days of the first and second banks
of the United States and among state banks under the laws of some
states, there has been a strong disinclination to introduce it in the
national banking system. PaUiatives have been discussed, such as
a diminution of the minimum capital with which a national bank
can be established, in order to bring national banking within the
reach of smaller communities, or the increase of the note issue to
the par value of the bonds deposited, instead of hmiting it, as hereto-
fore, to ninety per cent of that value ; but these measures obviously
do not go to the root of the evil complained of. Far more radical
is the proposed abandonment of the principle of a specially
secured currency and the substitution of a prior lien upon
the general assets of the issuing bank, with perhaps a revival of
the systematic central redemption of notes, formerly practised in
some of the states and now in vogue in Scotland and in Canada.

In the meanwhile, the states and sections which found the
national bank system ill adapted by its requirements to their con-
dition have sought relief in many cases by an extraordinary de-
velopment of banking under state laws. Banks with as small a
capital as $10,000, and in Kansas, Nebraska, and the Dakotas
only $5000, have organized by the hundred, having no power of
note issue, of course, and in many cases with singular looseness
of control by the state authority. By these agencies the states in
question have secured a rapid increase of bank facilities, with
some neglect of provisions for its soundness. Their needs of
tangible currency for use are necessarily variable, and to satisfy

1 For the purposes of the Columbian Exposition of 1893, ^ special act of Congress was
passed, authorizing for two years the existence of branch offices of Chicago banks on the
exhibition grounds. — 27" Statutes at Large," p. 33.



364 ESSAYS

them the movement of large masses of government or bank notes
from the states farther east is annually required. But the inelastic
quality of issues, whose volume depends in great degree upon the
attractiveness of an investment in bonds, makes this annual flow
of currency a disturbing event and not seldom the cause of seri-
ous disturbances in the money market. It follows, therefore, that,
while the national banking system has created an issue of notes
of undoubted solidity, and of equal value in every part of the
Union, as the founders of the system expected, it has not yet
created a system of banking adapted to the wants of all sections
or tending to unify their interests. The national system is no
doubt the foundation on which any reorganization of the paper
currency of the United States ought to rest, but it is still only
a foundation, with the superstructure scarcely more advanced
than it was a generation ago.



INDEX



Adams, Henry, on character of Hamilton's
reports, 74.

Adams, J. Q., report of, on weights and meas-
ures, 23.

Alabama, direct tax of 1861 in, 105.

Amsterdam, banking in, 132, 142, 145.

Antwerp, 147.

Apportionment of national bank-notes, by the
act of 1863, 335 ; repealed 1864, 340 ; re-
newed 1865, 346; legal and actual state
quotas in 1865, 347-348 ; explanation of
disregard of law for, 348-350; effects of,
on distribution of the banks, 350-352;
act of 1870 for, 353; legal and actual in
1873, 355 ; act of 1874 for, 358 ; repealed
in 1875, 359.

Arkansas, collection of direct tax of 1861 in,
105 note ; banks unconstitutional in, 270.

Bagelot, W., on condition of economic
thought, 40 ; on deposits, 175.

Baltimore, banks of, in the crisis of 1857, 280,
288 ; in the crisis of i860, 301, 309.

Baltimore Plan, nature of, 234; chief defect
of, 243.

Banco del Giro, founding of, 156 ; organiza-
tion of, 157-158 ; history of, 159-161, 166-
167; effect of suspension on value of
currency of, 161-165.

Banco di Rialto, establishment of, 153 ; func-
tions of, 153-155 ; close of, 156.

Banking, the facilitation of payments at first
its chief function, 145-148 ; the use of
credit the source of profit in, 183.

Banking, Free, in New York, 270, 297, 317,
321-322; in the West, 271, 297, 310, 323-
325 ; list of states permitting, in i860, 322
note.

Banking in Venice, influence of, in England,
135-136, 140-141 ; legendary origin of,
143 ; works on, 144-145, 166 ; private,
145-153 ; suppression of, 153 ; Banco di
Rialto, 153-155, 156; renewal of private,
155-156; Banco del Giro, 155-167.

Bank-notes, depreciation of, 163, 287-288 ;
analogous to deposits, 173 ; the subject of
far more legislation, 174 ; deposit cur-



rency renders, less important, 179-181 ;
government notes not a substitute for, 184 ;
state laws concerning, 192. See Elasticity,
and National Bank-notes.

Bank of Commerce, special provision to
secure adhesion of, to the national bank-
ing system, 341.

Bank of England, model for the first bank of
the United States, 90-93 ; publication of
accounts of, 171 ; relation of, to gold ex-
ports, 257; and the crisis of 1857, 277,
279, 286 ; analogy between suspension of
Peel's act and the use of clearing-house
loan certificates, 308.

Bank of France, and gold exports, 257.

Bank of New York, constitution of, written
by Hamilton, 90 note.

Bank of the United States, First, a Northern
measure, 17; services of, 18; the Bank of
England taken by Hamilton as a model
for, 90-93 ; accounts of, 168-171 ; notes
and deposits of, 174.

Bank of the United States, Second, conse-
quences of the war against, 18-19.

Banks, projects for, in England, 1581-1678,
135-142.

Banks, State, deposits of, 177-178 ; attractions
of, compared with national banks, 184 ;
bills for repeal of tax on notes of, 188 note ;
legislation regulating, 188-190, 192; geo-
graphical distribution of, 190-191, 230-
233 ; growth of, with small capital, 195-197,
235, 362 ; repeal of tax on notes of, undesir-
able, 198-206 ; issue of national currency
by, allowed in act of 1863, 202-203, 336,
338 ; repealed in 1864, 341 ; character and
situation of, in 1857, 269-271 ; effect of the
crisis of 1857 on, 287-288; position of,
prior to crisis of i860, 296-299; effect of
crisis, 309-310; survey of, in i860, 314-
329 ; the government not concerned with,
after 1846, 314; diversity of system, 315;
distribution of, 315-316; under special
charter, 317; in New England, 318-320;
in New York, 317, 321-322; free banks in
the West, 323-324 ; discount on notes of,
324 ; counterfeiting notes of, 324-325 ;



365



366



INDEX



banks of the States, 325-329 ; entrance of,
into the national system in 1863, 337 ; in
1864, 341 ; enabhng acts for, 342-343 ; tax
on notes of, 343-344.

Bascom, J., economic writings of, 12.

Bastiat, F., influence of Carey on, 14 ; reason-
ing of, affected by ethical aims, 49.

Bigelow, E. B., on protection, 23.

Bonds of the States, fall of price of Southern,
in i860, 301 ; losses on Western bank-
notes secured by, in i860, 310; use of,
as security by free banks in the West, 323.

Bonds of the United States, requirement of,
burdensome to small national banks, 232-
234,358; sale of, in 1894-1896, 222; pur-
chase of, by the treasury in 1857, 281 ;
price of, in 1857, 285; sale of, in i860,
301; slow sale of, in 1862,334; effect of
requirement of, from national banks on
sale of, 335 ; holdings of, by national and
state banks in 1864, 337-338 ; require-
ment of, from national banks changed
in 1864, 358 ; relation of national bank
circulation to price of, 361.

Boston, banks of, in the crisis of 1857, 278,
282, 283, 288; in i860, 300; policy of, in
the crisis of i860, 309; pressure exerted
on county banks, 319; banks of, enter the
national system, 342.

Boutwell, Secretary, proposal of, to retire the
legal tenders, 211.

Bowen, F., economic writings of, 12.

Bowery Bank, failure of, 283.

Branch banking, advantages of, 196-197;
would improve the national banking sys-
tem, 363.

Breckenridge, R. M., on Canadian bank-
notes, 242 notes.

Briscoe, J., 142.

Buckner, Congressman, on bank-notes, 181
note.

Cairnes, J. E., on economic method, 30, 31,

34. 35. 38. 39. 47-

Calhoun, J. C, as an economist, 9.

California, gold of, 314.

Canada, redemption of bank-notes in, 242;
banks of, successfully meet the crisis of
1857, 284.

Cantillon, R., cited, 164 note.

Capital, state banks in the West and South
with small, 191, 195, 235, 363; reduction
of, required from national banks undesir-
able, 236 ; relation of foreign investments
of, to gold movements, 253-258.

Capitation tax, 97.

Carey, H. C, writings of, 14-16; quoted, 47.

Carlisle, Secretary, cited, 236 note.

Carlyle, Thomas, quoted, 5.



Carriage tax, case of Hylton v. United States,
97. loi.

Central America, loss of steamer, 280.

Chamberlayne, H., 142.

Chase, Secretary, on the meaning of direct
taxes in the Constitution, 98 ; direct tax pro-
posed by, in 1861, loi ; national banking
proposed by, in 1861, 330-332 ; renewed
in 1862, 333-336; carried by influence of,
335 ; foresaw end of present system of note
issue, 362.

Chemical Bank, 283, 308.

Clarke, F., comptroller of the currency, 239
note, 247.

Clay, Henry, as an economist, 9.

Clearing-house of New York, returns of, in
1857, 281, 286; established in 1851, 322.

Clearing-house loan certificates, use of, in
i860, 307-308.

Cohn, G., method of, 42.

Coinage, legislation concerning, more stable
than that for government paper, 220.

Collamer, Senator, on the direct tax of 1861,
loi note ; proposal by, in 1864, of a coin
reserve for national banks, 345.

Columbian Exposition of 1893, 363 note.

Colwell, S., 12, 16 note, 155 note.

Competition, disappearance of, under branch
banking improbable, 237.

Compound-interest, notes of 1864-1865, 353.

Connecticut, banks of, in i860, 320.

Contarini, D., bank of, in Venice, 1597, 155.

Contarini, T., speech of, on Venetian bank-
ing, 144, 147-150.

Cooke, T., on the distribution of banks in the



Online LibraryCharles Franklin DunbarEconomic essays → online text (page 38 of 40)