THE LIBRARY 
 
 OF 
 
 THE UNIVERSITY 
 
 OF CALIFORNIA 
 
 RIVERSIDE 
 
 GIFT OF 
 
 M. Win slow
 
 - II 
 
 c.
 
 EXAMPLES OF PRIVATE Corn COINS IN CIRCULATION 
 
 BETWEEN 1830 AND 1 860. 
 
 
 See page 22.
 
 MONEY AND BANKING 
 
 ILLUSTRATED BY 
 AMERICAN HISTORY 
 
 REVISED AND CONTINUED TO THE YEAR 1908 
 BY 
 
 HORACE WHITE 
 
 THIRD EDITION 
 
 GINN & COMPANY 
 
 BOSTON NEW YORK CHICAGO LONDON
 
 COPYRIGHT, 1895, 1902, 1908 
 BY HORACE WHITE 
 
 ALL RIGHTS RESERVED 
 
 48.8 
 
 gfrt gtftengum 
 
 GINN & COMPANY . PRO- 
 PRIETORS BOSTON U.S.A.
 
 PREFACE TO THE THIRD EDITION 
 
 WHEN the second edition of this work was published in 
 1902 the question of the standard of value, which had been 
 in dispute for a quarter of a century, had been definitely 
 settled in favor of gold. This was a long step toward sta- 
 bility in the medium of exchange, but some unsettled ques- 
 tions still remain. 
 
 There are $346,000,000 of legal-tender notes outstand- 
 ing. Whatever reasons there might have been for their 
 existence in 1862 have long since passed away. They are 
 a menace to the business interests of the country, an expen- 
 sive kind of circulating medium, and a stumbling-block to, 
 currency reform. At every panic or unusual pinch in the 
 money market we hear demands for fresh issues of legal- 
 tender notes, and every movement in Congress for a more 
 elastic bank-note system is met by similar demands. The 
 greenbacks ought to be put out of existence by redeeming 
 $150,000,000 of them with the gold now held for that pur- 
 pose, and by canceling the rest as fast as they come into 
 the Treasury, or by funding them in bonds to be sold at not 
 less than par. 
 
 The Independent Treasury, established sixty years ago 
 for the purpose of divorcing the government from the money 
 market, has worked contrary to the intentions of its framers, 
 and has resulted in abuses far greater than those which it was 
 expected to correct. Thus we have seen public money, to the 
 amount of hundreds of millions of dollars, deposited in banks
 
 IV x PREFACE 
 
 without interest and distributed and redistributed among 
 them according to the caprice or favoritism of the Secretary 
 of the Treasury. Abuses more flagrant than any that were 
 charged against the Bank of the United States in President 
 Jackson's time are of common occurrence and pass almost 
 unnoticed. The excuse for these transactions is that the 
 keeping of public money locked up in the Treasury would 
 be artificial contraction of the currency, that it would bring 
 on a panic, and that it would be the greatest abuse of all. 
 This plea is virtually an accusation against the government* 
 as a whole for looking at this growing evil supinely and with- 
 out remedial action for twenty years. 
 
 We have a bank-note currency incapable of adjustment 
 to the varying demands of trade. It is lacking in the ele- 
 ment of elasticity which is the raison d'etre of a bank's circu- 
 lation. Such changes of volume as occur take place in long 
 undulations, so that expansion does not become effective 
 until after the immediate demand for it has ceased, and 
 .when the demand has ceased and contraction ought to fol- 
 low, it is prevented or retarded by law. To retire $100,000,- 
 ooo of redundant notes requires eleven months' time under 
 the present statute. The alternative is the exportation of 
 gold or the heaping up of a surplus in the central reserve 
 cities, thereby promoting unhealthy stock speculations. Both 
 of these operations are going on at the present time. There 
 is also a gorge of $60,000,000 of bank notes in the Treasury 
 now notes sent in for redemption and actually redeemed, 
 but which the clerical force of the department, although 
 recently increased for this purpose, is inadequate to handle 
 and to return to the issuing banks. This $60,000,000 repre- 
 sents a call loan due from the banks to the government, a 
 loan involuntary on both sides, and it has been growing for 
 several months, although the government has been struggling 
 like Laocoon to cast off the incumbrance.
 
 PREFACE V 
 
 This ironbound currency would have come to a timely end 
 by the payment of the national debt had not its adherents 
 devised a scheme for extending, for some thirty years, $600,- 
 000,000 of bonds maturing in 1904, 1907, and 1908, thus 
 putting an unnecessary burden of interest on the taxpayers 
 and preventing the government from using its surplus to pay 
 its debts. The existence of a growing surplus without such 
 an outlet is a prolific source of demoralization, leading to 
 ruinous extravagance in public expenditures. This is so 
 grave a menace that one of the greatest blessings to the 
 country possible at the present time would be a Treasury 
 deficit. This blessing we are likely to find soon. 
 
 The panic of 1907 brought the country to a realization 
 of the fact that there is something radically wrong in our 
 banking system. Business conditions in the United States 
 in the period preceding the panic were not unlike those pre- 
 vailing in the commercial world generally. Our resources 
 were greater than those of any other country, yet ours was 
 the only one afflicted by a general bank suspension. Why 
 was the richest country in the world prostrated by the finan- 
 cial gale, while all others stood upright ? Why did we remain 
 prostrate two months, struggling desperately, with illegal 
 shinplasters, to pay the wages of labor and to carry on retail 
 trade ? This question needs an answer before the next cycle 
 of speculation comes to an end. 
 
 Circumstances seem favorable for a revision of this book, 
 for weeding out matter that has become obsolete by the 
 passage of time, and for the introduction of other matter 
 of more immediate interest. Some chapters in the second 
 edition have been expunged entirely and new ones added, 
 including one on the recent panic and one on the central 
 bank question. It has been the author's endeavor also to 
 bring all the statistical parts down to date, and also to take 
 notice of all the important changes in banking law that have
 
 VI PREFACE 
 
 been made, either here or in foreign countries, since the 
 last edition was printed. Attention has been given to the 
 testimony taken by the House Committee on Banking and 
 Currency during the recent session of Congress. The text 
 and an analysis of the act of May 30, 1908, are given in 
 an appendix. 
 
 H. W. 
 NEW YORK, June, 1908
 
 CONTENTS 
 BOOK I. EVOLUTION OF MONEY 
 
 PAGB 
 CHAPTER I. MONEY A COMMODITY i 
 
 Difference between Money and Promises to Pay. Aristotle on 
 the Origin of Money. Various Kinds of Money. Wampum and 
 Beaver. Disappearance of Wampum. Tobacco Money in Virginia. 
 Rapid Decline in Price. Tobacco Riots in 1683. Tobacco Paper 
 Currency. Early Massachusetts Currency. Early New York 
 Money. Rice Currency. Early California Devices. Private Coins 
 and " Slugs." General Principles. The Value of Gold. All Trade 
 is Barter. Portability. Stability. Uniformity. Durability. Divisi- 
 bility. Cognizability. Gold not wholly Free from Variations in 
 Value. A Standard of Deferred Payments. Money a Product of 
 Evolution. Recapitulation. Authorities. 
 
 CHAPTER II. COINAGE 16 
 
 Principles of Coinage. Subsidiary and Token Coins. Shape 
 of Coins. Materials. Weight Coins. The Monetary Standard. 
 An "Ideal Dollar" Impossible. Seigniorage. Deposits of Gold 
 Bullion. Assaying. Coining. Private Coining Inadmissible. The 
 Mint Price of Gold. A " Premium on Gold." Abrasion of Coin. 
 The Spanish Dollar. Gresham's Law. Early Colonial Coins. The 
 Pine-Tree Shilling. The Proclamation of Anne. It is disregarded. 
 Money of Account. Recapitulation. Authorities. 
 
 CHAPTER III. LEGAL TENDER 30 
 
 Roman Law of Tender. Origin of Modern Law of Tender. Our 
 First Coinage Act. Double Legal Tender. Its Failure. Our 
 Second Coinage Act. Silver Coins in the United States prior to 
 1853. Our Third Coinage Act. Our Fourth Coinage Act. The 
 Trade Dollar. Present Varieties of Legal Tender. Recapitulation. 
 Authorities.
 
 Vlll CONTENTS 
 
 PACK 
 CHAPTER IV. GOLD AS A METAL 41 
 
 Where Gold is found. Its Affinity for Quicksilver. Placer Gold. 
 Methods of Collection. Hydraulic Mining. Quartz Crushing. 
 Chlorination. The Cyanide Process. Recapitulation. 
 
 CHAPTER V. GOLD PRODUCTION 49 
 
 First Half of the Nineteenth Century. California and Australia. 
 The Comstock Lode. South Africa. The Klondike. Cripple 
 Creek, Colorado. Second Half of the Century. Effect of New 
 Gold on Prices. Its Modus Operand!. Prospect of Continued 
 Advance. The Quantity Theory. Recapitulation. Authorities for 
 Chapters IV and V. 
 
 CHAPTER VI. THE GOLD STANDARD 60 
 
 Market Values of the Precious Metals. Experience of England. 
 Act of 1774. A Tentative Step. Gold Standard Adopted. The 
 United States and Portugal. Experience of Germany. Act of 
 1871. Act of 1873. Treasury Order of 1900. Bimetallist Agita- 
 tion Ineffectual. French Monetary Law of 1803. Did not keep 
 the Market Ratio Steady. The Latin Monetary Union. Austria- 
 Hungary. Adopts the Gold Standard in 1892. Her Modus 
 Operand!. British India. Petition for the Gold Standard. The 
 Herschel Commission of 1893. Fowler Committee of 1898. Japan 
 adopts the Gold Standard. Her New Coinage Law. Russia 
 adopts the Gold Standard. New Russian Coinage Law. Inter- 
 national Monetary Conferences. Obstacles to Bimetallism. Reca- 
 pitulation. Authorities. 
 
 BOOK II. GOVERNMENT PAPER MONEY 
 
 CHAPTER I. COLONIAL BILLS OF CREDIT .... 79 
 
 First Bills of Credit. Strife with the Mother Country. And with 
 the Colonial Governors. Prohibitions by Parliament. Rhode Island 
 an Awful Example. Testimony of Thomas Paine. Loans from 
 the Treasury. Other Pretexts for Bills of Credit. False Reports. 
 Forcing Laws. Usual Career of Bills of Credit. Extending Time 
 for Redemption. Counterfeiting. Depreciation. Swindling. Mob 
 Law. Repudiation. Economic Effect of the Loan Bills. A Con- 
 spiracy of Landowners. Recapitulation. Authorities.
 
 CONTENTS IX 
 
 PAGE 
 CHAPTER II. REVOLUTIONARY BILLS OF CREDIT. 91 
 
 Franklin's Warning. First Issues. Pelatiah Webster. Early 
 Depreciation. Price Convention in New England. Burglary legal- 
 ized. Price Convention of the Middle States. Washington's First 
 Views. Subsequently changed. The Final Cataclysm. Social Ter- 
 rorism. Mutiny of Soldiers. "New Tenor." Counterfeiting. Spe- 
 cific Supplies. A Complete Failure. Impressments. Also a Failure. 
 "Scales of Depreciation." "Not worth a Continental." Con- 
 tinental Money considered as a Tax. Or as Confiscation. The 
 Alternative. Display of Luxury during the War. Post-Revolu- 
 tionary Bills. Recapitulation. Authorities. 
 
 CHAPTER III. THE GREENBACKS 106 
 
 Treasury Notes before the Civil War. War Loans of 1861. Sus- 
 pension of Specie Payments. The Legal-Tender Bill. Bankers 
 remonstrate against it. Mr. Chase assents to it. The Bill passes. 
 The Second Issue. The Coin Purchase Act. Third Issue. Depre- 
 ciation. Interest-Bearing Notes. Compound-Interest Notes. Frac- 
 tional Currency. The 10-40 Bonds. Maturing Bonds paid in Gold. 
 Funding Clause repealed. The Anti-Gold Law. Its Repeal. Were 
 Legal-Tender Notes Necessary ? Other Methods of War Finan- 
 ciering. Effect of Legal Tender on Wages. Effect on Prices of Com- 
 modities. First Trading in Gold. Gold Exchange organized. Gold 
 Exchange Bank. Gold Clearings. A Commercial Necessity. Gam- 
 bling Raids. " Selling Short." Black Friday. California adheres 
 to the Gold Standard. Early Embarrassments. Severe Losses. 
 Confusion in Business. Greenbacks not Legal Tender for Taxes. 
 Rise of the Rate of Interest. Specific Contract Law. Sustained by 
 the Supreme Court of the United States. Supreme Court Deci- 
 sions. Gold Contracts Enforceable. The Hepburn Case. The 
 Hepburn Judgment reversed. Judge Strong on "Value." The 
 Latest Decision. George Bancroft's Criticism. Recapitulation. 
 Authorities. 
 
 CHAPTER IV. CONFEDERATE CURRENCY 140 
 
 First Steps. A Produce Loan. The Currency not Legal Tender. 
 Failure to Tax. Compulsory Funding. Partial Repudiation. Final 
 Collapse. Fatal Mistakes. State and Private Currency. Recapit- 
 ulation. Authorities.
 
 X CONTENTS 
 
 PAGE 
 CHAPTER V. AFTER THE WAR 150 
 
 Money as an Educator. Paying Bonds with Greenbacks. Policy 
 of Contraction adopted. Repealed. Greenbacks reissued. Inflation 
 Bill of 1874. Vetoed by President Grant. Specie Resumption Act 
 of 1875. Doubts as to its Meaning. Attempts to repeal it. Politi- 
 cal Campaign of 1875. Resumption accomplished. Gold Imports 
 in 1879 and 1880. The $100,000,000 Reserve. The Sherman Act. 
 Silver and Tariff Bills in 1890. The Treasury Deficit. Gold Ex- 
 ports. The Currency Act of 1900. Treasury Divisions of Issue 
 and Redemption. The " Endless Chain." Treasury Notes of 1890 
 to be retired. Minor Provisions of the Act of 1900. Denomina- 
 tions of Paper Currency. Recapitulation. 
 
 CHAPTER VI. SILVER DOLLARS AND THE PANIC 
 OF 1893 167 
 
 First Silver Agitation. The "Crime of 1873." Movement for 
 Remonetization. New Alignment of Parties. The Bland Bill. The 
 Allison Amendment. Vetoed and passed. Modus Operandi. Slow 
 Circulation of the New Dollars. Rapid Movement in 1879 an d 
 1880. Crisis in 1884. Small Silver Certificates introduced. Panic 
 predicted. The Act of 1890. Gold Movements of 1891 and 1892. 
 Action of Secretary Foster. Panic of 1893. Commercial Crises. 
 Causes of the Panic. End of the Silver Purchasing. " Coining the 
 Seigniorage." Indifference of Congress. Bond Sales in 1894. Bond 
 Syndicate of 1895. Panic of 1895. $100,000,000 Bond Sale. Coin- 
 age of the Silver Bullion in the Treasury. Act of 1900. Its Defect. 
 Direct Redemption of the Silver Dollar Desirable. Recapitulation. 
 Authorities for Chapters V and VI. 
 
 BOOK III. BANKING 
 
 CHAPTER I. FUNCTIONS OF A BANK 193 
 
 Original Meaning of the Term. A Manufactory of Credit. Dis- 
 counting Commercial Paper. Two Kinds of Deposits. Utility of 
 Bank Credits. Limit to Bank Credits. Bank Reserves. Bank 
 Notes. Of the Same Nature as Checks. Issue of Notes Auto- 
 matic. Utility of Bank Notes. Evolution of Bank Notes. A 
 Common-Law Right. Why Interest is paid for the Use of Bank
 
 CONTENTS XI 
 
 PAGE 
 
 Notes. How Banks aid in the Work of Production. Recapitula- 
 tion. Authorities. 
 
 CHAPTER II. A BANK STATEMENT 205 
 
 Loans and Discounts. Accommodation Paper. "Cash Credits." 
 Drafts and Bills of Exchange. Acceptances. Bills of Lading. 
 Letters of Credit. United States Bonds. Other Interest-Bearing 
 Securities. Real Estate. Due from Other Banks. National Bank 
 Notes. The Cash Reserve. Bank Note Redemption Fund. Country 
 Bank Deposits. Interest on Deposits. Certificates of Deposit. 
 Certified Checks. Cashier's Checks. Capital and Surplus. Profits. 
 Recapitulation. 
 
 CHAPTER III. THE CLEARING-HOUSE SYSTEM . . 216 
 
 The Essence of Clearing. The Old System. New York Clear- 
 ing House. Preparations for Clearing. The Operation. The 
 Result. Present System of Payment. Magnitude of Clearings. 
 Other Varieties of Clearing. Clearing-House Loan Certificates. 
 "Pooling" the Reserves. Form of Certificates. Effect on the 
 Public Mind. The Case of a Small Town. That of a Large City. 
 Suspension not always prevented. Benefit of the System. Small 
 Certificates for Retail Trade. Recapitulation. Authorities. 
 
 CHAPTER IV. COLONIAL BANKING 232 
 
 Colonial Ideas of Banking. The Bank of Amsterdam. The 
 Fallacy of Land Banking. " The Fund at Boston in New England." 
 The Massachusetts "Projection" of 1714. Crude Conceptions. 
 The New London Bank of 1732. The Company suppressed. Pri- 
 vate Note Issues in 1731. A New Hampshire Experiment. The 
 Massachusetts Land Bank of 1740. Its Note Issue. Opposition 
 of Governor Belcher. Political Consequences. Parliament takes 
 Action. Mob Violence. Recapitulation. Authorities. 
 
 CHAPTER V. EARLY AMERICAN BANKS 244 
 
 Bank of North America. Chartered by Congress in 1781. Its 
 Service in the Revolution. Rechartered by Pennsylvania. Attacks 
 on the Bank after the War. The Charter repealed. And reenacted. 
 Bank of Massachusetts. First Legal Restrictions. Bank of New
 
 Xll CONTENTS 
 
 PAGB 
 
 York. At First Unpopular. Legal Restrictions. Question of Small 
 Notes. Restriction of Debts and Credits. Other Prohibitions. 
 New York Restrictions. Recapitulation. Authorities. 
 
 CHAPTER VI. FIRST BANK OF THE UNITED STATES 254 
 
 Hamilton's Report. The Bank's Capital. Regulations of its 
 Charter. Constitutionality of the Bill. Reasons for Regulations. 
 The Government as a Shareholder. Voting Power of Shareholders. 
 Other Provisions. Great Financial Success. A Regulator of the 
 Currency. Renewal of Charter proposed. The Spoils System. 
 Opposition to the New Charter. Alleged Foreign Influence. The 
 Government's Shares in the Bank. Senatorial Debate. Charter 
 refused. Mr. Gallatin's Opinion. Recapitulation. Authorities. 
 
 CHAPTER VII. SECOND BANK OF THE UNITED 
 STATES 267 
 
 Financial Distress in 1814. A National Bank proposed. The 
 Bank Charter of 1816. Public Deposits. Other Regulations. 
 Deposits payable in Specie. Duties and Taxes. Post Notes. 
 Branch. Drafts. Penalty for Suspension. Bonus for Charter. 
 Branch Banks. Scandalous Beginnings. The Bank in 1829. 
 Recapitulation. 
 
 CHAPTER VIII. THE BANK WAR 276 
 
 The Question of a Recharter. First Signs of Political Conflict. 
 Isaac Hill. Amos Kendall. Jackson's first Message. Its Mis- 
 statements. Benefits of the Bank. Bank sustained by Congress. 
 The Previous System. Biddle and Ingham. Jackson's Message 
 of 1830. Milder Tone of the President. Baltimore Platform of 
 1831. Henry Clay and the Bank. Affair of the 3 Per Cents. Mr. 
 Biddle's Duplicity. The Charter passed. The Charter vetoed. 
 Jackson's Victory. The Deposits removed. The Pennsylvania 
 Charter. Wild Speculation. Final Collapse of the Bank. Reca- 
 pitulation. Authorities for Chapters VII and VIII. 
 
 CHAPTER IX. THE SUFFOLK BANK SYSTEM ... 291 
 
 Stock Notes. Struggle to compel Payment of Capital Stock. 
 Chaos of Banking in New England. The New England Bank. 
 The Suffolk Bank. Country Banks asked to redeem in Boston.
 
 CONTENTS Xlll 
 
 PACK 
 
 The Forcing Process. Basis of the Suffolk System. Its Popu- 
 larity and Success. Small Losses. The " Banking Principle." The 
 " Currency Principle." Specie Reserve. Massachusetts General 
 Laws. Recapitulation. Authorities. 
 
 CHAPTER X. THE SAFETY FUND SYSTEM .... 303 
 
 Banks and Politics. The Manhattan Company. Joshua For- 
 man. Safety Fund System. Notes made a Prior Lien. Reason 
 for this. Fraudulent Overissues. Faults of the System. The 
 Safety Fund in Canada. Recapitulation. 
 
 CHAPTER XI. THE FREE BANK SYSTEM 311 
 
 The Evils of Monopoly. Political Revolt. Free Banking Law. 
 A Bad Beginning. Abuses of Free Banking. Faults of the System. 
 System perfected. Elasticity of Note Issues. Free Banks in Illinois. 
 Final Collapse. Indiana. Wisconsin. Free Banking in Canada. 
 Recapitulation. Authorities for Chapters X and XI. 
 
 CHAPTER XII. CHAOS OF BANKING IN THE XIX 
 CENTURY 322 
 
 Speculation in Bank Charters. Bank Failures. Chaos in North 
 Carolina. In Georgia. In Michigan. " Wild-Cat Banks." Coun- 
 terfeit and Spurious Notes. Counterfeit Detectors. Minor Abuses. 
 Recapitulation. Authorities. 
 
 CHAPTER XIII. SOME NOTABLE BANKS 333 
 
 State Bank of Indiana. Its Branch System. Charter Regula- 
 tions. Circulating Notes. The System of Examinations. Final 
 Liquidation. Crisis of 1857. Mortgage Loans. George Smith. 
 The Wisconsin Marine and Fire Insurance Co. Efforts to sup- 
 press Smith. " George Smith's Money." The " Raison d'etre." 
 Smith's Retirement. Louisiana Bank Act of 1842. Recapitula- 
 tion. Authorities. 
 
 CHAPTER XIV. THE NATIONAL BANK SYSTEM . . 348 
 
 Origin of the System. Difficulty of passing the Bill. Comp- 
 troller. Organization. Capital Stock. Powers. Deposit of Bonds. 
 Directors. Liability of Shareholders. Circulating Notes. Their
 
 XIV CONTENTS 
 
 PAGB 
 
 Redemption. Retirement of Circulation. Redemption of Failed 
 Bank Notes. Tax on Circulation. Legal Reserve. Usury. Re- 
 strictions. Reports. State Taxation. Bank Examiners. Receivers. 
 Public Deposits. Bank Statistics, August 22, 1907. Recapitu- 
 lation. 
 
 CHAPTER XV. STATE BANKS AND TRUST COM- 
 PANIES .361 
 
 State Banks. Private Banks. Cash Reserves. Trust Com- 
 panies. New York State Law. Bank Notes as Reserves. Cash 
 Reserves. Swapping Bank Notes for Gold. Is it Inflation ? 
 Recapitulation. 
 
 CHAPTER XVI. FOREIGN BANKING SYSTEMS ... 369 
 THE BANK OF ENGLAND 
 
 Successful Beginning. Monopoly of Note Issues. The 
 
 "Restriction" of 1797. Sir Robert Peel. The Act of 1844. 
 
 Suspension of the Bank Act. The Arguments Pro and Con. 
 
 The Bank keeps the Gold Reserve of the Nation. 
 
 THE SCOTCH BANK SYSTEM 
 
 Cash Credits. The Branch System. Note Issues. Economy 
 in the Use of Gold. 
 
 THE CANADIAN BANK SYSTEM 
 
 Note Issues. Safety Fund. Branch Banks. Bank Note 
 Inspection. 
 
 THE BANK OF FRANCE 
 
 Note Issues. Cash Reserves. Suspension of Specie Pay- 
 ments. Branches and Discounts. Great Service to the 
 Government. 
 
 THE IMPERIAL BANK OF GERMANY 
 
 Its Organization. Note Issues. The Elastic Feature. Vari- 
 ous Provisions. Dividends. Recapitulation. Authorities. 
 
 CHAPTER XVII. RECENT HISTORY 401 
 
 Inflexibility of Note Issues. Seasonal Demand for Notes. 
 Unnecessary Contraction and Expansion. Extending the Public 
 Debt. Loss of Interest. Bad Financiering. Secretary Shaw's
 
 CONTENTS XV 
 
 PAGE 
 
 Policies. Various Bonds as Security for Government Deposits. 
 No Bank Reserve against Government Deposits. Stimulating 
 Gold Imports. Moving the Crops. Omniscience in the Treasury 
 Department. 
 
 CHAPTER XVIII. THE PANIC OF 1907 411 
 
 The Knickerbocker Trust Company. The Run on Other Trust 
 Companies. Drain on Bank Reserves. Premium on Currency. 
 Importation of Gold. Action of the Government. Cause of the 
 Panic. 
 
 CHAPTER XIX. PRESENT PROBLEMS 416 
 
 State of Public Opinion. Defect of the Bond Deposit System. 
 No Panic in Foreign Countries in 1907. Branch Banks. Their 
 Relation to Note Issues. Legal Cash Reserve. Bank Notes as 
 Reserves. Frequent Redemption Desirable. " Emergency Circu- 
 lation." The Proposed Tax. The German Practice. 
 
 CHAPTER XX. THE CENTRAL BANK QUESTION . . 424 
 
 Fortification of Credit. Functions of a Central Bank. Its Note 
 Issues. Drains on Bank Reserves. How Banks drain Each 
 Other in the United States. Is a Central Bank Feasible ? Advan- 
 tages of Union. Plan for a Central Bank. Powers of a Central 
 Bank. The Comptroller of the Currency favors a Central Bank. 
 Desirable Features of his Plan. Conclusion. 
 
 APPENDIX A. THE NEW YORK CHAMBER OF COM- 
 MERCE REPORT ON THE CURRENCY 431 
 
 APPENDIX B. AMERICAN BANKERS' COMMISSION 
 
 REPORT ON THE CURRENCY 433* 
 
 APPENDIX C. CURRENCY BILLS IN CONGRESS ... 440 
 THE ALDRICH-YREELAND ACT. FULL TEXT AND ANALYSIS 
 THE FOWLER BILL. SUMMARY 
 
 BIBLIOGRAPHY 456 
 
 INDEX 461
 
 MONEY AND BANKING 
 
 BOOK I 
 
 EVOLUTION OF MONEY 
 
 CHAPTER I 
 MONEY A COMMODITY 
 
 MONEY 'is a commodity which mankind voluntarily accepts 
 in exchange for all other commodities and services. 
 
 We are now speaking of real money, not of promises to pay 
 money. All of our paper circulating medium and all of our 
 Difference be- smaller coins are, either directly or indirectly, 
 tween Money and promises to pay money. In the case of the 
 to pay. f ormer t h e p rom ise is stamped on it. In 
 the case of the latter it is merely, expressed in the laws. 
 The difference between real money and a promise to pay 
 money is the same as that between a meal and a meal ticket, 
 or between a trunk and a trunk check. 
 
 A commodity which is universally accepted as a medium 
 of exchange naturally becomes a standard of value, by 
 being continually brought into comparison with other com- 
 modities. 
 
 Aristotle gives us the following definition of money and 
 account of its origin : 
 
 It is plain that in the first society (that is, in the household) 
 there was no such thing as barter, but that it took place when the
 
 2 EVOLUTION OF MONEY 
 
 community became enlarged : for the former had all things in 
 
 common, while the latter, being separated, must exchange with 
 
 each other according to their needs, just as many 
 
 Anstotle on the barbarous tribes now subsist by barter : for these 
 Origin of Money. J . ' 
 
 merely exchange one useful thing for another, 
 
 as, for example, giving and receiving wine for grain and other 
 things in like manner. This kind of trading is not contrary to 
 nature, nor does it resemble a gainful occupation, being merely 
 the complement of one's natural independence. From this, never- 
 theless, it came about logically that as the machinery for bringing 
 in what was wanted, and of sending out a surplus, was inconven- 
 ient, the use of money was devised as a matter of necessity. For 
 not all the necessaries of life are easy of carriage ; wherefore, to 
 effect their exchanges, men contrived something to give and take 
 among themselves, which, being valuable in itself, had the advan- 
 tage of being easily passed from hand to hand for the needs of 
 life such as iron or silver or something else of that kind, of which 
 they first determined merely the size and weight, but eventually 
 put a stamp on it in order to save the trouble of weighing, for the 
 stamp was placed there as the sign of its value. 1 
 
 Among the things used as money by various people 
 within the historical period are cacao beans, salt, silk, 
 furs, tobacco, dried fish, wheat, rice, olive oil, 
 101 cocoanut oil, cotton cloth, cowry shells, iron, 
 
 copper, platinum, nickel, silver, and gold. It 
 would be difficult to say what had not been used as money 
 at some time or place. Our own history furnishes an abun- 
 dance of curious examples, the most instructive being the 
 tobacco currency of the colonial period. It may be said 
 that Virginia grew her own money for nearly two centuries, 
 and Maryland for a century and a half. 
 
 The first settlers of New England found wampumpeage, 
 sometimes called wampum and sometimes peage, in use 
 among the aborigines as an article of adornment and a 
 medium of exchange. It consisted of beads made from 
 
 1 Politics, I, 9.
 
 MONEY A COMMODITY 3 
 
 the inner whorls of certain shells found in sea water. The 
 beads were polished and strung together in belts or sashes. 
 They were of two colors, black and white, 
 the black bein S double the value of the 
 white. The early settlers of New England, 
 finding that the fur trade with the Indians could be carried 
 on with wampum, easily fell into the habit of using it as 
 money. It was practically redeemable in beaver skins, 
 which were in constant demand in Europe. The unit of 
 wampum money was the fathom, consisting of 360 white 
 beads worth sixty pence the fathom. In 1648 Connecticut 
 decreed that wampum should be " strung suitably and not 
 small and great vncomely and disorderly mixt as formerly it 
 hath been/' Four white beads passed as the equivalent of 
 a penny in Connecticut, although six were usually required 
 in Massachusetts and sometimes eight. In the latter colony 
 wampum was at first made legally receivable for debts to 
 the amount of \2ii. only. In 1641 the limit was raised 
 to 10, but only for two years. It was then reduced to 
 40^. It was not receivable for taxes in Massachusetts. 
 The use of wampum money extended southward as far as 
 Virginia. 
 
 The decline of the beaver trade brought wampum money 
 into disrepute. When it ceased to be exchangeable in large 
 sums for an article of international trade the basis of its 
 value was gone. Moreover it was extensively counterfeited, 
 and the white beads were turned into the 
 more valuable black ones b Y dyeing. Never- 
 theless it lingered in the currency of the 
 colonies as small change till the early years of the eighteenth 
 century. While it was in use it fluctuated greatly in value. 
 The first General Assembly of Virginia met at James- 
 town July 31, 1619, and the first law passed was one fixing 
 the price of tobacco " at three shillings the beste, and the
 
 4 EVOLUTION OF MONEY 
 
 second sorte at i&J. the pounde." Tobacco was already 
 the local currency. In 1642 an act was 
 Money p assec j forbidding the making of contracts 
 payable in money, thus virtually making 
 tobacco the sole currency. 1 
 
 The act of 1642 was repealed in 1656, but nearly all the 
 trading in the province continued to be done with tobacco 
 as the medium of exchange. 
 
 In 1628 the price of tobacco in silver had been $s. 6</. 
 per pound in Virginia. The cultivation increased so^ rap- 
 idly that in 1631 the price had fallen to 6d. 
 ^ n or( ^ er to ra i se the price, steps were taken 
 to restrict the amount grown and to improve 
 the quality. The right to cultivate tobacco was restricted 
 to 1500 plants per poll. Carpenters and other mechanics 
 were not allowed to plant tobacco " or do any other work 
 in the ground." These measures were ineffective. The 
 price continued to fall. In 1639 it was only 3^. It was 
 now enacted that half of the good and all of the bad should 
 be destroyed, and that thereafter all creditors should accept 
 40 Ib. for 100 ; that the crop of 1640 should not be sold for 
 less than i2</., nor that in 1641 for less than 2S. per pound, 
 under penalty of forfeiture of the whole crop. This law 
 was ineffectual, as the previous ones had been, but it caused 
 much injustice between debtors and creditors by impairing 
 the obligation of existing contracts. In 1645 tobacco was 
 worth only \\d. and in 1665 only id. per pound. 
 
 These events teach us that a commodity which is liable 
 to great and sudden changes of supply is not a desirable 
 one to be used as money. 
 
 In the year 1666 a treaty was negotiated and ratified 
 between the colonies of Maryland, Virginia, and Carolina, 
 to stop planting tobacco for one year in order to raise the 
 
 1 Hening, I, 262.
 
 MONEY A COMMODITY 5 
 
 price. This temporary suspension of planting made neces- 
 sary some other mode of paying debts. It was accordingly 
 enacted that both public dues and private debts falling due 
 " in the vacant year from planting " might be paid in country 
 produce at specified rates. 
 
 In 1683 an extraordinary series of occurrences grew 
 out of the low price of tobacco. Many people signed 
 petitions for a cessation of planting for one 
 year for the purpose of increasing the price. 
 As the request was not granted, they banded 
 themselves together and went through the country destroy- 
 ing tobacco plants wherever found. The evil reached such 
 proportions that in April, 1684, the Assembly passed a law 
 declaring that these malefactors had passed beyond the 
 bounds of riot, and that their aim was the subversion of 
 the government. It was enacted that if any persons, to 
 the number of eight or more, should go about destroying 
 tobacco plants, they should be adjudged traitors and suffer 
 death. 
 
 In 1727 tobacco notes were legalized. These were in 
 the nature of certificates of deposit in government ware- 
 houses issued by official inspectors. They 
 Currenc ^^ wer e declared by law current and payable 
 for all tobacco debts within the warehouse 
 district where they were issued. They supply an early 
 example of the distinction between money on the one hand, 
 and government notes, or bank notes, on the other. The 
 tobacco in the warehouses was the real medium of ex- 
 change. The tobacco notes were orders payable to bearer 
 for the delivery of this money. They were redeemable 
 in tobacco of a particular grade, but not in any specified 
 lots. Counterfeiting the notes was made a felony. In 1734 
 another variety of currency, called "crop notes," was intro- 
 duced. These were issued for particular casks of tobacco,
 
 6 EVOLUTION OF MONEY 
 
 each cask being branded and the marks specified on the 
 notes. 
 
 The circulating medium of the New England colonies was 
 quite as fantastic as that of Virginia. Merchantable beaver 
 E was legally receivable for debts at IQS. per 
 
 Massachusetts pound. In 1631 the General Court of Massa- 
 chusetts ordered that corn should pass for 
 payment of all debts at the price it was usually sold for, 
 unless money or beaver skins were expressly stipulated. In 
 other words, a debt payable in pounds, shillings, and pence 
 might be paid at the debtor's option in any one of three 
 ways: in corn at the market price, in beaver at IDS. per 
 pound, or in the metallic money of England. For more 
 than half a century this order .continued in force and oper- 
 ation, other things being added to the list from time to time. 
 
 In 1635 musket balls were made receivable to the extent 
 of i2d. in one payment. 
 
 In 1640 Indian corn was made current at 4^. per bushel, 
 wheat at 6-$-., rye and barley at 5^., and peas at 6.r. Dried 
 fish was added to the list. Taxes might be paid in these 
 articles and also in cattle, the latter to be appraised. 
 
 The need of metallic currency was severely felt. In 1654 
 it was ordered that no coin should be exported, except 2os. 
 to pay each one's traveling expenses, on penalty of for- 
 feiture of the offender's whole estate. 
 
 The cost of carrying the country produce taken for taxes 
 amounted to 10 per cent of the collections. A constable 
 once collected 130 bushels of peas as taxes in Springfield. 
 He found that he could transport this portion of the public 
 revenue most cheaply by boat. Launching it on the Con- 
 necticut River, he shipped so much water on board at the 
 falls that the peas were all spoiled. Thus we learn that 
 money ought to be easy of carriage and not liable to injury 
 by exposure to the elements.
 
 MONEY A COMMODITY 7 
 
 In 1670 it was ordered for the first time that contracts 
 made in silver should be paid in silver. 
 
 In 1675, during King Philip's war, the need of metallic 
 money for public use was so great that a deduction of 50 
 per cent was offered on all taxes so paid. 
 
 The first local currency of New Netherland was wampum, 
 
 but it was subordinate to the silver coinage of the mother 
 
 country ; that is, it was reckoned in terms of that coinage as 
 
 fixed by the Dutch West India Company from 
 
 Early New York t j t ti Jt wag first fixed ^ ^ white 
 
 Money. 
 
 beads for a stiver. Wampum was not made 
 in the province, but was imported from the east end of Long 
 Island, the principal seat of production. It is mentioned in 
 a letter from the Patroons of New Netherlands to the States 
 General in June, 1634, as "being in a manner the currency 
 of the country with which the produce of the country is 
 paid for," the produce of the country being furs. 
 
 Beaver soon became current here, as in New England, 
 and for the same reason, its currency value being fixed by 
 the company at 8 florins per skin. As 6 wampum beads 
 were equal to i stiver and 20 stivers to i florin, and 8 
 florins to i skin, the ratio of wampum to beaver was 960 
 to i. The market ratio did not coincide with the legal 
 ratio very long. Nor was the legal ratio of either wampum 
 or beaver to silver maintained ; for, in 1656, Director Stuy- 
 vesant wrote to the company urging that beaver be rated 
 at 6 florins instead of 8, and wampum at 8 for a stiver 
 instead of 6, as these rates were nearer the commercial 
 values. 
 
 In 1719 the Assembly of South Carolina made rice 
 receivable for taxes, " to be delivered in good barrels upon 
 
 the bay in Charlestown." In the following 
 Rice Currency. . i j 
 
 year a tax of 1,200,000 Ib. of rice was levied, 
 
 and commissioners were appointed to issue rice orders to
 
 8 EVOLUTION OF MONEY 
 
 public creditors, in anticipation of collection, at the rate of 
 30J. per 100 lb., in the following form : 
 
 " This order entitles the bearer to one hundred weight of 
 well-cleaned merchantable rice to be paid to the commis- 
 sioners that receive the tax on the second Tuesday in 
 March, 1723." 
 
 Rice orders were made receivable for all purposes, and 
 counterfeiting was made felony without benefit of clergy. 
 
 In eastern Tennessee and Kentucky, early in the nine- 
 teenth century, deer skins and raccoon skins were receivable 
 for taxes and served the purposes of currency. 
 
 When California was first invaded by gold seekers there 
 were a few Mexican coins in circulation there, not nearly 
 sufficient to answer the needs of the growing community. 
 The immigrants brought more or less metallic money with 
 them. The smaller coins were those of many 
 different countries, chiefly Spanish. For want 
 of sufficient coins, the first trading was done 
 largely with gold dust, sometimes by weighing it in scales, 
 sometimes by guesswork. A " pinch" of gold dust about 
 as large as a pinch of snuff had a current value and was a 
 common measure in places where there was no means of 
 weighing. At a public meeting in San Francisco, Septem- 
 ber 9, 1848, it was resolved by unanimous vote that $16 
 per ounce was a fair price for placer gold. This rate was 
 at once adopted in all business transactions. By and by pri- 
 vate coiners of gold came into the field. The Legislature 
 was at first alarmed by the appearance of these unaccus- 
 tomed pieces, and passed a law to prohibit their circulation 
 and to close the shops where they were made. It was soon 
 found, however, that they were a great convenience. Then 
 the law was repealed. Several establishments immediately 
 went to work assaying and coining gold. One of these 
 was at Salt Lake City, whose productions were known as
 
 MONEY A COMMODITY 9 
 
 Mormon coins. Only one of these establishments, that of 
 
 Moffat & Co., of San Francisco, conformed exactly to the 
 
 government standard of weight and fineness. All the 
 
 others, however, including the Mormon ones, 
 
 Pri 7^ e , C in8 ,, circulated freely, and were received on deposit 
 and " Slugs." * ' 
 
 by the banking houses until the government 
 set up an assay office and began to stamp octagonal pieces of 
 $50, called "slugs," and afterwards those of $20 each. This 
 was done in 1851 ; the San Francisco mint was not ready 
 till 1854. The Moffat coins continued to circulate after the 
 mint had gone into operation, since everybody had confi- 
 dence in their goodness. It is estimated that $50,000,000 
 of private coins were struck. They were received in the 
 Atlantic cities at their assay value only. 
 
 The foregoing illustrations drawn from our own history 
 serve to explain the nature of money and the processes by 
 which mankind learns to distinguish between 
 good money and bad. Men discover the 
 need of a common medium of exchange as 
 soon as society emerges from the patriarchal state, where 
 each group of persons is sufficient unto itself. They learn 
 by experience that one who wants wheat, and has only skins 
 to exchange for it, must meet somebody who has wheat and 
 wants skins, and that much time and labor may be lost 
 before the two can find each other. Then more time may 
 be lost before they can agree upon the ratio at which the 
 two articles should be exchanged for each other. The few 
 and simple words with which Aristotle has treated this 
 subject cannot be bettered. Whole tomes have been 
 written to say the same things and have ended without 
 saying them. 
 
 Money is always the product of labor. Nobody would 
 give that which has cost him labor, in exchange for some- 
 thing which he could obtain without labor.
 
 10 EVOLUTION OF MONEY 
 
 All the things that have been used as money have pos- 
 sessed value for other purposes, and this other value led to 
 their use as money. Hence it may be said that the value 
 of any standard money depends upon its utility for this and 
 other purposes combined and is measured 
 of h GoId 1U< ky the demand for those purposes. Gold 
 
 would never have been brought into use as 
 money if it had not possessed certain qualities of beauty, 
 portability, durability, etc., which caused it to be prized as 
 an article of adornment. 
 
 All trade is barter, or the exchange of property and ser- 
 vice for other property and service. This is true when wheat 
 is exchanged for gold, and gold for cloth. Here are two 
 acts of barter to accomplish one result, namely, the procur- 
 ing of cloth for wheat. The word " barter " is commonly 
 used to signify the exchange of property without the use 
 of money. It must be borne in mind, how- 
 ever, that all trade is barter, even when the 
 
 JScUliv& 
 
 precious metals are employed as intermediaries 
 the latter being articles of barter also, and possessing 
 the same value as the things for which they are exchanged. 
 The whole science of money hinges on this fact. 
 
 Objections to tobacco money in Virginia and to the 
 variegated colonial currency of New England are obvious. 
 
 They were inconvenient in every way. In 
 
 Portability. 
 
 the first place, they were not easily portable. 
 It cost 3 6s. in 1662 for cartage of the proceeds of the 
 tax levy of the town of Ipswich, amounting to 7 6-f. &d- 
 In Virginia there was a difference in the value of tobacco 
 notes according to the location of the warehouse where 
 the tobacco was situated. This amounted in some cases 
 to i os. per cwt. 
 
 Another objection is found in the fluctuations in value of 
 these currencies. The range of tobacco prices in Virginia
 
 MONEY A COMMODITY II 
 
 from 1619 to 1775 was from 3^. 6d. down to id. per 
 pound. We have seen what strenuous efforts were made 
 
 by the tobacco-planting colonies to restrict the 
 Stability. . 
 
 production and what distress and disorder 
 
 were caused by their inability to do so. 
 
 Another inconvenience attending these media of exchange 
 
 was the difference in value between different lots of the 
 
 same article at the same place. Tobacco, even when up to 
 
 standard, was of four different kinds, described in the laws 
 
 as sweet-scented, Oronoko, leaf, and stemmed. 
 
 Uniformity. ... 
 
 Then there were differences in the inspection, 
 some inspectors being more skillful and more strict than 
 others, whereby their receipts or notes came to have a higher 
 price than others. There were differences also arising from 
 different seasons and different cultivators. A large part of 
 the legislation of both Virginia and Maryland was directed 
 to the suppression of "trash." No substance can be con- 
 sidered suitable for the purposes of money, if different 
 parcels of it are of different degrees of goodness. 
 
 Want of durability was another objection to all of these 
 things. There was so much shrinkage and 
 
 Durability. , . . 
 
 deterioration in tobacco that the notes issued 
 against it could not be safely kept more than one year. 
 Some of the articles used as money in the colonial period 
 could be divided and subdivided without 
 
 Divisibility. . .... ... 
 
 losing any part of their value, while others 
 could not. Grain and tobacco could be so divided. Beaver 
 skins could not. For the purposes of exactitude divisibility 
 is necessary. No article which does not possess this quality 
 can be considered a good medium of exchange. 
 
 It is not absolutely necessary that the substance used as 
 money should be coined. Gold and silver were used as 
 money before they were coined and then they passed by 
 weight. All that coining does is to save the trouble of
 
 12 EVOLUTION OF MONEY 
 
 frequent weighing and assaying. Accordingly it is desirable 
 
 that the substance of which money is composed should 
 
 be one which can receive and retain a stamp. None of 
 
 the substances which the early American 
 
 Cognizability. , , . .. 
 
 colonies used in lieu of the precious metals 
 answered this requirement. The putting of wampum shells 
 together in parcels equal to one penny, and higher denom- 
 inations, easily recognized, was something akin to coinage. 
 So also was the marking of a hogshead of tobacco by an 
 inspector. When so marked it would pass without reweigh- 
 ing or reexamination. The stamp had here become the 
 sign of value, but the tobacco itself could not be stamped 
 because the substance was not suitable for receiving and 
 retaining an impression. 
 
 All writers are agreed that the six requisites mentioned 
 above are essential to a good kind of money, viz., portability, 
 uniformity, durability, divisibility, cognizability, and stability 
 of value. 
 
 Long experience has taught mankind that these qualities 
 are best embodied in the metal gold. 
 
 It must not be assumed that gold is absolutely stable in 
 
 value. When we speak of the value of one thing which 
 
 measures all values, we mean its purchasing 
 
 Gold not wholly power in terms of those commodities whose 
 
 Free from Vari- . . 
 
 ations in Value, supply is unlimited, or not controlled by 
 
 monopoly. The value of gold thus measured 
 is subject to variations, but it is impossible to measure 
 them with accuracy, even when we compare prices during 
 long intervals of time. We are concerned at present only 
 with the comparative steadiness of value of different things, 
 as, for example, gold and tobacco. If gold is subject to fewer 
 changes of purchasing power than tobacco, it is better fitted 
 to serve the purposes of money and will sooner or later 
 supplant it in that function. If it is subject to fewer changes
 
 MONEY A COMMODITY 13 
 
 than any other known substance, it will supersede all others. 
 The fact that it is not wholly free from variation itself will 
 not prevent it from becoming the sole and universal money 
 of civilized mankind. 
 
 The durability of gold is one of the most potent factors 
 contributing to its stability of value. Gold does not deterio- 
 rate with age, and its loss by abrasion is slight. The pro- 
 duction of each year is added to the accumulations of the 
 past. Hence the mass in existence at any time is so great 
 that its value is not perceptibly affected by any change in 
 the output of a single year or short series of years. This 
 A standard mass may be likened to the ballast which gives 
 of Deferred steadiness to a ship. Gold thus becomes a 
 
 good standard of deferred payments. The 
 desideratum here is that the value of the future payment 
 shall be as nearly as possible equal to that of a present 
 payment, although absolute equality cannot be expected. 
 
 The durability of gold makes it also a convenient store of 
 value. Gold coins or ornaments that have been buried 
 thousands of years are of no less value than gold fresh from 
 the mine. 
 
 Money is a product of evolution, a result of the ages. 
 
 The better has gradually crowded the worse out of existence. 
 
 Our own history forms no exception to this 
 
 ofEvoiutk>n dU ru ^ e ' ^ or a l tnou gh our colonial ancestors for a 
 time went back to a system almost as rude as 
 that of the Homeric period, they eventually abandoned it 
 and resumed metallic money, which always served as a 
 mental standard even when it was not a legal one. It 
 is a fact of prime importance we meet it everywhere 
 in colonial history that in all trading, whether the 
 medium of exchange was wampum, beaver, tobacco, or 
 what not, there was a mental reference to metallic money, 
 most commonly silver. In other words, silver, although
 
 14 EVOLUTION OF MONEY 
 
 a latent standard, was the real standard at all times and 
 places. 
 
 The question may be asked, Why did our ancestors endure 
 the burden of an inferior kind of money so long, when they 
 knew that it was inferior? The answer is that a metallic 
 money is an expensive tool acquired by a community at a 
 considerable cost and sacrifice. The early settlers had very 
 little capital, and preferred to put as little of it as possible 
 into the shape of money, and as much as possible into food, 
 clothing, and implements. They could not have both a 
 metallic currency and an axe. They chose the axe as being 
 more important to them, and got along without the coin. 
 Hence the prevalence of paper money. Moreover, the one 
 form of ready capital which was acceptable to all, and there- 
 fore could be used as a medium of exchange, was a ready 
 article of export, e.g., in New York, beaver skins ; in Vir- 
 ginia, tobacco ; in South Carolina, rice, etc. These were 
 the natural money in those sections. Silver could not be 
 kept in circulation, as it was inevitably exported to be ex- 
 changed for more valuable kinds of capital (axe, food, 
 clothing). The faster it was coined or imported from the 
 West Indies, the faster it left to buy goods abroad. 
 
 RECAPITULATION 
 
 Money is a common measure of value, a medium of 
 exchange, and a standard of deferred payments. Like most 
 other commodities, it is the product of labor. Any portable 
 article may answer the purpose of money; some com- 
 modities are more convenient than others. Mankind has 
 experimented with many different ones, and has selected 
 gold as the best. The selection has been made by tacit 
 agreement, not by convention. 
 
 All trade is essentially barter, even when carried on by 
 the use of gold.
 
 MONEY A COMMODITY 15 
 
 The value of any standard money depends upon its utility 
 or usefulness, i.e., upon what the consumers of the com- 
 modity are willing to pay for it for other than monetary 
 uses ; for instance, for ornament. 
 
 In every exchange the gold is of the same value as the 
 thing for which it is exchanged, or is so considered by the 
 traders. 
 
 The requisites of a good kind of money are portability, 
 homogeneity, durability, divisibility, cognizability, and sta- 
 bility of value. These requisites are found to exist in the 
 greatest perfection in gold. 
 
 By the value of gold we mean the quantity of other com- 
 modities that it will exchange for, at a given time. As value 
 is a relation existing between different things, it follows that 
 variations of value may arise from causes affecting either 
 of them. 
 
 Gold is not wholly free from variations of value, but is 
 subject to fewer changes than any other substance which is 
 fitted to be used as money. 
 
 AUTHORITIES 
 
 Felt's Historical Account of Massachusetts Currency. 
 
 Bronson's Historical Account of Connecticut Currency, etc. 
 
 Sumner's History of American Currency. 
 
 Weeden's Economic and Social History of New England. 
 
 Documents Relating to the Colonial History of New York. 
 
 Brock's History of Tobacco (in Vol. Ill, Tenth U. S. Census). 
 
 Hening's Statutes of Virginia. 
 
 Ridgway's Origin of Currency and WeigJit Standards. 
 
 Hill's Handbook of Greek and Roman Coins (London, 1899).
 
 CHAPTER II 
 COINAGE 
 
 COINAGE is the process of identifying and stamping a 
 piece of metal intended to be used as money. Coins are 
 of two kinds, namely : 
 
 I. Those made by the government for private persons, 
 from metal deposited by them, without limit as to quantity, 
 and full legal tender. 
 
 II. Subsidiary coins made by the government for itself, 
 such coins being restricted in quantity, and sold to private 
 persons at more than cost, and being usually limited legal 
 tender. 
 
 As regards coins of the first class, the government's 
 stamp is merely a certification of the weight and fineness of 
 the metal composing them. The prime requisites of such 
 a coinage are : 
 
 1. That the coins shall contain exactly the amount of fine 
 metal that the law prescribes ; 
 
 2. That they shall be easily recognized ; 
 
 3. That they shall not be easily counterfeited or altered ; 
 
 4. That they shall not be easily abraded by ordinary use. 
 The word " subsidiary " is usually applied to coins which 
 
 constitute the small change of a country and which are 
 legal tender only for limited amounts. In 
 the United States the silver dollar must be 
 classed as subsidiary also ; for, although it is 
 full legal tender, the government does not coin it for private 
 individuals as it coins gold. It is subsidiary, or subordinate, 
 
 16
 
 COINAGE 17 
 
 to gold coins. It passes for much more than the value 
 of the metal contained in it. Professor Taussig has fitly 
 applied the term " large change " to the silver dollar. Coins 
 made of copper or other base metal are called " token " coins. 
 They are subsidiary coins for the smallest transactions. 
 
 Subsidiary coins, however much their metallic value may 
 fall below their nominal value, may be kept at par either by 
 restricting their quantity, or by redeeming them on demand. 
 If the quantity is restricted to the actual needs of the coun- 
 try for small change, they will be at par because they are 
 among the necessities of life. Our government redeems its 
 coins smaller than one dollar when presented in sums not 
 less than twenty dollars. 
 
 By the coinage act of 1873 the weight of our subsidiary 
 coins was increased slightly, to make them correspond with the 
 legal-tender silver of France. Two half dollars (384 grains) 
 were raised to 25 grams (385.8 grains), equal to the five- 
 franc piece. This change was of no practical importance. 
 
 If subsidiary silver coins circulate at a value which is 
 largely imaginary, the question may be asked, Why not 
 make them of some other metal, or even of 
 Metal*' paper ? There are no reasons except custom 
 
 and convenience. A coin not heavier than a 
 half dollar is more convenient than a piece of paper ; it is 
 cleaner, and in the long run is probably cheaper, as it does 
 not require frequent renewal. A cheaper coin might be 
 made out of some other metal, but it is generally best to 
 conform to the habits of the people. Having been always 
 accustomed to a silver subsidiary coinage, no good reason 
 is apparent why we should depart from it. 
 
 The shape of coins is usually circular, but some are 
 square, others oblong, others cubical. Many ancient coins 
 were dish-shaped ; others in the form of rings. The first 
 coins struck by the government in California were octagonal.
 
 1 8 EVOLUTION OF MONEY 
 
 The copper coins of China, called "cash," have square 
 holes in the center by which they are strung on a wire and 
 
 hung over the owner's neck. The objects 
 Shape of Coins. . . . . ' 
 
 to be aimed at in determining the shape of a 
 
 coin are freedom from abrasion, exemption from alteration, 
 and convenience in handling. Modern commerce tends to 
 minimize the use of gold except to settle international bal- 
 ances. For this purpose fine gold bars are best, as they 
 are subject to hardly any abrasion and are much more 
 convenient to bankers than ordinary coins. 
 
 Coins have been made, at different times and places, of 
 iron, lead, tin, brass, copper, nickel, platinum, silver, and 
 gold. There were coins of electrum in the ancient world. 
 This was a mixture of silver and gold found in a natural 
 state in the Tmolus Mountains in Asia Minor and else- 
 where. Specimens found in the Tmolus range 
 Materials. 
 
 in modern times have yielded 73 per cent 
 
 gold and 27 per cent silver. Electrum was also produced 
 artificially, with a larger proportion of silver, in order to 
 debase the currency. 
 
 In early Rome small payments were made by tale (i.e., 
 by counting), and large ones by weight. The Latin word 
 
 pendo, from which our words " compensation," 
 Weight Coins. 
 
 " expenditure, and " stipend are derived, 
 
 means to weigh. The shekel, the talent, the drachma, the 
 pound, the penny, the peso, the livre, the franc, and the 
 mark were originally the names of weights. They are 
 instances of the transference of the name of a weight to 
 a coin. 
 
 A standard is a measure, by comparison with which the 
 length, size, weight, capacity, fineness, value of other things 
 is determined, as a standard inch, a standard gallon, etc. 
 It is proper, therefore, to speak of a standard of weight, a 
 standard of fineness, a standard of value. Our law says
 
 COINAGE 19 
 
 that the dollar composed of 25 T 8 ff grains of gold, nine-tenths 
 fine, shall be the standard unit of value, and that ten times 
 this amount shall be the eagle, etc. The amount of fine gold 
 
 in the dollar is 23.22 grains. The smallest 
 standard 6 * &^ com now P r duced at the mint is the 
 
 quarter eagle (two dollars and a half) of the 
 standard weight of 64^ grains. The gold dollar is too 
 small a piece for convenient use. Its coinage was discon- 
 tinued by the act of September 26, 1890. The coins 
 now authorized to be struck at the mint of the United 
 States are the gold quarter eagle, half eagle, eagle, and 
 double eagle ; the silver dollar, the half dollar, the quarter 
 dollar, and the dime ; the five-cent piece of nickel and 
 copper, and the one-cent piece of copper. 
 
 We sometimes read of an "ideal dollar," a phrase imply- 
 ing that there may be a dollar whose value is not embodied 
 
 in any tangible substance, but is purely a 
 iar " im ^ibie menta ^ conception. This is impossible. Money 
 
 must be something which shall serve as a 
 medium of exchange. There may be as many different ideas 
 as there are different people. How should we choose an 
 umpire to furnish ideas of the relative values of different 
 kinds of property? Yet the Supreme Court of the United 
 States, in the Legal Tender Cases, gravely maintained that 
 "value is an ideal thing" and that "the gold or silver thing 
 we call a dollar is in no sense a standard of a dollar." 
 
 The government receives all the gold deposited at the 
 mint by private individuals and converts it into coin or bars 
 
 free of charge. All silver, nickel, and copper 
 Seigniorage. 
 
 coins are made by the government from its 
 
 own metal and are sold to the public for gold or its equiv- 
 alent. The profit which the government makes on such 
 sales is called "seigniorage." It is the difference between 
 the cost of the bullion and the price received for the coins.
 
 2O EVOLUTION OF MONEY 
 
 The same term is applied to any charge which a govern- 
 ment makes for coining a metal for private individuals. 
 Formerly the seigniorage on silver subsidiary coins was 
 only 5 to 7 per cent. Since the great decline in the price 
 of silver took place, it has become more than 100 per cent. 
 Formerly the government could buy only sixteen pounds of 
 silver bullion with one pound of gold. Now it can buy 
 more than thirty-five pounds for the same money. 
 
 Although the law contemplates the deposit of gold bullion 
 at the mint, or assay offices, of the United States, and the 
 coinage of the same for the depositor, yet 
 Bumon 8 f GOM Poetically the Treasury buys the bullion 
 and pays for it. The practice of the assay 
 office in paying for gold varies according to the kind of 
 bullion in the deposit. A depositor of bars from known 
 assayers, or smelters, or of foreign coin of which the fine- 
 ness can be readily approximated, is allowed at once 90 
 per cent of the value ascertained by weight and calculation 
 of the fineness. The balance is paid after melting and 
 assaying. When the deposit is small, or when bullion is 
 tendered without well-known "ear-marks," no advance pay- 
 ment is made, but the full payment is made after assaying 
 without waiting for coinage. Having bought the bullion, 
 the director of the mint determines what portion shall be 
 coined and what portion converted into bars. A certain 
 portion is always converted into " fine bars " for commer- 
 cial use, the remainder into mint bars (^ fine) suitable 
 for coinage. 
 
 The successive steps in the making of coins are : (i) 
 assaying, (2) refining, (3) alloying, (4) coining. The bul- 
 lion is first melted in a crucible. While in the molten state 
 it is stirred until thoroughly mixed. It is then allowed to 
 cool in the form of a brick. Small pieces are clipped from 
 two corners of the brick most distant from each other and
 
 COINAGE 21 
 
 given to two different assayers to test the fineness of the 
 metal. If their tests do not agree within a certain fraction, 
 
 the brick is returned to the melting pot and 
 Assaying. 
 
 the process repeated. When the test is sat- 
 isfactory and the amount of foreign substance is known, 
 the whole of the impurity is removed by chemical means. 
 Then the requisite amount of alloy is added, by remelting 
 and mixing, to harden the mass. Thus, to nine pounds of 
 pure gold one pound of copper is added, so that the coins 
 shall be nine-tenths fine. 
 
 The bullion is rolled into strips or ribbons a little wider 
 than the coin to be struck. It is then " drawn " in a 
 
 machine which reduces it to the thickness of 
 
 Coining. 
 
 the coin. The strips are then passed through 
 another machine, which cuts out of them circular pieces, of 
 the proper size, called "blanks." Each blank is examined 
 by an expert both by weighing and by sounding. If one is 
 found too light, or if it does not " ring true," it is returned 
 to the melting pot. If it is too heavy, the excess of metal is 
 removed by filing. 
 
 The blanks are sent to a machine by which a slight 
 rim is raised around the edge of the piece on both sides, 
 so that its weight shall rest on the rim and not on the 
 whole surface of the coin, in order to minimize the abra- 
 sion. This process is called "milling." The blanks are 
 then put in a cylindrical case and sent to the coining machine. 
 At each revolution of the machine one blank drops from 
 the bottom of the cylinder, is seized and conveyed to a 
 sunken steel bed which contains a die that prints one sur- 
 face of the coin. This bed has a serrated edge or " collar." 
 Directly above this sunken die is a steel stamp containing a 
 die which prints the other surface of the coin. This stamp 
 descends on the blank underneath with sufficient force to 
 impress upon it the letters and figures of both surfaces of
 
 22 EVOLUTION OF MONEY 
 
 the coin. The pressure also squeezes the coin against the 
 serrated collar, producing an indentation on the edge of 
 the coin, the object of which is to prevent any clandes- 
 tine removal of metal. If a piece were clipped from the 
 edge, or if any portion were removed by filing, the fraud 
 would be detected by the absence or irregularity of the 
 indentations. 
 
 Experience has shown that the work of coining cannot be 
 
 safely intrusted to private enterprise. Between the years 
 
 1830 and 1860 there were numerous private 
 
 fT 16 C >!, ning manufactories of gold coins in the United 
 Inadmissible. 
 
 States. They were situated in Georgia, North 
 Carolina, California, Oregon, Utah, and Colorado. 1 They 
 turned out coins of varying goodness, all purporting, how- 
 ever, to be of the weight and fineness of the government's 
 coins. They were not counterfeits. They did not imitate the 
 designs on the coins of the United States. Many of them 
 bore the names and places of business of the manufacturers. 
 They were ingots purporting to be worth the number of dol- 
 lars stamped on them. The value of these five-dollar pieces 
 
 1 The mint at Philadelphia has upwards of sixty specimens of private 
 gold coins and many copper ones which circulated in the United States 
 at one time and another. Examples of these private gold coins are 
 shown in the frontispiece, viz. : 
 
 1. Coined by Templeton Reid of Georgia. Value about $5.00. 
 Mr. Reid afterward removed his coining apparatus to California. 
 
 2. Bechtler Mint at Rutherfordton, N. C. Value about $4.90. 
 
 3. Letters over the figure of a beaver are the initials of the persons 
 composing the Oregon Exchange Company. Value about $4.84. 
 
 4. Letters J. S. O. mean J. S. Ormsby, the coiner of these pieces. 
 Value 59-37- 
 
 5. Mormon coin. Letters above the clasped hands mean Great 
 Salt Lake City Pure Gold. Value $4.36. 
 
 6. Pike's Peak (Colorado) coin. Value not known. 
 
 7. Ingot of Moffat & Co., San Francisco. Value $16.
 
 COINAGE 23 
 
 ranged from $4.36 to $5.00. The people who took them in 
 trade could not distinguish between them and were therefore 
 liable to be cheated. The government did not forbid the 
 private coining of gold until June 8, 1864. 
 
 The weight of a new gold eagle, or double eagle, must not 
 vary more than half a grain from the standard weight fixed in 
 the law. That of the smaller gold coins must 
 in not var y more tnan a quarter of a grain. This 
 
 allowable variation is called the " tolerance of 
 the mint." The " mint price " of gold is the amount of 
 money which a given weight of standard gold will produce 
 when coined. An ounce of gold nine-tenths fine will produce 
 approximately $18.604. The fine ounce is worth $20.671. 
 As the gold dollar contains 23.22 grains, the $20 piece con- 
 tains 464.4 grains. The troy ounce contains 480 grains, or 
 15.6 grains more than $20. Then 23.22 : 100 : : 15.6 : 67.1 
 approximately. 
 
 The mint price of gold in England is .3 17^. io$d. per 
 ounce. This is the exact amount of money which an ounce 
 of gold of the English standard, \^ fine, will produce by 
 coinage. Anybody can take gold to the British mint for 
 coinage. In order that the holders of gold need not lose 
 time waiting to have it coined, the law requires the Bank of 
 England to buy all the gold offered to it at the price of 
 ^3 ijs. f)d. per ounce. The difference between this price 
 and the mint price (i-^/.) is compensation to the Bank for 
 interest and for the labor of weighing, assaying, etc. Coin- 
 age in the United States is free ; that is, without expense to 
 the depositor of gold bullion, but he is required to deposit 
 also the alloy used in making the coins, or to pay the cost 
 of it. 
 
 We sometimes hear that the Bank of England has raised 
 the price of gold, or is paying a premium for it. This means 
 that its desire to obtain gold is such that it will forego a
 
 24 EVOLUTION OF MONEY 
 
 part of the \\d. Strictly speaking, there cannot be a pre- 
 mium on gold in a country which has the single gold 
 standard, since that would imply that one gold 
 A '<l^ ei f, lum sovereign is worth more than another of the 
 
 on Gold." 
 
 same weight and fineness. 1 There may be a 
 premium, however, on gold bars over gold coin, or on one 
 kind of coin over another kind. The Bank of England 
 sometimes charges a little more for American eagles than 
 the metallic equivalent in pounds, shillings, and pence, and 
 this is called a premium on American gold. This is not a 
 premium on gold but on its form. 
 
 There is a serious loss due to the abrasion of gold coin in 
 
 England. Anybody to whom it is offered may 
 
 Abrasion of Coin. ,, X i i' i i i i i- 
 
 weigh it, and if he finds it below the legal limit 
 of tolerance the law requires him to cut it in half, or other- 
 wise mutilate it, and return the parts to the person tendering 
 it. Practically, however, nobody does this except the Bank 
 of England or the officers of the government. The Bank 
 weighs all coins offered to it and complies with the law by 
 mutilating the light ones. The law, as it stands, throws the 
 whole loss of abrasion of a coin on the last holder. This is 
 a manifest injustice. The same rule prevails in the United 
 States, although our law does not require anybody to mutilate 
 coins of light weight. Anybody may refuse to receive them. 
 So, practically, the loss falls upon the last holder here as in 
 England. The evil is scarcely felt in this country since the 
 circulation of gold is small and the consequent abrasion 
 slight. 
 
 The new coinage law of Japan (1897) provides that if, in 
 consequence of abrasion from circulation, any of the gold 
 coins fall below the minimum circulating weight, the gov- 
 ernment shall exchange such coins for others of the same 
 face value without making any charge. It proceeds upon 
 the assumption that it is possible to distinguish between
 
 COINAGE 25 
 
 abrasion caused by ordinary wear and fraudulent abrasion, 
 or "sweating." It is the opinion of some of the officials 
 of the United States Mint that this is feasible, but there 
 has not been sufficient time as yet to decide whether the 
 Japanese experiment is a safe one. In 1891 the British 
 Mint was authorized, by way of experiment, to exchange 
 full-weight gold coins for light ones not mutilated, and 
 an appropriation was made from the public treasury to 
 pay the difference. In 1897 the practice was stopped, 
 showing that the results of the experiment did not justify 
 its continuance. 
 
 Fraudulent abrasion and clipping of coins were a great 
 pest in the seventeenth century. The silver coins circu- 
 lating in the colonies were chiefly Spanish 
 dollars sometimes called "pieces-of-eight," 
 being of the value of eight reals and their 
 fractions. They were brought in by trade with the West 
 Indies. Some were coined in Spain and others in the 
 Spanish-American colonies. At their best estate they were 
 not uniform in either weight or fineness, and they had been 
 much tampered with by sweating and clipping. The heavier 
 ones were constantly culled out to make remittances abroad, 
 since they were received in England by weight only. Those 
 which remained in the colonies grew lighter and lighter, 
 until, in 1652, the pieces in circulation had lost about 
 one-fourth of their original weight. 
 
 When two kinds of money, differing in value, are equally 
 current, the worse drives the better out of circulation. The 
 
 reason is that brokers, bullion dealers, jewel- 
 Gresham's Law. , , , . .. . ~ 
 
 ers, and others who habitually make a profit 
 
 from the use and handling of the precious metals, select the 
 full-weight coins for melting, or exportation, and pass the 
 light ones into the circulation. The same rule applies in a 
 case where money of two metals, like silver and gold, is
 
 26 EVOLUTION OF MONEY 
 
 coined without limit at the mint, and both kinds are equally 
 legal tender. If there is a slight difference in the metallic 
 value of the different kinds of dollars, the more valuable 
 ones will be exported by bullion dealers and the less valu- 
 able retained for domestic use. This is called Gresham's 
 Law from Sir Thomas Gresham, who explained it to Queen 
 Elizabeth about the year 1559. 
 
 In order to correct the defects of a constantly depreciat- 
 ing currency and to fix a standard of money, the colony 
 of Massachusetts, in 1652, decided to estab- 
 
 CoToniai coins. lish a mint for the coinage of shillings, six- 
 penny, and three-penny pieces. Conforming 
 to the depreciation that already existed, she gave to the 
 shilling the weight of 72 grains, which was 22^- per cent 
 less than that of the English shilling. The English standard 
 of fineness was preserved. The colony did not itself 
 operate the mint, but made a contract with one John Hull 
 to do the work, requiring him to receive and coin all 
 the silver offered to him and authorizing him to retain 
 as his pay one shilling out of every twenty which he pro- 
 duced. The mint was closed by order of the home 
 government in 1686. 
 
 These early Massachusetts coins had two different devices. 
 The first issues of the mint were plain circular discs bearing 
 on one face the letters " N E " (New England) 
 
 ree and on the other face " XI1 " for the shillin gs, 
 "VI" for the sixpences, and "III" for the 
 
 three-penny pieces. These pieces, by reason of their plain- 
 ness, offered every facility to coin clippers, by whom they 
 were speedily reduced in size and weight. In order to pre- 
 vent such fraud a change of design was adopted by which 
 the figure of a tree was stamped on one face and a row of 
 dots and lettering was placed around the margin of the 
 other. This became known as the " pine-tree coinage."
 
 COINAGE 27 
 
 The disorders of the currency due to the clipping and 
 
 sweating of coin led to different valuations of the Spanish 
 
 " pieces-of-eight " at different places. On the 
 
 WonTrAnne 14 T ^ tn ^ J une > I 74 a proclamation was issued 
 by Queen Anne on this subject. It first stated 
 the actual value of foreign coin circulating in America, in 
 terms of sterling money, according to the assays of the mint. 
 " Sevil pieces-of-eight old plate, 1 17 pennyweight 12 grains," 
 were equal to 4^. (yd. The proclamation then says that 
 " from and after the first day of January next no Sevil, pillar, 
 or Mexico pieces-of-eight shall be accounted, received, taken, 
 or paid within any of our colonies or plantations at above the 
 rate of six shillings per piece, current money, for the dis- 
 charge of any contracts or bargains to be made after the 
 said first day of January next." Six shillings was consid- 
 ered by the home government a fair average of the various 
 colonial valuations of the Spanish dollar. This valuation 
 came to be known everywhere by the term " proclamation 
 money" or " proc. money." One hundred pounds sterling 
 was the equivalent of ^133^ proclamation money. 
 
 The proclamation was generally disregarded, because it 
 
 interfered with the habits of the people. See- 
 it is disregarded. . 
 
 ing that the proclamation was not regarded, 
 
 Parliament, in 1707, embodied it in a law and decreed a 
 penalty of six months' imprisonment and a fine of 10 
 for each violation of it. This act was disregarded as com- 
 pletely as the previous proclamation had been. Each col- 
 ony continued to keep its accounts in its customary pounds, 
 shillings, and pence, which were different from those of 
 England and which differed among themselves. Thus, in 
 New York, the Spanish dollar was rated at 8s. and in 
 Pennsylvania at "js. 6d. 
 
 1 The word " plate " (Spanish plata, silver) is here used to signify 
 Spanish silver money, not bullion. Old plate meant old coinage.
 
 28 EVOLUTION OF MONEY 
 
 The phrase " money of account " means the money in 
 
 which people keep their accounts and in which they think. 
 
 The money of account of all the American 
 
 colonies was pounds, shillings, and pence, but 
 
 there were no such things in circulation except 
 
 a limited amount of the pine-tree coinage. The money in 
 
 actual use was the Spanish dollar and its fractions, more or 
 
 less clipped and abraded. The division of the dollar into 
 
 one hundred parts was not made till 1792. By a law of that 
 
 year Congress enacted that the money of account of the 
 
 United States should be dollars, dimes, etc., but it did not 
 
 become so in practice until after the Civil War. Before 
 
 that era the price of merchandise, was quoted in dollars, 
 
 shillings, and sixpences. 
 
 RECAPITULATION 
 
 Coins are pieces of metal stamped to indicate their weight, 
 fineness, and the rate at which they shall pass in trade. 
 Ours are of two kinds : (i) full legal tender, being pieces 
 of gold deposited as bullion by private persons, upon which 
 the government has put a stamp showing its weight and fine- 
 ness ; (2) limited legal tender, or subsidiary, being small 
 pieces of silver, nickel, or copper, made by the government 
 from its own material, and sold to citizens for small change. 
 
 The standard unit of value in the United States is the gold 
 dollar, but, being inconveniently small, it is not now coined. 
 
 The gold coins struck at the mint are the double eagle 
 (twenty dollars) and its submultiples down to two dollars 
 and a half. The subsidiary coins are the silver dollar (one 
 hundred cents) and its submultiples down to one cent. 1 
 
 exceptional character of the silver dollar will be considered 
 more fully hereafter.
 
 COINAGE 29 
 
 Seigniorage is the profit made by the government in the 
 manufacture of coins. In the United States this profit arises 
 from silver, nickel, and copper coins only. 
 
 Coining is now universally considered an attribute of sov- 
 ereignty. There have been times, however, when private 
 coining was permitted, and such was the case in the United 
 States prior to 1864. 
 
 Gold coins when abraded more than one-half of one per 
 cent are legal tender only in proportion to their weight. 
 
 The " mint price of gold " is the amount of money that a 
 given weight of gold, say one ounce, will produce when coined 
 in accordance with law. 
 
 When two kinds of money differing in actual value are 
 equally current, the worse drives the better out of circulation, 
 because brokers, bullion dealers, etc., select the better for 
 hoarding, or melting, or exportation. This principle is called 
 " Gresham's Law." 
 
 AUTHORITIES 
 
 Linderman's Money and Legal Tender. 
 Muhleman's Monetary Systems of the World. 
 Watson's History of American Coinage. 
 Snowden's Coins in the Cabinet of the United States Mint. 
 J evens' Money and the Mechanism of Exchange. 
 Falkner's article on the Private Issue of Token Coins, in the 
 Political Science Quarterly, June, 1901.
 
 CHAPTER III 
 LEGAL TENDER 
 
 ANYTHING which can be lawfully used in payment of a 
 debt expressed in terms of money, and which creditors are 
 required to accept, is called legal-tender currency, or simply 
 legal tender. 
 
 The principle of legal tender did not have its origin in 
 an act of conscious legislation. The government begins, at 
 a time when metal is circulating by weight, to 
 
 certif y the wei g ht and fineness. It stamps 
 small ingots in order to avoid the necessity 
 of frequent weighing. This is coinage. Then people make 
 contracts in terms of the government coinage, and the 
 government enforces the contracts. Under Roman law the 
 creditor was obliged to take in payment whatever the gov- 
 ernment was coining. 
 
 The origin of legal tender in the modern world is con- 
 nected with the reestablishment of the double standard of 
 gold and silver in Western Europe in the thirteenth century, 
 in place of the single silver standard which previously pre- 
 vailed. The double standard means that debts may be 
 paid at the debtor's option with either one of two metals 
 coined into money according to a ratio fixed 
 b y P ublic authority -providing, for exam- 
 pie, that one pound weight of gold shall be 
 the equivalent in law of fifteen pounds of silver, the mints 
 coining both metals without limit for private persons. The 
 establishing of such a ratio was considered, from very 
 
 3
 
 LEGAL TENDER 31 
 
 early times, an attribute of sovereignty, and in monarchical 
 countries a prerogative of the crown. Each proclamation 
 of the ratio was virtually a legal-tender act. Debts had to 
 be paid in one or the other of two metals. Consequently 
 any man, or body of men, who could fix the ratio, could 
 decide how much of either should be paid. 
 
 From the analytical point of view, a legal-tender act is 
 nothing but an act of legal force, establishing a new defini- 
 tion of an old term for instance, " dollar " which has 
 been customarily used in making contracts. It is essen- 
 tially ex post facto legislation, binding the courts to a new 
 interpretation of existing contracts, and incidentally inflict- 
 ing various degrees of injury on those whose position is 
 such that they cannot take advantage of circumstances to 
 modify existing contracts as for wages. Extreme cases 
 may be imagined where such action might be needful in the 
 interest of the general welfare, but with very few exceptions 
 the passage of such an act is a subterfuge of a government 
 for giving to itself, or to some favored class, immediate 
 advantage over part of the community concerned. 
 
 Gold and silver were made full legal tender by the Con- 
 gress of the United States at the ratio of i to 15 in 1792. 
 The coinage act was based upon a report of Alexander 
 Hamilton, Secretary of the Treasury. Hamilton examined 
 . the question of the standard with great care, and although 
 the conclusion he reached was erroneous, it is interesting to 
 observe how near he came to the truth. He thought that 
 gold was better fitted to be the standard than silver because 
 it was less liable to fluctuations of value and also because 
 it was the standard de facto. He observed that the silver 
 dollar of Spain in actual circulation had no standard value 
 by weight and fineness, but circulated by tale, " very much 
 as a mere money of convenience," whereas gold money had 
 a fixed weight by the custom of merchants. This fixed
 
 32 EVOLUTION OF MONEY 
 
 weight was 24! grains of fine metal per dollar. 1 While this 
 
 consideration favored the adoption of the single gold 
 
 standard, Hamilton says that "to annul the 
 
 Our First Coin- c *.!_ 1.1. . i r t t n 
 
 age Act use eitner * ^e metals as money [of full 
 
 legal tender] is to abridge the quantity of circu- 
 lating medium, and is liable to all the objections which arise 
 from a comparison of the benefits of a full with the evils of 
 a scanty circulation." He thought also that a country could 
 draw to itself a greater quantity of the precious metals in 
 international trade by means of the double than of the 
 single standard. This conception was erroneous, but it was 
 the common belief of the time. 
 
 Hamilton accordingly recommended the double standard 
 at the ratio of 15 to i. He had not failed to note that the 
 Spanish silver dollars in circulation were of two different 
 coinages, varying slightly in weight. He decided to take 
 neither of them as the exact basis of our coinage, but to 
 take instead the average of the dollars in actual circulation. 
 By reason of abrasion they were somewhat lighter than the 
 new coins then issuing from the Spanish 
 
 Tender ^ mints ' With these facts before him and 
 
 having regard also to the market ratio of 
 
 the two metals in Europe, he decided that the ratio of 15 to i 
 would be not far from the true metallic equivalent. Taking 
 
 1 Hamilton here perceived the fact that a standard of value may 
 exist, and have controlling force in mercantile circles, without any stat- 
 ute law, and without any conscious action on the part of merchants 
 themselves. The gold standard was in practical operation in his time, 
 just as the silver standard was in operation in the colonies when tobacco 
 and other forms of barter currency were used. The mind of the trader 
 was fixed upon, and governed by, a standard different from the one 
 that most commonly passed from hand to hand. In a book of merit 
 and originality, entitled The Evolution of Modern Money (Macmillan, 
 1901), Mr. W. W. Carlile has traced the existence of what we may call 
 the " latent gold standard " in Europe for a long period before gold 
 became the avowed standard.
 
 LEGAL TENDER 33 
 
 the gold valuation of the dollar (24^ grains of pure metal) 
 as the starting point, and multiplying by 15, the product, 
 37 1 grains of pure metal, was adopted for the silver dollar. 
 The smaller coins were to be of proportionate weight and 
 full legal tender. Congress followed these recommendations 
 in the coinage act of 1792. 
 
 The mint began to coin silver in 1794 and gold in 1795. 
 It was supposed that there would soon be a plentiful supply 
 of coins of both metals ; but, in order to provide for the 
 interval while the mint was in course of erection and equip- 
 ment, Congress passed a law making certain foreign coins, 
 of both gold and silver, legal tender in the United States 
 according to their weights respectively. This act was to 
 remain in force three years after the starting of our mint 
 and no longer, but by reason of the difficulty experienced 
 in retaining our own coins in circulation the legal tender of 
 foreign coins was kept in force by repeated reenactments 
 for more than sixty years. We did not have any settled 
 money of our own until after the passage of the act of 1853 
 providing for a subsidiary coinage. 
 
 The first silver dollars turned out by our mint were a 
 little lighter than new Spanish dollars, but they passed in 
 trade for the same value, both here and in the West Indies. 
 Brokers began to collect and export them to the Spanish 
 colonies, where they were exchanged for Spanish dollars, 
 and the latter were brought back for recoinage at our mint. 
 
 There was a profit of one per cent in the 
 Its Failure. 
 
 operation. As coinage was free, the govern- 
 ment was working for bullion brokers without pay, and was 
 not accomplishing the end aimed at. It was not supplying 
 the American people with American money. Accordingly 
 President Jefferson, in 1806, gave an order to the mint to 
 stop the coinage of silver dollars altogether. This order 
 remained in force thirty years.
 
 34 EVOLUTION OF MONEY 
 
 The legal ratio of 15 to i, although pretty close to the 
 market ratio at the time when the coinage act of 1792 
 was passed, did not long remain so. In 1797 the market 
 ratio in Hamburg was 15.47. Gresham's Law asserted itself. 
 American gold coins began to grow scarce. They were 
 melted or exported because they were worth more for that 
 purpose than for debt-paying at home. As early as 1817 
 they had entirely disappeared from circulation, although 
 the coinage of them continued at the usual rate. 
 
 In 1834 the market ratio in Hamburg was 15.73 and 
 gold bore a premium in brokers' offices in the United 
 States of 4^- per cent over silver. Congress had had the 
 subject of a change of the legal ratio under consideration 
 since 1818. In 1834 it passed the Gold Bill, so called 
 because it was intended to bring gold again into circula- 
 tion. The ratio adopted was approximately 
 co[nageAct I ^ > to I- ^ e amount of pure metal in the 
 silver dollar remained unchanged. That of 
 the gold dollar was reduced from 24.75 grains to 23.2 
 grains, but was increased in 1837 to 2 3- 22 grains, at which 
 weight of pure metal it now stands. This made the gold 
 dollar 2 per cent less valuable than the silver one at that 
 time. It was a debasement of the currency to that extent. 
 There was strong opposition to the bill, on the ground that 
 it would drive our silver coins out of circulation. Neverthe- 
 less, the majority in favor of the bill was very large in both 
 branches of Congress, about four to one in the House and 
 five to one in the Senate. 
 
 When the law of 1834 was parsed, the premium on gold 
 in the market was 4^- per cent. Anybody having $100 
 gold could buy $104.50 silver to pay his debts with. The 
 government had never promised to hold the market ratio 
 of the metals steady at 1:15. This had come in the course 
 of time to be 1:15.625. Under the new law anybody
 
 LEGAL TENDER 35 
 
 having $100 silver could buy $102 gold to pay his debts 
 with. In other words, the standard was debased 2 per 
 cent. The law of 1834 ought to have provided that 
 preexisting contracts should be settled on the preexisting 
 basis. 
 
 There were no silver dollars in circulation, since the coin- 
 age of them had been discontinued by order of President 
 Jefferson, as already stated. As our smaller 
 
 Silver coins in silver coins were of full weight, they were 
 
 the United States 
 
 prior to 1853. melted and exported, and their place in the 
 
 circulation was taken by light-weight foreign 
 coins, principally Spanish and Mexican. Two halves or four 
 quarters, if new and full weight, were worth about 2 cents 
 more than a gold dollar. Consequently they were collected 
 by brokers and exported. But two halves, or four quarters 
 that had lost 2 cents' worth of silver by abrasion, would 
 circulate, because there would be no motive to melt or 
 export them. From 1834 to 1856 the silver money of this 
 country consisted, to a large extent, of foreign coins, more 
 or less worn, chiefly Spanish and Mexican, but with a con- 
 siderable sprinkling. of English, French, German, and Scan- 
 dinavian pieces. Every merchant kept a coin-chart manual 
 for handy reference to determine the value of these pieces 
 as they were offered in trade. 
 
 In the act of 1853 we adopted the principle of the British 
 act of 1 816.* The debates in Congress on this bill show 
 that it was the fixed intention of its promoters to establish 
 the single gold standard, and that there was scarcely any 
 opposition to the project. They failed to carry out this 
 intention, however, since they left the silver dollar in the 
 list of coins to be struck at the mint if anybody should 
 choose to deposit silver bullion for that purpose. Our 
 silver dollar was still a favorite coin in China, where it 
 1 See page 63.
 
 36 EVOLUTION OF MONEY 
 
 passed by weight. This was probably the reason why it 
 
 was not treated like our other silver coins in the act of 
 
 1853. The silver dollar was worth four cents 
 
 age Act"* 1 C in " m re than the S ld d Ilar in the bullion mar ' 
 ket. Consequently none were to be found 
 
 in circulation, although upwards of $5,600,000 were coined 
 between 1853 and 1873. All of these must have gone to 
 China except a few which were retained in coin collections 
 and as curiosities. The act of 1853, however, accomplished 
 its main object. It gave the country an abundance of new 
 and bright half dollars, quarters, dimes, and half dimes 
 that would stay at home and serve the purpose of small 
 change. The weight of the half dollar was reduced about 
 7 per cent, /'.<?., to 192 grains, and that of the smaller 
 coins in the same proportion. Consequently there was 
 no longer any motive to export them. In 1857 the legal- 
 tender faculty was taken away from all foreign coins, 
 both gold and silver, and they very rapidly passed out 
 of circulation. 
 
 In 1873, when the next change took place in our coin- 
 age system, the country was under the rdgime of irredeem- 
 able paper. Neither gold nor silver was in circulation. 
 Practically the silver dollar had never been in circulation. 
 To Americans it was an unknown coin. From 1797 to 
 1806 it had been sent out of the country by speculators to 
 be exchanged for Spanish dollars. From 1806 to 1836 the 
 mint had ceased to coin it altogether. After 1836 its cir- 
 culation was rendered impossible by reason of its premium 
 over gold in the bullion market. 
 
 In 1869 the Treasury Department undertook a revision 
 of the coinage laws. Mr. Boutwell, the Secretary, placed 
 the work in the hands of Mr. John J. Knox, who prepared 
 a bill which made the silver coins of the United States legal 
 tender for only $5.00 in one payment. This included a
 
 LEGAL TENDER 37 
 
 silver dollar of 384 grains, but it was omitted by Con- 
 gress and the " trade dollar," of 420 grains, intended fur 
 circulation in China, was substituted. The bill provided that 
 no silver coins except those enumerated should 
 
 Our Fourth Coin- be struck at the mint an( j that none excep t 
 age Act. 
 
 trade dollars should be coined for private 
 
 individuals. The silver dollar at that time was worth about 
 two cents more than the gold dollar. The bill made the 
 gold dollar the unit of value. 
 
 Mr. Knox's report and the accompanying bill were sent 
 by the Department to chambers of commerce throughout 
 the country and to persons interested in monetary science, 
 in order to get their opinions and advice. They were sent 
 to Congress in April, 1870. The bill passed the Senate 
 on the loth of January, 1871, but was not reached by the 
 House in time for passage by that Congress. It came up 
 in the next Congress, and after debate in the House, in 
 which the policy of discontinuing the silver dollar was 
 specially discussed, it passed that body, May 27, 1872, by 
 a vote of no to 13. It passed the Senate January 17, 
 without a division, and became a law February 12, 1873. 
 The United States thus adopted the single gold standard. 
 
 Private persons were allowed to deposit silver bullion 
 at the mint and have it coined into trade dollars for their 
 own account. It was never intended that the trade dollar 
 should circulate in the United States at all, but it was inad- 
 vertently placed in the list of coins which were legal ten- 
 der for $5.00. As soon as the price of silver fell so that 
 420 grains were worth less than a dollar, it 
 
 The Trade became profitable for owners of silver to have 
 
 Dollar. 
 
 these dollars coined and put in circulation at 
 
 home. Straightway they began to fill the channels of retail 
 trade. They became so great a nuisance that Congress, in 
 1876, took away their legal-tender quality altogether. This
 
 38 EVOLUTION OF MONEY 
 
 led to a dispute, with a charge of bad faith. So Congress, 
 in 1878, discontinued the coinage of trade dollars entirely. 
 This only aggravated the dispute. Speculators bought up 
 the trade dollars with the expectation that the government 
 would eventually redeem them at par. Nearly $2,000,000 
 of them were reimported from China for tha^ purpose. 
 Finally, in 1887, Congress passed a bill to redeem at par 
 all that should be presented within six months, and Pres- 
 ident Cleveland allowed it to become a law without his 
 signature. The number of trade dollars so redeemed was 
 7 ,68 9 ,o 3 6. 1 
 
 The following varieties of legal tender exist at the present 
 time under the laws of the United States : 
 
 1. Gold coins, legal tender without any 
 Present Varieties exoress i: mit 
 
 of Legal Tender. ' 
 
 2. Silver dollars, and Treasury notes issued 
 
 under the act of 1890, legal tender "except where otherwise 
 expressly stipulated in the contract." 
 
 3. United States notes (greenbacks), legal tender except 
 for interest on the public debt and for duties on imports. 
 Since the resumption of specie payments (1879) these notes 
 have been made receivable for duties by Treasury order, to 
 avoid the trouble of carrying gold to and from the custom 
 house. 
 
 4. National bank notes, legal tender in payment of any 
 debt or liability to any national bank ; also receivable for 
 all government dues except duties on imports. 
 
 5. Silver coins smaller than $1.00, legal tender to the 
 amount of $10 in one payment. Coins of nickel and copper, 
 legal tender to the amount of 25 cents in one payment. 
 
 1 A detailed account of the struggles of the government with the 
 trade dollar is given in Upton's Money in Politics.
 
 LEGAL TENDER 39 
 
 RECAPITULATION 
 
 Legal tender may consist of anything which the law 
 of a country declares shall be received in discharge of an 
 obligation which is payable in money. 
 
 There are several different kinds of legal tender in the 
 United States. That of gold coin is the only one which is 
 not subject to any limitations. 
 
 If a law of tender is made applicable to debts contracted 
 or to bargains made before its enactment, and it alters the 
 terms thereof, it is unjust. It is sometimes said that a 
 change in the law of tender exhausts itself on past debts ; 
 that while people cannot avoid accepting the new legal- 
 tender thing for preexisting dues, yet that they straightway 
 adjust their business and bargains to the new law, and thus 
 escape further harm. This is true of only a very small part 
 of the community. The masses either do not understand 
 the subject sufficiently, or are so entangled in the social 
 fabric that they cannot protect themselves. For example, 
 no individual workman can raise his wages by his own 
 volition merely because his cost of living has increased. 
 
 A law of tender adds nothing to the value of gold coins. 
 The private gold coins that circulated in the United States 
 between 1830 and 1860 were not legal tender, yet they were 
 of equal value with government coins when they contained 
 the same amount o.f gold. Gold bars are not legal tender, 
 yet they occasionally command a small premium over coin 
 by reason of their convenience in international trade. 
 
 The first coinage act of the United States (1792) made 
 all of our gold and silver coins full legal tender at the 
 weight ratio of i to 15. Under this act gold gradually 
 disappeared from the circulation, one ounce of it being worth 
 more in the bullion market than fifteen ounces of silver. 
 
 The second general coinage act (1834) made both gold
 
 40 EVOLUTION OF MONEY 
 
 and silver coins full legal tender at the weight ratio of i to 
 1 6. Under this act silver was expelled from the circulation, 
 sixteen ounces of it being worth more in the bullion market 
 than one ounce of gold. In this act the legal tender was 
 debased about 2 per cent by diminishing the weight of the 
 gold coins. 
 
 The third general coinage act (1853) lessened by 7 per 
 Cent the amount of fine metal in the silver coins smaller 
 than $1.00, in order to prevent their exportation. It limited 
 the legal-tender faculty of these silver coins to $5.00 in one 
 payment. It did not change the legal-tender act of 1834 
 in any other particular. The half dollar weighs 12^ grams 
 (French metric system). Two of them are exactly the 
 weight of the five-franc piece. The quarter dollar weighs 
 one-half and the dime one-fifth as much as the half dollar. 
 
 The fourth general coinage act (1873) omitted the silver 
 dollar from the list of coins authorized to be struck at the 
 mint and made the gold dollar the unit of value. At that 
 time the silver dollar was worth more than the gold dollar. 
 The act of 1873 put the United States on the basis of the 
 single gold standard. 
 
 Legal-tender notes will be considered in a subsequent 
 chapter. 
 
 AUTHORITIES 
 
 In addition to those of the preceding chapter: 
 Hamilton's Report on the Mint. 
 
 Laugh lin's History of Bimetallism in the United States. 
 Brough's Natural Law of Money. 
 F. A. Walker's Money. 
 Upton's Money in Politics. 
 
 History of the Coinage Act of 1873, published by the House 
 of Representatives, 1900.
 
 CHAPTER IV 
 GOLD AS A METAL 
 
 THE metal gold occupies a unique place among the sub- 
 stances of which the earth is composed. It is accepted by 
 civilized mankind without compulsion and without limit in 
 exchange for all other kinds of property and for all the serv- 
 ices that men render to each other for hire. For this rea- 
 son it is an object of universal desire. As a mineral it is 
 sought for with greater eagerness than any other substance 
 in or upon the earth. 
 
 Gold is yellow in color in the natural state, and is the 
 only metal that is so. Its atomic weight is 196.7, that of 
 hydrogen being reckoned as i. Its specific gravity is 19.3, 
 being exceeded only by that of platinum, iridium, and 
 osmium. Its melting point is 2014 F., at which temper- 
 ature there is no perceptible loss by volatilization, even 
 when long continued and often repeated. It is the most 
 ductile of the metals. It can be" beaten into sheets s^ 1 ^ <r 
 of an inch in thickness. A single grain can be drawn into 
 a thread 500 feet long. As a conductor of electricity it is 
 inferior only to silver and copper. 
 
 Gold is found in placers in the beds of existing rivers or 
 
 in those of past geological ages, which are now dry or 
 
 uplifted, or buried under new strata. It is also 
 
 where Gold found in veins of rock formation. It has been 
 is found. * 
 
 found in the United States in rocks of all 
 
 geological ages from the pre-Silurian to the Quaternary. It 
 was the opinion of Professor Newberry that the metal in 
 
 41
 
 42 EVOLUTION OF MONEY 
 
 fissure veins was deposited there from chemical solutions 
 forced upward from deeply buried rocks of various kinds, 
 from which the gold had been leached under great pres- 
 sure and heat. Gold is found also in bedded veins of 
 sedimentary rock in conjunction with argentiferous galena, 
 iron pyrites, and other metals, where there is no trace of a 
 fissure. It has been found in common clay, and also traces 
 of it in sea water. Placer gold has been separated from 
 vein formations and conveyed by running water, in con- 
 junction with gravel and other detritus, to the places where 
 it is found. 
 
 Gold does not suffer any change by exposure to the air 
 or by being buried in the earth. It is rapidly dissolved in 
 quicksilver at ordinary temperatures, and forms with it an 
 amalgam, either fluid, or pasty, or solid, according to the 
 proportions of each metal present. The quicksilver can be 
 distilled from the mass by heat and recovered 
 Qu^iiveV ' b y condensation, leaving the gold solid. It 
 thus becomes an agent of supreme impor- 
 tance in the production of gold. Its use was known to the 
 ancients. Pliny says with truth that if gold mixed with 
 impurities is shaken in a vessel containing quicksilver, the 
 latter will absorb the gold and reject the impurities, and 
 that the quicksilver can then be squeezed through a skin 
 like perspiration, leaving the gold pure. Quicksilver has 
 the same affinity for silver as for gold. 
 
 Placer gold is of various sizes, ranging from dust up to 
 
 nuggets weighing many pounds, and of various degrees of 
 
 purity. That of Australia averages gco in 
 
 Placer Gold. ' . . 
 
 - 1000, being purer than any gold coin now m 
 use; that of California averages 884; that of Montana 
 895. Native gold is almost always associated with silver. 
 In 1000 parts of placer gold of California, 112 are com- 
 posed of silver, and 4 of base metal.
 
 GOLD AS A METAL 43 
 
 The most common method of obtaining alluvial or placer 
 gold is by washing river sands. " Panning " was practiced 
 by the Egyptians in prehistoric times. This process con- 
 sists of stirring with the hands a quantity of gold-bearing 
 sand in a hollow vessel filled with water. The gold, being 
 heavier than the other material, sinks to the bottom. The 
 earthy matter is spilled over the top of the vessel from time 
 to time as the stirring proceeds. When the panful has 
 been thoroughly washed most of the gold contained in the 
 mass will be found in the bottom of the pan. As there is 
 always some sand and gravel left, it is customary to collect 
 the gold by means of quicksilver. 
 
 Sluicing is the method by which auriferous sands and 
 gravels are now attacked in places where water can be 
 obtained in sufficient quantity. In the ancient world water 
 from gold-bearing mountains was made to flow over hides, 
 or sheepskins, in which the particles became entangled. 
 Thence, probably, came the legend of the golden fleece. 
 
 Sluicing is performed by shoveling gold-bearing earth 
 into running water, which is made to pass through a wooden 
 conduit, on the bottom of which are fastened a series of 
 " riffles," or obstructions, against which the heavier portion 
 of the material lodges. Quicksilver is fed into the stream 
 at various places in the form of a fine rain, 
 Collection * being squeezed through chamois leather or 
 
 canvas to give it dispersion. It passes down 
 the inclined surface and lodges with the other heavy material 
 against the riffles, where it collects the gold by amalgama- 
 tion. When the first riffle is full, the material suspended in 
 the water passes over the obstruction and is caught in the 
 next one, and so on till all are filled. Then the " clean-up " 
 begins. The gold is found amalgamated with the quicksilver. 
 
 Hydraulic mining is sluicing on a large scale, in which 
 the force of a jet of water is used, instead of shoveling, to
 
 44 EVOLUTION OF MONEY 
 
 break down the bank and move the earth and gravel to the 
 entrance of the sluice. For this purpose a powerful head 
 of water is required, from one hundred to three hundred 
 feet higher than the ground to be operated on. The water 
 is collected in mountains, sometimes at long distances from 
 the works, and brought in ditches which follow the contour 
 of the country, often crossing valleys on high trestlework 
 or by inverted siphons. Sometimes the " pay gravel " is 
 found where there is insufficient drainage, and it becomes 
 necessary to excavate tunnels to carry off the " tailings." 
 One such tunnel in California is 7874 feet 
 l n g- T^ e water is delivered against the 
 bank through an iron nozzle with something 
 like the velocity of a cannon ball. It soon excavates a 
 hole, which is gradually enlarged until the superincumbent 
 mass falls down. Then this is attacked by the same 
 means, and the whole mass begins to dissolve and follow 
 the drainage line, which brings it to the sluices con- 
 structed like those already described, but on a much 
 larger scale. They are operated on the same principles 
 as the smaller ones. 
 
 The disposition of the tailings has been the most serious 
 problem of hydraulic mining in California. Not only is the 
 natural drainage of the country altered by these operations, 
 but stupendous quantities of earth are carried down and 
 deposited in the beds of the rivers, which are caused to 
 overflow their banks and spread the detritus over the 
 adjoining lands, to the ruin of agriculture. A vast deal of 
 litigation has ensued, and the state legislature has been 
 compelled to intervene for the protection of the farmers. 
 Hydraulic mining is the most economical of all methods of 
 obtaining gold, the cost being from i^- cents to 8 cents per 
 ton of material treated. The most expensive is panning, 
 the cost of which is $5.00 to $8.00 per ton.
 
 GOLD AS A METAL 45 
 
 Gold existing in rock formation is either free-milling or 
 combined chemically with other substances. Often both 
 are found in the same mine. Free-milling ores are treated 
 by crushing and then amalgamating with quicksilver. In 
 reaching the metal and tearing it from the rock, man 
 accomplishes with his own hands what nature has done 
 for him in the case of placer gold. 
 
 There are numerous methods of crushing free-milling 
 
 ores, the one most largely used being that of the stamp 
 
 battery. The ore is first reduced to the size 
 
 Quartz Crushing. . 
 
 of a walnut by a stone-breaker. It is then 
 put into an elongated mortar made of cast-iron, which has a 
 series of iron pestles arranged side by side, so as to be 
 lifted, one by one, by a revolving wheel and allowed to fall. 
 Water is supplied to keep the mass in a splashing state, 
 and also quicksilver to amalgamate the gold as it is released 
 from the pulverized rock. Sometimes the sides of the 
 mortar are lined with copper plates, which have been 
 previously amalgamated with quicksilver, as the amalgam 
 produced in the mortar tends to adhere to the surface of 
 such plates. The contents of the mortar are thus reduced 
 to a "pulp," which is allowed to flow slowly over a series 
 of amalgamated copper plates, by which still more of the 
 gold is amalgamated and retained, the remainder passing 
 off as tailings. The tailings contain some gold, and are 
 subjected to further treatment.. The excess of quicksilver 
 in the amalgam is recovered by squeezing it through filter- 
 bags of chamois leather or buckskin, which leaves a solid 
 amalgam. The remainder is evaporated by heat and the 
 vapor condensed by passing through pipes which are sub- 
 merged in cold water. The solidified gold remains. 
 
 There are two important chemical processes for the 
 extraction of gold from sulphides and other refractory ores : 
 one by chlorine, the other by cyanide of potassium. By
 
 46 EVOLUTION OF MONEY 
 
 the former the ore is first reduced to sizes small enough to 
 
 expose all the gold contained in it to contact with chlorine 
 
 gas. It is then roasted, either in a reverberatory or a 
 
 revolving furnace, in order to expel sulphur, 
 
 Chlorination. 
 
 arsenic, and other impurities which would 
 impede the action of the chlorine. The charge is then 
 drawn from the furnace and allowed to cool, after which it 
 is shoveled into a vat and impregnated with chlorine gas. 
 Then it is leached with water as wood-ashes are leached for 
 making lye. The resulting liquor contains chloride of gold, 
 which is usually precipitated by adding to it a solution of 
 sulphate of iron, the gold falling to the bottom in the form 
 of a powder, and usually in a very pure state, sometimes as 
 high as 990. Precipitation can be effected also by passing 
 the solution over charcoal, to which the gold adheres, the 
 charcoal being afterwards burned and the gold recovered. 
 
 The cyanide process is of comparatively recent date. It 
 has been in operation in the United States about twenty 
 years ; in South. Africa a little longer. A solution of 
 cyanide of potassium will dissolve metallic gold. This 
 affinity is now the basis of great industries and has enabled 
 mankind to save large quantities of the precious metal that 
 would otherwise have been lost. The process is substan- 
 tially like that of chlorination, except that roasting is not 
 generally required. The ore is first comminuted, as in 
 chlorination, and placed in large vats, where it is leached 
 by a dilute solution of cyanide, the liquor being allowed to 
 remain until all the gold has been extracted. It is then 
 
 drawn off by a stopcock into a box under 
 
 Pr h oce2 anide the vat> The & old is P reci P itated b y zinc 
 shavings, and falls to the bottom of the box 
 
 in the form of a slime. Another method of precipitating 
 the gold is by electrolysis. A current of electricity is 
 passed through the solution, and the gold is precipitated on
 
 GOLD AS A METAL 47 
 
 thin sheets of lead suspended in it and to which it adheres. 
 These are melted in order to recover the gold. More 
 recently sheets of aluminum have been used instead of 
 lead, as the gold can be removed without injury to the 
 sheets. The cyanide process has added largely to the 
 productiveness of the gold fields of South Africa, and has 
 made the accumulated tailings of past years a source of 
 profit. It has made many mines profitable that could not 
 be worked before. 
 
 There are also many methods of extracting gold from 
 metals associated with it, by smelting. 
 
 It was the opinion of Professor Newberry twenty years 
 ago that nine-tenths of all the gold in the possession of 
 mankind had been obtained from placer deposits. At the 
 present time the greater part of the annual increment is 
 obtained from veins in rock formation. 
 
 RECAPITULATION 
 
 The metal gold is the common medium of exchange and 
 measure of value among civilized peoples. It was used for 
 purposes of ornament in the ancient world before it was 
 used as money. 
 
 It is found in detached fragments and particles in the 
 beds of existing rivers and also of ancient ones now dry. 
 In this situation it is called placer gold. The greater part 
 of the metal now in the possession of mankind is placer 
 gold. The most important agent for the recovery of placer 
 gold is quicksilver, which dissolves it and forms an amalgam 
 with it, the earthy matter being rejected. The quicksilver 
 can be easily separated from the amalgam and used 
 again. Placer gold has been detached from rock forma- 
 tions and conveyed by running water to the places where 
 it is found.
 
 4 EVOLUTION OF MONEY 
 
 Gold exists in rock formations in a comparatively pure 
 state, and also in chemical combination with other sub- 
 stances. It has been found in the United States in rocks 
 of all geological ages. 
 
 Placer gold is easily separated from the earthy matter 
 associated with it by means of water and quicksilver. 
 
 Gold in rock formation is obtained by crushing the rock 
 and either amalgamating with quicksilver, or treating it by 
 chlorination or cyanide of potassium, or by smelting.
 
 CHAPTER V 
 GOLD PRODUCTION 
 
 ACCORDING to the statistics of the Director of the Mint, 
 the world's production of gold for the first half of the nine- 
 teenth century was $787,463,000, and for the second half 
 $6,914,679,100. 
 
 The chief gold-producing countries at the beginning of 
 the century were Mexico, Colombia, Brazil, Peru, and 
 Buenos Ayres in the western hemisphere, and Russia and 
 Hungary in the eastern. Small quantities were obtained 
 also from the East Indies and from Africa. From 1801 to 
 1810 the average annual yield from all countries was about 
 $12,000,000, two-thirds of which came from American mines. 
 Revolutionary disturbances in Mexico and South America, 
 which broke out in 1810 and continued till 
 
 First Half of 1824, caused a great reduction of their out- 
 
 the Nineteenth 
 
 Century. P ut of both gold and silver. The world s 
 
 production of gold declined to an average of 
 $7,600,000 per year, which was not sufficient, in the opinion 
 of Mr. William Jacob, a leading authority for that period, 
 to supply the amount used in the arts and make good 
 the loss by abrasion, shipwreck, and other accident. After 
 the restoration of peace in those countries there was a 
 gradual gain in their production of gold. That of Russia 
 increased also, her average output from 1837 to 1848 being 
 $12,500,000 per year, or more than that of the whole world 
 at the beginning of the century. The details of production 
 
 49
 
 50 EVOLUTION OF MONEY 
 
 for the first half of the century, as computed by the Director 
 of the Mint, are the following : 
 
 ANNUAL TOTAL FOR 
 
 PERIOD AVERAGE PERIOD 
 
 1801-1810 $11,815,000 $118,152,000 
 
 1811-1820 7,6o6,OOO 76,063,000 
 
 1821-1830 9,448,000 94,479,000 
 
 1831-1840 13,484,000 134,841,000 
 
 1841-1850 36,393,000 363,928,000 
 
 Half century .... $15,749,200 $787,463,000 
 
 On the igth of January, 1848, James Wilson Marshall 
 found a small lump of gold in the tail-race of Sutler's saw- 
 mill in El Dorado County, California. This discovery led 
 to a search in the bed of the stream and in the adjoining 
 ground, which was found to contain rich deposits of the 
 precious metal. The news spread like wildfire through- 
 out California and the Pacific coast of North and South 
 America, and later to the Atlantic States, and all civilized 
 countries, leading to a great immigration of 
 gold-hunters. The production of the metal 
 in California alone in 1850 was $36,000,000, 
 being equal to the annual average of the whole world during 
 the preceding decade. It reached $56,000,000 in 1851. 
 In the latter year a similar discovery of placer 'gold was 
 made in New South Wales, Australia, followed by a still 
 more important one in the colony of Victoria. These dis- 
 coveries were also attended by public excitement and heavy 
 immigration. The production of gold in Australia and 
 New Zealand rose to $65,000,000 in 1854. Concurrently 
 with these discoveries, there was a considerable increase 
 of production in Russia, which reached $25,000,000 per 
 annum. 
 
 The next great discovery of the precious metals was that 
 of the Comstock lode in Nevada. This is a fissure vein
 
 GOLD PRODUCTION 51 
 
 four miles long in rock of the Tertiary age. It is situated 
 at the base of Mount Davidson in the Virginia range, an 
 offshoot of the Sierra Nevada. In the central part of the 
 fissure its width is about 3000 feet. The gangue, or vein- 
 stone, is quartz, not uniformly distributed in 
 0( ^ e Oi the fissure, but coagulated in large bodies 
 
 called " bonanzas." The magnitude of this 
 deposit may be inferred from the fact that, since 1861, 
 when it was first worked scientifically, it has yielded 
 $350,000,000 of bullion, and that 190 miles of shafts and 
 galleries have been excavated in it. Forty per cent of 
 the bullion produced was gold and 60 per cent silver. 
 In 1882 the richest ore bodies of the Comstock lode 
 had been exhausted, and the annual yield had fallen to 
 $1,333,000, from which point, however, there was a recovery 
 to $7,000,000 in 1887, due to the working of low-grade 
 ores that had been previously neglected. 
 
 In the meantime (in 1884) a discovery had been made in 
 
 South Africa that was destined to surpass in magnitude the 
 
 Comstock and every other deposit of the 
 
 South Africa. 
 
 precious metals that the world had ever seen. 
 This was in the Witwatersrand of the Transvaal. Here the 
 country rock is a bed of sandstone, interlaminated with 
 deposits of conglomerate, which the Dutch call "banket." 
 This conglomerate carries the gold, the average being ten 
 pennyweights per ton of material. Borings to the depth of 
 3500 feet have found the gold-bearing reef undiminished. 
 The outcroppings of the reef have been traced for a dis- 
 tance of forty miles. The production of the Transvaal in 
 1898 was $78,070,761. There was an interruption of the 
 working of the Rand mines in the latter part of 1899 and in 
 1900 by reason of the war with Great Britain. In the latter 
 year the production fell to less than $10,000,000, but after 
 the war it rose, in 1903, to $59,000,000, notwithstanding a
 
 52 EVOLUTION OF MONEY 
 
 great scarcity of labor in South Africa. There are other 
 deposits of gold in the Transvaal and in Rhodesia, which 
 may prove to be important. 
 
 One of the most surprising discoveries of modern times 
 is that of the gold placers of the Klondike in the Yukon 
 territory of Canada. These are deposits underneath ground 
 
 which is perpetually frozen. The method of 
 The Klondike. . , , 
 
 obtaining the gold is by sinking a shaft 
 
 through the frozen ground by means of hot bowlders. Then 
 a drift is run by building a fire against the face of the 
 ground. The gravel is thrown, out and left till summer, 
 when it thaws and is washed by panning. All the gravel 
 thrown out by two men in eight months of winter can be 
 washed in two months of summer. Of course these deposits 
 must have been laid down at a time when the climate of 
 that region was much warmer than it is now. The output 
 of the Klondike reached its maximum (about $21,000,000) 
 in the year 1900, that of Canada entire being slightly 
 under $28,000,000. There has been a gradual decline 
 since that time, the production of Canada falling in 1903 
 to $19,500,000. Placer beds similar to those of the Klon- 
 dike exist at Cape Nome, Alaska. The yield of these beds 
 reached $5,000,000 in 1900, and the output now shows a 
 yearly increase. 
 
 The most important gold-bearing district in the United 
 States now is that of Cripple Creek, Colorado. The ore at 
 this place is a telluride known to mineralogists 
 as calaverite - The country rock (says Mr. 
 Philip Argall in Mineral Industry} is altered 
 andesite, granite, or phonolite, containing thinly disseminated 
 iron pyrites and tellurium minerals. At or near the surface 
 the tellurium is oxidized, and the gold, when visible, exists 
 as an ochre-like powder, " mustard gold." By roasting, the 
 tellurium is oxidized and the gold set free in the metallic
 
 GOLD PRODUCTION 53 
 
 state easily soluble by cyanide or chlorination. The yield of 
 Cripple Creek and the adjoining territory was curtailed in the 
 year 1903 to the extent of $6,000,000 by labor troubles. 
 
 In recent years there has been a remarkable increase 
 of the yield of Australia, which rose to nearly $89,000,000 
 in 1903, the increase being due chiefly to new workings 
 in West Australia, which now furnishes one-half of the 
 entire output of Australasia. 
 
 Statistics of the world's production of gold 
 
 fhece d nfu a ry f in the second half of the century, as pub- 
 lished in annual reports of the Director of 
 the Mint, are as follows : 
 
 ANNUAL TOTAL OF 
 
 PERIOD AVERAGE PERIOD 
 
 1851-1855 $132,513,000 $662,566,000 
 
 1856-1860 134,083,000 670,415,000 
 
 1861-1865 122,989,000 614,944,000 
 
 1866-1870 129,614,000 648,071,000 
 
 1871-1875 115,577,000 577,883,000 
 
 1876-1880 114,586,000 572,391,000 
 
 1881-1885 99,116,000 495,582,000 
 
 1886-1890 112,895,000 564,474,000 
 
 1891-1895 162,947,000 814,736,000 
 
 Forty-five years . . . $124,892,000 $5,621,602,000 
 
 Single Years : 
 
 1896 $202,251,600 
 
 1897 238,812,000 
 
 1898 287,428,600 
 
 1899 306,584,900 
 
 1900 (estimated) 258,000,000 
 
 Second half century $6,914,679,100 
 
 First half century 787,463,000 
 
 Century $7,702,142,100 
 
 Probably 10 per cent of the world's gold production 
 escapes the notice of statisticians altogether.
 
 54 EVOLUTION OF MONEY 
 
 The world's production of gold during the first six years 
 of the present century has been computed by the Director 
 of the Mint as follows : 
 
 1901 ... $263,374,000 1905 . . . $377,647,700 
 
 1902 . . . 298,452,000 1906 . . . 400,342,100 
 
 1903 . . . 328,540,000 Total . 52(OI5i733)000 
 
 1904 ... 347,377,200 
 
 The production of the year 1906 came from the following 
 named sources : 
 
 Africa . . . $135,472,500 Mexico . . $18,534,700 
 
 United States 94,373,800 Canada . . 12,023,900 
 
 Australia . . 82,391,400 British India . 12,087,700 
 
 Russia . . . 19,494,700 All other . . 25,963,400 
 
 Total . . $400,342,100 
 
 The production of the United States came from the fol- 
 lowing named sources : 
 
 Colorado . . . $22,934,400 Montana . . . $4,522,000 
 
 Alaska. . . . 21,365,100 Arizona . . . 2,691,300 
 
 California . . 18,832,900 Oregon . . . 1,320,100 
 
 Nevada . . . 9,278,600 Idaho .... 1,035,700 
 
 South Dakota . 6,604,900 All other . . 657,900 
 
 Utah . . . 5,130,900 Total _ 
 
 The amount of gold in various forms in Europe and 
 America in 1848 was estimated by Tooke & Newmarch 
 (History of Prices, VI, 230) at $2,800,000,000, and of silver 
 at $4,000,000,000, both metals being then available as 
 money. These figures have been criticised by other statis- 
 ticians as being too high, but we cannot hope for accuracy 
 in a case where the data are so obscure and uncertain. To 
 this mass, whether greater or less, there was added in the 
 next twenty years $2,000,000,000 of gold and $680,000,000 
 of silver. 
 
 It was the opinion of Cairnes and Jevons of England, of 
 Levasseur of France, and of Soetbeer of Germany, eminent
 
 GOLD PRODUCTION 55 
 
 economists and statisticians of the last half century, that 
 
 the great output of gold in the fifties and sixties had caused 
 
 an average increase of the prices of commod- 
 
 G^d'on'pricr ^ es e( l ua ^ to aDOUt 20 per cent. In some 
 cases the increase was greater than the aver- 
 age, in others less, and in still others it counteracted a 
 decline of price which would ordinarily have taken place by 
 reason of new inventions and improved processes of pro- 
 duction. The four authorities named, working independ- 
 ently of each other, reached this opinion about thirty years 
 ago, and it may be accepted as one of the established facts 
 of statistical science. 
 
 The way in which new supplies of gold operate on prices 
 will now be considered. The essential quality of gold is 
 that it constitutes purchasing power. It is per se a demand 
 for goods. People do not mark up the prices of the things 
 they offer for sale merely because new gold mines have been 
 discovered, however rich they may be. If a portion of the 
 community (gold miners or others) should find two dollars 
 in their pockets where there had been only one dollar 
 before, prices would not rise in consequence merely of that 
 fact. Tradesmen would ask the same prices 
 for their wares, laborers would work for the 
 same wages as before, buyers would expect 
 to receive the same quantities of goods for a dollar as before. 
 But the possession of double the quantity of money by the 
 fortunate persons would double their demand for goods, 
 and this increase of demand would cause an advance of 
 prices. The attempt to supply the demand would call for 
 more labor and cause an advance of wages. Then the 
 advance of wages would enable the wage-earners to improve 
 their style of living by buying more goods, and there would 
 be a further advance in prices unless it should be counter- 
 acted by new facilities of production and transportation.
 
 56 EVOLUTION OF MONEY 
 
 It was in this Way that the new supplies of gold operated 
 to cause the advance of both prices and wages in the 
 twenty years succeeding the great gold discoveries of Cali- 
 fornia and Australia. The community was not made richer 
 by using two dollars instead of one to transact a given 
 amount of business, but an advantage was given, as Profes- 
 sor Cairnes showed at the time, to wage-earners over rentiers 
 and others having fixed incomes. The former had steadier 
 employment and better pay, and a fairer chance to rise in 
 the world, while the latter were obliged to pay higher 
 prices for consumable goods without any enlargement of 
 their income. 
 
 Another fact shown by the foregoing statistical tables 
 is that the production of gold in the second half of the 
 century reached a minimum in the period 1881-1885, the 
 average annual output being less than $100,000,000, and 
 that soon afterwards an extraordinary increase took place. 
 In the last decade, 1891-1900, the production was more 
 than twice as great as that of the first decade, 1851-1860. 
 Why has not the same effect on prices been noticed as was 
 observed after the great output of California and Australia? 
 There has been some advance in prices during recent years, 
 which may be fairly attributed to the new 
 supples of gold. The counteracting forces 
 of new inventions and facilities of production 
 and transportation, and the bringing of new land under 
 cultivation, have been very active and potent during this 
 time. Yet it is difficult to escape the conviction that we 
 are on the eve of another period of advancing prices, due 
 to the great outpour of gold described above, which seems 
 likely to continue and increase for some years. 
 
 In a recent monograph 1 Professor Kemmerer of Cornell 
 
 1 Money and Credit Instruments in their Relation to General Prices, 
 by Edwin Walter Kemmerer, New York, 1907.
 
 GOLD PRODUCTION 57 
 
 University, has sought to prove by the trade and labor sta- 
 tistics of the period 1879-1904 that general prices in the 
 \ commercial world vary inversely with the quantity of money 
 in use. This is called the quantity theory 
 
 of mone y- Jt ^HZPtStejp 68 rise as the 
 
 quantity of money falls, and vice versa, pro- 
 vided that other things are equal. Thus stated, it is generally 
 accepted by economists. But the other things assumed to 
 be equal to-day may not be so to-morrow. Among them 
 must be reckoned the rapidity of the circulation, the pro- 
 gress of invention, the vicissitudes of the crops, peace and 
 war among nations, banking facilities, and the state of busi- 
 ness confidence or depression. Professor Kemmerer reckons 
 bank checks, and all other credit instruments which perform 
 the office of money, as real money for the purposes of his 
 argument. He attacks the problem with mathematical for- 
 mulae where few critics will have patience to follow him. 
 One such (Professor Persons of Dartmouth College) has 
 sought to do so, and his conclusion is that "whatever may 
 be the fact, the statistics presented by Kemmerer do not 
 demonstrate that general prices move in sympathy with rela- 
 tive circulation." In his opinion the statistics available are 
 not adequate to answer the problem. 1 
 
 The amount of gold coin and bullion in the United States 
 June 30, 1907, was given in the Mint Report as $1,466,- 
 056,632. 
 
 RECAPITULATION 
 
 The production of gold in the first half of the nineteenth 
 century was little more than sufficient to supply the amount 
 used in the arts and to make good the losses from abra- 
 sion and accident. About the middle of the century there 
 was a great increase, due to discoveries of placer mines in 
 
 1 " The Quantity Theory, as tested by Dr. Kemmerer," by Warren 
 M. Persons, Quarterly Journal of Economics, February, 1908.
 
 58 EVOLUTION OF MONEY 
 
 California and Australia. The annual production of the 
 world was quadrupled. Ten years later the Comstock lode 
 of Nevada began to yield large amounts of the precious 
 metals, $350,000,000 having been taken from it in about 
 twenty years, 40 per cent of which was gold. 
 
 In 1884 the greatest discovery of gold the world has ever 
 known was made in the Transvaal republic of South Africa. 
 These mines, although yet in their infancy, have yielded 
 $78,000,000 in a single year. Discoveries only second in 
 importance to those of South Africa were made in the last 
 decade of the century in the Klondike region of Canada, in 
 Alaska, in Cripple Creek, Colorado, and in West Australia. 
 
 The world's gold production in the second half of the 
 century was nine times as great as during the first half. 
 That of the whole century was nearly eight thousand 
 millions of dollars. 
 
 The new supplies of the mid-century caused an average 
 advance in the prices of commodities of about 20 per cent. 
 
 As gold is purchasing power, new supplies of it constitute 
 new demand for goods. Prices rise in consequence ; first, 
 in the mining districts, then gradually throughout the civil- 
 ized world. The new demand calls for more labor and 
 leads to an increase of wages. The wage-earners are ena- 
 bled to buy more goods, and this causes a further advance 
 of prices. A redistribution of earnings takes place to the 
 advantage of the producing classes and to the disadvan- 
 tage of those having fixed incomes. Prices of commodities 
 follow the law of supply and demand in this case as in 
 others. 
 
 The new supplies of gold in the last decade of the nine- 
 teenth century and in the first decade of the twentieth appear 
 to have caused an advance of prices.
 
 GOLD PRODUCTION 59 
 
 AUTHORITIES FOR CHAPTERS IV AND V 
 
 Jacob's The Precious Metals. 
 
 Cairnes' Essays in Political Economy (" The Gold Question "). 
 
 Jevons' " On the Variation of Prices and the Valuation of the 
 Currency since 1787," in the Journal of the Statistical Society of 
 London, June, 1865. 
 
 Tooke and Newmarch's History of Prices, Vol. VI. 
 
 Lock's Gold, Its Occurrence and Extraction. 
 
 Percy's Metallurgy, Silver and Gold. 
 
 Phillips and Louis' On Ore Deposits. 
 
 Rothwell's Mineral Industry (annual).
 
 CHAPTER VI 
 THE GOLD STANDARD 
 
 SPEAKING broadly, it may be said that the ancient world 
 had the double standard of silver and gold ; that the single 
 silver standard prevailed during the Middle Ages, from the 
 seventh century to the thirteenth ; that the double standard 
 was then reintroduced and prevailed in Europe and America 
 till the beginning of the nineteenth century, and that it has 
 now been superseded by the single gold standard. 
 
 The gold florin, first coined by the city of Florence about 
 the year 1252, was introduced to meet the needs of the 
 growing commerce of the Italian republics. The conven- 
 ience of gold in making large payments had been observed 
 by the crusaders at Byzantium. The idea of a gold cur- 
 rency was brought back in this way to Western Europe, 
 from which it had disappeared long before in the penury of 
 the dark ages. Gold thus became an addition to, not a 
 substitute for, silver money, and thus the double standard 
 was reestablished. 
 
 The market values of the two metals, gold and silver, are 
 subject to the law of supply and demand like other com- 
 modities ; they are liable to change of value with reference 
 to each other. Sixteen pounds of silver may 
 
 Market Values b e WO rth more than one pound of gold to- 
 
 of the Precious 
 
 Metals. day, and less at another day. One of them 
 
 may be in greater demand in India than in 
 England, and so on. There are persons in every com- 
 munity (bankers, brokers, and bullion dealers) who seek to 
 
 60
 
 THE GOLD STANDARD 6l 
 
 make a profit out of these changes by exporting or melting 
 coins. Theirs is a perfectly proper vocation, as legitimate 
 as the getting of gain from any mercantile transaction, yet 
 it has been held in great opprobrium at some periods in 
 the world's history, has bee'h treated as a crime, and severe 
 laws have been passed to punish persons guilty of it. The 
 community was put to inconvenience by finding either gold 
 or silver coins growing scarce in the circulation. These 
 were called "coins of the realm." They were regarded as 
 belonging in a peculiar sense to the country whose stamp 
 they bore, whereas they were the exclusive property of 
 individuals, who had the same right to dispose of them as 
 of their sheep or oxen. The enactments in various coun- 
 tries against trading in the precious metals, and especially 
 against exporting or melting them, form a remarkable 
 chapter of human fatuity and folly. It was impossible 
 to execute the laws passed for this purpose. A remedy 
 for the alternate drains of gold and silver was accordingly 
 sought by changing the legal ratio. " In France," says Mr. 
 W. A. Shaw, 1 " the ratio of gold to silver was changed in a 
 single century more than one hundred and fifty times." To 
 enumerate all the changes of ratio that took place in Europe 
 from the middle of the thirteenth century to the beginning 
 of the nineteenth would be a hopeless undertaking. 
 
 The true solution of these difficulties was first reached in 
 
 England. This country had had her share of the loss 
 
 and vexation due to changes of the ratio. 
 
 "^ ne ^ a< ^ a ^ so v ^ s ^ te( l crue ^ punishments on 
 individuals for melting and exporting the 
 precious metals. All attempts to enforce these foolish laws 
 were eventually abandoned, and it came to pass in the reign 
 of Charles II that the guinea of gold, although proclaimed 
 by royal authority to be the equivalent of 2os. in silver, 
 1 History of Currency, p. 31.
 
 62 EVOLUTION OF MONEY 
 
 passed in trade for 2 is., and no attempt was made by the 
 government to interfere. The guinea remained as a trade 
 coin till the third year of George I (1717), when another 
 proclamation was issued making it legally equal to 2 is., at 
 which figure the ratio to silver was about 15 to i. 
 
 As gold was slightly overrated at the ratio of 15^, there 
 was a tendency to export silver; and for this purpose the 
 full-weight coins were selected. So it came about in the 
 course of half a century that the only silver coins remaining 
 in circulation were those which had been much reduced in 
 weight by abrasion or by fraudulent clipping. The evil 
 became so intolerable that Parliament, in 1774, passed a 
 law providing that silver coin should not be legal tender for 
 more than ^"25 in one payment, except by weight at the 
 rate of 5-$-. 2d. per ounce. It was enacted at the same time 
 that gold coins deficient in weight should be 
 called in and recoined, and that thereafter 
 such coins, if under a certain weight, should not be legal 
 tender at all. The restriction of the legal tender of silver 
 was to continue two years. The expectation of Parlia- 
 ment was that some effectual and permanent steps would 
 be taken to deal with the evil of light coins in that inter- 
 val, but since nothing was done, the act of 1774 was 
 renewed in 1776 for two years more. In 1778 it was 
 renewed for seven years, and then by repeated renewals it 
 was carried forward to 1798. Another clause was now 
 added that no more silver should be coined at the mint for 
 private persons. 
 
 The significance of this legislation was not perceived at 
 the time. It had not been the intention of Parliament to 
 establish the single gold standard. The ques- 
 tion of standard was not under consideration 
 t>tep. 
 
 at all. What Parliament did in 1774 was: 
 (i) to put the gold coin in a state of perfection by recoining
 
 THE GOLD STANDARD 63 
 
 the defective pieces and making light coins unavailable in 
 payments thereafter; (2) to limit the legal-tender faculty 
 of the silver money then in circulation. The mint was still 
 open, and anybody could have silver bullion coined into 
 money of full weight and full legal tender. But since silver 
 was undervalued at the ratio of 15^, nobody would take it 
 to the mint. Thus all the conditions of the single gold 
 standard were in practical operation without any fixed inten- 
 tion of Parliament to bring it about, or any knowledge that 
 it had been done. 1 
 
 It was noticed, however, that the inconveniences of a 
 shifting ratio had disappeared. There was plenty of gold 
 money for large transactions and of silver 
 money for small ones. Although the silver 
 coins were deficient in weight, they answered 
 the purposes of small change. After the experience of a 
 quarter of a century, Parliament and people were convinced 
 that the act of 1774, although adopted as a temporary 
 measure, ought to be made permanent. Accordingly it 
 was made so in 1799. Yet it was not until 1816 that the 
 true philosophy of the step was well enough understood to 
 secure its enactment into a settled law. In that year it was 
 enacted that the gold coin of the realm, when of full weight, 
 should be full legal tender and should be coined for pri- 
 vate persons to any amount, and that silver coin should not 
 be legal tender for more than 40^. in one payment, and 
 should be coined only on government account and should 
 
 1 " The fact that a change in the monetary standard of the country, 
 while it was in actual process of accomplishment under their eyes, could 
 have escaped the recognition of contemporary observers, seems at first 
 sight to be of so marvelous a character as to pass the bounds of belief. 
 Yet that it was a fact is beyond all question." CARLILE'S Evolution of 
 Modern Money, p. 18. The truth was pointed out by Lord Liverpool 
 in 1805 and Mr. Carlile properly calls it "a genuine stroke of genius" 
 on his part.
 
 64 EVOLUTION OF MONEY 
 
 be reduced in weight 6 per cent. This law, which estab- 
 lished the single gold standard, remains in force to the 
 present d,ay. 
 
 In 1853 the United States followed the example of Great 
 Britain, by reducing the weight of its silver coins smaller 
 than $1.00 and making them legal tender 
 01 - onl y 5.o in one payment. The states- 
 men who passed this law supposed that they 
 were adopting the single gold standard, but this was not 
 legally accomplished until 1873, as has been explained in 
 Chapter III. 
 
 The kingdom of Portugal adopted the single gold standard 
 in 1854. 
 
 In the year 1857 the states composing the German Zoll- 
 verein and the empire of Austria entered into a monetary 
 treaty by which they adopted the single silver 
 Germany" f standard. The treaty provided that any of 
 the contracting states might coin gold crowns 
 and half crowns to circulate at their market value. It was 
 expressly stipulated that these should not be legal tender. 
 They might be received at the public treasuries, however, 
 at rates to be fixed by the respective governments at least 
 once every six months, but the rate should not be higher 
 than the average commercial rate for the preceding six 
 months. The official rate might be changed oftener if the 
 market rate should make such change necessary. 
 
 It happened at this time that France was importing gold 
 and exporting silver on a very large scale. As the market 
 ratio was now 15.27 and the legal ratio 15.50, there was a 
 profit to bullion dealers of i per cent in the traffic. The 
 gold crowns of Germany were drawn to Paris as fast as they 
 came from the mints, and the country was left with silver 
 coins only for her domestic trade. These were so bulky 
 and inconvenient that they were largely supplanted by
 
 THE GOLD STANDARD 65 
 
 issues of bank notes which were subject to varying rates of 
 discount in different cities and states. This condition was 
 
 considerably aggravated by the heterogeneous- 
 Act of 1871. 
 
 ness of the silver coins of the several states 
 
 thalers, marks, florins, gulden, kreutzers, etc. There was a 
 very general demand for a uniform system of coins ; and, 
 when the question was brought up for solution after the 
 consolidation of the German Empire, it was decided by the 
 government to make gold the standard, with a silver sub- 
 sidiary currency in other words, to adopt the English 
 system. The first bill for this purpose became a law 
 December 4, 1871. It discontinued the coinage of silver 
 except for the government. It provided for the coinage of 
 ten-mark pieces of gold (equal to $2.38), of which 139^ 
 should contain one pound of pure metal ; also twenty-mark 
 pieces of double the weight ; and all gold coins were made 
 unlimited legal tender. For the purpose of settling preex- 
 isting contracts and of exchanging gold for silver coins, it 
 established the ratio of 15^, which was the market ratio at 
 the time. Provision was made for calling in and melting the 
 outstanding silver money and exchanging gold for it out of 
 the funds in the Imperial Treasury practically the French 
 war indemnity. Another law containing further details was 
 passed July Q, 187^?. This law definitely 
 
 Act of 1873. 
 
 established the gold standard and provided a 
 new subsidiary coinage based upon the silver mark, which 
 should be legal tender for only twenty marks in one pay- 
 ment. It was provided that the old thalers (three-mark 
 pieces) should be full legal tender as long as they should 
 remain in circulation. Under the law for taking in and 
 melting the old silver coins upwards of 7,000,000 pounds 
 weight of fine silver were sold in the open market between 
 1873 and 1879. The price of silver declined ^d. per 
 ounce during that time. The sales were then suspended,
 
 66 EVOLUTION OF MONEY 
 
 leaving 339,000 pounds of silver bullion in the Imperial 
 Treasury. 
 
 An order was issued in the year 1900 to convert the 
 residue of bullion into silver subsidiary coins during the 
 next ten years. There are still in circula- 
 tion in Germany about 125,000,000 of silver 
 thalers, or three-mark pieces, which are full 
 legal tender. They occupy the same position as our silver 
 dollars and the French five-franc pieces. The Imperial Bank, 
 or any other bank in Germany, can pay them out at par in liqui- 
 dation of all claims against them. While this condition exists 
 Germany cannot be considered strictly on the gold basis. 
 
 There was a brief bimetallist revival in Germany in 
 1894-96. It grew out of the low price of grain, which 
 was erroneously ascribed by the landowners, or Agrarian 
 party, to the demonetization of silver. Chancellor Caprivi 
 so far yielded to the demands of this party as to authorize a 
 commission to investigate the question. It consisted of six- 
 teen members, and it held twenty-one sessions and took 
 a large amount of testimony, but came to no 
 resolution whatever. Soon after this com- 
 mission came to an end Chancellor Caprivi 
 retired from office and was succeeded by Prince Hohenlohe. 
 Thereupon the Agrarians in the Reichstag started up afresh 
 and on the i6th of February, 1895, prepared a motion asking 
 the government to take the initiative in calling a new inter- 
 national monetary conference. This motion was supported 
 by a large majority of the Reichstag, and the government 
 somewhat reluctantly referred it to the Bundesrath, whose 
 consent was necessary. Nearly a year was consumed in the 
 deliberations of the several states composing the Bund. On 
 the 1 6th of February, 1896, Prince Hohenlohe announced 
 that the German states had unanimously rejected the motion 
 to convoke an international monetary conference.
 
 THE GOLD STANDARD 
 
 In 1874 Sweden and Norway followed the example of 
 Germany by adopting the gold standard, and Holland did 
 the same in 1875. 
 
 At the beginning of the nineteenth century France had 
 
 the double standard at the ratio of 15^. This ratio had 
 
 been adopted in 1785, at the instance of 
 
 French Monetary Calonne Comptroller-General. The Revolu- 
 
 Law of 1803. 
 
 tion came on and the monetary system was 
 plunged in chaos by issues of irredeemable paper so vast 
 that they could only be cleared off by repudiation. Then 
 the statesmen of the republic passed the coinage law of 
 1803, intending to establish the single standard of silver. 
 The law began with a general provision that five grams of 
 silver -^ fine should constitute the monetary unit bearing 
 the name of the franc. The measure was before the legis- 
 lative body three years. Eight reports were made upon it, 
 the point in controversy being the various methods proposed 
 for utilizing gold in the currency while making silver the 
 sole standard. No decision was ever reached on this point, 
 but at the last moment a clause was added to the bill pro- 
 viding that gold pieces of 20 francs should be coined at 
 the rate of 155 to the kilogram. Under this law five grams 
 of silver would constitute i franc, and five grams of gold 
 15^ francs. The debates and reports show that there was 
 a general understanding that if the market ratio should 
 change so as to make a recoinage necessary, the gold 
 should be recoined and the silver franc kept as the invari- 
 able measure of value. There was nothing on the subject 
 of legal tender in the law, but since all debts were payable 
 in francs, and since two kinds of francs were authorized to 
 be coined, the law really established the double standard at 
 the ratio of 15^-, which ratio already existed by virtue of 
 the law of 1785. 
 
 It has been frequently asserted that the French law of
 
 68 EVOLUTION OF MONEY 
 
 1803 kept the market ratio of the two metals steady at the 
 legal ratio, i.e., at 15^-, until 1873. This is an entire mis- 
 take. There were only six years in the seventy in which 
 the market ratio was approximately 15^.' These were 1806, 
 1807, 1811, 1820, 1851, and 1867. In 1821 
 
 Did not keep the g O \d money had nearly disappeared from 
 
 Market Ratio / , ,* 
 
 steady. .trance and the circulation consisted of silver 
 
 exclusively, and so continued until 1851, when 
 the great outflow of gold from California and Australia 
 cheapened that metal, putting the market ratio below 15^-. 
 The ratio remained below 15^ till 1867. During that inter- 
 val France imported gold to the amount of $600,000,000, 
 and exported so much of her silver to India that she suffered 
 inconvenience for the want of small change. She was com- 
 pelled to coin gold pieces as small as five francs. The 
 government attempted at first to adopt the English system 
 of subsidiary silver coins, limiting their legal-tender faculty 
 to fifty francs in one payment. Accordingly in 1864 it 
 brought before the Corps Legislatif a bill lowering the fine- 
 ness of the coins smaller than five francs to ^Vo' tnus 
 reducing their value about 7 per cent. The next step taken 
 was the formation of the Latin Monetary Union. 
 
 This was an attempt, beginning in the year 1865, to estab- 
 lish uniform coinage on a bimetallic basis, with concurrent 
 circulation, by treaty among four European countries (France, 
 Belgium, Switzerland, and Italy), in which bimetallism already 
 prevailed. The union proved to be an embarrassment to all 
 
 the nations concerned, and resulted in the 
 
 Moneteryunion. ad P tion of the sin g le S old standard by all of 
 them in succession. This change was adopted 
 by simply discontinuing the coinage of silver for private indi- 
 viduals and limiting it to subsidiary coins struck on govern- 
 ment account. The union still exists, but it has been a source 
 of trouble, waste, and loss to all the countries so united.
 
 tHE GOLD STANDARD 69 
 
 Under the treaty of 1857 with the states of the German 
 Zollverein the single silver standard prevailed in Austria- 
 Hungary, but the currency in actual use was 
 
 Austria-Hungary. . 
 
 irredeemable paper. The monetary unit was 
 the silver florin, the normal value of which was 45.3 cents of 
 our money. In 1879, in consequence of the heavy decline 
 in the price of silver, the government gave orders to the 
 mints in both Austria and Hungary to receive no more of 
 that metal from private individuals for coinage. The effect 
 of this order was to make government paper money the 
 standard, and this paper varied somewhat from day to day 
 in comparison with gold, but it no longer followed the down- 
 ward course of silver. The paper florin was worth in 1879 
 about 42 cents. In 1892, before the currency 
 reform wa * adopted, it was worth 41 cents. If 
 it had kept pace with the decline of silver, it 
 would have been worth only 30 cents. Austria had a gold 
 coinage at this time, but it was not legal tender. In 1892 
 she decided to resume specie payments in gold. She first 
 fixed a ratio at which all paper money and paper obliga- 
 tions should be redeemable. The ratio decided upon was 
 119 paper to 100 gold, as this had been the average ratio 
 prevailing in the market during the thirteen years from 
 1879 to 1892. 
 
 The next step taken was to pass a coinage law. The 
 krone (crown) of gold was made the monetary unit, con- 
 taining 4.7 grains of fine gold, the ten-crown piece being 
 worth $2.026 of our money. Silver was to be 
 operand! 18 coined only for the government and to be legal 
 
 tender for fifty crowns. The government was 
 authorized to borrow gold sufficient to redeem its outstand- 
 ing notes amounting to 312,000,000 florins. Gold to the 
 amount of 112,000,000 florins was borrowed, and this, to- 
 gether with some reserves in the Treasury, was applied to
 
 7O EVOLUTION OF MONEY 
 
 the purpose of retiring 200,000,000 of the notes. The 
 method adopted was not direct redemption. The govern- 
 ment deposited the gold in the Austro-Hungarian Bank 
 and redeemed its own notes partly with bank notes and 
 partly with new silver money which was needed to replace 
 the small notes thus retired. In this way 200,000,000 florins 
 of old notes were withdrawn and canceled before the end of 
 the year 1897, leaving only 112,000,000 outstanding. When 
 this was 'accomplished the value of the paper florin became 
 very nearly equal to gold of the new standard. There is now 
 no premium on gold in Austria-Hungary. 
 
 After many struggles with the double standard the single 
 standard of silver was established in British India in the 
 year 1835, the unit of value being the rupee. Prior to 1873 
 
 this coin was worth about is. io4W., but was 
 British India. * 
 
 usually reckoned as the equivalent of 2s., 
 
 or 48 cents, the price of silver being about 6o</. per ounce. 
 With the gradual growth of commerce the inconvenience of 
 silver, on account of its bulk and weight, became oppress- 
 ive. Hence as early as 1859 the commercial classes of 
 the country began to urge the government to adopt the 
 gold standard, with silver as subsidiary, but nothing was 
 done until 1893. 
 
 On the 2ist of June, 1892, the government of India trans- 
 mitted to the home government a report and plan for cur- 
 rency reform prepared by Sir David Barbour, 
 Goifsundard 16 financial secretary of India. In this report 
 it was considered impossible to establish in 
 India a currency composed entirely of gold, yet the example 
 of France and of other countries, which had the gold stand- 
 ard but maintained a large circulation of silver of full legal 
 tender, pointed to the conclusion that the gold standard 
 could be established in India without a large accumulation 
 of gold. Sir David avowed himself a bimetallist in principle,
 
 THE GOLD STANDARD 71 
 
 but in the event of a failure of the Brussels Monetary 
 Conference he thought that an attempt should be made to 
 establish the gold standard in India. The government of 
 India requested permission to discontinue the coinage of 
 silver for private persons. The subject was referred to a 
 committee of seven, of which Lord Herschel was chairman. 
 The Committee's labors extended over a period of seven 
 months. On the 3ist of May, 1893, it recommended that 
 the request of the government of India for permission to 
 close the mints against silver, retaining the right to coin 
 rupees on government account, be granted. 
 
 The Herschel j n order, however, to guard against any sud- 
 
 Commission 
 
 of 1893. den and large advance in the value of the 
 
 rupee on account of its scarcity, it was recom- 
 mended that the government should announce that it would 
 give rupees for gold at the rate of 16^. per rupee and 
 would receive gold for taxes at that rate. The recom- 
 mendations of the Committee were approved by the home 
 government and were promulgated by the government of 
 India on the 26th of June, 1893. The first effect of the 
 closing of the Indian mints was a heavy fall in the price 
 of silver. The price at the beginning of June, 1893, was 
 38f</. per ounce. After the announcement was made it 
 fell to 2"]\d. The price of rupees fell gradually to 13^., 
 but rose during the next five years to 16^. As the quan- 
 tity of rupees in circulation could not be increased, they 
 began to have a "scarcity value." In other words, the 
 demand for them, due to the growth of business, exceeded 
 the supply, and raised the price to ibd. 
 
 In March, 1898, a committee of thirteen, with Sir Henry 
 H. Fowler, M.P., at its head, was appointed by the Anglo- 
 Indian government with a view to the completion of the 
 policy initiated in 1893. The Committee made a report 
 July 7, 1899. It said that it was deemed important to assure
 
 72 EVOLUTION OF MONEY 
 
 the world that India was not to take any backward step from 
 
 the position already assumed. Events had been, on the whole, 
 
 propitious since 1893, the value of the rupee 
 
 o^ r Committee having, risen by reason of its scarcity to i6</. 
 
 and remained stable within the ordinary 
 
 fluctuations of exchange. Inasmuch as the public had 
 
 come to regard i6</. as the par value of the rupee, and 
 
 since business had adjusted itself to that ratio, it was deemed 
 
 best to maintain it. 
 
 Gold was made legal tender in India by Act 22 of 1899, 
 at the rate of fifteen rupees to the sovereign. In the budget 
 statement issued at Calcutta in March, 1900, it was said that 
 the government has accumulated upwards of ,8,000,000 in 
 gold, and that it intended to retain not less than ,5,000,- 
 ooo as a permanent reserve. It is believed that the rupee 
 can be maintained at par without any large accumulation of 
 gold in the Treasury. 
 
 Prior to 1897 Japan had the double standard in law but 
 the single silver standard in practice. She had been under 
 the regime of irredeemable paper from 1873 
 
 to i886 - In the latter y ear she had resumed 
 
 specie payments in silver. The decline in 
 the price of that metal and the consequent disturbance of 
 the foreign exchanges induced the government, in 1893, to 
 appoint a commission to make inquiries concerning the 
 coinage system and the monetary standard. This commis- 
 sion remained in session twenty-two months. It made its 
 report in July, 1895, a majority of the members recom- 
 mending the adoption of the single gold standard. 
 
 The war between China and Japan took place the same 
 year, and the Chinese indemnity fund, equal to ,38,000,000 
 sterling, put in the hands of Japan the means to carry this 
 monetary reform into effect with very little delay. It was 
 stipulated in the treaty of peace that the indemnity should
 
 THE GOLD STANDARD 73 
 
 be paid in London in English money. The law to carry the 
 reform into effect was passed in May, 1898. 
 
 At that time the market ratio of silver to gold was about 
 32 to i. The gold yen of the old coinage was in circula- 
 tion as commercial money and was worth 
 
 ?ge 2w Coin " about double the value f the silver y en - li 
 
 was decided to make the gold yen the unit of 
 value, and to make it approximately equal to the value of 
 the silver yen at that time. For convenience in reckoning, 
 and in order to keep the gold yen of the former coinage in 
 circulation, the new yen was given exactly one-half the 
 metallic content of the old one. The fineness is nine- 
 tenths. The weight of the ten-yen piece is 8.3333 grams, 
 and its value is $4.98. The gold pieces authorized to be 
 struck at the mint are those of 5, 10, and 20 yen. All 
 gold coins were made unlimited legal tender, the old yen 
 to circulate at double the value of the new. The gov- 
 ernment receives and coins without charge all gold of 
 standard fineness brought to the mint at Osaka. 
 
 The coinage of silver for private persons was discon- 
 tinued. It was provided that each silver yen of the old 
 coinage should be redeemed with a gold yen of the new 
 coinage if presented before July 31, 1898, and after that 
 date be regarded as bullion only. The new silver coins 
 authorized are pieces of 50 sen, 20 sen, and 10 sen, the sen 
 being the hundredth part of a yen. Silver coins are legal 
 tender for 10 yen only. There are also small coins of 
 nickel and bronze called "rin," which are legal tender for 
 one yen. The rin is the tenth part of the sen. 
 
 The coinage law of Japan contains a provision that if, in 
 consequence of abrasion from circulation, any of the gold 
 coins fall below the minimum circulating weight, the 
 government shall exchange such coins for others of the 
 same face value without making any charge. In other
 
 74 EVOLUTION OF MONEY 
 
 words, the government insures its gold coins against loss 
 by ordinary wear. 
 
 The whole amount of one-yen silver coins redeemed 
 under this law was 75,093,822 yen. Of this sum 25,567,011 
 was set apart for minting new subsidiary silver coins, and 
 the remainder was sold at Hong Kong, Shanghai, and 
 elsewhere. 1 
 
 Russia suspended the coinage of silver for private indi- 
 viduals on the Qth of September, 1876. Prior to that time 
 she had had the single silver standard nominally, but had 
 been under the regime of irredeemable paper. This paper 
 was quoted in terms of gold in all transactions of any mag- 
 nitude. In other words, gold was in practice the standard 
 of the Russian mercantile classes. The value of the legal- 
 tender notes was measured in it from day to 
 
 da y- The S ld im P erial was in circulation as 
 commercial money. Its normal value was 10 
 roubles 30 copecks in paper. When the price of silver had 
 declined so that 10 roubles 30 copecks of paper would buy 
 silver bullion which would yield a greater sum, by coining 
 at the mint, the government suspended the free coinage of 
 that metal anid set its face toward the gold standard. Vari- 
 ous steps were taken to this end at different times during 
 the succeeding twenty-three years. They culminated in the 
 law of June 7 (19), 1899, by which the gold standard was 
 definitely adopted. 
 
 It was decreed that the ratio between the old currency 
 rouble and the new gold rouble should be as i to i, and 
 that this rating should apply to all past contracts, public 
 and private. A person owing 150 roubles could pay the 
 debt with 100 roubles after the resumption of specie pay- 
 
 1 See report on the adoption of the Gold Standard in Japan, by 
 Count Matsukata Masayoshi, Minister of Finance, Tokio, 1899.
 
 THE GOLD STANDARD 75 
 
 ments, but these would be gold roubles. This act has been 
 severely criticised, as though it were equivalent to repudia- 
 tion of one-third of all debts. On the contrary, if the 
 single silver standard had remained in force, 
 
 a11 debts would have been scaled down 5 
 per cent or more, instead of 33^ per cent. 
 
 A debt of 150 roubles could in that case have been paid 
 with 75 gold roubles or less. 
 
 The gold rouble was made the monetary unit of the 
 empire, containing 17.424 doli (about 12 grains) of fine 
 gold. The smallest gold coin, however, is the five-rouble 
 piece, containing 87.12 doli (59.7413 grains) of fine gold. 
 Gold pieces of 5, 7^-, 10, and 15 roubles are to be struck. 
 The imperial, of fifteen roubles, is equal to $7.718. All gold 
 brought to the mint either by the government or by private 
 individuals is to be coined. The standard of fineness is T 9 ^. 
 Gold coins are legal tender without limit. Silver and cop- 
 per are coined only for the government. Silver roubles and 
 half and quarter roubles are legal tender for 25 roubles in 
 one payment. Smaller silver and copper coins are legal 
 tender for 3 roubles only. The rouble is divided into 100 
 copecks. The smallest silver coin is 5 copecks. 
 
 Mexico adopted the gold standard in 1906. 
 
 During the last quarter of the nineteenth century three 
 
 international conferences were held, the declared object of 
 
 whose promoters was to secure the adoption 
 
 international o f bimetallism, or the double standard, by the 
 Monetary Con- . ... , , , , . , 
 
 ferences. nations participating. Iney were held in the 
 
 years 1878, 1881, and 1892 the first and 
 second at Paris, the third at Brussels. The first and the 
 third were called at the instance of the. United States ;
 
 /6 EVOLUTION OF MONEY 
 
 the second, at the instance of the United States and France 
 jointly. All of them failed to agree upon any plan to ac- 
 complish the object sought. Notwithstanding these repeated 
 failures, President McKinley, in 1897, appointed a commis- 
 sion of three persons, of whom Senator Wolcott of Colorado 
 was the chief, to visit Europe and endeavor to promote inter- 
 national bimetallism in some form. The commissioners met 
 with some encouragement in France. They then went to 
 England and sought to secure the aid of the Salisbury min- 
 istry, who at first seemed inclined to cooperate, but when 
 facts of the negotiation became generally known, the busi- 
 ness community both in the United Kingdom and in India 
 protested so strongly against it that the whole project was 
 abandoned. 
 
 The first essential of an international agreement would be 
 to express in figures the legal ratio between the two metals, 
 yet none of the conferences ever progressed so far as to dis- 
 cuss that subject. Any considerable deviation of the agreed 
 ratio from the market ratio would bring powerful counter- 
 vailing forces into play. If gold, for example, were artificially 
 cheapened, less gold would be mined and greater quantities 
 would be used in the arts, while the contrary effects would 
 be felt in the production and consumption of silver. 
 
 The great obstacle to international bimetallism lies in the 
 preference of mankind for gold money over silver money. 
 If this preference did not exist, no international conference 
 would be needed in order to put silver on an 
 Bimetallism equal footing with gold. Even the most elab- 
 orate system of exchanges through banks and 
 clearing houses leaves a residuum of payments to be made 
 by the transfer of metal, and here the question of weight 
 becomes decisive. A bank which has to receive $1,000,- 
 ooo of metal will always prefer, say, 4000 pounds of gold 
 rather than 140,000 pounds of silver. It can afford to pay
 
 THE GOLD STANDARD 77 
 
 a premium for gold equal to the difference in the cost of 
 handling and storing the two masses. The earliest sign of 
 a premium on gold, after a bimetallic agreement had been 
 made, would render the agreement itself inoperative. 
 
 RECAPITULATION 
 
 Inconveniences resulting from the use of two metals as 
 standard money have led civilized nations successively to 
 demonetize silver and to adopt the single standard of gold. 
 These inconveniences were manifested for the most part 
 in the exportation of one or the other metal, according as 
 the market ratio varied from the legal ratio. The change 
 to the single gold standard has come about within the past 
 century, and mostly during the past thirty years. One 
 reason why gold has been preferred to silver is that it con- 
 tains much greater value than silver in a given weight and 
 bulk, being thus akin to a labor-saving machine. 
 
 The demonetization of silver means the discontinuance 
 of the coinage of silver bullion deposited at the mint by 
 private persons. 
 
 In some countries there still remain large amounts of 
 silver in circulation, of full legal tender, such as the thalers 
 of Germany, the five-franc pieces of France, and the rupees 
 of India. These pieces are usually at par with gold at 
 some preexisting ratio, because they are limited in amount 
 and are received as the equivalent of gold by the govern- 
 ments for taxes. The banks have the legal right to tender 
 these silver pieces in payment of checks, and in France and 
 Germany they exercise the right at times, in order (as they 
 say) to curtail the exportation of gold. In such cases there 
 is a small premium on gold in the market.
 
 78 EVOLUTION OF MONEY 
 
 AUTHORITIES 
 
 Lord Liverpool's Coins of the Realm. 
 
 Shaw's History of Currency. 
 
 Giffen's Case against Bimetallism. 
 
 Carlile's Evolution of Modern Money. 
 
 Papers issued by the Gold Standard Defence Association. 
 London, 1898. 
 
 Report and accompanying documents of the United States 
 Monetary Commission of 1876. 
 
 Report from the Select Committee on the Depreciation of 
 Silver. London, 1876. 
 
 Report of the Royal Commission on Recent Changes in the 
 Relative Value of the Precious Metals. London, 1888. 
 
 Report of the International Monetary Conference held in Paris 
 in August, 1878. Washington, 1879. 
 
 Proceedings of the International Monetary Conference held in 
 Paris in April, May, June, and July, 1881. Cincinnati, 1881. 
 
 Report of the International Monetary Conference held at 
 Brussels in 1892. London, 1893.
 
 
 v v<X*.. 
 
 BOOK II 
 
 GOVERNMENT PAPER MONEY 
 
 CHAPTER I 
 COLONIAL BILLS OF CREDIT 
 
 GOVERNMENT paper money is usually a promise to pay 
 coined money. Such paper is of several different kinds. 
 We shall here consider chiefly the kind which does not 
 bear interest, which is payable at no fixed time, and which 
 is made legal tender between individuals. 
 
 The first government paper to circulate as money in this 
 country was issued by the Colony of Massachusetts in 1690, 
 in order to pay soldiers who had returned from an unsuc- 
 cessful expedition against Canada. The public treasury 
 was empty, and the soldiers could not or would not wait 
 for the collection of taxes to meet their demands. The 
 General Court accordingly issued ,40,000 in 
 f *c <rt S bills of credit which were made receivable for 
 
 taxes and exchangeable for any commodities 
 in the treasury. These were issued to the soldiers in antici- 
 pation of the tax collections ; they were not payable at any 
 particular time ; they did not bear interest, and they were 
 not legal tender. They did not pass for more than twelve or 
 fourteen shillings in the pound. The soldiers lost two-fifths 
 of their dues. In 1692 the bills were made legal tender in 
 all payments and receivable for taxes at 5 per cent better 
 than silver and redeemable in silver at the end of twelve 
 months. These provisions made them equal to silver. 
 
 79
 
 80 GOVERNMENT PAPER MONEY 
 
 Yet this was a fatal experiment. Its apparent success as 
 a means of postponing taxes led to disorders far worse than 
 the commodity currency of the earlier period. It spread to 
 the other colonies like an epidemic. Nearly all the colonial 
 governors were at variance with their legislatures concern- 
 ing bills of credit. Acting under instructions of the Lords 
 of Trade, they repeatedly vetoed the paper- 
 
 mone y bills - Then the legislatures refused 
 to provide for the support of the local govern- 
 ments. They stopped the salaries of the governors and 
 allowed the public buildings and barracks to go to decay. 
 This source of irritation against the mother country has 
 been grossly neglected by historians in general, but not 
 by Mr. Felt, the historian of Massachusetts currency, who 
 assigns it its proper place among the causes which led to 
 the separation. 
 
 In South Carolina in 1719 the people deposed the Pro- 
 prietors' governor, because he would not assent to bills of 
 credit, and the king connived at this act of insubordination 
 in order to get the province under his own authority. At 
 a later period the legislature of this colony, being at variance 
 with the royal governor on the same subject, adjourned 
 for three years, making no provision for the support of the 
 government meanwhile. The same thing happened in New 
 Hampshire. Her representatives for five years preceding 
 the year 1736 refused all supplies. New 
 
 And with the Jersey did the same for four years, for the 
 Colonial Gov- . . 
 
 ernors. same reason. The governors complained to 
 
 the home authorities ; and the latter insisted 
 that the colonies should provide a permanent instead of 
 an annual support for the local governments, which the 
 colonies refused to do because they were not allowed a free 
 hand in issuing bills of credit. In almost every case the 
 governors were at last worn out and compelled to yield.
 
 COLONIAL BILLS OF CREDIT 8 1 
 
 As Mr. Felt says, " The Briareus of paper money was too 
 strong for them." 
 
 Petitions against bills of credit, from the mercantile 
 
 classes in the colonies, and from London merchants at 
 
 last prevailed on Parliament to take action. In 1751 a 
 
 bill was brought forward to prohibit paper 
 
 pTr^ment 8 ^ mone y in the four New England provinces 
 where the trouble was greatest, but before 
 it was passed the agents of the colonies managed to get 
 exceptions in case of great emergencies and of war. Even 
 in these cases the bills were not to be legal tender between 
 individuals. In 1763 Parliament passed another act much 
 more stringent, and applicable to all the colonies. 
 
 A pamphlet of 1743 l speaks of the bills of credit in New 
 England issued on loan 
 
 to themselves, Members of the Legislature, and to other Bor- 
 rowers, their Friends, at easy and fallacious Lays, to be repaid at 
 very long Periods ; and by their provincial Laws made a Tender 
 in all Contracts, Trade and Business, whereby Currencies, various 
 and illegal, have been introduced which from their continued 
 and depreciated nature in the Course of many Years have much 
 oppressed Widows and Orphans and all other Creditors. 
 
 This writer gives special attention to the colony of Rhode 
 Island, which had 
 
 defrauded more in a few years than any the most wicked admin- 
 istrations in the several nations of Europe have done in several 
 
 centuries. A contract made 30 years ago for 
 Rhode Island an /- IOQ ster ij n g j n va i ue / t h a t j s s jl ver at Ss. per 
 Awful Example. *" 
 
 oz.) is at present reduced to a nominal $2s. per 
 
 oz. . . . This expedient of depreciating their Government bills, 
 by their Laws made a Tender and Currency, is promoted by the 
 
 1 Quoted in " A Letter from a Gentleman in Boston to his Friend in 
 Connecticut." In the New York Public Library.
 
 82 GOVERNMENT PAPER MONEY 
 
 fraudulent Debtors and desperate part of the Colony in order to 
 pay former contracts with a much less value than was contracted 
 for, and more especially to defraud British merchants in their out- 
 standing debts. The paper-money promoters are the desperate 
 and fraudulent, these being vastly the Majority in the colony, 
 carrying all elections ; both legislative and executive parts of 
 their government are annually elective. Thus Government is 
 perverted and become worse than a State of Nature. If by 
 chance any of the elected opposes the emission of any of those 
 fraudulent bills he is drop'd next election as a professed enemy to 
 the Interest of the Colony. . . . This poor small colony, from a 
 late exact Perlustration, contains not exceeding 20,000 men, 
 women and children, whites, Indians and negroes, have extant 
 about .400,000 paper money. And of this about three-quarters 
 is in the Possession of people of neighboring Colonies. 
 
 " All our paper-money-making legislatures," says the con- 
 temporary writer, Dr. Douglass, "have been legislatures of 
 debtors, the representatives of people, who for incogitancy, 
 idleness, and profuseness have been under the necessity of 
 mortgaging their lands." To the same purport writes 
 the historian, Hutchinson. 
 
 Thomas Paine has drawn the portrait of the group. 
 Writing in 1786, he tells us how the speculators and debtors 
 were then working for bills of credit. He says : 
 
 There are a set of men who go about making purchases upon 
 credit, and buying estates that they have not wherewithal to pay 
 
 for ; and having done this their next step is to fill 
 Testimony oi ^g news p a p e rs with paragraphs of the scarcity of 
 
 money and the necessity of a paper emission, then 
 to have legal tender under the pretense of supporting its credit, 
 and when out, to depreciate it as fast as they can, get a deal of it 
 for a little price and cheat their creditors ; and this is the concise 
 history of paper-money schemes. 1 
 
 1 Writings, Vol. II, p. 178.
 
 COLONIAL BILLS OF CREDIT 83 
 
 Usurers were then, as now, unpopular. Any means of 
 circumventing them was hailed with satisfaction, and no 
 method was more obvious than that of furnishing loans at 
 the public treasury to those who could not 
 0111 borrow elsewhere, or who wanted to borrow 
 
 at less than the market rates, or who wanted 
 to borrow from the colony at low rates in order to lend 
 again at high rates. Anybody who had influence could do 
 this. In Rhode Island it was the custom of the favored 
 ones to sell their privileges. The first issue of bills of 
 credit for a loan was in South Carolina in 1712. From this 
 example, says Bancroft, " the passion for borrowing spread 
 like flame on a dry prairie." 
 
 There were three main causes or excuses for the issue of 
 bills of credit: (i) war expenses; (2) loans to individuals; 
 (3) ordinary expenses of government. There were also 
 other minor pretexts. One of the most common ways of 
 increasing such issues was the alleged replacement of old 
 and worn bills, which often meant an issue so large as to 
 leave a margin over for general expenses, and 
 
 50 " 1611 65 a Vel 7 lar g e mar g in " ThuS > f 
 
 ,46,000 Connecticut bills authorized for this 
 purpose between 1713 and 1732, ^"29,885 went to the pay- 
 ment of colony debts. In this case the General Court did 
 not wait to see what margin would be left after replacing 
 the old and worn bills, but dipped into the reservoir to meet 
 current charges. Similarly, Maryland once issued bills of 
 credit as a sheer gift to a portion of the inhabitants, 
 "the taxables." 
 
 Reports were made from time to time to the home govern- 
 ment, in response to inquiries as to the amount of bills 
 outstanding. Often these were ingeniously prepared to 
 convey false impressions. To avoid discovery the New 
 York Assembly repealed all safeguards against the reissuing
 
 84 GOVERNMENT PAPER MONEY 
 
 of bills of credit that had been redeemed. When the 
 governor disallowed the act the treasurer reissued the bills 
 
 nevertheless. The governor so reported to 
 False Reports. 
 
 the Lords of 1 rade, and added that the treas- 
 urer refused to let him know the amount of bills outstanding 
 when requested to do so. 
 
 In addition to legal-tender acts, there was a great variety 
 of laws to compel people to sell their property at the same 
 price for bills of credit as for silver. The "debtor class" 
 were not satisfied with forcing depreciated paper upon 
 
 creditors for past obligations, but insisted 
 
 Forcing Laws. 1,11, 
 
 that they ought to be able to buy as much 
 property with the paper as with specie. Those who had 
 been forced to take the paper for past debts naturally joined 
 in this demand, and the legislatures agreed with them. 
 Hence we find in nearly all the colonies severe penalties on 
 those who charged more for their goods, lands, or services in 
 bills of credit than in money. In some cases the penalty 
 was a fine, in others imprisonment, in others confiscation of 
 the property offered. 
 
 The usual course of events where bills of credit were 
 issued was as follows : (i) emission ; (2) disappearance of 
 
 specie ; (3) counterfeiting; (4) wearing out 
 
 of bills 5 (S> callin g in and replacing worn 
 and counterfeited issues with new ones ; (6) 
 extending the time for old ones to run, especially those 
 which had been placed on loan ; (7) depreciation ; (8) repudi- 
 ation of early issues in part and the emission of others, 
 called " new tenor." 
 
 Dr. Douglass says that Massachusetts had at one time 
 "old tenor, middle tenor, new tenor first, new tenor second." 
 Rhode Island had an indefinite number of tenors. 
 
 In all cases, except where the bills were placed on loan, 
 taxes were laid to sink them at some time, near or remote.
 
 COLONIAL BILLS OF CREDIT 85 
 
 This was necessary to give them any credit at all, but it 
 was very easy to extend the time. Consequently postpone- 
 ments were frequent. When Parliament took 
 hold of the sub J ect it: prohibited all extensions 
 and deprived the bills of their legal-tender 
 character after the allotted time had expired. This was 
 regarded as" a great grievance. The New York Legislature 
 even resolved that bills not tenderable were useless. 
 
 Counterfeiting and wearing out were invariable and very 
 trying evils. The former was punishable with death in all 
 the colonies except one or two, Bronson says in all except 
 Connecticut, but, although there were many convictions, 
 the extreme penalty was hardly ever enforced. The expul- 
 sion of specie which followed after the first emission of 
 bills of credit usually left the people without 
 
 Counterfeiting. ' *. . 
 
 small change. I hen the practice of halving 
 and quartering the bills came into vogue, and this opened 
 a new door to fraud. The counterfeiters halved and 
 quartered their own bills and united the parts to the corre- 
 sponding parts of genuine ones and sometimes attached the 
 half of a five-pound note to the half of a ten. There was, 
 indeed, no end to their tricks. Some bills of small denomi- 
 nations circulated after they were known to be counterfeit, 
 because there was no other small change. 
 
 Worn-out bills likewise were an ever-recurring nuisance. 
 All sorts of opprobrious epithets were heaped upon them. 
 They were called, in various statutes, old, worn, torn, tat- 
 tered, shattered, ragged, mutilated, defaced, obliterated, 
 illegible, and "unfit to pass." 
 
 The depreciation of the colonial bills varied in the differ- 
 ent colonies. In Massachusetts the maximum depreciation 
 was ii for i (the standard being "proclamation money"). 
 In Connecticut it was 8 for i. In 1763 the value of the New 
 Hampshire shilling was a little less than a half-penny; in
 
 86 GOVERNMENT PAPER MONEY 
 
 1771 it vanished altogether. Rhode Island old-tenor bills 
 in 1770 were worth 26 for i. Those of North Carolina were 
 
 10 for i ; of South Carolina, 7 for i. The 
 Depreciation. ,.,,,, ,, , 
 
 bills of the middle colonies were kept within 
 
 reasonable bounds, a result due mainly to the stubborn- 
 ness of their governors in resisting the legislatures and 
 keeping the issues of bills within limits. The maximum 
 depreciation in New York was only 25 per cent, in com- 
 parison with proclamation money. 
 
 The pamphlets and records of the colonial period are 
 filled with accounts of the distress and demoralization caused 
 by depreciated paper made legal tender. As all loans were 
 so payable, the accumulations of age and the inheritances 
 
 of orphans dwindled. So, too, did the earn- 
 Swindling. 
 
 ings of the wage-worker. In order to avoid 
 
 the losses from a depreciating standard of value, resort was 
 had by workingmen to " store pay," and here they were gen- 
 erally cheated. Trustees and executors who had money in 
 their hands which belonged to other people, and who saw 
 how things were going, often postponed payment on frivo- 
 lous pretexts, since each delay enabled them to settle their 
 accounts with less value, thus " devouring widows' houses." 
 Not only was bad blood stirred up by the 
 
 Mob Law. 
 
 resistance of the royal governors, but a spirit 
 of lawlessness was engendered against the local assemblies 
 if they showed a disposition to resist the demands of the 
 greenbackers of that day. Even after the Revolution the 
 Legislature of New Hampshire was mobbed because it 
 refused to issue legal-tender bills. One of the demands of 
 Shays' rebellion in Massachusetts was for more paper money. 
 
 In Rhode Island after the Revolution a general 
 Repudiation. . . 
 
 system of repudiation of debts, public and 
 
 private, was undertaken and carried through by means of 
 legal-tender paper, in spite of the decisions of her courts.
 
 COLONIAL BILLS OF CREDIT 87 
 
 Now it may be asked what happened when colonial bills 
 of credit were issued as loans to private individuals. What 
 the borrowers wanted was circulating capital. They bor- 
 rowed the bills in order to spend them for 
 store g ods > provisions, building materials, 
 labor, etc. The wages they paid to laborers 
 were expended for store goods, provisions, etc. ; so we may 
 say that the borrowers of the bills of credit aimed to get 
 control of the useful things that were on sale in the com- 
 munity, and that they succeeded in doing so. Now, whether 
 the bills depreciated or not, it is evident that the borrowers 
 got an advantage over their neighbors, because they 
 obtained control of this circulating capital at lower rates 
 than others had to pay. This was precisely the reason 
 why they wanted the loan bills to be issued. If they could 
 have borrowed at the same rate in the open market, there 
 would have been no reason for borrowing from the gov- 
 ernment. But the injustice did not stop there. What- 
 ever they took out of the loan market in this way caused a 
 scarcity, and a rise of the rate of interest, for other bor- 
 rowers. One of the most observing pamphleteers of the 
 day tells us that the rate of interest on "natural loans" 
 always advanced after a public loan. This was due in part 
 to the withdrawal of loanable capital, and in part to the fear 
 of lenders that the bills would depreciate in consequence 
 of the new emission. Most commonly they did depreciate. 
 The borrowers were for the most part land- 
 Landowners 7 owners. Only two kinds of security were 
 , allowed by law, land and bullion. Very little 
 bullion was ever offered at the loan offices. The land- 
 owners controlled the legislative assemblies everywhere. 
 Thus the emission of bills of credit on loan was, in effect, 
 a conspiracy of needy landowners against the rest of the 
 community.
 
 88 GOVERNMENT PAPER MONEY 
 
 RECAPITULATION 
 
 Most frequently the issue of legal-tender notes has its 
 beginning in an emergency of war; when the government 
 finds itself unable to meet its obligations with money, or 
 hopes to escape paying the rate of interest demanded for 
 loans. 
 
 Such paper is usually put in circulation by the govern- 
 ment paying it to its creditors as the equivalent of specie, 
 and authorizing them to pay it to their creditors, and so on. 
 
 Such were the conditions under which colonial bills of 
 credit were first issued in this country. Afterwards the 
 practice of issuing them for the ordinary expenses of govern- 
 ment was adopted, and still later the colonies issued such 
 bills as loans to private individuals. 
 
 In all cases the bills depreciated more or less. In some 
 instances their value fell to zero and they were repudiated 
 in whole or in part. In others the depreciated bills were 
 followed by fresh issues called " new tenor," which depre- 
 ciated in like manner, and were succeeded by third and 
 fourth " tenors," which took the same downward course. 
 
 This teaches us that a popular government, when once 
 started after the ignis fatuus of irredeemable paper, cannot 
 readily stop itself. 
 
 The effect of a depreciating currency is similar to that of 
 clipped coin. If all the money in the country were metallic, 
 if each man, upon receiving a piece, should be privileged 
 to shave off one per cent before passing it, and if the law 
 required everybody to accept the remainder at its face value, 
 the consequences would be like those which followed the 
 emission of colonial bills of credit. In the course of time 
 the whole coinage would be reduced to a fraction of its 
 original weight. If the rulers of the people should then 
 decree that the pieces should pass only for their metallic
 
 COLONIAL BILLS OF CREDIT 89 
 
 value, and that new coins should be struck at the mint of 
 full weight, but that clipping might go on as before, we 
 should have old tenor and new tenor just as they had in 
 New England in the eighteenth century. 
 
 There is one difference, however, in favor of clipped coin. 
 Nobody loses anything by merely holding it. Nobody can 
 shave off any part of it except the owner. In the case of 
 a depreciating currency, the longer one keeps it the more 
 he loses. 
 
 The colonial bills of credit were always made receivable 
 for taxes. Generally the laws provided that they should be 
 sunk by taxes within a specified time, meaning that they 
 should all be taken in by taxation or redeemed with the 
 proceeds thereof, within the specified' time, and then be 
 canceled. If these provisions and promises had been 
 adhered to, the disorders in the currency would have been 
 much less serious than they were, but the importunity of 
 debtors was always influential with the legislative assem- 
 blies. In order to postpone payment of their debts to the 
 government they persuaded the government to postpone 
 payment of its debts to the bill-holders by extending the 
 time for redemption and even adding new bills before the 
 old ones had been retired. 
 
 If no more bills had been issued than could be sunk by 
 taxes within one year, and if the law to this effect had 
 been rigidly enforced, the evil consequences would have 
 been slight. 
 
 AUTHORITIES 
 
 William Douglass' Discourse concerning the Currencies of the 
 British Plantations in America. (Republished by the American 
 Economic Association, 1897.) 
 
 Palfrey's History of New England. 
 
 Felt's Historical Account of Massachusetts Currency.
 
 90 GOVERNMENT PAPER MONEY 
 
 Hutchinson's History of Massachusetts, 1628 to 1774. 
 
 C. H. J. Douglas' Financial History of Massachusetts, includ- 
 ing catalogue of colonial pamphlets on currency and banking. 
 (Columbia College series, 1892.) 
 
 Bronson's Historical Account of Connecticut Currency. 
 
 Arnold's History of the State of Rhode Island and Providence 
 Plantations. 
 
 Belknap's History of New Hampshire. 
 
 Phillips' Historical Sketches of American Paper Currency. 
 
 Ramsay's History of South Carolina. 
 
 Hickcox's History of Bills of Credit issued by New York from 
 1709 to 1789. 
 
 Documents relating to the Colonial History of New York. 
 
 Parker's Taxes and Money in New Jersey before the Revolution. 
 
 Bullock's Essays on the Monetary History of the United States 
 (1900). 
 
 A. McFarland Davis' Currency and Banking in the Province 
 of Massachusetts Bay (American Economic Association, 1900).
 
 CHAPTER II 
 REVOLUTIONARY BILLS OF CREDIT 
 
 BAD as the colonial bills of credit were, those of the Revo- 
 lutionary period were worse. Our ancestors went to war 
 without any preparation. They had no money. They had 
 no system of taxation. They had no central authority 
 capable of enacting and enforcing one, and what was even 
 worse they objected to being taxed either by Great Britain 
 or by their own local governments. All the separate colo- 
 nies began to issue bills of credit, even before the Continental 
 Congress assembled. 
 
 Nevertheless, the experience of the past had not been 
 wholly forgotten. Even Franklin, who had been an advo- 
 cate of government paper in earlier times, now recoiled. 
 When the first paper money was proposed in the Conti- 
 nental Congress (June, 1775) he urged that 
 warning S tne ^^ s should bear interest, in order to pre- 
 
 vent depreciation. When the second issue 
 was proposed, he urged that Congress should borrow on 
 interest the bills already authorized. Both of these plans 
 were rejected. The third issue bore interest, and now 
 Franklin urged that the interest should be payable in "hard 
 dollars." This was voted to be impracticable. 
 
 There was much confusion of ideas concerning details. 
 While taking time to consider them, it was voted in July, 
 
 1771;, to issue due bills for two million Span- 
 First Issues. . 
 
 ish milled dollars, to be sunk by taxes in four 
 
 successive years, beginning November 30, 1779, the taxes 
 
 91
 
 92 GOVERNMENT PAPER MONEY 
 
 to be levied and collected by the states in proportion to 
 their population. The bills were not legal tender. The 
 Congress had no power to make them legal tender, but in 
 January, 1777, it recommended that the states should do so ; 
 and this they did, one after another, in one way or another. 
 Before the two millions were issued, another million was 
 wanted and was authorized, together with three millions 
 more before the end of the year. Nine millions more, or 
 fifteen in all, were out before independence was declared. 
 This was called " continental " currency, to distinguish it 
 from the issues of the separate states. 
 
 From this time the demon of " fiat money " had posses- 
 sion of the country and worked its will on the inhabitants. 
 The issues ran on, in an increasing volume, till they 
 amounted to two hundred and forty-two million dollars in 
 the year 1779. In 1781 the whole mass became worthless. 
 
 On this subject the essays of Pelatiah Web- 
 Pelatiah Webster. 
 
 ster have become classic. Mr. Webster was 
 
 a merchant of Philadelphia and an ardent patriot. He 
 wrote while the paper-money experiment was going on. 
 We can readily believe him when he says : " We have 
 suffered more from this than from every other cause of 
 calamity ; it has killed more men, pervaded and corrupted 
 the choicest interests of our country more, and done 
 more injustice than even the arms and artifices of our 
 enemies." 
 
 In his first essay (October 5, 1776) Mr. Webster says 
 that he cannot discern any depreciation as yet, or any 
 advance in the prices of goods beyond what a state of war 
 
 would occasion, even if the currency consisted 
 Early Deprecia- Q goM and silyer exdusively- On the other 
 
 hand, Professor Sumner has collected evidence 
 showing that at some places goods were sold at lower prices 
 for silver than for bills, even before the Declaration was
 
 REVOLUTIONARY BILLS OF CREDIT 93 
 
 signed. 1 It is certain that committees were at work early 
 in 1776 attending to the cases of persons who discriminated 
 against paper money. The most common punishment for 
 this offense was seizing some portion of the offender's goods 
 and declaring him an enemy of his country. That this was 
 no trifling penalty is attested by the fact that nearly every 
 one recanted and promised amendment. Nevertheless the 
 number of offenders increased continually. In Philadel- 
 phia, in the latter part of 1776, one of the penalties was the 
 closing of the shops of the guilty parties. This caused 
 prices to rise by giving a monopoly to the others ; and so, 
 when this effect was observed, the first culprits were allowed 
 to reopen. 
 
 Early in 1777 the depreciation had become too great to 
 be ignored. Committees were appointed in nearly all the 
 states to prevent engrossing and forestalling. 2 One way to 
 do this was to buy all the goods of a particular kind in sight 
 for the army and to require the owners to accept continental 
 money for it. This involved the necessity of deciding how 
 much the owners were entitled to retain for their own use 
 or to meet engagements previously made. It was necessary 
 also to fix the rate of wages of labor for reproducing the 
 goods. At a later period the depreciation was so rapid that 
 Professor Sumner says a man might lose his whole wages 
 while earning them. 
 
 Price conventions were the next resort. The first one, 
 held at Providence, was composed of delegates from the 
 four New England states. It fixed the prices at which 
 
 1 There are several histories of the continental currency. That of 
 Professor Sumner, in his Financier and Finances of the American Revo- 
 lution, is much the best. Mr. A. S. Bolles, in his Financial History of 
 the United States, has been an industrious collector of facts. 
 
 2 Forestalling is buying goods before they reach the market, in order 
 to sell them at a higher price. Engrossing is the same as monopolizing.
 
 94 GOVERNMENT PAPER MONEY 
 
 imported goods might be sold, but an exception was made 
 of arms and ammunition in order to encourage their im- 
 portation. Retailers were not to charge more 
 Price Conven- than 20 per cent advance. The regulation of 
 
 tion in New 
 
 England. prices of domestic products was left to the 
 
 states, as was also the penalty for over-charg- 
 ing. Rhode Island enacted, in addition to other penalties, 
 that if anybody withheld from sale any goods required for 
 the army or navy, the state officers might seize them and, 
 if necessary, break open buildings. A little later it was 
 enacted that buildings containing any goods needed by the 
 community and withheld by the owners might be broken 
 open and the contents sold at the statutory prices. An 
 exception was made of salt, as being, like arms and ammu- 
 nition, an indispensable article. The effect of these laws 
 was to discourage importation. Nobody would 
 bring in goods to be exposed to legal pillage. 
 Accordingly the Rhode Island laws against 
 engrossing were repealed after a few months. The course 
 of proceedings in Connecticut was substantially the same. 
 This state, however, had a law to prohibit persons from buy- 
 ing any more goods than the selectmen should judge to be 
 necessary for the use of their respective families. Anything 
 like prudence in laying in supplies was thus forbidden. 
 
 A price convention of the six Middle States was held at 
 
 York, Pa., in March, 1777, but was unable to agree upon a 
 
 single point. Three states voted that maxi- 
 
 Price Convention mum p r i ces should be fixed, that sales by 
 of the Middle 
 
 states. auction should be forbidden, and that impor- 
 
 tation (which had fallen off, in consequence 
 of the disorderly proceedings of committees) should be 
 encouraged by bounties. Three voted against these propo- 
 sitions, believing that they would only aggravate the evils. 
 The subject was accordingly referred back to the states,
 
 REVOLUTIONARY BILLS OF CREDIT 95 
 
 but the execution of the price-limiting laws was oftener 
 carried out by mobs than by the constituted authorities. In 
 Albany two persons who had sold rum for more than the 
 established price were taken to the market place and put 
 on a scaffold, when they fell on their knees, acknowledged 
 themselves guilty, and promised to observe the law and help 
 to enforce it upon others. Every method of evasion, such 
 as trade by barter, subjected persons to suspicion. Thus, 
 Richard Henry Lee, who commuted his rents to payment in 
 produce, was denounced as a Tory and left out of Congress 
 at the next election. 
 
 Mr. Webster, in one of his essays, said that not more 
 than one man in ten thousand was capable of understanding 
 the subject. The greatest man of the period did not under- 
 stand it ; for Washington wrote to Reed, the president of 
 
 Pennsylvania, December 12, 1778, commend- 
 Krsfvtews' 8 m & ki g zea l "i n bringing. those murderers of 
 
 our cause, the monopolizers, forestallers, and 
 engrossers, to condign punishment. It is much to be 
 lamented," he continued, "that each state, long ere this, 
 has not hunted them down as pests to society and the 
 greatest enemies we have to the happiness of America. I 
 would to God that some one of the more atrocious in each 
 state was hung in gibbets upon a gallows five times as high 
 as the one prepared by Haman." Yet he had written, more 
 than a year earlier (September 28, 1777), to John Parke 
 Custis, directing him to see that the rent of certain land 
 and slaves should be so arranged that the payments should 
 have a value relative to the currency. " I do not mean by 
 this," he says, " that I am unwilling to receive the paper 
 money. On the contrary, I shall with cheerfulness receive 
 payment in anything that has currency at the time of pay- 
 ment, but of equal value then to the intrinsic worth at the 
 time of fixing the rent." Only two months before he wrote
 
 96 GOVERNMENT PAPER MONEY 
 
 to Reed about hanging monopolizers, forestallers, and 
 engrossers, he wrote (October 10, 1778) to Custis, advisi 
 ing him not to accept money for a piece of land he was 
 about to sell, but to take other land in exchange for it, 
 because the money might lose its value. This was just what 
 the monopolizers, forestallers, arid engrossers apprehended. 
 
 Washington was an honest man. It never occurred to 
 him that he was doing with his land and slaves exactly what 
 the others were doing with their provisions and store goods. 
 But, a year later, his eyes were wide open. In August, 1779, 
 he wrote to his agent, Lund Washington, that he would no 
 longer accept continental money on contracts made before 
 the war, unless other people did the same. 
 " The law '" he sa y s " undoubtedly was well 
 designed. It was intended to stamp a value 
 upon, and to give a free circulation to the paper bills of 
 credit, but it never was nor could have been intended to 
 make a man take a shilling or sixpence in the pound for a 
 just debt, which the debtor is well able to pay, and thereby 
 involve himself in ruin." 
 
 When the Father of his Country could make such mistakes, 
 we need not wonder that the common people were befogged. 
 Washington here says that it was merely intended by Con- 
 gress to " stamp a value " upon certain pieces of paper. If 
 value can be stamped upon paper, it is obviously useless to 
 work for a living. All that is required to insure plenty and 
 prosperity is to pass a law, and then set a few printing 
 presses at work. If Congress attempts to stamp a value 
 upon a thing that is intrinsically worthless and fails in the 
 attempt, its intentions may form a subject of curious interest, 
 but they are of no practical importance. 
 
 After the Revolution and to the end of his life, Washing- 
 ton was an inflexible opponent of bills of credit, and he had 
 need to use all his influence against that form of debauchery 
 in Virginia.
 
 REVOLUTIONARY BILLS OF CREDIT 97 
 
 With the mass of the people nothing could be done. All 
 of them, the wise and unwise together, were hurrying to a 
 cataclysm. 
 
 The fatal error (says Pelatiah Webster), that the credit and 
 
 currency of the continental money could be kept up and supported 
 
 by acts of compulsion, entered so deep into the 
 
 The Final mind of Congress and all departments of adminis- 
 
 Cataclysm. 
 
 tration through the states that no considerations 
 
 of justice, religion, or policy, or even experience of its utter ineffi- 
 ciency could eradicate it. It seemed to be a kind of obstinate 
 delirium, totally deaf to every argument drawn from justice and 
 right, from its natural tendency and mischief, from common sense 
 and even common safety. This ruinous principle was continued 
 in practice for five successive years, and appeared in all shapes 
 and forms, i.e., in tender acts, in limitations of prices, in awful 
 and threatening declarations, in penal laws with dreadful and 
 ruinous punishments, and in every other way that could be 
 devised, and all executed with a relentless severity, by the high- 
 est authorities then in being, viz., by Congress, by assemblies 
 and conventions of the states, by committees of inspection (whose 
 powers in those days were nearly sovereign), and even by military 
 force ; and though men of all descriptions stood trembling before 
 this monster of force, without daring to lift a hand against it, 
 during all this period, yet its unrestrained energy ever proved 
 ineffectual to its purposes, but in every instance increased the 
 evils it was designed to remedy, and destroyed the benefits it was 
 intended to promote ; at best, its utmost effect was like that of 
 water sprinkled on a blacksmith's forge, which indeed deadens 
 the flame for a moment, but never fails to increase the heat and 
 force of the internal fire. Many thousand families of full and 
 easy fortune were ruined by these fatal measures, and lie in ruins 
 to this day, without the least benefit to the country, or to the great 
 and noble cause in which we were then engaged. 
 
 When the price conventions failed of their object, new 
 ones were held fixing new limits, as, for example, fourfold
 
 98 GOVERNMENT PAPER MONEY 
 
 the prices of 1774, then eightfold, then tenfold, then twenty- 
 fold, terrorism being applied in each case to enforce the 
 decrees. Country folks accused town folks of extortion, 
 and threatened to come in and take what they wanted by 
 force. Town folks accused country folks of withholding their 
 produce. Laws were enacted against withholders. Anony- 
 mous handbills and broadsides were circulated, threatening 
 
 vengeance on merchants. Turmoil was every- 
 Social Terrorism. . . 
 
 where. Society was like a tram of Eskimo 
 
 dogs when the driver hits with the whip the leader, which 
 turns and falls upon the dog behind him, and presently the 
 whole pack are piled together in battle, not one knowing 
 what it is all about. As a result of such irrational business 
 disturbances Boston was, in October, 1779, on the verge of 
 starvation ; money transactions had nearly ceased, and 
 business was done by barter. 
 
 In May, 1779, two regiments of Connecticut troops 
 
 revolted on account of their bad pay. In January, 1781, 
 
 the Pennsylvania line broke into mutiny for 
 
 Mutiny of Soldiers. ,1-1,1 i 
 
 the same reason and killed a captain who tried 
 to bring them to submission. A soldier's pay had dropped 
 by depreciation from $7.00 per month to 33 cents, although 
 it had been twice raised by Congress. Washington could 
 not move his soldiers to Yorktown till Robert Morris had 
 borrowed hard money from Rochambeau for their back pay. 
 In March, 1780, Congress tried the colonial experiment 
 of " new tenor " in a very awkward and roundabout way, 
 and declared old tenor to be worth 40 for i, the actual 
 
 depreciation being 60 for i. As it was sup- 
 ' ' Hew Tenor. ' ' 
 
 posed that $200,000,000 of continental money 
 
 was now out, this was a repudiation of all but $5,000,000 of 
 it. The depreciation then went on more rapidly than 
 before. The new-tenor bills started at a depreciation of 2 
 for i, which became 3 for i before they reached the army
 
 REVOLUTIONARY BILLS OF CREDIT 99 
 
 and dropped to 6 for i in a few months. Old tenor went at 
 a galloping pace down to 500 for i in Philadelphia, when it 
 ceased to circulate. In the remoter districts of the South 
 it continued in circulation nearly a year longer, and until 
 the depreciation had reached 1000 for i. The Southern 
 people, when they learned that they had been using the 
 tuff long after it had become worthless in the North, thought 
 that they had been cheated by the Yankees, thus .intensifying 
 thesectionaj_distrust which was already so dangerous. 
 
 Counterfeiters had been at work all the time and with 
 so much success that Congress was obliged to call in the 
 
 entire issues of certain dates and declare them 
 Counterfeiting. . . 
 
 uncurrent after a fixed period. The issues 
 
 thus branded fell 25 per cent as compared with those not 
 branded. Still, counterfeiting only hastened the impending 
 crisis, and in that respect it was a public advantage ; for, 
 as soon as paper money was dead, hard money sprang to 
 life, and was abundant for all purposes. Much had been 
 hoarded and much more had been brought in by the French 
 and English armies and navies v 
 
 When the paper had become clearly unmanageable, early 
 in 1779, Congress bethought itself of specific supplies as 
 a means of feeding the army. Under this plan requisitions 
 were made upon the states for beef, pork, 
 Specific flour, corn, forage, etc. Contrary to expecta- 
 
 tion, this was found to be the worst device of 
 all, since it called for a vast new system of transportation, 
 warehousing, and accountability, and opened the door to 
 innumerable frauds. Robert Morris, the Superintendent of 
 Finance, protested against it in the beginning as the most 
 wasteful method of supplying the army, but his protest was 
 unheeded. Nothing would open the eyes of Congress but 
 an experiment. Instantly there was a tangle of the public 
 accounts which nobody could unravel. In some cases flour
 
 IOO GOVERNMENT PAPER MONEY 
 
 collected for the army was not forwarded because there was 
 no money to pay teamsters, but it remained at the place of 
 collection till it was spoiled. Other consignments which 
 were actually sent arrived too early or too late and were 
 left on the ground exposed to the weather. Cattle forwarded 
 for beef were allowed to wander away. Collections were 
 
 made and not reported. In August, 1780, 
 FaSure Plete Washington was obliged to send word to a 
 
 body of militia, who were about to march to 
 his aid, not to come, because he could not feed them. Com- 
 municating this fact to Congress, he said, "The present 
 mode of obtaining supplies is the most uncertain, expen- 
 sive, and injurious that could be devised." He said that 
 it had made impressment necessary, and that impressment 
 could not last long. Many of General Greene's soldiers 
 could not leave their tents because they had no clothes. This 
 experiment of specific supplies was an attempt to carry on 
 government without any medium of exchange. It was a 
 complete failure. 
 
 Impressment, somewhat disguised, had been resorted to 
 from the time when continental money began to depreciate. 
 To seize a man's goods and tender him irredeemable paper, 
 
 at a rate which would not enable him to 
 Impressments. 
 
 replace the goods, was confiscation of the 
 
 difference between the value of paper and that of specie. 
 All the price conventions were, in fact, impressment con- 
 ventions under another name. Congress recommended the 
 impressment of horses and wagons " at a reasonable rate " 
 as early as 1775. This method of securing supplies was not 
 unknown to the colonies. New York had resorted to it in 
 the old French wars, and South Carolina in her Indian wars. 
 Lists of articles impressed, with the prices attached, are of 
 frequent occurrence in colonial statutes. These, however, 
 implied payment in full measure, not long deferred.
 
 REVOLUTIONARY BILLS OF CREDIT IOI 
 
 When the continental money began to depreciate rapidly, 
 impressments became more frequent. In Pennsylvania so 
 many horses and wagons were impressed that the country 
 people stopped bringing fuel to the towns. This led to an 
 exception, by the Council of Safety, of teams engaged in 
 hauling wood or provisions. In Virginia impressments were 
 so numerous that the people sent their teams over the 
 
 mountains or into North Carolina for safety. 
 Also a Failure. , . , , , 
 
 Others made a practice of removing and hid- 
 ing a wheel or some other indispensable part of a wagon, so 
 that it might be useless when the impressing officers came. 
 When Washington arrived in camp at Yorktown, ample 
 supplies of bacon had been collected and stored for the 
 army, south of the James River, but they could not be 
 moved because the impressing officers could not find any 
 teams to haul them, in the oldest settled part of America. 
 Teamsters who had been impressed threw out their loads 
 at the wrong places. Others ran away with them and did 
 not return. Hamilton wrote to Greene that public credit 
 was so totally lost that nobody would furnish aid, even in 
 the face of impending ruin. All this was at the very crisis 
 of the war, while the fleet of De Grasse was sailing into 
 Chesapeake Bay. But for that fortunate conjuncture the 
 war could not have been continued, so greatly had the 
 people been alienated by bad money and the harsh treat- 
 ment which it led to. 
 
 In May, 1781, Congress recommended that the states 
 should repeal their legal-tender laws. Some of them had 
 
 already done so, and now the rest followed 
 
 Deprecation " suit A11 of them ad P ted "scales of depre- 
 ciation " for the settlement of debts. These 
 were tables showing how much the money was worth in 
 specie at various times and how disputed accounts should 
 be settled. The tables were notoriously incorrect. The one
 
 IO2 GOVERNMENT PAPER MONEY 
 
 recommended by Congress placed the currency at par in 
 September, 1777, whereas it was worth at that time only 33 
 cents on the dollar. New confusion and new wrongs were 
 introduced by the new policy. " The courts could not do 
 justice," says Professor Sumner, " because depreciation 
 introduced a fraud into the very essence of the case, and 
 the agent of the fraud was almost always innocent, so far as 
 his intention was concerned. If, therefore, the court under- 
 took to release the victim of the fraud from all effect of the 
 fraud, the injury was simply thrown back on the perpetrator, 
 who, being innocent, suffered as much wrong as the victim 
 would have suffered if nothing had been done." 
 
 Continental money was now an object of execration and 
 afterwards of derision. " Not worth a continental " became 
 a synonym for absolute worthlessness. In 
 the act of Con g ress approved August 4, 1790, 
 authority was granted for funding the bills in 
 6 per cent bonds "at the rate of one hundred dollars in 
 the said bills for one dollar in specie." Only $7,000,000 
 turned up to take advantage of this provision. 
 
 When the final catastrophe came, some of the wise men 
 
 of the period exclaimed that the continental money was 
 
 simply a form of taxation, and that it had been paid and 
 
 canceled. Franklin consoled himself with 
 
 Continental t hi s ^ea, saying that the bills clothed and 
 
 Money consid- 
 
 ered as a Tax. fed the army and that they operated as a tax, 
 
 bearing most heavily on the rich, as was 
 proper, since the rich had the most money. Strange that 
 so great a man could have been so deceived ! If the con- 
 tinental money was a tax, it did not bear heaviest upon those 
 who had the most, but upon those who kept it longest. 
 Those who had money due them at fixed times and could 
 not hasten the payment were taxed, not in proportion to 
 their wealth, but in proportion to the time the debts had to
 
 REVOLUTIONARY BILLS OF CREDIT 103 
 
 run. All who depended upon regular interest payments 
 and most of the charitable and educational institutions of 
 the day were in this category were taxed at various rates 
 up to 97^ per cent of their entire income. It is a complete 
 subversion of ideas to call this a tax. 
 
 The word " tax " is from the Latin taxare, to value or to 
 appraise. It presumes a methodical arrangement of the 
 taxable persons so that justice shall be done and each shall 
 know what he has to pay. Taxation is the opposite of con- 
 fiscation. It was adopted in order that confiscation might 
 be avoided. Confiscation, however, has the 
 catf(m CC merit of enabling the government and people 
 
 to know how much has been taken, and from 
 whom, so that when more propitious times come, or a higher 
 sense of justice prevails, restitution may be made. The 
 kind of confiscation or taxation that continental money pro- 
 duced was hurly-burly. The government plundered right 
 and left, and, instead of keeping an account of persons and 
 things, it told the victims to rob the next ones they came to. 
 
 A euphemism which still lingers is that "the continental 
 money fell gently asleep in the arms of its last possessor." 
 A truer figure of speech would be that it passed out of the 
 world like a victim of delirium tremens. 
 
 It may be asked what else could have been done. If the 
 continental money was a disguised tax, certainly an undis- 
 guised one would have been better. What the government 
 required was army supplies. These were partly the products 
 of the country and partly imported, the latter being paid 
 
 for with the products of the country. The 
 The Alternative. . 
 
 people did not avoid the necessity of parting 
 
 with their products by the device of issuing paper money. 
 Except what was borrowed and begged abroad, the whole 
 cost of the war was paid by the thirteen states out of their 
 annual produce. Therefore it was a question merely of
 
 104 GOVERNMENT PAPER MONEY 
 
 how the contributions should be levied. Regular taxation 
 is always better than confiscation, because it is more eco- 
 nomical and because it conserves the public morals, the 
 confidence of the citizens in their own government, and 
 the respect of the world. 
 
 One of the striking phenomena of the Revolution was 
 
 the great display of luxury. Franklin wrote in 1779 : " The 
 
 extravagant luxury of our country in the 
 
 Display of midst of all its distresses is to me amazing." 
 
 Luxury during 
 
 the War. Another writer says : " Every form of waste- 
 
 fulness and extravagance prevailed in town 
 and country, nowhere more than in Philadelphia under the 
 very eyes of Congress, luxury of dress, luxury of equipage, 
 luxury of the table." 1 
 
 This is not hard to understand. If a man owed $1000 
 gold value and was enabled to pay it with $100, he had 
 $900 disposable for other purposes. As this money had 
 not come by hard labor, he would naturally be somewhat 
 free in spending it. He would give good dinners, drive fast 
 horses, and buy fine clothes and jewelry for his family. It 
 was the transfer of property from frugal persons to spend- 
 thrifts. While it continued, it gave a deceitful appearance 
 of prosperity. Like conditions prevailed during the Civil 
 War, both North and South. 
 
 After the war seven states (Rhode Island, New York, 
 New Jersey, Pennsylvania, the Carolinas, and 
 Georgia) plunged into paper-money debauch- 
 ery afresh. There were also severe struggles 
 over the question in New Hampshire, Massachusetts, Mary- 
 land, and Virginia. 2 
 
 1 Greene's Historical View of the American Revolution, 
 
 2 See the first volume of McMasters' History of the People of the 
 United States, where these movements are well described.
 
 REVOLUTIONARY KILLS OF CREDIT 105 
 
 RECAPITULATION 
 
 The Revolutionary bills of credit were of the same gen- 
 eral character as the colonial bills which preceded them, 
 except that they were issued only for war purposes. 
 
 To prevent depreciation it was deemed necessary to fix 
 the prices of merchandise by law and to punish persons 
 who should sell at higher prices for paper than for silver. 
 Severe punishments were inflicted for this offense, but they 
 did not stop or even retard the depreciation. 
 
 The bills eventually became worthless and were repudiated. 
 
 Many of the most patriotic families of that day were ruined 
 by the use of these bills, without any benefit to the public 
 cause. 
 
 AUTHORITIES 
 
 Pelatiah Webster's Political Essays. 
 
 Sumner's Financier and Finances of the American Revolution. 
 Bronson's Connecticut Currency, Continental Money and the 
 Finances of the Revolution. 
 
 Belles' Financial History of the United States. 
 Ramsay's History of the American Revolution. 
 Hildreth's History of the United States. 
 Bancroft's History of the United States. 
 McMasters' History of the People of the United States.
 
 CHAPTER III 
 
 A J*' 
 
 THE GREENBACKS 
 
 DURING the War of 1812 the government of the United 
 
 States issued Treasury notes to the amount of $36,680,794. 
 
 All except $3,392,994 were payable to order and payable at 
 
 a definite time and bore interest at the rate of 5| per cent. 
 
 About two-thirds of them were of denomina- 
 
 Treasury Notes tions of $100 or more. They did not become 
 
 before the Civil ... . . 
 
 War . a part of the circulating medium and were 
 
 not intended to. They were paid to such 
 creditors of the government as were willing to receive them, 
 and they were generally at par until specie payments were 
 suspended in September, 1814. On November 12, 1814, 
 Mr. Hall, a member of Congress from Georgia, introduced 
 a bill in the House for an issue of Treasury notes to be 
 legal tender. The House, by a vote of 42 to 95, and with- 
 out debate, refused to consider this bill. No other attempt 
 was made to pass a legal-tender bill until 1862. 
 
 In the panic and crisis of 1837-43, during a portion of 
 which time specie payments were suspended, the govern- 
 ment issued Treasury notes to the amount of $47,000,000 
 to meet deficiencies of revenue. All of these notes bore 
 interest and were payable at a fixed time. They did not 
 become a part of the circulating medium. A few were 
 issued by the Secretary of the Treasury in 1842 bearing 
 only a nominal rate of interest (one mill per $100 per 
 annum). Such notes had not been contemplated by Con- 
 gress. The Committee of Ways and Means of the House, to 
 
 1 06
 
 THE GREENBACKS IO/ 
 
 whom the subject was referred, reported that the Secretary 
 had exceeded his authority, but Congress took no action on 
 the report. It was the opinion of the Committee that these 
 notes were " bills of credit " within the meaning of the Con- 
 stitution and that Congress had no power to issue bills of 
 credit. In 1847, during the war with Mexico, Treasury 
 notes to the amount of $26,122,100 were issued. They 
 bore interest at the rate of 5f and 6 per cent. They did 
 not enter into the circulation and were not intended to. 
 The foregoing issues of interest-bearing Treasury notes 
 were merely government loans, of which the securities were 
 in small denominations and had only short periods to run. 
 
 When specie payments were suspended in 1814, and 
 again in 1837, silver small change disappeared because it 
 was worth more per dollar than the bank notes in circula- 
 tion. On both occasions private notes and tickets of less 
 denominations than $1.00, and copper coins, were issued 
 and put in circulation by bridge, ferry, and turnpike com- 
 panies and by tradesmen and manufacturers. One hundred 
 and sixty-four varieties of private copper coins of the period 
 of 1837 have been preserved in numismatic collections. 
 Most of them bore the names of the issuers, who promised 
 to redeem them. 
 
 Prior to the Civil War the fiscal operations of the gov- 
 ernment were transacted exclusively with coin, by its own 
 officers, without the intervention of banks. In August, 1861, 
 Mr. Chase, the Secretary of the Treasury, negotiated three 
 loans of $50,000,000 each from the banks of New York, 
 Boston, and Philadelphia. In anticipation of 
 
 War Loans of 1861 . , , 
 
 such loans, Congress had passed a law author- 
 izing him " to deposit any of the moneys obtained on any of 
 the loans in such solvent specie-paying banks as he might 
 select," and to withdraw the same as required for the pay- 
 ment of public dues. The object of this law was to enable
 
 108 GOVERNMENT PAPER MONEY 
 
 him to leave the money in the banks as a deposit till wanted 
 for actual disbursement, and then to withdraw it by checks, 
 which would be settled at the clearing house. This was 
 a discretionary power, and Mr. Chase decided not to make 
 use of it. The bankers argued that the financial operations 
 of the government could be best carried on by leaving their 
 gold in their own vaults as the basis of credit. Against the 
 strong opposition of the banks, he required them to pay 
 their gold into the sub-treasury at New York at the rate of 
 about $5,000,000 per week. 
 
 This policy does not appear to have had any harmful 
 effect, except that of exciting the fears of the bankers them- 
 selves. 1 The public creditors, who received the gold, depos- 
 ited it again in banks, where it became the property of the 
 latter, like any other funds or securities among their assets. 
 The largest amount of gold in the banks of the three cities 
 at any time during the year was $63,200,000, August 17. 
 On December 7 following, it was $58,100,000, although in 
 the meantime they had loaned the government $100,000,000 
 and had agreed to loan $50,000,000 more. These loans had 
 been largely, but not wholly, reimbursed to the banks by the 
 sale to the public of the securities they received from the 
 government. 
 
 Everything appeared to be going on well, but early in 
 December, 
 
 two untoward events occurred. The first was the report of the 
 Secretary of the Treasury. It had been generally felt that the 
 plan of borrowing from the banks to carry on the war could be 
 only a temporary makeshift intended to serve until a permanent 
 
 1 In the first edition of this book I ascribed the suspension of specie 
 payments in December, 1861, to the removal of the gold from the banks 
 by Secretary Chase. An article on this subject by Mr. Wesley C. 
 Mitchell, in the Journal of Political Economy, June, 1899, has convinced 
 me that I attached too much importance to that action.
 
 THE GREENBACKS IOQ 
 
 policy could be matured. It was hoped that the finance report in 
 December would present a programme of adequate taxation. The 
 disappointment over its failure to do so was keen, and the suspi- 
 cion that the Secretary was not equal to his great task injured the 
 credit of the government. The second event was the Trent affair, 
 which threatened for a time to involve the Federal Government 
 in a war with England. 
 
 The moral effect of these events was immediately seen. The 
 credit of the government declined, so that it became impossible 
 for the banks to sell the government securities, which they held to 
 a large amount, except at a great pecuniary sacrifice. This cut 
 off one source from which they had been obtaining specie. At 
 the same time people became frightened, stopped depositing money 
 in the banks, thus cutting off the other source. Even worse, the 
 deposits began to be withdrawn and the specie reserve dwindled 
 at an appalling rate. About twenty-seven million in specie were 
 drawn inland from the New York banks in the month of Decem- 
 ber, by far the larger part of it in the last two 
 
 suspension o weeks. It was all outgo now, and no income. 
 Specie Payments. 
 
 The end was but a question of time. After stand- 
 ing the strain upon their reserves for two weeks, the New York 
 banks were compelled, in order to save themselves from complete 
 exhaustion, to suspend specie payments on the thirtieth day of 
 December. Banks in other cities speedily followed suit. The 
 suspension of the national Treasury was entailed as a necessary 
 consequence of the suspension of the banks. Thus the first day 
 of the new year 1862 saw the collapse of the whole scheme of 
 national finance. 1 
 
 Among the various devices for raising money at the begin- 
 ning of the war, was that of issuing non-interest-bearing 
 Treasury notes in small denominations fitted to be used as 
 currency. Sixty millions of these had been authorized 
 before Mr. Chase negotiated the above-mentioned loans. 
 These notes were payable on demand and were receivable 
 
 1 Mr. Wesley Mitchell in the Journal of Political Economy, June, 
 1899.
 
 110 GOVERNMENT PAPER MONEY 
 
 for taxes and duties on imports, but were not legal tender. 
 Mr. Chase was paying them to such of the public creditors 
 as were willing to receive them, simultaneously with his 
 disbursement of the gold drawn from the banks. Thirty- 
 three millions were outstanding when specie payments were 
 suspended. They were called " demand notes " in distinc- 
 tion from the subsequently issued legal-tender 
 The Legal-Tender nQtes The bm for ^ ^^ ^ ^ prQ _ 
 
 posed by Mr. Elbridge G. Spaulding, a mem- 
 ber of the Committee of Ways and Means, and was reported 
 by the Committee by a majority of one vote on January 7, 
 1862. It authorized the Secretary of the Treasury to issue 
 $150,000,000 of United States notes not bearing interest, 
 payable to bearer, of denominations not less than $5.00 
 each. Fifty millions of these notes were to be in lieu of 
 that amount of the demand notes aforesaid. The notes 
 were to be receivable for all dues to the government and 
 to be legal tender for all debts public and private within 
 the United States and to be exchangeable for bonds of the 
 United States bearing interest at 6 per cent, redeemable 
 after five years and payable in twenty years. These bonds 
 were familiarly known as the 5-2 o's. 
 
 A delegation of bankers from New York, Boston, and 
 
 Philadelphia came to Washington to remonstrate against the 
 
 bill. A meeting was held at the office of the Secretary of 
 
 the Treasury on January n, at which these gentlemen and 
 
 the members of the financial committees of 
 
 Bankers remon- the Uouse and Senate were present. Mr. 
 strate against it. 
 
 James Gallatin, in behalf of the bankers, pre- 
 sented a plan of national finance which would, in the opinion 
 of those gentlemen, procure the means for carrying on the 
 war without recourse to legal-tender notes. One of the 
 proposals was to " issue 6 per cent twenty-year bonds, to 
 be negotiated by the Secretary of the Treasury, and without
 
 THE GREENBACKS I I I 
 
 any limitation as to the price he may obtain for them in 
 the market." 
 
 Mr. Spaulding took ground at once against this plan. 
 He tells us that he "objected to any and every form of 
 'shinning' by government through Wall or State Street to 
 begin with ; objected to the knocking down of government 
 stocks to 75 or 60 cents on the dollar, the inevitable result 
 of throwing a new and large loan on the market, without 
 limitation as to price" 
 
 In order to avoid selling government stocks at 75 or 60 
 cents on the dollar in an honest way, Mr. Spaulding initiated 
 a policy which ended in selling those stocks at 40 cents on 
 the dollar in a roundabout way, and cheating creditors, 
 soldiers, and laboring men out of more than half their dues 
 in an incidental way. This state of facts he mournfully 
 acknowledges in his book, and he seeks to put on Mr. Chase 
 the blame for too much inflation of the currency. 1 But the 
 man who opens the floodgates has no right to complain of 
 the inundation. 
 
 Although Mr. Chase, in his annual report for December, 
 
 1 86 1, distinctly rejected the idea of legal-tender notes (which 
 
 was already in the air), on account of "the immeasurable 
 
 evils of dishonored public faith and national bankruptcy," 
 
 yet on January 22 following, he wrote to Mr. 
 
 Mr. chase assents Spaulding a qualified approval of his bill. The 
 
 to the Legal-Ten- , 
 
 derBiii. letter was not satisfactory to all the members 
 
 of the Committee. Consequently a resolution 
 was adopted, asking his opinion as to the propriety and 
 necessity of the immediate passage of the bill by Congress. 
 
 1 " He [Chase] left the office with twice as much inflating paper out- 
 standing as ought ever to have been issued, and with the promised 
 dollar printed on the face of the greenback worth only 35 to 40 cents 
 in gold." Introduction to second edition of SPAULDING'S Financial 
 History of the War, p. 1 1.
 
 112 GOVERNMENT PAPER MONEY 
 
 His answer was returned on the twenty-ninth. Much un- 
 necessary verbiage was employed to convey the Secretary's 
 assent to the legal-tender clause, but he gave his assent and 
 added certain reasons for it which had not been advanced 
 by anybody else. He said that some people gave a cordial 
 support to the government by taking its notes at par, while 
 others did not, referring to the "demand notes " which 
 were not legal tender. "Such discriminations," he said, 
 " should, if possible, be prevented, and the provision mak- 
 ing the notes a legal tender, in a great measure at least, 
 prevents it by putting all citizens in this respect on the 
 same level, both of rights and duties." This was very 
 plausible. It appealed powerfully to the spirit of patriotism. 
 But Mr. Chase was a victim of his own phrases. The duties 
 of the citizen are to submit to the laws of conscription and of 
 taxation, and his rights are to be exempt from impressment 
 and confiscation. If others enter the army voluntarily or 
 give their money to the government outright, those acts are 
 over and above duties. They rise to the category of merits. 
 The bill passed the House, February 6, 1862, by 93 to 
 59. The legal-tender clause, however, narrowly escaped 
 defeat in the Senate. On Mr. Collamer's 
 
 The Bill passes. . 
 
 motion to strike it out, the yeas were 17 and 
 the nays 22. Senator Fessenden, the chairman of the Com- 
 mittee on Finance, spoke and voted against the legal-tender 
 clause, but he did not oppose it vigorously. In any narrow 
 division of the Senate his influence would have been deci- 
 sive, if he had exerted it. But evidently he did not wish to 
 be responsible for the defeat of the measure. 
 
 Two amendments of importance were added by the 
 Senate : one making the interest on the government's obli- 
 gations payable in coin ; the other giving the Secretary of 
 the Treasury authority to sell bonds bearing 6 per cent 
 interest at any time, at the market value thereof, for notes
 
 THE GREENBACKS I I 3 
 
 or coin. The latter clause was intended to enable the Sec- 
 retary to obtain gold at some price, to pay the interest on 
 the bonds. In the Conference Committee of the two 
 houses an additional plan was devised for this end, by 
 making duties on imports payable in coin. 
 
 The bill became a law on the 25th of February, 1862. 
 
 On the 7th of June Mr. Chase asked for 
 The Second Issue. 
 
 $150,000,000 more notes. A bill for this pur- 
 pose was passed with very little opposition. It provided 
 that not more than $35,000,000 should be of denominations 
 smaller than $5.00. 
 
 On the 6th of March Mr. Stevens introduced a bill author- 
 izing the Secretary of the Treasury to dispose of any bonds 
 or notes authorized by law, for coin, on such terms as he 
 should deem most advantageous to the public interest. 
 After the legal-tender act was passed it was remembered 
 that $60,000,000 of demand notes were outstanding, which 
 
 were receivable for customs duties. If duties 
 chase C< Act PU should be paid exclusively in these notes, 
 
 some considerable time must elapse before 
 any coin would come in to meet the interest payments. 
 Mr. Stevens said that it was impossible to sell bonds " at 
 the market value," and that the Secretary of the Treasury 
 had sent down this bill and wanted to have it passed 
 at once. He concurred in the necessity of it since the 
 coin amendment had been adopted by Congress, although 
 that amendment was against his judgment. The bill was 
 passed by the House on the following day, and by the 
 Senate March n, without a division. In the Senate it 
 was amended so as to read as follows : 
 
 The Secretary of the Treasury may purchase coin with any 
 bonds or notes of the United States authorized by law, at such 
 rates and upon such terms as he may deem most advantageous to 
 the public interest.
 
 114 GOVERNMENT PAPER MONEY 
 
 In the Revision of the Statutes, which was completed in 
 1874, this clause was wisely retained among the provisions 
 of law "general and permanent in their nature" ; for, so long 
 as the Treasury is responsible for the maintenance of parity 
 between gold and paper, its power to obtain gold ought to 
 be unrestricted. 
 
 When Congress assembled in December, 1862, it found 
 that the. most sacred obligation of the government the 
 
 pay of the army and navy had not been 
 Third Issue. .. . . 
 
 met, and that great distress existed among 
 the families of soldiers in consequence. Mr. Gurley, of 
 Ohio, in the House (January 15, 1863) drew a most harrow- 
 ing picture of the suffering in consequence of this default. 
 The amount of pay overdue was $59,000,000. 
 
 It is not possible to acquit Mr. Chase of responsibility for 
 this default. The House passed a resolution asking why he 
 had allowed the pay of the army to fall into arrears. He 
 had power under the law to sell 6 per cent bonds at their 
 market value for greenbacks or coin. Why had he not done 
 so ? His answer was in these words : 
 
 The Secretary, solicitous to regulate his action by the spirit as 
 well as the letter of the legislation of Congress, did not consider 
 himself at liberty to make sales of the 5-20 bonds below their 
 market value ; and sales except below were impracticable. 
 
 What Mr. Chase meant was that the quoted value of 6 per 
 cent bonds on a particular day the 3d of January, 1863, for 
 example was 98 in currency. But if the Secretary should 
 offer any -large lot, the price would fall below 98. In other 
 words, there was no market value for bonds, although there 
 was a market value for every other merchantable thing under 
 the sun. There was much feeling against Mr. Chase among 
 congressmen, on account of this interpretation of the law 
 which they had passed to meet every financial emergency.
 
 THE GREENBACKS 115 
 
 The Secretary's scruples on this subject led to the third 
 batch of legal-tender notes, $100,000,000, authorized by a 
 joint resolution dated January 13, 1863, "for the immediate 
 
 payment of the army and navy of the United 
 Depreciation. / J 
 
 States. The whole amount now authorized 
 
 was $400,000,000. The price of gold at this time was 142; 
 at the end of the month it was 15^. Mr. Spaulding was 
 surprised, at this juncture, to find that there was a great 
 scarcity of currency. This he attributed, not to the advance 
 in prices which had absorbed the additions to the circulating 
 medium, but to the operations of the army and navy. He 
 did not explain how the operations of a million men fighting 
 and destroying property should call for more currency than 
 those of the same number engaged in peaceful occupations 
 at home. 
 
 <r 
 
 Two other kinds of legal-tender notes were issued during 
 the war. They were called Treasury notes in contradis- 
 tinction to the former ones, which were called United States 
 notes, or popularly "greenbacks." On March 3, 1863, 
 Congress authorized the issue of $400,000,000 of Treasury 
 notes of denominations not less than $10, to run not more 
 than three years, to bear interest not exceeding 6 per cent, 
 payable in " lawful money," i.e., in either gold or United 
 States notes. They were to be legal tender 
 for their face value, excluding interest. The 
 object of this law was to obtain loans from 
 small investors without making further additions to the 
 currency. Anybody having $10 for which he had no imme- 
 diate use could buy a Treasury note for that sum. He 
 would be impelled to hoard it for the sake of the interest, 
 but if necessary he could use it as money for its face value, 
 in which case the payee would be impelled to hoard it. 
 
 Under this act $44,520,000 of one-year notes and $166,- 
 480,000 of two-year notes, bearing interest at 5 per cent,
 
 Il6 GOVERNMENT PAPER MONEY 
 
 were issued. A portion of these notes had interest coupons 
 attached to them, which could be cut off -and collected as 
 the interest matured. These were found to be troublesome, 
 since they caused alternate contraction and expansion of 
 the currency. When the accumulated interest was sufficient 
 to make it worth while for the owner to keep them they 
 would be hoarded, and when the coupon was cut off they 
 would be put in circulation. They were paid off by the 
 government and canceled as soon as possible. 
 
 Under this act there were issued also $266,595,440 of 
 compound-interest notes to run three years. The rate of 
 interest was 6 per cent, compounded semi-annually, and the 
 interest was payable with the principal at maturity, and 
 not otherwise. On the back of the note was a printed state- 
 ment showing its value at the end of each six months. The 
 $10 note was worth $10.30 at the end of the 
 
 STLes. - first half vear and "-94 at the end of three 
 years. This was the most scientific form 
 of legal-tender notes issued during the war, since it offered 
 a continuing and increasing inducement to the owner to hold 
 them as an investment instead of putting them in circulation. 
 In the summer of 1862 the silver subsidiary coins began 
 to grow scarce. By the coinage act of 1853 their metallic 
 value had been reduced 7 per cent, but they remained in 
 circulation with the greenbacks until the latter had depre- 
 ciated more than 7 per cent. Then, in obedience to 
 Gresham's Law, they were exported and sold as bullion, or 
 put into circulation in Canada. As small change thus 
 became scarce, people began to use postage stamps as a 
 substitute. The demand for stamps became 
 g reat er than the Post Office Department could 
 supply; and the stamps themselves, being 
 flimsy and sticky, were inconvenient and exasperating to the 
 last degree. Private individuals began to issue fractional
 
 THE GREENBACKS \\J 
 
 currency and copper coins in great numbers and varieties 
 to supply an indispensable need. On July 17, 1862, Con- 
 gress authorized the issue of small notes to take the place 
 of the stamps and of the local " shin-plasters," as they were 
 popularly termed. The first form issued was a piece of 
 paper with the facsimile of a 5-cent postage stamp in the 
 center of it. The 2 5-cent note had the 5-cent stamp five 
 times repeated. This was called "postage currency." By 
 a later act fractional currency was issued in the form of 
 promissory notes of the United States for sums less than 
 one dollar. All of these, and also the postage currency 
 notes, were redeemable by the government and receivable 
 for all taxes except duties on imports. The notes were 
 small in size, as well as of small denominations, and were 
 easily worn out and lost. The largest amount in circulation 
 at any time was about $2 7, 000,000. l 
 
 On March 3, 1863, Congress passed a law providing for an 
 
 issue of bonds bearing interest at 5 per cent, redeemable in 
 
 ten years and payable in forty years, known 
 
 The 10-40 Bonds. 
 
 as the 10-40 s. Two features of importance 
 are to be noted in this measure. One was a provision 
 making the principal, as well as the interest, of these bonds 
 payable in coin. The other was the repeal of the clause of 
 the legal-tender act which made the notes convertible into 
 bonds at par. 
 
 When the legal-tender act was passed, creating two kinds 
 of public debt, bonds and notes, nobody dreamed of paying 
 the former with the latter. If any member of Congress had 
 risen in his place while the bill was pending, and said that 
 the government might sell $150,000,000 of interest-bearing 
 bonds for gold, and then pay them off with the $150,000,000 
 of non-interest-bearing and irredeemable notes authorized 
 
 1 See article on "The Private Issue of Token Coins," by R. P. Falkner, 
 in the Political Science Quarterly, June, 1901.
 
 Il8 GOVERNMENT PAPER MONEY 
 
 by the same act, he would have been considered a lunatic. 
 But a year had not elapsed before a considerable stir was 
 created by persons who held that all the government bonds 
 then outstanding might be lawfully paid with greenbacks. 
 Accordingly, Congress made the principal of the 1 0-40*3, as 
 well as the interest, payable in coin. 
 
 On the first of January, 1863, an old debt of the govern- 
 ment, contracted in 1842, for $8,000,000 became due, and 
 Secretary Chase paid it in gold. The House 
 M a a i a u n | f d nds of Representatives had previously asked him 
 by resolution (December 16) in what kind of 
 money he intended to pay it. He postponed the answer 
 until he had actually paid it. He then said (January 5) that 
 he had paid it in coin in order to keep the government's 
 credit good. 
 
 It was disclosed later that the country had narrowly 
 escaped a great danger. The Treasury had no gold at that 
 time, or not sufficient to meet the claim, and some persons 
 talked of paying it with legal-tender notes. At the last 
 moment Mr. John J. Cisco, the assistant treasurer of the 
 United States in New York, obtained $8,000,000 gold from 
 the banks in exchange for legal-tender notes, on his personal 
 pledge to redeem the notes with the first gold that came into 
 his hands from customs duties. With the gold so obtained 
 Mr. Chase paid the debt. 1 
 
 Mr. Chase desired to have the funding clause of the legal- 
 tender act repealed, because, as long as the holders of notes 
 could convert them into 6 per cent bonds at par, no bonds 
 could be sold bearing a lower rate of interest. He believed 
 that, if this privilege were taken away, a loan could be nego- 
 tiated at 5 per cent. Congress yielded to his request, fixing 
 
 1 See letter of George S. Coe in Spaulding's Financial History of 
 the War, second edition, appendix, p. 94.
 
 THE GREENBACKS I 19 
 
 a date (July i, 1863) when the right of conversion should 
 cease. This was an inexcusable breach of contract and 
 a financial blunder. By preventing the volun- 
 tary conversion of the notes into bonds it 
 prevented the early resumption of specie pay- 
 ments after the close of the war, as Chief Justice Chase 
 acknowledged in his dissenting opinion in the Legal Tender 
 Cases. Whenever the rate of interest on government secu- 
 rities in the money market should be less than 6 per cent, 
 as it was immediately after the war, the notes would be 
 converted into bonds and retired. This operation being 
 automatic, being part of a contract, and coinciding with 
 public opinion at the close of the war, which was favorable 
 to specie resumption, would probably have worked out that 
 result within a brief period. 
 
 In June, 1864, Congress enacted that the whole amount 
 of greenbacks issued or to be issued should never exceed 
 $450,000,000, the last $50,000,000 being a temporary issue. 
 When the war came to an end and the army was paid off 
 and disbanded the amount remained fixed in the law at 
 $400,000,000. 
 
 Secretary Chase resigned his office June 30, 1864, and 
 was succeeded by W. P. Fessenden. Mr. Chase's last finan- 
 cial act was the preparation of a bill, which he induced Con- 
 gress to pass, to " prohibit certain sales of gold and foreign 
 exchange." 1 It prohibited sales of gold unless the person 
 selling it had it in his actual possession and 
 Law Anti ' G ld delivered it to the buyer the same day. It 
 prohibited the purchase or sale of foreign 
 exchange to be delivered more than ten days subsequently. 
 It provided also that no purchases or sales of gold coin or 
 bullion or of foreign exchange should be made except at the 
 ordinary place of business of the seller or purchaser occupied 
 
 1 Shucker's Life of Salmon P. Chase, p. 359.
 
 I2O GOVERNMENT PAPER MONEY 
 
 by him individually. Violation of the law was punishable 
 by fine or imprisonment or both, the smallest fine being 
 $1000. The idea of Mr. Chase and of the congressmen 
 who voted for the bill was that the brokers caused the price 
 of gold to advance. They imagined that they could stop 
 the advance by an act of Congress. Mr. Chase was of that 
 opinion. Three days after the passage of the law he wrote 
 to Horace Greeley: "The price of gold must and shall come 
 down, or I '11 quit and let somebody else try." * 
 
 This measure became a law June 17, 1864. It remained 
 on the statute book only two weeks. On the day it passed 
 
 gold was quoted at 108. The next day it 
 Its Repeal. 
 
 was 208, the next 230, and at the end of the 
 
 month 250. At no time before had there been so rapid an 
 advance. Congress repealed the act, without debate, on the 
 zd of July. 
 
 Early in 1864 Congress discovered that the issuing of 
 greenbacks must be stopped and the policy of heroic taxa- 
 tion adopted. Laws were passed which yielded in 1866 a 
 clear revenue of $558,032,620. This was equal to two- 
 thirds of the entire expenditures in 1864. If taxation on 
 this scale had been enacted in 1862 it would have yielded 
 in 1864 as much as that of 1864 did in 1866, and the gov- 
 ernment's credit would have been strengthened in propor- 
 tion to its income. Fewer legal-tender notes would have 
 been required, the prices of commodities would not have 
 advanced to any great extent, and the cost of the war to the 
 taxpayers would have been much less than it was. 2 
 
 1 See letters of Chase to Greeley in the New York Daily Tribune, 
 January 20, 1895. 
 
 2 Professor Simon Nevvcomb, in his work on Our Financial Policy 
 during the Southern Rebellion, published in 1865, but written before 
 the war was ended, computed the government's net loss due to the 
 use of a depreciated currency, down to the end of the year 1864, at
 
 THE GREENBACKS 121 
 
 The question whether legal-tender notes were necessary 
 at the time when they were issued, i.e., whether the war 
 were Legal- could have been carried on without them, has 
 Tender Notes been much disputed, and very respectable 
 authorities are to be found on either side of 
 it. Some are to be found on both sides, and among these 
 
 $180,000,000, and estimated the loss still to be incurred, even if the war 
 should end immediately, at $300,000,000 more, or $480,000,000 in all. 
 According to his reckoning the government saved $97,000,000 during 
 the first year of the war by paying greenbacks instead of selling bonds, 
 since it paid them to its creditors at something near par in gold, 
 whereas the gold price of its 6 per cent bonds in the market ranged 
 between 78 and 90. By paying $1000 in greenbacks the government 
 got nearly $1000 worth of property, gold value; whereas, if it had 
 sold a $1000 bond, it would have received only $780 to $900. " We 
 were enabled to pay off contracts made when gold was at par, with 
 notes after they had depreciated one-third." But the progressive 
 decline in the purchasing power of greenbacks turned the scale. In 
 the third quarter of 1863 the government made an average loss of 10 
 per, cent in its purchases, and this loss rose to 68 per cent at the end 
 of 1864. In 1865 the government was paying, with currency worth 75 
 cents per dollar, debts contracted when it was worth only 40 or 50 
 cents per dollar, and after 1879 li paid 100 cents on bonds sold at 
 various rates of discount. 
 
 In his work on Public Debts Professor H. C. Adams computes the 
 extra cost of the war to the taxpayers, in consequence of the use of a 
 depreciated currency, at $850,000,000. This is the difference between 
 the debt created and the gold value of the currency which the govern- 
 ment received for its obligations. 
 
 Mr. Wesley Mitchell, in the Journal of Political Economy, March, 
 1897, computes the net increase in the cost of the war, due to this 
 cause, at $528,400,000. In reaching this sum he assumes that the 
 government's receipts were increased $228,700,000 by the use of green- 
 backs. In this calculation he assumes that the government's receipts 
 from internal revenue were increased to the full extent of the depre- 
 ciation of the currency, but he acknowledges that there is room for 
 doubt whether this was the fact. Mr. Mitchell's paper is well worth 
 examination, but it is too complicated for reproduction here, even by 
 way of summary.
 
 122 GOVERNMENT PAPER MONEY 
 
 is Mr. Chase himself. What he said as Secretary of the 
 Treasury we have seen. As Chief Justice of the Supreme 
 Court at a later period he held not only that the legal- 
 tender act was unconstitutional as applied to preexisting 
 debts, but that legal tender did not add anything to the 
 value or usefulness of the notes. " The legal-tender 
 quality," he said, "was valuable only for purposes of dis- 
 honesty. Every honest purpose was answered as well or 
 better without it." l 
 
 A nation pays its annual expenses, in war as well as in 
 peace, out of its annual earnings, except so far as it borrows 
 from foreigners, and the only question for the Minister of 
 Finance is how to lay his hands upon the portion he needs. 
 Issuing legal-tender notes is one way ; taxa- 
 tion is another. The principal advantage of 
 the former method is that it can be put in 
 operation immediately, whereas taxation involves delay. On 
 the other hand, taxation strengthens the government's credit 
 and enables it to borrow for its immediate needs until the 
 taxing machinery can be put in working order. Moreover, 
 the government may borrow by means of interest-bearing 
 notes, which are not legal tender. Not to multiply words 
 about the assumed necessity of legal-tender notes in the 
 Civil War, it may be safely said that other methods ought to 
 have been exhausted first. Mr. Don C. Barrett has shown 
 (in the Quarterly Journal of Economics, May, 1902) that the 
 needs of the government in 1862 were actually met by tem- 
 porary deposits and certificates of indebtedness before the 
 greenbacks could be engraved, printed, and issued. 
 
 One of the reasons advanced by Senator Fessenden for 
 opposing the legal-tender clause was that the loss would 
 fall most heavily on the poor. All tricks of legerdemain 
 
 1 See his dissenting opinion in the Legal Tender Cases, 12 Wallace, 
 457-
 
 THE GREENBACKS 123 
 
 with the currency bear most heavily on the poor. Take a 
 concrete case. The government wanted guns. It paid for . 
 them with legal-tender notes. The manufac- 
 turer must P a y them to his workmen, who must 
 buy their supplies of all kinds in a rising mar- 
 ket. The cost of living not merely followed the gold premium, 
 but generally kept above it. The dealers in commodities 
 advanced their prices faster and farther than gold advanced, 
 in order thus to insure themselves against loss by rapid 
 fluctuations. Valuable lessons may be learned by consider- 
 ing the variations in the purchasing power of a soldier's 
 monthly pay over commodities for each quarter of the four 
 years of the war, as compared with the prices of January, 
 1860. The pay was nominally $13 per month. In the third 
 quarter of 1862 it .would buy $11.26 worth of gold and $11.11 
 of the commodities usually consumed in the family. One 
 year later it would buy $9.96 gold and $8.07 commodities. 
 One year later Congress raised the pay to $16 nominally, 
 but even then (July, 1864) the gold value of the pay was 
 only $6.19 and its purchasing power over commodities 
 $6.40. In April, 1865, the gold value of the month's pay 
 had risen to $10.77, DU ^ its value in commodities was only 
 
 $7-69- x 
 
 The question, in what manner wages responded to the 
 advance in prices during the war, is an important one. 
 Professor Taussig, of Harvard University, made a computa- 
 tion reaching substantially the foregoing conclusions, which 
 he placed in graphical form. "It will be seen," he says, 
 " that money wages responded with unmistakable slowness 
 to the inflating influences of the Civil War. In 1865, 
 when prices stood at 217 as compared with 100 in 1860, 
 wages had only touched 143. The course of events at 
 
 1 See article by Mr. Wesley Mitchell in the Journal of Political 
 Economy, March, 1897.
 
 I2 4 
 
 GOVERNMENT PAPER MONEY 
 
 this time shows the truth of the common statement that in 
 times of inflation wages rise less quickly than prices, and 
 that the period of transition is one of hardship to the wage- 
 receiving Class." l 
 
 PROFESSOR TAUSSIG'S CHART SHOWING THE COURSE OF WAGES 
 AND PRICES OF COMMODITIES 
 
 --'0 
 2IO 
 
 2(>0 
 19,., 
 
 i8c 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -!10 
 
 ^l.xi 
 
 190 
 
 180 
 
 170 
 160 
 
 5" 
 '(" 
 130 
 
 i -j<.) 
 i id 
 IOO 
 
 90 
 Bo 
 
 
 
 
 
 1 
 1 
 
 \ 
 \ 
 
 
 
 
 
 
 
 
 
 
 I 
 
 1 
 
 \ 
 
 
 
 
 
 
 
 
 
 
 1 
 
 \ 
 
 
 
 
 
 
 
 United States Prices 
 " " Wage 
 
 
 
 
 
 
 r 
 i 
 
 
 
 s 
 
 Id. 
 
 
 
 
 
 1 
 
 
 ^\- 
 
 
 ^_ \ 
 
 
 
 
 
 
 
 
 
 
 / 
 
 A 
 
 
 N * 
 
 /-** 
 
 ^ 
 
 
 
 
 
 
 
 1 
 
 / \ 
 
 
 V. 
 
 / 
 
 
 
 
 
 
 
 
 / 
 
 
 ^\ 
 
 
 
 
 
 
 
 
 
 
 77 
 
 
 
 \ 
 
 
 
 
 I 10 
 
 A 
 
 
 /" 
 
 ~~~^ 
 
 77 
 
 
 
 \ 
 
 
 
 
 V, 
 
 S\ , 
 
 ,-J 
 
 
 2 
 
 
 
 \ 
 
 A 
 
 
 
 
 
 - - 
 
 ^ 
 
 
 
 
 
 v 
 
 ^ 
 
 V^- ~- 
 
 _ 
 
 ft . 
 
 ~~ 
 
 
 
 
 
 
 
 
 
 
 
 8 4 '45 '5 '55 '60 '65 '70 '75 '80 '85 '90 
 
 We may here note the difference, in their effect on prices, 
 
 between new supplies of gold and additions to the volume of 
 
 an irredeemable currency. Nobody advances the price of his 
 
 goods because new gold is coming out of the 
 
 Effect on Prices , T ^ , , , 
 
 of commodities. g round - Everybody knows that the gold he 
 
 receives to-day is final payment, and that it will 
 
 be accepted by others at the same general value to-morrow. 
 
 Quite otherwise is the effect of an issue of irredeemable 
 
 1 Paper read before the International Statistical Institute at Chicago, 
 1893.
 
 THE GREENBACKS 125 
 
 paper. This is not final payment, but only a promise to pay 
 at some indefinite time. The promise is also uncertain 
 of fulfillment. Not all men realize these facts at first, but 
 there are always some who do, especially bankers and deal- 
 ers in foreign goods. To the latter class it is a matter of 
 doubt whether they can replace their goods at the prices they 
 formerly paid. Accordingly they will buy foreign exchange 
 (which means gold abroad) in anticipation of their needs. 
 This unusual demand will cause an advance in foreign 
 exchange and also in the prices of the exportable commodi- 
 ties (including gold), by which foreign exchange is made. 
 Eventually the advance will extend to all goods, domestic as 
 well as foreign, because producers and dealers find that they 
 cannot replace their stocks at the same prices as before. 
 The advance is usually slow at the beginning. Thus, 
 although specie payments were suspended on the 3oth of 
 December, 1861, the premium on gold did not reach 4 per 
 cent until the month of May following. 
 
 When the premium on gold became noticeable in January, 
 1862, the business of buying and selling it began naturally 
 in the shops of those Wall Street brokers who dealt in 
 foreign coins. These brokers had gold and silver on exhi- 
 bition in their windows. People who wanted 
 Fir rM radmg coin went there to buy it. Those who wanted 
 
 in Gold. * 
 
 to sell coin for greenbacks naturally went there 
 also. Gradually the dealings in front of their offices became 
 so large that the traders blocked the sidewalks, and the 
 public authorities were obliged to give special orders to the 
 police to keep the crowds moving. The business being 
 thus interrupted, the dealers took up their quarters in a 
 neighboring restaurant, where the business went on until it 
 outgrew its accommodations. Then the need of a Gold 
 Exchange was recognized. Thirty or forty men who had 
 been in the habit of meeting in the restaurant formed a
 
 126 GOVERNMENT PAPER MONEY 
 
 loose organization, hired a hall, and adopted rules by which 
 any respectable man could become a member by paying $100 
 per year, to defray the expenses. This was 
 Gold Exchange . h t f g 6 It voluntary 
 
 organized. * 
 
 organization, existing under the rule of honor. 
 Eventually it had 450 members, consisting of bankers, 
 brokers, and merchants of the principal cities of the Union. 
 At first the business was carried on by the manual 
 delivery of gold in return for certified bank checks. To do 
 this the gold had to be carried through the streets by mes- 
 sengers, who were sometimes knocked down and robbed. 
 To facilitate the transactions the Treasury, in 1865, began 
 to issue gold certificates of deposit, under authority of a law 
 passed two years earlier. By and by the business became 
 so large that it could not be carried on by manual delivery, 
 even with the help of gold certificates. Then 
 the Gold Exchange Bank was started as an 
 adjunct to the Gold Exchange. This was an 
 institution incorporated under the laws of New York, with a 
 capital of $1,000,000. It did a regular banking business 
 with its own capital, and it acted as a clearing house for 
 the Gold Exchange at a fixed rate of compensation. 
 
 The method of clearing was as follows : Each transaction 
 was noted on a "ticket of advice" signed by both buyer 
 and seller. All the tickets were passed into the bank. If 
 Mr. A. had bought $1,000,000 worth of gold from various 
 persons at various prices and had sold $999,000, then 
 instead of receiving from and paying to all 
 
 Gold Clearings. 
 
 these people he would settle only with the 
 bank. He would receive at the close of the day $1000 in 
 gold and would pay whatever sum in greenbacks was due 
 from him as the resultant of all his transactions. The 
 usual daily amount of such clearings was $60,000,000 to 
 $70,000,000.
 
 THE GREENBACKS 12; 
 
 All the foreign trade of the country, both imports and 
 exports, was regulated by the daily and hourly quotations of 
 the Gold Room. This trade could not have been carried 
 
 on otherwise. The wholesale prices of all 
 A commerci, importable and exportable commodities were 
 
 regulated by the quotations. Retail prices 
 were affected at longer range. That is, the retail dealers 
 were obliged to fix their prices high enough to cover fluctu- 
 ations and to save themselves from loss. The consumer 
 was not able to buy at the lowest price that the law of 
 competition would, under other circumstances, have made. 
 Commodities not of an exportable or importable kind were 
 affected in less degree and at still longer range, but were 
 not exempt from the influence. In short, the whole trade 
 of -the country, both external and internal, pivoted on the 
 Gold Exchange. Gold being the universal liquidator of 
 commerce, it was necessary to know where and at what 
 price it could be obtained in any desired quantity. The 
 Gold Exchange gave the answer to this question daily and 
 hourly, and was accordingly indispensable. 
 
 During seventeen years the business of the country was 
 regulated by the quotations of the Gold Exchange and was 
 
 exposed to the raids of gold gamblers. The 
 
 Gambling Raids. 
 
 most disastrous of these was the " Black Fri- 
 day conspiracy," which was a trap set for exporters. The 
 export trade of the country at that time necessitated the 
 selling of gold in advance of its delivery. A buyer of wheat 
 or cotton for export would make his purchase according to 
 the current price of gold, but he would not get his returns 
 from abroad for some weeks, nor could he get a negotiable 
 bill of lading immediately. If the price of gold should fall 
 meanwhile, he would be a loser. So he would sell at once 
 the gold which he expected to receive later. He would do 
 this by giving an order to a broker in the Gold Exchange to
 
 128 GOVERNMENT PAPER MONEY 
 
 sell, putting up a small margin as a guaranty against possible 
 fluctuations. Thus both the exporter and the broker would 
 be protected, unless the fluctuations should be so great as to 
 prevent the exporting merchant from keeping his margin 
 good. In the latter event he might be ruined altogether. 
 
 The act of " selling short " is most commonly frowned 
 upon as something akin to gambling. In this case the 
 gambling consisted in not selling short. A fluctuating cur- 
 rency introduces the gambling element into 
 "Selling Short." . , / 
 
 all business, but more especially into the for- 
 eign trade of a country. By selling at once the gold that 
 he expected to receive for his outward cargo, the exporter 
 was doing a legitimate business. By waiting till his cargo 
 arrived and his returns became available he took the risks 
 of any amount of fluctuation in the interval. 
 
 Mr. Jay Gould, who was at that time president of the 
 Erie Railway, and a daring speculator, conceived the idea 
 of buying all the gold in the market and compelling the 
 " short " sellers to buy of him, when their contracts should 
 mature. He organized a clique of brokers, speculators, and 
 Tammany Hall politicians, who succeeded by various devices 
 and by enormous purchases in carrying the price up from 
 133 to 162 in about twenty days, the greater part of the rise 
 being in two days, September 2^-24. The 
 
 Black Friday. 
 
 24th was always afterwards known as Black 
 Friday. About 250 persons and firms were caught "short" 
 of gold, who had no way of meeting their contracts except 
 by buying it of Gould and his party. The consequences 
 were thus described by a Committee of Congress, of whih 
 General Garfield was chairman : 
 
 Hundreds of firms engaged 'in legitimate business were wholly 
 ruined or seriously crippled. Importers of foreign goods were 
 for many days at the mercy of gamblers and suffered heavy losses. 
 For many weeks the business of the whole country was paralyzed,
 
 THE GREENBACKS I 29 
 
 a vast volume of currency was drawn from the great channels of 
 industry and held in the grasp of the conspirators. The founda- 
 tions of business morality were rudely shaken, and the numerous 
 defalcations that shortly followed are clearly traceable to the mad 
 spirit engendered by speculation. 
 
 Black Friday and its evil consequences were due to the 
 existence of a bad currency and a fluctuating standard of 
 value. The Gold Room was at that time a necessity. 
 Business could not be carried on without it, but it offered 
 temptations and facilities for gambling which could not be 
 resisted ; and this gambling was more calamitous than any 
 other, because the prices of all commodities and securities 
 were affected by it. It was only an exaggerated and glar- 
 ing illustration of the evils of an unstable currency. 
 
 When .the war came to an end in May, 1865, the price 
 of gold sank to 130, at which rate greenbacks were worth 
 77 cents per dollar. It had been as high as 285 in July, 
 1864, greenbacks being then worth 36 cents. The dif- 
 ference between these extreme quotations may be taken 
 to represent changes in the public credit, or various vicissi- 
 tudes and states of mind, dependent upon the war, wholly 
 apart from the redundancy of the circulation, since the 
 currency was no greater in volume at the one date than 
 at the other. 
 
 The baleful effect of these fluctuations was shown very 
 
 clearly in California. As that state was an integral part of 
 
 the Union, the legal-tender act was as valid 
 
 California ad- there as elsewhere, yet the greenbacks never 
 
 heres to the Gold , ., - 
 
 standard. became current there until after specie pay- 
 
 ments were resumed. California had no 
 banks of issue and was entirely unfamiliar with paper 
 money. It was not without a severe struggle, however, that 
 the gold standard was maintained. The claims of loyalty 
 were imported into the controversy, and it was stoutly
 
 130 GOVERNMENT PAPER MONEY 
 
 insisted by the greenback party that unwillingness to use 
 legal-tender notes was akin to treason. Their opponents 
 replied that they were entirely willing to use the notes at 
 their actual value, but not at a higher value. They con- 
 tended that, except for past debts, greenbacks could not 
 be used at anything above their actual value, because the 
 prices of commodities would fluctuate in some near propor- 
 tion to the fluctuations of the currency. If taken for more 
 than their actual value by ignorant persons, such persons 
 would be cheated. In regard to past debts they said that 
 it would be unjust to pay less value than the parties had 
 agreed for. 1 
 
 There is an advantage in studying the events in Califor- 
 nia at this time, because what happened there, in plain sight 
 and hearing, took place on an immensely larger scale else- 
 where, but was, for the most part, unnoticed. 
 
 There were no railways to the Pacific coast at that time, 
 hence several months elapsed before any commercial effects 
 were produced by the legal-tender act. On the iyth of 
 September, 1862, a firm in San Francisco published a letter 
 in the Alta California saying that they had been compelled 
 to receive many thousands of dollars in legal-tender notes 
 for goods which they had bought for gold and had sold on 
 credit at gold prices. They had tendered the 
 ments Er *" notes to tne i r employees in payment of wages, 
 
 but the latter had refused to receive them, 
 saying that the boarding houses, the butchers, and the 
 grocers would not take them at par. " For ourselves," said 
 the firm, "we wish to maintain the government, but we 
 would like the burden to fall equally on all classes." 
 
 On March 5, 1863, a victim of the legal-tender law 
 wrote to the Evening Bulletin of San Francisco that he had 
 
 1 See article " Legal Tender Notes in California," in the Quarterly 
 Journal of Economics, October, 1892, by Professor Bernard Moses.
 
 THE GREENBACKS 131 
 
 lent $10,000 in gold coin four years previously to a man in 
 Sacramento, taking his note for it. The promissory note 
 was lodged at the banking house of D. O. Mills & Co. 
 for collection. The borrower came to the bank and ten- 
 dered $10,000 in greenbacks as full payment. 
 Severe Losses. 
 
 Greenbacks were then worth 68 cents on the 
 
 dollar. D. O. Mills & Co. refused to receive the tendered 
 greenbacks without the consent of the owner of the note, 
 and denounced the conduct of the debtor as unfair in 
 the extreme. After a protracted dispute the creditor 
 accepted the $10,000 in greenbacks and $1000 in gold, 
 rather than enter upon a doubtful lawsuit. His loss then 
 was $2200, but as he kept the notes a few months, it 
 became $3500. 
 
 Business was thrown into confusion by the contrariety of 
 practice in different parts of the state with reference to 
 greenbacks. Attempts were made to introduce into promis- 
 sory notes, invoices, and bills of sale a clause stipulating 
 for payment in gold, and these attempts were 
 
 Confusion in ...... . . 
 
 Business partially successful, but this could not be 
 
 done with accounts current, with telegraphic 
 orders, or with retail trade conducted on the credit system. 
 On the 8th of November, 1862, the merchants of San 
 Francisco entered into a written agreement not to receive 
 or pay legal-tender notes except at their market value in 
 gold. Country merchants were invited to sign it also. If 
 anybody should refuse to sign or should violate the agree- 
 ment, the others would decline to have any business trans- 
 actions with him. This plan was slow in getting into 
 operation and could not be made comprehensive enough 
 to meet the emergency, since it included regular dealers 
 only, and not transient customers. 
 
 Presently a case came into court, where a citizen had ten- 
 dered greenbacks for state taxes and the collector had
 
 132 GOVERNMENT PAPER MONEY 
 
 refused to receive them. The Supreme Court of the state 
 
 decided that taxes were not " debts," and hence that the 
 
 legal-tender law did not apply to them. This 
 
 Greenbacks not view was eventually sustained by the Supreme 
 Legal Tender for . . . 
 
 Taxes. Court of the United States. I he decision 
 
 of the state court had a great influence on 
 local public opinion, by strengthening the hands of the 
 anti-greenback men. 
 
 In October, 1862, the Board of Supervisors of San Fran- 
 cisco adopted a resolution to pay the interest on city and 
 county bonds in gold coin and instructed their financial 
 agent in New York to advertise to that effect. This action 
 likewise tended to strengthen the position of the anti- 
 greenbackers. 
 
 On February 12, 1863, resolutions were introduced in the 
 Legislature, asking the general government to except Cali- 
 fornia from the operations of the legal-tender 
 Rise of the Rate j Q f th reasons advanced by the 
 
 of Interest. * 
 
 mover of the resolutions was that the rate of 
 
 interest had risen to double the customary rate because 
 lenders were fearful that no form of contract could prevent 
 the payment of greenbacks where gold had been promised. 
 Lenders required a higher rate to compensate them for this 
 risk. The resolutions were, however, rejected. 
 
 An agitation now was started by the Daily Herald for a 
 law to enforce the payment of contracts in whatever kind of 
 money the parties might agree for. The Legislature took up 
 the subject in earnest, and in April, 1863, passed a law to 
 this end, not mentioning gold, greenbacks, or any particular 
 kind of money by name. This was known 
 specific contract as the Specific Contract Law. It provided 
 
 merely that in an action on a contract, or 
 obligation in writing, payable in a specified kind of money 
 or currency, the judgment should be payable in such money
 
 THE GREENBACKS 133 
 
 or currency. The parties might stipulate for English sover- 
 eigns, or Spanish doubloons, or notes of the Bank of France, 
 as well as for American eagles, or greenbacks ; the law 
 would enforce the contracts in all- cases. The act was 
 passed upon by the Supreme Court of the state the same 
 year and pronounced constitutional. It was also held to 
 be applicable to contracts made before its 
 Sustained by the passage. Both these doctrines were subse- 
 
 Supreme Court of 
 
 the United states, quently affirmed by the Supreme Court of the 
 United States, in terms which implied that the 
 Specific Contract Law was superfluous. In other words, 
 specie contracts were enforceable without it. 
 
 It remains to notice other decisions of the Supreme Court 
 of the United States on the subject of legal-tender notes. 
 
 In the case of Lane County vs. Oregon 1 
 DeSn S COUrt (December, 1868) the court held unanimously 
 that the legal-tender acts of 1862 and 1863 
 did not apply to taxes imposed by the authority of a state, 
 and that taxes are not "debts." It followed that if a state 
 made its taxes payable in gold the taxpayer's obligation 
 could not be discharged with legal-tender notes. 
 
 In Branson vs. Rodcs* 1 (December, 1868) the court held 
 
 that a contract specifically payable in gold and silver coin 
 
 could not be discharged by a tender of United States notes. 
 
 In Butler vs. Honvitz, immediately following, it was held 
 
 that a contract to pay a certain sum in gold and silver coin 
 
 is, in legal effect, a contract to deliver a cer- 
 
 Gold Contracts . -i^r u j-i t j. 
 
 Enforceable weight of gold and silver of a certain 
 
 fineness. In this case the contract had been 
 made in 1791 and was for payment in " English golden 
 guineas." It was held in this case that damages for breach 
 of contract should be assessed in coin also. 
 
 1 7 Wallace, 71. 
 
 2 7 Wallace, 229.
 
 134 GOVERNMENT PAPER MONEY 
 
 In Hepburn vs. Griswold 1 (December, 1869) it was held 
 by five judges against three (the opinion of the court being 
 delivered by Chief Justice Chase) that the making of notes, 
 or bills of credit, a legal tender in payment of preexisting 
 debts is not a means appropriate, plainly adapted, or really 
 calculated to carry into effect any express 
 
 e ep urn power vested in Congress ; is inconsistent with 
 the spirit of the constitution and is prohibited 
 by the constitution. Also that the clause in the acts of 
 1862 and 1863 which makes United States notes a legal 
 tender in payment of all debts, public and private, so far as 
 it applies to debts contracted before the passage of those 
 acts, is unwarranted by the constitution. 
 
 The judges who concurred with the Chief Justice were 
 Clifford, Nelson, Grier, and Field. The dissenting judges 
 were Miller, Swayne, and Davis. 
 
 In the Legal Tender Cases' 1 (December, 1870) the fore- 
 going decision was reversed by five judges against four. 
 The opinion of the court was delivered by 
 
 The Hepburn Justice Strong, who had been appointed in 
 Judgment b ' . 
 
 reversed. place of Justice Grier, resigned. A new mem- 
 
 ber (Bradley) had been added, in pursuance 
 of a law passed by Congress in April, 1869, raising the 
 whole number of judges to nine. The opinion read by 
 Justice Strong implied that the power of Congress to make 
 the government's notes legal tender between individuals on 
 preexisting contracts was an incident and consequence of 
 the war power, but it did not expressly say so. The legal 
 points of the opinion will not be considered here, but some 
 attention must be given to an economical dictum found in 
 it, viz. : 
 
 It is hardly correct to speak of a standard of value. The 
 Constitution does not speak of it. It contemplates a standard for 
 
 1 8 Wallace, 603. 2 12 Wallace, 457.
 
 THE GREENBACKS 135 
 
 that which has gravity or extension, but value is an ideal thing. 
 
 The coinage acts fix its unit as a dollar, but the gold or silver 
 
 thing we call a dollar is in no sense a standard of 
 
 Judge Strong on d n It is a representative of it. There 
 " Value." 
 
 might never have been a piece of money of the 
 
 denomination of a dollar. There never was a pound sterling 
 coined until 1815, if we except a few coins struck in the reign of 
 Henry VIII, almost immediately debased, yet it has been the 
 unit of British currency for many generations. It is thus a mis- 
 take to regard the legal-tender acts as either fixing a standard of 
 value, or regulating money values, or making that money which 
 has no intrinsic value. 
 
 The learned judge here confounds value with the standard 
 of value, and speaks of both as having no concrete existence. 
 Value is an ideal thing in the same sense that weight is. 
 The former means exchangeability ; the latter means force 
 of gravity. A dollar is a definite amount of exchangeability 
 as an ounce is a definite amount of the force of gravity. 
 The former will bring to its possessor a given quantity of 
 goods ; the latter requires a given amount of force to lift it. 
 Both are fitted to become standards, -the one of value and 
 the other of weight, and when made such by law they are 
 not ideal but concrete things. The legal-tender act, as has 
 been remarked previously, was a change of the definition of 
 a term in common use, i.e., the word "dollar." It had pre- 
 viously meant a definite amount of metal of a specified fine- 
 ness. Under the new definition it meant the government's 
 promise to pay this thing at an indefinite time. 
 
 The five judges who concurred in this opinion were 
 Strong and Bradley in addition to the minority in the 
 Hepburn case. Separate dissenting opinions were read 
 by Chief Justice Chase and by Judges Clifford, Field, and 
 Nelson. 
 
 In Juillard vs. Greenman^ (March, 1884) it was held that 
 1 no U. S., 421.
 
 136 GOVERNMENT PAPER MONEY 
 
 Congress has the constitutional power to make the Treasury 
 notes of the United States a legal tender in payment of 
 private debts in time of peace as well as in time of war. 
 Also that legal-tender notes redeemed and reissued under 
 the act of May 31, 1878, are a legal tender, although not 
 
 expressly made so by that act. The opinion 
 Decision 68 ^ ^ e court was delivered by Justice Gray, 
 
 and a dissenting one was written by Justice 
 Field. In Justice Gray's opinion we find the following 
 statement : 
 
 The power, as incident to the power of borrowing money and 
 issuing bills or notes of the government for money borrowed, of 
 impressing upon those bills or notes the quality of being a legal 
 tender for the payment of private debts, was a power universally 
 understood to belong to sovereignty in Europe and America at 
 the time of the framing and adoption of the Constitution of the 
 United States. 
 
 George Bancroft, the historian, reviewed this opinion in 
 both its legal and its historical aspects. Referring to the 
 statement quoted above, he declares it to be 
 " a stupendous error," and affirms that no 
 such power was understood to belong to 
 sovereignty in Europe at that time, i.e., in I788. 1 
 
 RECAPITULATION 
 
 United States notes, otherwise called greenbacks, or legal 
 tenders, were issued by Congress during the Civil War, to 
 the maximum sum of $450,000,000. They were similar 
 in their nature and consequences to the Colonial and 
 
 1 "The Constitution of the United States of America Wounded in 
 the House of its Guardians," by George Bancroft. Pamphlet, 1884.
 
 THE GREENBACKS 137 
 
 Revolutionary bills of credit that preceded them, but the 
 depreciation was not so great. The lowest rate reached 
 by them was 35 cents per dollar in the year 1864. 
 
 The notes were originally made convertible, at the option 
 of the holder, into bonds bearing coin interest at 6 per cent. 
 This connecting link between the notes and gold was 
 unwisely repealed in 1863. If it had remained in force, 
 the notes would have been exchanged for bonds whenever 
 the price of the latter was above par, and specie payments 
 would probably have been resumed automatically soon after 
 the close of the war. 
 
 As the notes were declared by law to be legal tender for 
 all debts public and private, except duties on imports and 
 interest on United States bonds, many people affirmed and 
 believed that the principal of the bonds could be rightfully 
 paid with greenbacks, although the latter were irredeemable. 
 This misconception led to a political controversy of great 
 bitterness, long duration, and doubtful issue. 
 
 The cost of the war was largely enhanced by the use of 
 irredeemable paper, the prices of arms, ammunition, and 
 supplies having risen in consequence of currency inflation. 
 The prices of commodities were relatively higher during 
 the suspension of specie payments than the premium 
 on gold. Dealers sought to protect themselves in this 
 way against loss by fluctuations in the value of the 
 currency. 
 
 The wages of labor did not advance part passu with the 
 prices of commodities during the war. The effective pay 
 of the soldiers was seriously reduced by the advance of 
 prices. Thus the pecuniary burden of the war fell most 
 heavily upon the classes least able to bear it. 
 
 Irredeemable currency makes changes in the distribution 
 of property among individuals and classes. It works injus- 
 tice between debtors and creditors and between employers
 
 138 GOVERNMENT PAPER MONEY 
 
 and employees. It promotes speculation, introduces the 
 gambling element into business, defrauds the wage-earner, 
 and brings ruin upon innocent people. 
 
 The issuing of irredeemable paper is sometimes called a 
 forced loan, but it has none of the characteristics of a loan. 
 A loan, even when forced, implies an accounting and repay- 
 ment to the lender. No such thing is promised or contem- 
 plated when such paper is issued, but merely that somebody 
 shall be paid something at some time. Even this promise 
 is not always fulfilled. 
 
 The value of greenbacks during the suspension of specie 
 payments was recorded during the business hours of each 
 day by actual sales and purchases of gold on the New York 
 Gold Exchange. In 1864 Congress attempted to check the 
 depreciation of the currency by closing the Gold Exchange 
 and prohibiting sales of gold or foreign exchange for future 
 delivery. The premium on gold advanced more rapidly 
 after the passage of this act than before, and Congress 
 repealed it two weeks later. 
 
 Gambling in gold was one of the evils of the time, and 
 almost a necessary one in connection with the foreign trade 
 of the country. In 1869 a scheme was set on foot by an 
 unscrupulous speculator for the purpose of "cornering" 
 gold, i.e., buying all the gold in the market and compelling 
 persons who had sold it for future delivery to buy it from him 
 and his clique. It resulted in a most disastrous panic, 
 ruining or seriously crippling hundreds of business men in 
 the principal cities of the Union. The day on which the 
 catastrophe occurred was afterwards known in Wall Street 
 as Black Friday. 
 
 United States notes never became current in California 
 until after the resumption of specie payments. The busi- 
 ness community declined to receive them, except at their 
 value in gold. The Legislature of the state passed an act
 
 THE GREENBACKS 139 
 
 known as the Specific Contract Law, by virtue of which con- 
 tracts should be enforceable in any kind of money the 
 parties should stipulate for. This law was upheld by the 
 highest courts of the state and of the United States. 
 
 The Supreme Court of the United States has held that 
 a contract between private persons, if made specifically 
 payable in coin, cannot be discharged with legal-tender 
 notes. Also (December, 1869), that the legal-tender act of 
 1862 was unconstitutional so far as it applied to debts con- 
 tracted before its passage. The last-mentioned decision was 
 reversed one year later (December, 1870). It was inferred 
 from the language of the court in this decision that the 
 power of Congress to make the notes of the United States 
 legal tender between individuals on preexisting contracts 
 was an incident of the war power. In March, 1884, the 
 court held that Congress has power to make the notes of 
 the United States legal tender in time of peace as well as in 
 time of war. 
 
 AUTHORITIES 
 
 Knox's United States Notes. 
 
 Spaulding's History of the Legal-Tender Money issued during 
 the Great Rebellion. 
 
 Newcomb's Critical Examination of our Financial Policy 
 during the Southern Rebellion. 
 
 H. C. Adams' Public Debts. 
 
 Mitchell's " Greenbacks and the Cost of the Civil War," in the 
 Journal of Political Economy, March, 1897. 
 
 Banker's Magazine and Statistical Register, 1861-65.
 
 CHAPTER IV 
 CONFEDERATE CURRENCY 1 
 
 THE provisional government of the Confederate States of 
 America was formed at Montgomery, Ala., on the 8th of 
 February, 1861. Its Secretary of the Treasury was C. G. 
 Memminger. Its first financial act (March, 1861) was the 
 issue of $2,000,000 of Treasury notes in denominations not 
 smaller than $50. They bore interest at the rate of 3.65 
 per cent and were payable to order, that is, to some person 
 named in the note and transferable by his endorsement. 
 They were not intended to be used as currency and were 
 not so used. Shortly afterwards the Confederacy borrowed 
 $15,000,000 on bonds drawing 8 per cent interest, for which 
 it received gold value during the year 1861. The money was 
 expended in the purchase of arms, ammunition, and sup- 
 plies abroad. An export duty of i cent per 
 
 First Steps. 
 
 pound on cotton was enacted, but by reason 
 of the blockade of the Southern ports it yielded scarcely 
 anything. Later in the same year, May 16, the Confed- 
 erate Congress authorized the issue of $20,000,000 of non- 
 interest-bearing Treasury notes of denominations of $5.00 
 and $10, redeemable in specie in two years and convert- 
 ible into 8 per cent bonds. These were intended to cir- 
 culate as money, and they became at once the currency 
 of the Confederacy. 
 
 1 The principal authority for the facts embraced in this chapter is 
 Professor J. C. Schwab's The Confederate States of America, 1861-1865 
 (Charles Scribner's Sons, 1901). 
 
 140
 
 CONFEDERATE CURRENCY 141 
 
 The issue of bonds was increased to $150,000,000, and 
 it was sought to make this, in part, a produce loan. 
 Cotton, corn, flour, pork, beef, and tobacco were to be taken 
 in exchange for bonds, and agents were appointed to solicit 
 subscriptions among the planters. Nine-tenths of all the 
 subscriptions were in cotton. The reason why cotton was 
 offered so profusely was that the Confederate Treasury was 
 the only market open to the planter, whose customary mar- 
 ket was cut off by the blockade. Meanwhile he had his 
 own obligations to meet, and these could not be satisfied 
 with 8 per cent bonds any more than with cotton itself. 
 
 There was an outcry in many quarters for 
 A Produce Loan. , 
 
 relief for the planters. Some persons advo- 
 cated an issue of Treasury notes, with which to buy all the 
 cotton offered for sale. Others proposed a loan of such 
 notes on the cotton as security. Either of these plans, it 
 was seen, would cripple the Confederate finances at the 
 start, by filling the field of circulation before the armies 
 were fairly in motion. The Confederate Congress did 
 nothing for the planters, but some of the separate legisla- 
 tures voted them Treasury notes of their own state issues 
 on the security of cotton, which was left in the hands of the 
 planters themselves. 
 
 At the end of 1861 there were $105,000,000 of Confeder- 
 ate Treasury notes outstanding, and the premium on gold 
 was 15 to 20 per cent, the record is not exact. The notes 
 were never made legal tender. The question of making 
 them such was frequently under debate in 
 ^ on g ress > but was always decided in the neg- 
 ative. Although the Confederate Congress 
 did not, and Southern state legislatures could not, make 
 the notes legal tender, the latter bodies, or some of them, 
 deprived creditors of the remedies they had previously 
 enjoyed for collecting their dues in the courts of law.
 
 142 GOVERNMENT PAPER MONEY 
 
 On August 19, 1 86 1, the Confederate Congress author- 
 ized an issue of $100,000,000 of Treasury notes of denom- 
 inations of $5.00 and upwards. It was the opinion of the 
 Southern bankers, who were then holding a convention at 
 Richmond, that this might be safely done, but the limit was 
 raised to $150,000,000 before the end of the year. The 
 notes were redeemable " six months after the ratification of 
 a treaty of peace between the Confederate States and the 
 United States." They were convertible into bonds draw- 
 ing 8 per cent interest, or into call certificates drawing 
 6 per cent, the latter being reconvertible into notes at the 
 holder's option. 
 
 Internal taxation was not resorted to by the Confederacy 
 in the first year of the war, except by a direct tax on the 
 states, which was paid mostly by issues of state notes or 
 
 bonds, that is, by borrowing. The customs 
 Failure to tax. . . . 
 
 yielded next to nothing, the ports being block- 
 aded. It was Secretary Memminger's opinion at the outset 
 that the war should be carried on by loans, with just suffi- 
 cient taxation to pay interest. The Confederate Congress 
 did not go so far in the way of taxation as Secretary Mem- 
 minger advised. It preferred to rely on bond issues and 
 note issues altogether. It accordingly passed an act in 
 April, 1862, for $165,000,000 of 8 per cent bonds and 
 $50,000,000 of new notes. It also issued another kind of 
 note, of the denomination of $100, bearing interest at the rate 
 of 7.30 per cent, receivable for taxes. It was supposed that 
 these would be held for investment, but they were soon 
 found to be in circulation. Prices of commodities were 
 rising so rapidly that the notes were worth more in trade 
 than in one's strong-box. Only 9 per cent of the public 
 expenses was met with bonds, 85 per cent with notes, and 
 6 per cent with taxes, donations, and the confiscation of 
 Federal property.
 
 CONFEDERATE CURRENCY 143 
 
 As early as September, 1862, every barrier to note issues 
 was thrown down by the passage of an act authorizing 
 issues limited only by the public expenses. This system 
 avoided present trouble, but it added to the anxieties of the 
 Secretary of the Treasury, who knew that it was ruinous in 
 the long run. Produce loans were resorted to as a partial 
 check to excessive issues of currency. The government 
 thus obtained the ownership of 430,000 bales of cotton, and 
 was able to ship 19,000 bales to Europe by blockade-run- 
 ners. In December, 1862, the Treasury notes outstanding, 
 including state issues, reached $500,000,000, and gold was 
 worth 3 for i. 
 
 As the foregoing methods were proving fruitless, the idea 
 was conceived of making cotton the basis of a loan abroad. 
 After various negotiations the scheme was undertaken by 
 the house of Erlanger & Co. of Paris. It was for .3,000,- 
 ooo sterling, and was secured by cotton in the Confederate 
 States at a valuation of 6d. per pound. Cotton was then 
 selling at 2 id. per pound in England. The payments were 
 to be made in monthly instalments, the first one being 5 per 
 cent. The subscription was opened March 21, 1863, at the 
 issue price of 90, and was said to have been over-subscribed 
 five times in England alone. Yet after deducting brokers' 
 commissions, interest on bonds, repurchases to sustain 
 the market, and other expenses, the net amount realized 
 on the $15,000,000 of bonds was only $6,500,000. The 
 Confederate cruisers were paid for out of the net amount 
 received. 
 
 At the beginning of 1863 Mr. Memminger addressed him- 
 self to the task of getting his Treasury notes funded into 
 bonds. He recommended that a bill be passed providing 
 that notes not funded before August i, 1863, should cease 
 to be currency and cease to be convertible. The Confed- 
 erate Congress passed a bill with elaborate provisions to
 
 144 GOVERNMENT PAPER MONEY 
 
 carry this plan into effect. It contained also provisions for 
 issuing new notes to the amount of $50,000,000 per month. 
 This attempt to brand the old notes while issuing new ones 
 threw the currency into worse disorders than 
 
 before< The Richmond banks refused to 
 receive the old notes as deposits, and the 
 Virginia Legislature ordered that they should not be received 
 for state taxes. Newspapers denounced the act of Congress 
 as repudiation. The note-holders, seeing that the old notes 
 were likely to become worthless, now hastened to fund 
 them, and actually sent in $125,000,000 in three months of 
 1863, but in these three months $150,000,000 of new notes 
 had been issued. The total amount outstanding on the 
 ist of January, 1864, was upwards of $700,000,000, and 
 the gold quotation was 20 for i. Only $5,000,000 was 
 raised during the year by taxation. The total debt of the 
 Confederacy was now $1,221,000,000. 
 
 Various schemes of repudiation were now on foot. 
 They took shape eventually in a bill (passed February 17, 
 1864), providing that all outstanding notes smaller than $5.00 
 should be convertible into bonds and receivable at par till 
 the ist of July, 1864, and thereafter be taxed 
 Repudiation out ^ ex i stence within the year. Simultane- 
 ously another issue of notes was authorized 
 (a sort of " new tenor," like the secondary issues of colo- 
 nial bills of credit), for which the old notes, except those 
 of $100 and upwards, could be exchanged at the rate of 
 $3.00 old for $2.00 new; $426,000,000 were so exchanged. 
 The currency had now become unmanageable. The $100 
 notes continued to circulate after they had been outlawed. 
 There was active funding for some months after the passage of 
 this bill, and its effect was shown in a decline of the gold 
 quotation from $23 to $17 for $1.00; but when the new notes 
 came out, it rose again to $23 in September, and reached
 
 CONFEDERATE CURRENCY 145 
 
 $40 before the end of the year. The volume of currency 
 was now fully $1,000,900,000. The old notes and the new 
 ones circulated side by side, were equally discredited, and 
 continued to depreciate together. They passed in trade at 
 the same rates. The credit of the Confederate Government 
 was now shattered, and Mr. Memminger resigned his office 
 in midsummer, 1864. 
 
 He was succeeded by George A. Trenholm of Charleston. 
 The latter was not slow to perceive that compulsory funding 
 had been a grave mistake. "Apprehensions of ultimate 
 repudiation," he wrote to Governor Bonham, "crept like 
 an all-pervading poison into the minds of the people, and 
 greatly circumscribed and diminished the purchasing power 
 of the notes." In January, 1865, the gold quotation was 
 $53 for $1.00. Secretary Trenholm proposed to reverse the 
 policy of compulsory funding, in order to save the govern- 
 ment's credit, but it was too late. A bill to 
 Final Collapse. . 
 
 carry Mr. Trenholm s plan into effect was 
 
 passed by the House, but failed in the Senate. There was 
 nothing to do now but to make fresh issues of notes, 
 although the previous law for this purpose contained a 
 pledge that there should be no more. In March, 1865, a 
 bill for $80,000,000 of "new tenor" was passed over the 
 President's veto. There was some talk about heavier taxes 
 on exports and imports, although there were none to be 
 taxed. The last scheme was for a specie loan of $3,000,- 
 ooo, failing which there was to be a tax of 25 per cent on 
 all the specie in the Confederacy. This singling out of one 
 kind of property, and putting on it a tax of one-fourth of its 
 value, was confiscation. The Richmond banks, which were 
 most exposed to the application of force, advanced $300,000, 
 and almost immediately thereafter the Confederacy collapsed. 
 Almost every blunder that it was possible to commit in 
 national finance was committed by the Confederacy, and on
 
 146 GOVERNMENT PAPER MONEY 
 
 a gigantic scale. The initial one was the failure to tax. 
 The direct tax on the states, as we have seen, was largely 
 met by borrowing, and this was additional to the Confederate 
 borrowing and in the same field. In 1863 the Confederate 
 Congress was awakened to the necessity of taxing the 
 people by its own machinery, but it was now too late to do 
 
 so effectively. The population was sparse, 
 Fatal Mistakes. . . 
 
 the means of communication slow, and the 
 
 territory to be covered wide, with much of it in possession 
 of the Union forces. Worst of all, the swelling volume of 
 the currency inflated the prices of property so that a given 
 rate of taxation payable in dollars yielded a constantly 
 lessening value. In order to overcome this difficulty a 
 system of tithing was enacted, that is, a tax payable in 
 produce, of the kinds needed by the army. This system 
 was grossly unjust to the farmers. The man who had to 
 pay $100 in currency, and the one who had to contribute 
 one hundred bushels of corn, did not stand on the same 
 footing. The former might pay in 1863 not more than $10 
 in value measured by gold, and not more than $5.00 in 1864, 
 while the one hundred bushels of corn contributed by the 
 latter remained a fixed, unshrinkable quantity. The farmers 
 made so stout a resistance to the tithing system that it 
 yielded very small returns. 
 
 The next blunder in Confederate finance was that of 
 paying interest on loans in irredeemable paper. It must 
 not be assumed that there was no other alternative. No 
 other was ever tried. It would have been time enough to 
 fall into the pit when it could not be avoided. The gov- 
 ernment should have bought specie at the market price and 
 paid the interest on the bonds with it, in order to support 
 the public credit. 
 
 The third and fatal folly of the Confederacy was the 
 compulsory funding act. No casuistry could disguise this
 
 CONFEDERATE CURRENCY 147 
 
 step. It was repudiation, and it brought its own speedy 
 punishment. If military events had not brought the Con- 
 federacy to an end in April, 1865, it must have collapsed 
 financially about that time. In other words, the power to 
 supply the army in the field with food, clothing, arms, and 
 ammunition could not have continued much longer. The 
 blockade of the Confederacy, of course, intensified its finan- 
 cial difficulties. Secretary Memminger attributed his failure 
 to it. Indeed, if it had had free communication with Europe 
 the Confederacy might have survived the errors of its Treas- 
 ury Department and the war might have had a different 
 ending. 
 
 The note issues of the separate states are of importance 
 in connection with those of the Confederacy a throwing 
 light on the course of a paper currency unregulated by 
 redemption in specie and unrestrained by anything except 
 the whims of legislatures. The " wants of trade " in respect 
 of money are never so imperious as when governments are 
 issuing irredeemable notes. Prices of com- 
 vate^urrency niodities advanced faster than the price of 
 gold. This was because dealers made an extra 
 charge for goods, by way of insurance against fluctuations 
 in price. The advance of prices absorbed the new currency 
 and created an abnormal demand for more. The appetite 
 was shared by the state governments, by cities and counties, 
 by banks, by railroad and other corporations ; and finally 
 the right of issue was assumed by private persons, such as 
 tobacconists, grocers, barbers, and milk dealers, who issued 
 tickets, which they gave out as change in the ordinary 
 course of trade and promised to redeem in goods or ser- 
 vices. Alabama began with an issue of $1,000,000 of state 
 notes as early as February, 1861, and the amount was 
 increased later to $3,500,000. These were receivable for 
 state taxes. Georgia issued $18,000,000 of state notes
 
 148 GOVERNMENT PAPER MONEY 
 
 redeemable in Confederate notes. These were in effect an 
 addition of that sum to the Confederate currency. Missis- 
 sippi made liberal issues to relieve the distressed cotton- 
 planters. All the states east of the Mississippi River issued 
 notes. The city of Richmond issued scrip in denominations 
 from 25 cents to $2.00. Charleston, Pensacola, Augusta, and 
 other cities followed suit. Georgia granted " banking privi- 
 leges," which meant the right to issue notes, to two railroad 
 companies. Factories, turnpike companies, insurance com- 
 panies, and others assumed this right either with or without 
 legislative authority. Money was as nearly equal to the 
 wants of trade as the printing press could make it. The 
 state legislatures at last attempted to prevent the circu- 
 lation of personal and corporate notes, but the evil had 
 grown beyond their reach. Virginia passed three acts for 
 this purpose, but they could not be enforced. People con- 
 sidered these private notes as good as the public ones 
 (as they were), and so continued to accept them. The 
 banks issued their own notes freely, since they were not 
 obliged to redeem them, suspension having been .legalized 
 in all the states. 
 
 RECAPITULATION 
 
 For the means of meeting the expenses of the Civil War 
 the Confederate States of America relied almost wholly 
 on Treasury notes, which served as the currency of the 
 people. Those notes were not made legal tender by legis- 
 lative authority, but were made practically so by public 
 opinion and by the repeal of state laws for the collection 
 of debts. Their course was similar to that of the Revo- 
 lutionary bills of credit. They became nearly worthless 
 before the close of the war, and were repudiated in part 
 by the Confederate government and were superseded by
 
 CONFEDERATE CURRENCY 149 
 
 another batch, a sort of "new tenor," which pursued the 
 same downward career. 
 
 Secretary Memminger said that it was impossible to carry 
 on war by means of taxes alone. This was a mistake. 
 Except money borrowed abroad, every country pays the 
 cost of a war at the time of the war. The Southern Con- 
 federacy presents an easy illustration of this maxim, because 
 it was for the most part isolated, having little communication 
 with the outer world, and because all of its debts were oblit- 
 erated at the end of the war. Obviously somebody paid the 
 cost. It was not paid by foreigners (except the trifling sum 
 borrowed in Europe), nor did it fall from the moon. There 
 being nobody else to pay it, the people of the Confederacy 
 must have paid it, and must have paid it during the time of 
 the war, and not a moment later. To levy taxes sufficient 
 to pay the whole of each year's expenses within the year 
 would not have made the burden any greater than it actu- 
 ally was. The Confederacy, by assuming that taxes to pay 
 interest on money borrowed would be sufficient, did not get 
 rid of heavier ones. It only levied them in a different way. 
 
 AUTHORITIES 
 
 Schwab's The Confederate States of America, 1861-1863. 
 Capers' Life of C. G. Memminger. 
 Pollard's Southern History of the War. 
 
 E. A. Smith's History of the Confederate Treasury, in Publi- 
 cations of the Southern History Association (Washington, 1901). 
 Statutes of the Confederate States.
 
 ' 
 
 CHAPTER V 
 AFTER THE WAR 
 
 THE money circulating among the people is a powerful 
 
 educator. It teaches either truth or false- 
 
 iwucator 8 ai hood. Sometimes the results of its false 
 
 teachings are merely whimsical ; more often 
 
 they are disastrous. 
 
 We have seen in a previous chapter that after the forma- 
 tion of the Latin Monetary Union a million and a half of 
 silver francs, of the coinage of the Papal States, rushed into 
 France with those of Italy proper, although the Papal gov- 
 ernment was not a member of the Union. These coins bore 
 the effigy of Pope Pius IX. They gradually found their 
 way into the pockets of the least intelligent members of the 
 community. In 1875 there was a loss of two sous on each 
 of these Roman francs, and in some parts of France the 
 Roman Catholic priests lost their influence with the peas- 
 ants in consequence. 1 The latter put the blame of their 
 loss on the Pope and on the priests as agents of the Pope. 
 One of the consequences of this delusion was that all can- 
 didates for the Chamber of Deputies who were supported by 
 the priests were defeated by the votes of the peasants. It 
 was useless to say to these people that they ought not to 
 have accepted the Roman coins, that the Papal States were 
 not members of the Monetary Union, and that neither the 
 Pope nor the priests were to blame. The people could not 
 
 1 Round my House ; Life in France in Peace and War, by Philip 
 Gilbert Hamerton, p. 214. 
 
 150
 
 AFTER THE WAR 151 
 
 understand such things. The only facts they could grasp 
 were the Pope's effigy on the coins and the loss of the two 
 sous. 
 
 Our legal-tender act taught people false notions. First, 
 it led large numbers of unreflecting persons to believe that 
 the government can make money. If the government can 
 do so, people argued that it ought to make money plentiful. 
 The legal-tender act led to the belief also that the govern- 
 ment's bonds were payable in greenbacks. The act said 
 that the notes should be lawful money and a legal tender 
 for all debts, public and private, within the United States 
 except duties on imports and interest on government bonds. 
 These words printed on the greenbacks led 
 multitudes of people to think that the govern- 
 ment could rightfully pay the first piece of 
 paper with a second one. If it could do so, it could pay 
 the second with the first. Thus, by swapping one for the 
 other, the whole debt might be paid without taxation. As 
 all other governments could do what we could, all national 
 debts might be settled in a twinkling. But there would be 
 no need of taking the trouble to exchange an interest-bear- 
 ing bond for a non-interest-bearing note. The whole debt 
 could be canceled by simply passing a law saying, " All 
 bonds of the United States are legal tender and shall cease 
 to bear interest after the passage of this act." 
 
 The policy of paying the 5-20 bonds in greenbacks was 
 advocated by General Butler in the Republican party, and 
 by George H. Pendleton in the Democratic, immediately 
 after the close of the war. Both of them were defeated in 
 their respective national conventions in 1868, but in differ- 
 ent ways. The Republican Convention discountenanced in 
 its platform the payment of the bonds in greenbacks. The 
 Democratic Convention favored it, but rejected Mr. Pen- 
 dleton as a candidate for the presidency, and nominated
 
 I$2 GOVERNMENT PAPER MONEY 
 
 Horatio Seymour, who was strongly opposed to that policy. 
 The Republicans carried the election, and soon thereafter 
 (March 18, 1869) Congress passed an act declaring that all 
 government obligations were payable in coin unless the law 
 under which they were issued expressly provided for some 
 other payment. 
 
 This did not put an end to the controversy, however. 
 The fight was long and bitter. If the question of paying 
 the bonds with greenbacks had been referred to popular 
 vote at any time between the end of the'war and the resump- 
 tion of specie payments, the result would have been very 
 doubtful. 
 
 In his annual report, December, 1865, the Secretary of 
 the Treasury, Mr. Hugh McCulloch, recommended the 
 policy of contracting the currency with a view to the early 
 resumption of specie payments. The House of Representa- 
 tives, on the 1 8th day of that month, by a vote of 144 to 6, 
 adopted a resolution " cordially concurring " in the recom- 
 mendation. An act to carry that policy into 
 
 effect Was P aSSed A ? ril I2 > l866 ' Tt aU ' 
 thorized the Secretary to sell bonds for the 
 
 purpose of "retiring Treasury notes or other obligations 
 issued under any act of Congress, . . . provided that, of the 
 United States notes, not more than $10,000,000 may be 
 retired and canceled within six months from the passage 
 of this act, and thereafter not more than $4,000,000 in any 
 one month." 
 
 In February, 1868, Congress suspended the reduction of 
 the currency under the foregoing act. The act thus repealed 
 had been in force twenty-one months, and 
 44,000,000 of the greenbacks had been re- 
 tired, but the Secretary had not exercised his full powers 
 under it. The amount outstanding when the cancellation 
 was suspended was $356,000,000.
 
 AFTER THE WAR 153 
 
 In 1870 and 1871 the Secretary of the Treasury, Mr. 
 George S. Boutwell, issued $6,000,000 of legal-tender notes 
 in lieu of those retired by his predecessor, Mr. McCulloch, 
 showing that, according to his view, those 
 notes were still legally in existence, although 
 they had been actually withdrawn and can- 
 celed. The Senate Committee on Finance made a report 
 upon this action, holding that the Secretary had no power to 
 issue notes for any portion of those retired under the act of 
 1866. Although Congress took no action on the report, 
 Secretary Boutwell retired a large part of the reissued notes, 
 and his successor, Mr. Richardson, retired the remainder. 
 Soon afterward, Secretary Richardson himself reissued 
 $26,000,000 of the retired notes in a vain attempt to check 
 the financial panic of 1873, thus bringing the whole amount 
 up to $382,000,000. 
 
 In February, 1874, the Senate Committee on Finance 
 reported a bill, the first section of which fixed the maximum 
 amount of United States notes at $382,000,000, and the sec- 
 ond section provided that, on the ist of January, 1876, the 
 Secretary of the Treasury should either exchange gold coin 
 at par for United States notes, or give 5 per cent bonds 
 for them on the demand of any holder of the 
 
 Inflation Bill nQtes The bm wag amended in the Senate 
 oi 1074. 
 
 by inserting $400,000,000 instead of $382,- 
 
 000,000 and by striking out the second section altogether. 
 This was known as the Inflation Bill, as it sanctioned the 
 policy of adding to the volume of an irredeemable currency 
 
 in time of peace. It passed both houses, but 
 President Grant was vetoe d by President Grant, who thereby 
 
 rendered the country a great service. Yet he 
 intended at one time to sign the bill and had written a paper 
 to accompany his approval of it. Congress then hurriedly
 
 154 GOVERNMENT PAPER MONEY 
 
 passed another bill fixing the maximum amount of legal- 
 tender notes at $382,000,000, which was signed by the 
 President June 22. 
 
 The Inflation Bill having been a Republican measure and 
 vetoed by a Republican President, the party was left in a 
 position of great embarrassment, and was badly beaten in 
 the congressional elections of that year. It could neither 
 inflate nor stand still. The only other course was to take 
 steps for resuming specie payments. It improved the few 
 remaining weeks of its power to pass a bill for this purpose. 
 The bill was reported from the Committee on Finance by 
 Senator Sherman, December 21, 1874, and passed the fol- 
 lowing day without any change. It first removed certain 
 restrictions upon the circulation of national 
 on C Acfof S T 7 5" banks and Prided that the Secretary of the 
 Treasury should " redeem " greenbacks to the 
 amount of 80 per cent of the new bank notes issued, until 
 the total volume, which was then $382,000,000, should be 
 reduced to $300,000,000. It provided that the Secretary 
 should, "on and after January i, 1879, redeem in coin the 
 United States legal-tender notes then outstanding, on their 
 presentation for redemption at the office of the assistant 
 treasurer of the United States in the city of New York, in 
 sums of not less than fifty dollars." The selling of bonds 
 to provide means for redemption was authorized without 
 limit as to amount. 
 
 The word "redeem" was used in the act in two places 
 without any definition of its meaning. Ordinarily the 
 redemption of a promissory note means paying and cancel- 
 ing it, and this was the necessary meaning of 
 Meaning 8 1 ^e wor d i the place where it was first em- 
 
 ployed. It meant that the volume of green- 
 backs should be reduced to $300,000,000 by retiring and 
 canceling the excess over that sum, for if the excess were
 
 AFTER THE WAR 155 
 
 not canceled the reduction could not take place. The true 
 meaning of the word having been determined in one part of 
 the act, its use in another part would have been clear and 
 binding upon all courts of law ; but Senator Sherman, when 
 asked whether the greenbacks which should be redeemed 
 would be put out of existence, refused to answer the ques- 
 tion. The bill passed both houses without any explanation 
 on this point, and became a law January 14, 1875. 
 
 All doubts were resolved by Congress itself three years 
 later. October 31, 1877, the House Committee on Banking 
 and Currency reported a bill to repeal the specie resumption 
 act, and this was passed by the House November 23, by a 
 vote of 133 to 120. At this time the Democrats had a 
 majority of twenty in the House. The Senate was composed 
 of thirty-eight Republicans, thirty-seven Democrats, and one 
 Independent (Davis, of Illinois), who usually voted with the 
 Democrats on financial measures. The Senate 
 rejected this measure by a majority of one 
 vote only. April 29 the House passed a 
 bill, 177 to 35, without debate, forbidding the retiring or 
 canceling of any more legal-tender notes and providing that 
 any thereafter redeemed should be reissued, paid out, and 
 kept in circulation. This bill was concurred in by the 
 Senate, 41 to 18. Before its passage Senator Bayard offered 
 an amendment that notes once redeemed should not there- 
 after be legal tender between individuals, but this was 
 rejected, 18 to 42. This measure became a law May 31, 
 1878. At that time the volume of greenbacks outstanding 
 was $346,681,016, at which it still remains. 
 
 The passage of the specie resumption act was followed 
 by a battle at the polls the following year. The center of 
 this engagement was in the state of Ohio, where the Demo- 
 crats had declared in their platform that the amount of 
 money ought to be made "equal to the wants of trade."
 
 156 GOVERNMENT PAPER MONEY 
 
 This sophism was slain by Carl Schurz in a speech at Cin- 
 cinnati, which decided the campaign. The phrase " equal 
 to the wants of trade " means the wants of any- 
 body in trade. It also requires measures to put 
 the person in possession of what he wants. 
 Since all must be treated alike, it follows that everybody 
 must be served with greenbacks at the public treasury till 
 he says he has enough. To give everybody all the green- 
 backs he wants would give nobody an advantage, except by 
 canceling past debts. Therefore an act of Congress can- 
 celing all debts would accomplish the same end more 
 expeditiously. 
 
 The immediate result of the voting in Ohio in 1875 was 
 the election of Rutherford B. Hayes as governor. A sec- 
 ondary result was his elevation to the presidency the follow- 
 ing year. He appointed John Sherman Secretary of the 
 Treasury. During 1877 and the following year Mr. Sher- 
 man was engaged in refunding the national debt in pursu- 
 ance of the act of July 14, 1870. In connection with this 
 negotiation he arranged with a banking syndicate for the 
 sale of new bonds under the resumption act, by which he 
 was to receive gold coin at the rate of $5,000,000 per month. 
 Before the 3ist of December, 1878, he had accumulated 
 $95,500,000 in this way, and the Treasury held about 
 $20,000,000 additional derived from customs 
 duties. The law had prescribed no plan of 
 
 accomplished. 
 
 resumption. Everything had been left to the 
 Secretary's discretion and to the chapter of accidents. This 
 laxity of Congress was due in part to a general disbelief 
 that resumption would or could be accomplished under that 
 act. When the time approached and the decline of the gold 
 premium betokened a strong probability that the law would 
 be carried into effect, the agitation in both political and 
 financial circles was extreme. On the i7th of December
 
 AFTER THE WAR 157 
 
 the premium on gold disappeared quietly and the Gold 
 Exchange was closed because there was nothing for its 
 members to do. On the ist of January, 1879, the Treasury 
 offered to redeem its legal-tender notes, but none were pre- 
 sented for that purpose. The banks of the large cities had 
 previously kept two kinds of accounts with such of their 
 customers as desired them, one in paper and one in gold. 
 They now discontinued this practice and kept accounts only 
 in "dollars." Therefore nobody had any motive to draw 
 gold from the Treasury to deposit in banks. 
 
 The chapter of accidents did more than anybody had 
 anticipated. The year 1879 proved to be the most remark- 
 able in our history in a commercial sense. 
 
 lIn l p0 Qo Sin The crops of wheat, corn, and cotton were 
 1879 and 1880. 
 
 unexampled in magnitude and excellence, 
 while those of the Old World were extremely deficient. The 
 balance of trade turned in our favor suddenly and strongly. 
 This condition of things was repeated on a somewhat 
 smaller scale in the harvests of 1880. The two years wit- 
 nessed importations of gold to the amount of $175,000,000, 
 putting the immediate success of specie resumption beyond 
 peradventure. 
 
 No reserve for maintaining specie payments had been 
 fixed in the law nor was the need of any reserve recognized 
 until 1882, when the subject was brought to the attention 
 
 of the Senate in an incidental way. A bill 
 00 ' 000 to amend the National Bank Act was under 
 
 consideration. A section relating to gold cer- 
 tificates of deposit was embraced in it. 1 On the 2ist of 
 June, in that year, Senator Aldrich moved an amendment 
 
 1 The issue of gold certificates had been authorized by Section 5 of 
 the act of March 3, 1863, in these terms : " That the Secretary of the 
 Treasury is hereby authorized to receive deposits of gold coin and bullion 
 with the Treasurer or any assistant treasurer of the United States, in
 
 158 GOVERNMENT PAPER MONEY 
 
 to it by providing that the Secretary of the Treasury might, 
 in his discretion, suspend the issue of such certificates 
 whenever the amount of gold in the Treasury available for 
 the redemption of United States notes should fall below 
 $100,000,000. 
 
 The object of the amendment was to prevent the holders 
 of greenbacks from drawing gold from the Treasury, rede- 
 positing it there, and taking gold certificates for it, all at 
 one operation, thus perhaps possessing themselves of all the 
 gold in the Treasury and at the same time using the govern- 
 ment's vaults as a free safe depository. Senator Allison 
 remarked, while this amendment was under consideration, 
 that " thus far there has been no absolute definition of what 
 the reserve fund should amount to." In order to supply 
 such a definition, Senator Ingalls moved to amend the 
 amendment, making it read as follows : 
 
 Provided, that the Secretary of the Treasury shall suspend the 
 issue of such gold certificates whenever the amount of gold coin 
 and gold bullion in the Treasury reserved for the redemption of 
 United States notes falls below one hundred millions of dollars. 
 
 In this form it became a law, July 12, 1882, and thus a 
 reserve of $100,000,000 gold in the Treasury for the redemp- 
 tion of United States notes was recognized as existing, 
 although not established by affirmative legislation. It cre- 
 ated in men's minds the habit of considering the greenbacks 
 as redeemable in gold at the option of the holder, although 
 they were legally redeemable in gold or silver at the option 
 of the government. 
 
 sums not less than $20 and to issue certificates therefor in denomina- 
 tions not less than $20 each, corresponding with the denominations of 
 United States notes. The coin and bullion deposited for, or represent- 
 ing, the certificates of deposit shall be retained in the Treasury for the 
 payment of the same on demand."
 
 AFTER THE WAR 159 
 
 On July 14, 1890, Congress passed an act for the issue of 
 an indefinite amount of legal-tender notes for the purchase 
 of silver bullion. This is commonly called the Sherman 
 Act. It was a part of the silver legislation treated in the 
 
 following chapter. 1 The notes were to be 
 The Sherman Act. ..... 
 
 redeemed on demand in "coin, either gold 
 
 or silver, at the discretion of the Secretary of the Treasury, 
 but it was declared in the words of the act to be "the 
 established policy of the United States to maintain the two 
 metals on a parity with each other upon the present legal 
 ratio or such ratio as may be established by law." This was 
 a hint rather than a command to the Secretary in favor of 
 gold redemption. The notes were declared in the act' to be 
 "legal tender in payment of all debts, public and private, 
 except where otherwise expressly stipulated in the con- 
 tract." In practical effect this was a fresh issue of green- 
 backs in time of peace, and of unlimited amount. The only 
 restriction in the law was as to the rate of issue, which was 
 to be the sum necessary to pay for 4,500,000 ounces of 
 silver bullion each month at the market price. Nearly 
 $156,000,000 of these notes were issued. A financial 
 panic of great severity ensued, and the act was repealed 
 November i, 1893. 
 
 The act of 1890 was not grounded upon financial consid- 
 erations. It was part of a political trade. In the Senate, 
 April 29, 1896, Senator Teller of Colorado gave what he 
 
 called the " unvarnished history" of the Sher- 
 is man ^ ct ' wn ^ cn nas never been contradicted. 
 
 He said that the Republicans desired to pass 
 the McKinley tariff bill. The silver men desired to pass a 
 free-coinage bill. The latter had a majority in the Senate, 
 
 1 The Sherman Act of 1890 is introduced here for the purpose of 
 presenting all the legislation respecting legal-tender notes in consecutive 
 order.
 
 l6o GOVERNMENT PAPER MONEY 
 
 with power to adopt a free-coinage clause as an amend- 
 ment to the tariff bill and thus compel the House to adopt 
 it or lose the latter bill altogether. They did not follow 
 that plan because they knew that President Harrison would 
 veto a free-coinage bill, even if, in doing this, he should kill 
 the tariff bill. So the silver senators determined to adopt, 
 not a free-coinage measure, which would certainly be vetoed, 
 but the nearest possible approach to it, and put this meas- 
 ure on its passage ahead of the tariff bill. This was done, 
 as the following legislative record shows : 
 
 May 17, 1890. The McKinley tariff bill passed the House. 
 June 5. Mr. McKinley moved in the House to take up the 
 
 Windom silver bill, which was amended by adopting the 
 
 Conger substitute, and passed June 7, by 135 to 119. 
 June 17. The Senate took up the House silver bill, amended it 
 
 by adopting the Plumb substitute (a free-coinage measure), 
 
 and passed it by 42 to 25. 
 June 25. The House took up the silver bill, non-concurred in the 
 
 Senate amendment and asked a conference. 
 July 7. The Conference committee reported the Sherman bill, 
 
 which was adopted by the House on that day and by 'the 
 
 Senate July 10. 
 
 July 14. The Sherman silver bill was approved by the President. 
 July 25. The McKinley tariff bill was taken up by the Senate 
 
 and passed September n. 
 
 Thus the Sherman silver bill was passed by the Repub- 
 licans as the price of the McKinley tariff. Mr. McKinley 
 himself was an ardent advocate of the former measure. 
 "Vote against this bill," he said (June 7, 1890), "and in 
 my judgment you vote that there shall be no legislation on 
 the silver question at this session of Congress. That is 
 what I fear it means. We know we cannot have free 
 coinage now except in the manner as provided in this 
 bill."
 
 AFTER THE WAR l6l 
 
 The McKinley tariff bill repealed the duties on sugar and 
 molasses, which had yielded $55,000,000 of revenue in the 
 fiscal year 1890, and the Sherman silver bill added about 
 $50,000,000 per year to the public expenses for the purchase 
 of silver bullion. These two measures exactly canceled the 
 surplus revenue ($105,000,000) of the year 1890, and a new 
 pension bill added $50,000,000 more to the expenditures in 
 1893, when it came into full operation. Thus 
 Deficit** *^e i n g re dients of a witch's cauldron, in the 
 
 shape of a Treasury deficit and a financial 
 panic, were collected for President Cleveland's second 
 administration. 
 
 That the country had a sufficiency of instruments of 
 exchange .in the summer of 1890, before the Sherman Act 
 was passed, is proved by the fact that we exported about as 
 many gold dollars as we obtained of new paper ones while 
 the act was in operation. The output of new legal-tender 
 notes to July i, 1893, was $i4o,66i,'694, and the net export 
 of gold during the same time was $141,017,158. This coin- 
 cidence was not accidental. Whenever there is an excess of 
 instruments of exchange forced into circulation by their legal- 
 tender faculty, one of two things will happen. If they are 
 redeemable in gold, there will be an outflow of that metal. 
 If not redeemable, there will be a depreciation 
 
 Gold Exports. 
 
 of the whole mass. The great exportation of 
 gold in the years following the passage of the Sherman Act 
 is thus easily accounted for, but it was stimulated by the 
 alarm of investors lest specie payments should be suspended. 
 On March 14, 1900, Congress passed " an act to define and 
 fix the standard of v.\lue, to maintain the parity of all forms 
 of money issued or coined by the United States, to refund 
 the public debt, and for other purposes." This is commonly 
 but mistakenly called " The Gold Standard Act," whereas the 
 gold standard was established by the act of February 12, 1873.
 
 l62 GOVERNMENT PAPER MONEY 
 
 The act of 1900 reaffirmed the earlier act, but it also 
 contained important specific provisions for maintaining the 
 
 gold standard. It provided in direct terms 
 The Currency Act h t n tfa legal . tender notes should be re - 
 of 1900. 
 
 deemed in gold coin on demand and that a 
 
 reserve of $150,000,000 of gold coin and bullion should be 
 kept in the Treasury for this purpose solely; that notes 
 redeemed out of this fund should not be reissued except in 
 exchange for gold ; that if the fund should at any time fall 
 below $100,000,000, it should be restored to the maximum 
 sum of $150,000,000 by the sale of bonds, and that none of 
 the proceeds of such sales of bonds should be used to meet 
 deficiencies of the current revenues. 
 
 It was also provided that there should be a complete sep- 
 aration of the currency functions of the Treas- 
 
 "I*. from its . fiscal operations. Bureaus, or 
 divisions, of issue and redemption were estab- 
 lished in the Department, to which were transferred all the 
 funds held for the redemption of greenbacks, Treasury 
 notes, gold certificates, silver certificates, and currency cer- 
 tificates. These were to be held as trust funds exclusively, 
 and were not to be mixed with the ordinary. receipts and 
 disbursements of the government. The need of this pro- 
 vision had been demonstrated by the events of President 
 Cleveland's second term (1893-97), when the deficiencies 
 of revenue amounted in the aggregate to $155,000,000, 
 forcing the Secretary of the Treasury to draw 
 
 Chain " D upon the gold reserve to meet the current 
 
 expenses of the government. This phenome- 
 non was designated in common parlance the " endless 
 chain." The phrase was a misnomer. It implied that 
 there was something in the nature of the greenback pecul- 
 iarly adapted to the purpose of pumping gold out of the 
 Treasury indefinitely. In practice, the holders of the notes
 
 AFTER THE WAR 163 
 
 presented them at the Treasury for redemption. After 
 redeeming them the Secretary paid them out again, for lack 
 of other money. Then they were presented for redemption 
 a second time, and so on. But if the Secretary had had a 
 surplus of daily receipts over daily expenses, the same green- 
 backs could not have been presented for redemption twice 
 without his consent. Hence the " endless chain " could not 
 have existed. Under the act of 1900, which separates the 
 currency function from the other operations of the Treasury, 
 no such trouble can arise. Shortage of revenue cannot viti- 
 ate the money in the pockets of the people and need not 
 disturb their equanimity. Thus the act of 1900 does much 
 to maintain the gold standard which had been established 
 by law twenty-seven years earlier. 
 
 The Treasury notes of 1890 are now in course of retire- 
 ment. In the war-revenue act of June 13, 1898, the 
 Secretary of the Treasury was directed to coin the silver 
 bullion bought under the act of 1890 into silver dollars at 
 the rate of not less than $1,500,000 per month. The act of 
 1900 provided that, as they were coined, an equal amount 
 of the Treasury notes which had been issued to pay for the 
 bullion should be canceled as fast as they should come 
 into the possession of the government, and that silver cer- 
 tificates should be issued in place of them. 
 SJJJSJJ**" The effect of this measure will be to lessen the 
 direct liabilities of the gold reserve by the 
 sum of $156,000,000 and to add that amount to the silver 
 currency, plus $62,000,000 derived from seigniorage, which 
 is the number of silver dollars that the bullion will yield 
 over and above the cost of the metal. Authority was granted 
 in the act of 1900 to use a part of this bullion (about 
 $20,000,000) for subsidiary coinage, in order to bring the total 
 volume of the latter up to $100,000,000, a corresponding 
 amount of Treasury notes to be canceled.
 
 164 GOVERNMENT PAPER MONEY 
 
 The Secretary of the Treasury was directed to resume 
 
 the issue of gold certificates, in denominations not less than 
 
 $20, in exchange for gold coin deposited in 
 
 Minor Provisions th Treasur The issue of gold certificates 
 of the Act of 1890. ' 
 
 had been suspended in 1893, in compliance 
 
 with the law which said that it should be suspended 
 whenever the amount of gold in the Treasury fell below 
 $100,000,000. It was also provided that thereafter silver 
 certificates should be issued only in denominations of $10 
 and under, and that greenbacks should be issued only in 
 denominations of $10 and upward. The Secretary was 
 authorized, in his discretion, to issue a small amount of 
 silver certificates in denominations of $20, $50, and $100, 
 not more than 10 per cent of the whole amount outstanding. 
 The object aimed at in lowering the denominations of silver 
 certificates and raising those of greenbacks was to give the 
 field of retail trade as much as possible to the silver 
 certificates. 
 
 The issue of currency certificates was discontinued by 
 the act of 1900. These had been authorized by the act of 
 June 8, 1872. Under it any national bank might deposit 
 United States notes in the Treasury, in sums of not less 
 than $10,000, and receive certificates of deposit, in de- 
 nominations of not less than $5000 each, the notes to be 
 held as special deposits and to be used only for the 
 redemption of the certificates. These were issued for the 
 convenience of banks in settling clearing-house balances. 
 The reason for discontinuing their issue was that, as 
 there was now a plentiful supply of gold certificates for 
 clearing-house purposes, currency certificates were no longer 
 needed. 
 
 At the present time the denominations of paper currency, 
 of all kinds, authorized to be issued and reissued are the 
 following :
 
 AFTER THE WAR 165 
 
 Greenbacks, $10 and upward to $1000; but some notes 
 of the denomination of $5.00, previously issued, are still 
 outstanding. 
 
 Gold certificates, $10 and upward to $10,000. 
 
 Silver certificates, $1.00 and upward to $100, but not more 
 
 than 10 per cent of the total volume shall be 
 Denominations of r i u 
 
 Paper Currency. of hl g her denominations than $10. 
 
 National bank notes, $5.00 and upward to 
 $100, but not more than one-third of the total issues of any 
 bank shall be of the denomination of $5.00. Some notes 
 lower than $5.00 and some higher than $100, issued under 
 former laws, are still outstanding. 
 
 Treasury notes of 1890, formerly issued in denominations 
 of $1.00 and upward to $20, are now in course of retirement. 
 None can be reissued. 
 
 RECAPITULATION 
 
 As government paper is a promise to pay money, its 
 value depends upon the fulfillment, or expected fulfillment, 
 of the promise, which, in turn, depends upon the ability and 
 good faith of the issuing government. 
 
 Several of the American states in the colonial period, 
 whether able to redeem their paper or not, were unwilling 
 to do so. The government of the Revolution and that of 
 the Southern Confederacy, whether willing to redeem their 
 paper or not, were unable to do so. The government of 
 the United States after the Civil War, although able to 
 redeem its paper, postponed redemption fourteen years. 
 During that interval its policy in reference to redemption 
 underwent frequent changes and was involved in doubt. 
 
 Congress voted in December, 1865, in favor of the early 
 resumption of specie payments. In pursuance of this 
 design, in April, 1866, it passed a law for retiring and
 
 1 66 GOVERNMENT PAPER MONEY 
 
 canceling the legal-tender notes at the rate of $4,000,000 per 
 month. In February, 1868, it repealed the last-mentioned 
 act, $44,000,000 of the notes having been retired meanwhile. 
 In 1873 the Treasury Department reissued $26,000,000 of 
 the retired notes, without authority of law. In 1874 Con- 
 gress passed a bill to reissue the entire $44,000,000, but 
 President Grant vetoed it, and it was not passed over the 
 veto. 
 
 In 1875 Congress passed an act to provide for the 
 resumption of specie payments on the ist of January, 1879. 
 In 1877 the House passed a bill to repeal the specie 
 resumption act, but this was defeated in the Senate by one 
 vote. Both houses passed a bill providing that the legal- 
 tender notes should not be retired when redeemed, but 
 should be paid out and kept in circulation. The amount 
 of notes then outstanding was about $346,000,000. 
 
 Specie resumption took place January i, 1879. 
 
 In 1890 Congress passed a law for a new emission of 
 legal-tender notes of indefinite amount, to pay for silver 
 bullion to be stored in the Treasury. The new issues of 
 notes were followed by the exportation of gold to nearly 
 the same amount and by a disastrous financial panic. 
 
 This shifting policy indicates that there will always be 
 uncertainty in respect of the redemption of government 
 paper and of the amount issued. Such uncertainty attaches 
 to the United States notes now outstanding, since it depends 
 upon the political majority to decide what amount shall be 
 issued and whether redemption shall continue or not. For 
 this reason the notes should be redeemed with the surplus 
 revenue of the government and canceled as soon as possible.
 
 CHAPTER VI 
 SILVER DOLLARS AND THE PANIC OF 1893 
 
 WHILE Secretary Sherman was selling bonds for gold, to 
 prepare for the resumption of specie payments, Congress 
 was passing a bill for the remonetization of silver. In 
 1876 this metal had declined 9 per cent from our old ratio 
 of 1 6 to i. The currency expansionists, who had been 
 sorely disappointed by President Grant's veto of the Infla- 
 tion Bill and by the loss of the Ohio elec- 
 ^ on ' turn d eagerly to silver, as a means of 
 accomplishing the ends which they had 
 failed to reach with greenbacks. Silver, they said, was a 
 product of labor. Its quantity could not be increased 
 suddenly. It was the dollar of our fathers. It was the 
 dollar of the poor man, of the debtor, of the common 
 people. Looking at the law, they discovered that the silver 
 dollar had been abolished by an act of Congress, passed in 
 1873, and that those of them who were members of Congress 
 at that time had voted for it. So they said that they had 
 been tricked and deceived, that this act of 1873 was a con- 
 spiracy against the debtor class, and that it was passed in a 
 clandestine manner. They declared that this was a great 
 wrong. Many people who had no particular interest to be 
 served by inflation really thought that a wrong had been 
 done. Some of them even thought that the wrong -had 
 been done to silver itself, by depriving it of the "legal 
 right of coinage." 
 
 167
 
 168 GOVERNMENT PAPER MONEY 
 
 The charge that the act of 1873 was passed secretly was 
 absurd en its face, since there is no way under our sys- 
 tem of government to pass a law secretly. The act was 
 called the "crime of 1873 " ; and the accusation was reiter- 
 ated frequently and supported by forged documents and 
 false swearing in the political campaigns of 
 
 The ^na twenty successive years. Due diligence had 
 
 been shown by the framers and promoters of 
 the law to publish and explain its provisions, but very few 
 persons, either in or out of Congress, took any interest in 
 the question ; and of those who did so nearly all were in 
 favor of its passage. Nor would any charge of fraud and 
 secrecy have been brought against the supporters of the 
 measure, if silver had not subsequently fallen in value. The 
 bill was introduced in both houses in 1870, at which time 
 1 6 ounces of silver were worth 40 cents more than i ounce 
 of gold. Nor was there any time during the three years 
 while the measure was pending in Congress when silver was 
 worth less than gold according to the legal ratio. Hence 
 there was no motive for deception. The persistence of the 
 charge of fraud during so long a period of time, in the face 
 of so many opposing facts, is one of the most singular 
 episodes in our political annals. 
 
 The movement for the remonetization of silver acquired 
 
 considerable strength in 1876. The opponents of the Infla- 
 
 tion Bill were taken by surprise when the 
 
 controversy assumed this new form. More- 
 Remonetization. * 
 
 over, the question of bimetallism was something 
 new and strange. Many persons who had considered green- 
 back inflation ruinous were glad to have escaped the evil of 
 unlimited paper but could see no harm in silver dollars. 
 
 The opponents of silver were of three classes : (i) those 
 who were opposed to it in any form except as subsidiary 
 coin ; (2) those who were opposed to free coinage except
 
 SILVER DOLLARS AND THE PANIC OF 1893 169 
 
 by international agreement ; (3) those who did not believe 
 that an international agreement was practicable but who 
 wanted to gain time, hoping that the excite- 
 o^Parties 11 rnent would pass away. The advocates of 
 silver were likewise of different types : (i) The 
 silver miners, who wanted to sustain the price of their 
 product ; (2) the currency inflationists, who had been 
 defeated and were glad to find a new weapon to their hand 
 in place of the greenback 1 ; (3) a multitude of misinformed 
 persons, who thought that an injustice, if not a fraud, had 
 been committed in the demonetization act of 1873. 
 
 On July 26, 1876, just before the adjournment of Congress, 
 Mr. Kelley of Pennsylvania introduced a bill to restore 
 
 the coinage of the silver dollar, as it had 
 The Bland Bill. 
 
 existed prior to the act of 1873, and moved 
 
 to pass it under suspension of the rules, which required a 
 two-thirds majority. The bill failed : yeas 119, nays 68. A 
 similar bill was introduced by Mr. Bland of Missouri the 
 following year, and was passed by the House November 5, 
 1877, by 164 to 34. 
 
 In order to defeat free coinage and gain time, some of its 
 opponents in the Senate said that it would not be right to 
 
 1 An inflationist is one who desires that the government shall do 
 something to make money more plentiful and prices higher, and whose 
 political action is directed to that end. Professor Charles J. Bullock, in 
 his Essays on the Monetary History of the United States, shows by statis- 
 tics that the support of the silver movement in the several states was 
 generally in inverse proportion to the density of population and the abun- 
 dance of capital. Thus eleven states whose density was above 60 per 
 square mile supported the gold standard in the election ot 1896. Of 
 eighteen states whose density was between 21 and 46, only eight sup- 
 ported the gold standard. Of sixteen states whose density was less 
 than 18, only four supported the gold standard. " It is evident, there- 
 fore," says Mr. Bullock, " that the inflationist movement at the present 
 day, as in all previous times, finds its strength in the sparsely settled 
 regions, where the scarcity of capital is most keenly experienced " (p. 119).
 
 I/O GOVERNMENT PAPER MONEY 
 
 give to those who happened to be the owners of silver bul- 
 lion, or who were digging it out of the ground, an advantage 
 of 9 per cent over everybody else ; that this profit ought to 
 accrue to the government ; that, since the government had 
 no silver bullion, it ought to purchase a certain quantity at 
 the market price, coin it, and sell the resulting coins to the 
 people, or use them to pay its expenses or to buy more 
 bullion. This was a plausible argument to defeat the Bland 
 bill and was probably the only one by which a free-coinage 
 bill could have been prevented from passing at that time. 
 An amendment proposed by Senator Allison 
 Amendment ~~ P roy iding for the purchase of not less than 
 
 $2,000,000 worth, and not more than $4,000- 
 ooo worth, of silver bullion each month, to be coined into 
 dollars of full legal tender and to be paid out like any other 
 money in the Treasury was adopted by the Senate and 
 accepted by the House. The bill was vetoed by President 
 Hayes, on the ground mainly that it em- 
 bodied a violation of contracts which had 
 been entered into since 1873, by introducing 
 a less valuable payment than was contemplated by the 
 parties. The bill was, however, passed over the veto and 
 became a law February 28, 1878. The votes taken in the 
 House fairly represented the state of public opinion at 
 the time. There were 73 votes to sustain the President's 
 veto i.e., against silver in any form and 196 in favor of 
 the limited coinage of the Allison amendment. As between 
 the latter and the original Bland bill the vote was 203 to 72. 
 The party of moderation and compromise exceeded the 
 extremists on both sides. One section of the Allison amend- 
 ment, which authorized the President to invite an inter- 
 national monetary conference, led to the Paris conference 
 of 1878. Another section authorized any holder of silver 
 dollars to receive certificates of deposit from the Treasury
 
 SILVER DOLLARS AND THE PANIC OF 1893 \J I 
 
 in exchange for them, in denominations 'not less than $10, 
 such certificates to be receivable for all government dues. 
 
 On November 12, 1878, the New York clearing house, 
 after a personal conference with Secretary Sherman and in 
 anticipation of the resumption of specie payments, voted to 
 admit the sub-treasury to the clearing house, for the purpose 
 of settling balances between the government and the banks ; 
 to receive and pay balances in gold or in legal-tender notes ; 
 to prohibit payment of balances in silver dollars or silver 
 certificates, except in sums under $10; and to receive silver 
 dollars from customers as deposits only under special con- 
 tract to withdraw the same in kind. 
 
 In 1882 Congress passed an act amendatory of the 
 national banking law. In it was inserted a provision that 
 " no national banking association shall be a member of any 
 clearing house in which such [silver] certificates shall not 
 be receivable for clearing-house balances." The New York 
 clearing house thereupon rescinded its rule discriminating 
 against silver certificates but did not discontinue the practice. 
 The members voluntarily declined to pay them to each other. 
 
 The Bland-Allison Act did not make money more plentiful 
 than it would otherwise have been, but merely substituted 
 silver in place of gold. Two operations were going on, side 
 by side. The mint, regarded as a manufactory, was paying 
 out gold already in its possession, in order to purchase silver 
 bullion, and was selling the coins so produced, crediting 
 itself with the seigniorage, i.e., the difference between the 
 raw material and the finished product. On the other hand, 
 the people needed a certain number of instruments of 
 exchange, called dollars, for the transaction of their daily 
 
 business. These instruments they paid for 
 Modus operand!. . 
 
 with their labor and their property, at the rate 
 
 of 100 cents gold per dollar. Obviously they could have 
 whichever metal they preferred, since gold value will always
 
 bring gold. Thus the bill did not make money more plenti- 
 ful, although it seemed to do so, but merely substituted one 
 kind of money for another. 
 
 The mode of operation was as follows : The government 
 bought (say) $2,500,000 worth of silver bullion, paying gold 
 for it. When the silver dollars were produced, it might pay 
 them out like any other m'oney or it might make its next 
 purchase of silver bullion with the dollars, or the certificates, 
 resulting from the last purchase. If there was a public 
 demand for this kind of money, the dollars would stay out. 
 If not, they would come back to the Treasury through the 
 custom house and the tax office, taking the place of gold in 
 the payment of government dues. 
 
 The officers of the Treasury were slow in learning how to 
 ward off the evils of this queer kind of currency, of which 
 they had had no previous experience. Each secretary 
 restricted the coinage of silver dollars to the lowest amount 
 permitted by the law, viz., $2,500,000 per month, or $30,- 
 000,000 per year. As the coins were bulky and inconven- 
 ient, the people refused to take any large quantity. At the 
 end of June, 1879, only $8,000,000 had gone 
 
 Slow Circulation j n j o circulation, out of $^6,000,000 coined. 
 
 of the New . ' ' 
 
 Dollars. The remainder were in the Ireasury, 1 an inert 
 
 mass. Inasmuch as the government had a 
 surplus of revenue more than sufficient to pay for the monthly 
 purchase of silver bullion, no present harm resulted. 
 
 The prosperity resulting from the crop conditions of 1879 
 and 1880 called for an increase of the circulating medium 
 and not merely led to the large importations of gold referred 
 to in the preceding chapter, but drew out of the Treasury 
 nearly all of the accumulated silver. This was taken in the 
 form of certificates, in exchange for gold. The movement 
 
 1 See Taussig's Silver Situation in the United States (second edition), 
 which may be studied with profit for all periods down to the end of 1896.
 
 SILVER DOLLARS AND THE PANIC OF 1893 
 
 was accelerated by an offer, on the part of the Treasury, to 
 pay silver certificates in the West and South, in exchange for 
 
 gold deposited in the sub-treasury at New 
 Rapid Movement y k whenever the rate of exchange was 
 in 1879 and 1880. 
 
 in favor of the West and South, the person 
 
 desiring to make remittances could save express charges 
 by accepting the government's offer. In this way the sur- 
 plus silver in the Treasury was worked off for the time 
 being. "For the three years 1881, 1882, and 1883, the 
 silver currency was absorbed by the public as fast as the 
 dollars were coined at the mint." 1 
 
 A trade reaction began in 1884. The silver already in 
 circulation remained there, but the annual addition con- 
 tinued. As fast as it was paid out by the 
 
 Crisis in 1884. . .. 
 
 Treasury, it returned in the receipts for taxes. 
 Simultaneously the public revenue began to decline, and the 
 gold reserve showed a shrinkage of $34,000,000 in 1884-85. 
 Gold receipts for customs duties fell from 75 per cent of the 
 whole to 36 per cent, and silver receipts rose from 17 per 
 cent to 36 per cent, the other receipts being greenbacks. 
 In Boston, where the banks made no discrimination against 
 silver, the certificates constituted so large a part of the cir- 
 culation that, when it became necessary to send money by 
 express to New York, a sufficiency of gold or greenbacks 
 could not be obtained, and a premium of one-half of i per 
 cent on funds bankable in New York prevailed in Boston for 
 a short time. The New York banks even turned in $6,000,000 
 of their gold to the Treasury, in exchange for fractional 
 currency, in order to avert the use of silver certificates by 
 the Treasury in the settlement of clearing-house balances 
 there. 
 
 In 1885 the Secretary of the Treasury, Mr. Manning, 
 perceived that the true method of utilizing the silver 
 
 1 Taussig, 24.
 
 GOVERNMENT PAPER MONEY 
 
 currency was to force it into retail trade. To make room 
 for it, he gave orders to stop the issue of greenbacks of 
 less denomination than $5.00 and to retain all such that 
 came into the Treasury in the way of col- 
 Smaii silver lections, in order to create a necessity for 
 
 Certificates 
 
 introduced. the use of silver. In 1886 he procured from 
 
 Congress authority to issue silver certifi- 
 cates of the denominations of $1.00, $2.00, and $5.00. 
 As national bank notes smaller than $5.00 had been for- 
 bidden some years earlier, the field of small paper circula- 
 tion was thus secured for silver certificates. Thereupon the 
 demand for them became very large, rising in 1890 to 
 $175,000,000 in denominations of $5.00 and under, and to 
 $293,000,000 in all. The number of coined dollars in 
 circulation at that time was $56,000,000 in addition. 
 
 The introduction of small silver certificates happened to 
 coincide with a shrinkage of the volume of national bank 
 notes due to the redemption of the 3 per cent bonds and 
 to a rapid advance in the price of other bonds, which made 
 it profitable for the banks to retire their circulation, sell 
 their bonds, and realize the premium. 1 One hundred and 
 sixty-eight million dollars of the bank notes were retired 
 between November, 1882, and February, 1890, that is, in 
 seven years and three months. The output of silver dollars 
 during the same period was only $50,000,000 in excess of the 
 bank notes retired. 
 
 1 " In 1883 upwards of $353,000,000 government bonds were on 
 deposit as a basis of bank-note circulation. Out of this total more 
 than $200,000,000 were in the 3 per cents, and it was naturally these 
 very 3 per cents which the Treasury selected in its public debt 
 redemption [because they were subject to call at par]. Whenever such 
 bonds were called for redemption, the bank possessing them was com- 
 pelled either to replace them with other government issues bought in 
 the open market, or else to retire its circulating notes." NOYES' Thirty 
 Years of American Finance, p. 108.
 
 SILVER DOLLARS AND THE PANIC OF 1893 1 75 
 
 When the silver coinage act was passed in 1878, its oppo- 
 nents predicted that sooner or later it would cause a finan- 
 cial panic. They said that, since the metallic value of the 
 
 silver dollars was not equal to the face value, 
 Panic predicted. . .,/. 
 
 they were simply a new kind of fiat money, 
 
 and that, whenever they should become redundant, they 
 would act like any other fiat money, like the greenbacks 
 at the beginning of the war, for example. There would 
 then be a change in the standard of value, if the coinage 
 were continued. This was a true prophecy, but the fulfill- 
 ment was delayed by the shrinkage in the national bank 
 circulation and by the retirement of small greenbacks, which 
 created a vacuum for the new silver to fill. But this was a 
 silent operation. The public could not understand it, and 
 so, as the years rolled on and no harm came from the 
 coining of silver dollars, the predictions of panic fell under 
 popular ridicule. 
 
 The passage of the Sherman Act of 1890 and the reasons 
 for it have been considered in the preceding chapter. 1 
 
 There were now three kinds of fiat money 
 The Act of 1890. J 
 
 which the government, according to its de- 
 clared policy, must keep at par with gold, namely, green- 
 backs, Treasury notes, and silver dollars. All three rested, 
 and still rest, upon the gold resources of the Treasury. 
 Those resources consist of its accumulated reserve and of 
 its daily receipts. It is immaterial, as regards the govern- 
 ment's gold balance, whether redemption is made at the 
 place where the reserve is paid out (the sub-treasury) or 
 where the receipts come in (the custom house). The 
 effect upon the balance is identically the same in the two 
 cases. 
 
 Nearly $50,000,000 of new fiat money came into the 
 channels of business the first year after the passage of the 
 1 Page 159.
 
 176 GOVERNMENT PAPER MONEY 
 
 Sherman Act ; and, as it happened, an equal amount .of the 
 surplus in the Treasury was paid out by enlarged appro- 
 priation bills passed by Congress. These 
 
 Gold Movements additions to the circulating medium presaged 
 of 1891 and 1892. 
 
 renewed exports of gold, which took place in 
 
 the first half of 1891 to the amount of $74,000,000, a sum 
 hitherto unexampled for a single period of six months. 
 
 The harvests of 1891, however, happened to give tempo- 
 rary relief from the consequences of bad financiering. 
 " The United States produced in that year the largest 
 grain crop in its history before or since. While Europe's 
 total wheat yield decreased 156,000,000 bushels from that 
 of 1889, our own crops increased 255,000,000 bushels, the 
 largest American crop on record." l The foreign exchanges 
 turned in our favor, and we imported $50,000,000 gold in 
 the six months succeeding the harvest. This was merely a 
 streak of luck. As soon as the foreign demand for our 
 grain was satisfied, the new fiat money began once more to 
 produce its usual effects. Gold exports were resumed in 
 1892. In November of that year the gold in the Treasury 
 had fallen from $185,000,000 (in August, 1890) to $124,000,- 
 
 ooo and was still declining. Secretary Foster 
 Action of Secre- , , , ,,,1 v XT 
 
 tarv Foster was mucn depressed. When he came to New 
 
 York to speak at a dinner of the Chamber of 
 Commerce, he said, among other things, that the govern- 
 ment intended to maintain gold payments, even if it became 
 necessary to sell government bonds for the purpose. This 
 was an admission on his part that gold payments could not 
 be continued without resorting' to extraordinary means. 
 Probably Mr. Foster made this speech in order to test public 
 sentiment and to find out whether he would be sustained 
 in issuing government bonds in time of peace. There had 
 been no increase of the bonded debt since the close of the 
 
 1 Noyes, 164.
 
 SILVER DOLLARS AND THE PANIC OF 1893 177 
 
 Civil War, and some persons in high place denied that there 
 was any legal authority to issue new bonds. Apparently 
 Mr. Foster was satisfied by the applause with which his 
 announced purpose was received by his hearers and by the 
 press, for shortly afterward he issued an order to the Bureau 
 of Engraving and Printing to prepare new bonds. This 
 order was dated February 20, 1893, and Mr. Foster was to 
 go out of office on the 4th of March. Naturally, he pre- 
 ferred to put upon his successor the onus of issuing the 
 bonds, if he could. So he came to New York and persuaded 
 the banks to give him a few millions of gold in exchange 
 for legal-tender notes, enough to carry him along till the 4th 
 of March. This enabled him to glide out of office leaving 
 the $100,000,000 redemption fund intact, but with only 
 $982,410 gold in excess of that sum and with the penumbra 
 of a deficit in full view. 
 
 The shrinkage of the government's reserve and the con- 
 tinued outpour of fiat money had shaken the confidence of 
 the business communities on both sides of the water. The 
 banks no longer furnished gold to their customers who 
 desired it for export, but gave them legal-tender notes 
 instead. Hitherto no doubt had crossed the minds of the 
 community that the government would redeem its notes on 
 demand, but now it was seriously questioned whether the 
 Treasury could maintain gold payments. The bankers did 
 not know whether the new Secretary of the Treasury, 
 Mr. Carlisle, would take steps to replenish his reserve, and 
 they could not know whether any steps he might take would 
 be effectual. So they kept their gold and paid their debts 
 with legal-tender notes. 
 
 When Secretary Carlisle came into office, he saw bank- 
 ruptcy approaching. The gold receipts of the Treasury 
 were now less than 9 per cent of the total receipts. He 
 first followed his predecessor's example by soliciting gold
 
 178 GOVERNMENT PAPER MONEY 
 
 from the banks in New York City. The banks responded 
 by turning $8,000,000 into the Treasury, in. exchange for 
 
 legal tenders. This was quickly dissipated, 
 Panic of 1893. 
 
 and on April 15 the Secretary was obliged 
 
 to acknowledge that the $100,000,000 fund had been 
 encroached upon. It was the first time that this had 
 happened since the fund was created. On the 2oth the 
 Secretary gave a newspaper interview, which was construed 
 by the public to mean that he had doubts whether the 
 $100,000,000 fund could be lawfully used for the redemp- 
 tion of the Treasury notes of 1890. This was a fresh cause 
 of alarm, which was, however, soothed by a later announce- 
 ment from President Cleveland that the redemption of 
 those notes in gold would be continued under all circum- 
 stances. 
 
 On the 26th of June the news came that the mints of 
 India had been closed to silver, and the price of that metal 
 fell in three days from 82 cents to 67 cents per ounce. A 
 run on the banks began at once. One hundred and fifty- 
 eight national banks and four hundred and fifteen state and 
 private banks were compelled to close their doors. 
 
 The question has been much discussed whether the finan- 
 cial disturbance of 1893 was a typical commercial crisis or 
 a money panic. A commercial crisis is a shattering of the 
 credit system due to speculation and malad- 
 justment of industry. If the conditions of pro- 
 duction and consumption were at all times well 
 balanced, so that no more wheat, cloth, iron, houses, fac- 
 tories, ships, railroads, etc., were produced than could be 
 sold or used at a profit, then each producer would be able 
 to pay his debts promptly and there could be no commercial 
 crisis. But in the complex conditions of modern society 
 no such equable distribution of capital and labor is pos- 
 sible. There is no omniscient eye to tell us when we are
 
 SILVER DOLLARS AND THE PANIC OF 1893 
 
 producing too much of one thing or putting too much capital 
 and labor into certain lines of business. The commercial 
 world is, accordingly, subject to periodical crazes, in which 
 there is a general rush to buy things -and invest money in 
 ways which promise unusual gains. Prices are inflated and 
 particular branches of trade are overloaded and cease to be 
 remunerative. Then the adventurers cannot meet their obli- 
 gations, and their creditors are crippled or made bankrupt. 
 Lenders of money become alarmed and the credit system 
 breaks down. The genesis of every true commercial crisis 
 can be traced to such a disproportionate investment of capi- 
 tal in some particular branch or branches of trade and in 
 speculation. 
 
 A money panic, on the other hand, may come at a time 
 when trade is in a normal and sound condition. Anything 
 which threatens to impair the quality of the money in cir- 
 culation may dry up the springs of credit, cause extensive 
 failures, and produce some of the phenomena of a com- 
 mercial crisis. Such conditions existed in 1860 and 1861, 
 when a large part of the circulating medium of the country 
 was based on bonds of the Southern States, which were 
 taking steps to secede from the Union. It cannot be 
 denied that there was some unsound trade in 1893, but the 
 one-sided development of industry and the top-heavy stage 
 of speculation which mark the real commercial crisis were 
 not general. On the other hand, the perils which menaced 
 the standard of value were sufficient to account for the 
 alarm and for most of the consequences that ensued. 1 
 
 1 "It is true that the years immediately preceding 1893, while they 
 had been years of activity, had not shown the feverish speculation 
 which commonly precedes the storm. Yet in some parts of the West, 
 notably in Colorado, there had been wild gambling in land; and, what 
 was probably more important, there had been in preceding years, from 
 1886 to 1890, a great deal of reckless investment in railways and in 
 iron-making industries. Certainly some great railway corporations had
 
 I So GOVERNMENT PAPER MONEY 
 
 Two powerful causes contributed to the panic of 1893: 
 (i) a deficiency of revenue, pointing to the necessity of 
 using the gold reserve to meet the current expenses of the 
 
 government ; (2) a fear in the public mind 
 Panic 8 C ^ est tnere be a change in the standard of 
 
 value. Yet, when the panic came, there was 
 no observable tendency on the part of bank depositors to 
 draw gold. What the frightened people wanted was the 
 means of payment and especially the payment of wages. 
 Government notes, bank notes, silver certificates, silver 
 dollars, and subsidiary coins would meet this want as well 
 as gold, and even better in some respects, because obtain- 
 able in the smallest denominations. All these things com- 
 manded the same premium as gold over certified bank 
 checks in Wall Street. If there was any premium on gold 
 over other currency, it was veiled under the rate of exchange. 
 The government itself replenished its stock of gold to some 
 extent by offering to deliver notes in New York in exchange 
 for gold deposited in other cities, and vice versa. The cost 
 of transferring the funds was a premium on gold. 
 
 On June 30, 1893, President Cleveland issued a call for an 
 extra session of Congress expressly to repeal the Sherman 
 Act. The time for meeting was August 7. A bill to repeal 
 
 the silver purchasing clause was promptly 
 
 P^r d ch f as t , h n e g SilVer P aSSed b X the H USe > b y a VOte f 2 39 to 108. 
 
 In the Senate there was a long delay, due to 
 the lack of any rule for terminating debate. It seemed at 
 one time as though the country was on the eve of some 
 great change, in consequence of the revolutionary conduct 
 of certain senators in refusing to allow a vote to be taken. 
 
 been living from hand to mouth for several years before 1893, borrowing 
 heavily on short time, hoping for a turn in their favor, helped for a 
 while by the favorable conditions of 1891 and 1892, and finally brought 
 to bankruptcy by the panic." TAUSSIG, pp. 138, 139.
 
 SILVER DOLLARS AND THE PANIC OF 1893 l8l 
 
 But filibustering came to an end at last, and the repealing 
 bill passed the Senate October 30, by 43 to 32. 
 
 The consequences of the panic did not come to an end, 
 however. The Treasury deficit was not checked by the 
 repeal of the Sherman Act. The gold reserve had declined 
 from $99,000,000 in July, 1893, to $65,000,000 in January, 
 1894. This was due, not to the presentation of notes for 
 redemption, but to an excess of ordinary disbursements 
 over ordinary receipts. The deficit was now running at 
 the rate of $5,000,000 per month. The cash balance in 
 the Treasury other than gold was only $12,000,000. The 
 situation was alarming. 
 
 At this juncture some of President Cleveland's political 
 friends, who had joined in repealing the Sherman Act, 
 asked him to agree to a measure for coining, in advance, 
 the seigniorage of the bullion purchased under 
 << coining the h Thg whole amount of bullion pur- 
 
 Seigniorage." 
 
 chased for $156,000,000 would produce 218,- 
 
 000,000 silver dollars. The difference between these two 
 sums ($62,000,000) would be seigniorage whenever the 
 coinage should take place, but the Sherman Act had not 
 contemplated the coinage of the bullion at any definite 
 time. If the seigniorage were coined in advance, the new 
 silver dollars would be in the Treasury, and if paid out 
 would aggravate the existing evil, like a new issue of green- 
 backs or of any other fiat money. If not paid out, people 
 would naturally ask why they had been coined. Moreover, 
 coining the seigniorage would have been interpreted as a 
 sign of vacillation and weakness on the part of the Execu- 
 tive and would have added to the prevailing panic. For 
 these reasons Mr. Cleveland properly refused to give his 
 assent to the proposed measure. 
 
 When Congress met in regular session in December, 
 1893, Secretary Carlisle laid before it the exact condition
 
 1 82 GOVERNMENT PAPER MONEY 
 
 of the Treasury, and recommended that his borrowing 
 powers be enlarged and modernized by giving him authority 
 to issue government obligations bearing 3 per cent interest 
 and redeemable in one year. Such obligations would be 
 akin to the Exchequer bills issued in emergencies by the 
 
 British government. But Congress was in a 
 ndi en sullen mood. The Democrats were angry with 
 
 President Cleveland for compelling them to 
 repeal the Sherman Act. The Republicans could see no 
 objection to a family quarrel among their opponents or to 
 the pecuniary embarrassment of the Administration. If 
 the Secretary could extricate himself by means of existing 
 laws, well and good ; otherwise the government might go 
 to protest. Neither branch of Congress would lift a finger 
 to prevent it. 
 
 It was now necessary to do something decisive. Under 
 the Resumption Act of 1875 the Secretary had power to 
 sell any one of three classes of bonds for the purpose of 
 beginning and continuing the redemption of United States 
 notes. Another law, not noticed at the time, gave him 
 power to buy coin at his discretion and to pay for it with any 
 bonds authorized by law. In January, 1894, the Secretary 
 
 advertised, under the act of 1875, the sale of 
 ^ g ond $50,000,000 of 5 per cent bonds, to run ten 
 
 years and to be sold at the rate of $117.223 
 gold for each $100, thus making the rate of interest equal 
 to 3 per cent. These were taken mostly by the New York 
 City banks. In this sale the element of coercion was not 
 wholly wanting. The banks were not free to take the bonds 
 or not, according to the attractiveness of the investment, but 
 were obliged to consider what would happen to themselves, 
 in common with the commercial world, if the loan should 
 fail. When they looked at that side of the shield, they saw 
 sufficient reasons for lending their money to the government
 
 SILVER DOLLARS AND THE PANIC OF 1893 183 
 
 at 3 per cent. The sale brought in $58,660,917, and the 
 Treasury gold reserve was carried up to $107,446,802 in 
 March, but it did not remain there long. Gold exports 
 began again in April and continued heavy till September. 
 The withdrawals reduced the Treasury reserve to $52,189,500 
 in August. The Secretary was compelled to advertise a new 
 sale of $50,000,000 of bonds. This was effected in Novem- 
 ber, 1894, at 117.077, realizing $58,538,500, and bringing 
 the Treasury reserve up to $105,424,569. 
 
 The second loan did not have a soothing effect. On the 
 contrary, it convinced the public on both sides of the water 
 that the United States was nearing bankruptcy. In the 
 midst of the trouble, a rumor gained acceptance in Wall 
 Street that the Treasury officials were keeping a list of the 
 persons who drew gold, intending to visit displeasure on 
 them later. This was naturally interpreted as a sign 1 of 
 panic inside the Treasury. It augmented the panic outside 
 and led to larger withdrawals of gold than would otherwise 
 have taken place. In the ten weeks following the second 
 loan, $80,000,000 gold was drawn from the Treasury. Of 
 this sum $36,852,000 was exported, and the remainder, 
 $43,148,000, was presumably hoarded. This was a run on 
 the Treasury, the like of which had not been known before. 
 
 The danger had come so rapidly that steps for a new 
 loan had not been taken in time to ward off the crisis. 
 There was a gloomy conference at Washington between 
 the President, the Secretary and two or three bankers 
 from New York. The President was told that another 
 sale of bonds by advertisement would require at least two 
 weeks' public notice and that, meantime, the Treasury 
 would have suspended payments. The assistant treasurer 
 in New York had, in fact, notified the Secretary that he 
 could not hold out more than two days longer, as things 
 were then going. President Cleveland did not believe that
 
 1 84 GOVERNMENT PAPER MONEY 
 
 he had legal authority to sell bonds in any other way than 
 in pursuance of public advertisement and competing bids, 
 but at this juncture, Mr. W. E. Curtis, assistant secretary of 
 the Treasury, drew attention to the following clause of the 
 Revised Statutes: 
 
 SEC. 3700. The Secretary of the Treasury may purchase 
 coin with any bonds or notes of the United States authorized by 
 law, at such rates and upon such terms as he may deem most 
 advantageous to the public interest. 
 
 A sudden change came over Wall Street. Gold with- 
 drawals from the Treasury, which in January had ranged 
 from $1,000,000 to $7,000,000 per week, fell on the 2d of 
 February to $67,000. News came from Washington that the 
 
 President had made an arrangement with a 
 ^ f g Synd syndicate of American and foreign bankers, 
 
 under the statute above cited, to provide 
 the Treasury with 3,500,000 ounces of gold coin, equal to 
 $65,117,500; that at least one-half of this gold should be 
 brought from Europe, at the rate of 300,000 ounces per 
 month, and that the syndicate should " exert all financial 
 influence and make all legitimate efforts to protect the 
 Treasury of the United States against the withdrawals of 
 gold pending the complete performance of this contract." 
 The bond deliveries were to be made concurrently with the 
 payments, and the terms of the contract allowed six months 
 for its entire fulfillment. This signified that, besides replen- 
 ishing the Treasury, the syndicate had undertaken to stop 
 the export of gold for six months, or at least to use all their 
 financial powers to that end. This coin was to be pur- 
 chased with 4 per cent thirty-year bonds at 104.49, a t which 
 rate the interest would be equal to 3^ per cent. The syn- 
 dicate, however, agreed to accept 3 per cent interest instead 
 of 3| per cent, if Congress would make the bonds specifically
 
 SILVER DOLLARS AND THE PANIC OF 1893 185 
 
 payable in gold. President Cleveland sent the contract to 
 the House, with a recommendation that this change be made, 
 saying that it would save the government $16,174,770 in 
 interest payments during the time the bonds would run; 
 but the House rejected the proposition, by 120 to 167. 
 
 By this transaction the Treasury's gold reserve was 
 brought up to $107,000,000, and the syndicate did actually 
 prevent withdrawals from the Treasury for remittance abroad 
 for four or five months, although the rate of exchange would 
 have warranted gold shipments. This they accomplished 
 by using their own credit in London and selling sterling 
 exchange at the current rate. But their ability to continue 
 this operation depended upon the state of international trade 
 in merchandise and securities, and eventually the demand 
 for remittances on trade account became so heavy that they 
 could not supply it by their own credit merely. The with- 
 drawals for export began again on a large scale in August, 
 and the reserve was down to $79,000,000 at the beginning 
 of December. 
 
 The syndicate operation of 1895 was assailed with vehe- 
 mence in Congress, on the ground that the terms were too 
 onerous to the government. This objection was urged for 
 the most part by men who, by refusing to make the bonds 
 payable in gold, had themselves added $16,000,000 to the 
 public burdens. It is true that the syndicate loan was 
 onerous, as compared with those immediately preceding, 
 but the reason was that it came at a time when the public 
 credit was at a low ebb. 1 
 
 1 In a monograph entitled " Appreciation and Interest " (Publica- 
 tions of the American Economic Association, August, 1896), Professor 
 Irving Fisher presents a table showing the rates of interest realized on 
 silver bonds (rupee paper) and on gold bonds of the Indian government 
 in the London market from 1865 to 1895. Until 1875 tne difference 
 was slight, not greater perhaps than might be accounted for by the
 
 1 86 GOVERNMENT PAPER MONEY 
 
 While the financial world was in the sensitive and strained 
 condition indicated above, President Cleveland (December 17, 
 1895) sent a message to Congress on the subject of the 
 boundary line between Venezuela and British Guiana. The 
 message was construed as a threat of war against Great 
 
 Britain in certain contingencies. There was 
 Panic of 1895. . . 
 
 an immediate panic in Wall Street, accompa- 
 nied by renewed exports of gold. The President again 
 appealed to Congress (December 20) not to adjourn for the 
 holidays without having "done something" to quiet the 
 apprehensions of the public at home and abroad as to our 
 financial soundness and honesty. Congress was willing to 
 pay the expenses of a commission to determine the boun- 
 dary of British Guiana, but would do nothing to ward off 
 national bankruptcy. The holiday recess took place as 
 usual. Meanwhile the withdrawals of gold from the Treas- 
 ury were increasing, $20,000,000 being taken in December, 
 of which $15,000,000 was exported. In January the reserve 
 had fallen to $49,800,000. 
 
 On January 6, 1896, the Secretary of the Treasury adver- 
 tised the sale of $100,000,000 of 4 per cent 
 Bond'saie 00 3o-year bonds. The loan was largely over- 
 subscribed and was taken at the average price 
 of 111.166, at which rate the interest was equal to 3.39 per 
 cent. After the payments had been made, the Treasury 
 reserve stood at $128,000,000. Exports of gold continued 
 till August, when the reserve fell to $100,957,561. This was 
 
 preference of investors for payment in London instead of Calcutta. In 
 1876 the decline of silver had become disturbing. Silver bonds sold 
 at a rate which realized 4.1 per cent to the investor and gold bonds 
 3.7 per cent ; in 1890 silver 4 per cent, gold 3 per cent; in 1895, s il ver 
 3.4 per cent, gold 2.8 per cent. The difference in the last-named year 
 was 0.6 per cent, which was approximately the difference that the bond 
 syndicate of 1895 offered to make between a gold bond and a "coin" 
 bond of the United States.
 
 SILVER DOLLARS AND THE PANIC OF 1893 1 87 
 
 within a small fraction of the sum turned over to Secretary 
 Carlisle by his predecessor, Mr. Foster. Meanwhile the 
 sum of $293,481,894 had been borrowed. The deficiency 
 of revenue in the fiscal years 1894, 1895 and 1896 was 
 $137,811,730, and the whole amount of money spent for 
 silver bullion under the Sherman Act was $155,981,002. It 
 is noteworthy that these two sums together equal the gov- 
 ernment's borrowings, within a small fraction. If the diffi- 
 culties of 1893-96 had been merely those of a deficiency of 
 revenue, probably all parties would have cooperated to bring 
 them to an end by means of increased taxes and a temporary 
 loan. But since the standard of value, the principal political 
 issue of the day, was involved in the solution of the fiscal 
 problem, no such cooperation was possible. 
 
 The Sherman Act provided that two million ounces of 
 the bullion purchased should be coined into silver dollars 
 each month until July i, 1891, and that thereafter only so 
 much should be coined as might be necessary to provide 
 for the redemption of the Treasury notes issued to buy 
 the bullion. It provided also that the amount of Treasury 
 notes outstanding should be neither greater 
 
 coinage of the nor j ess than the cost of the silver bullion 
 
 Silver Bullion in . , - 
 
 the Treasury. an d the silver dollars coined therefrom then 
 
 held in the Treasury. Accordingly, when any 
 Treasury notes were redeemed with silver dollars, it would 
 be necessary to cancel them, in order to make the notes 
 still outstanding equal to the silver still in the Treasury. If 
 redeemed with gold, the notes would be reissued. As there 
 is no provision for restoring canceled notes, it follows that 
 the total amount of them in existence must be diminish- 
 ing in exactly the ratio that redemption of them with silver 
 takes place. This process, as explained in the preced- 
 ing chapter, has been accelerated by the acts of 1898 
 and 1900.
 
 1 88 GOVERNMENT PAPER MONEY 
 
 Under the acts of 1878 and 1890 the purchases of silver 
 were as follows : 
 
 Silver bullion purchased under the act of February 28, 
 
 1878, fine ounces 291,272,018 
 
 Total coinage of silver dollars under said act .... $378,166,793 
 
 Total cost of silver bullion used in such coinage . . . $308,279,261 
 
 Silver bullion purchased under the act of July 14, 1890, 
 
 fine ounces 168,674,682 
 
 Cost of same $155,981,002 
 
 Silver dollars coined and to be coined there- 
 from $218,000,000 
 
 Less subsidiary coinage 20,000,000 
 
 ~~ $198,000,000 
 
 Total coinage of silver dollars under both acts .... $576,166,793 
 
 The first section of the act of March 14, 1900, says that 
 all forms of money issued or coined by the United States 
 shall be maintained at a parity of value with the gold stand- 
 ard, and that " it shall be the duty of the Secretary of the 
 Treasury to maintain such parity." It does 
 
 Act of 1900. . J . 
 
 not provide any means, however, by which to 
 maintain parity. This omission is the more remarkable since 
 the bill as originally reported and passed by the House 
 contained a clause expressly for that purpose. 
 
 The silver dollar is a larger kind of subsidiary coin, and 
 should be treated by the government exactly as the smaller 
 ones are treated. The government has received the value 
 of a gold dollar for every silver one emitted, and is there- 
 fore bound in equity to redeem the dollars as 
 Direct Redemp- jj redeems the halves, quarters, and dimes. 
 
 tion of the Silver 
 
 Dollar Desirable. It is not strictly necessary that the small 
 
 change should be redeemed, but it is a great 
 public convenience, as is shown by the fact that the redemp- 
 tions amount to upwards of $32,000,000 per year. 1 The 
 
 1 See Treasurer's report for 1900, p. 32.
 
 SILVER DOLLARS AND THE PANIC OF 1893 189 
 
 government exists for the benefit of the people, and the cost 
 of making the redemptions has been paid in advance by the 
 seigniorage on the coins. 
 
 There are additional reasons, however, for direct redemp- 
 tion of the silver dollars. One is that such coins are un- 
 limited legal tender between individuals. Another is that 
 there is a certain amount of public apprehension and lack 
 of confidence touching any coin which passes for more than 
 its metallic value. This fear would be removed by direct 
 redemption of the silver dollar. If such redemption were 
 provided for by law, it would never be availed of except in 
 cases of necessity. In such cases it would be universally 
 desired. 
 
 The silver dollar has so far ceased to be a political issue 
 that the future disposition of it may soon be decided on 
 economic grounds alone. A bill is now (1904) pending in 
 Congress, with the approval of the Secretary of the Treasury, 
 to convert silver dollars into subsidiary coins as fast as the 
 latter are needed. The annual increment of subsidiary 
 silver due to the growth of population and retail trade is 
 about $5,000,000. If the policy is adopted of recoining the 
 dollars into smaller pieces instead of buying new bullion 
 therefor, the government will eventually recover the money 
 that was expended under the Bland and Sherman acts, and 
 the silver dollar will cease to be an object of suspicion and 
 alarm in financial circles. The silver thaler pieces of Ger- 
 many are in this way rapidly disappearing under the Treasury 
 order of the year 1900, mentioned on page 66 ante. 
 
 RECAPITULATION 
 
 In 1873, by an act of Congress revising the coinage laws, 
 the silver dollar was omitted from the list of coins authorized 
 to be struck at the mint of the United States. At that
 
 GOVERNMENT PAPER MONEY 
 
 time the metal in a silver dollar was worth more than 100 
 cents gold. Any silver dollars previously coined remained 
 full legal tender, but the metal silver was demonetized by 
 that act. 
 
 There was a gradual decline in the value of silver after 
 1873. In 1876 the price had fallen so that the metal in a 
 dollar was worth only 89 cents. There was a movement in 
 Congress and a popular agitation to remonetize silver. A 
 bill for this purpose was passed by the House in 1877, and 
 was amended by the Senate so as to provide for a limited 
 coinage of silver dollars from bullion purchased by the gov- 
 ernment. In this form it became a law February 12, 1878. 
 It did not remonetize silver, since it did not authorize the 
 coinage of that metal in unlimited quantities for private 
 persons. It was entitled " an act to authorize the coinage 
 of the standard silver dollar and to restore its legal-tender 
 character," but the phrase " standard silver dollar " was mis- 
 leading, since the silver dollar had ceased to be a standard 
 and was not made such by that act. The act remained in 
 force about thirteen years. Under it the government paid 
 $308,000,000 for silver bullion, from which it coined 378,- 
 000,000 silver dollars, which it paid out of the Treasury 
 at par. The seigniorage, or apparent profit, was about 
 $70,000,000. 
 
 In 1890 the act of 1878 was repealed and another act 
 was passed, enlarging the government's purchases of silver 
 bullion and providing that payment be made with legal- 
 tender Treasury notes, which should be redeemable in 
 "coin." This act remained in force about three years. 
 Under it the government issued its legal-tender notes to 
 the amount of $156,000,000. Simultaneously with this act 
 a bill was passed making changes in the tariff by which the 
 revenues of the government were largely reduced, and a 
 deficit became inevitable.
 
 The output of legal-tender notes was accompanied by an 
 exportation of gold of about equal magnitude. The reserve 
 of gold in trie Treasury known as the greenback redemption 
 fund fell below the $100,000,000 mark in April, 1893. A 
 financial panic ensued. It was succeeded by a severe and 
 prolonged commercial crisis, during which it became neces- 
 sary for the government to sell bonds on four different occa- 
 sions to replenish its gold reserve. Congress was called 
 together in extraordinary session in the summer of 1893 to 
 repeal the silver act, and it did so. It refused, however, to 
 take any other steps to improve the public credit, although 
 repeatedly urged to do so by the President and the Secretary 
 of the Treasury. The reason why it refused was that the 
 standard of value was the leading issue in national politics. 
 Anything tending to improve the public credit helped the 
 gold standard, which the majority in Congress at that time 
 did not desire. 
 
 The following statistics embrace facts of importance : 
 
 Gold drawn from the Treasury by redemption of legal- 
 tender notes in 14 years, 1879-92 inclusive .... $43,310,887 
 
 Gold drawn in 4 calendar years, 1893-96 483,538,788 
 
 Gold exported during same period 344,248,036 
 
 Borrowed by the government, same period 293,481,894 
 
 Bonds issued, same period 262,315,400 
 
 Bonds issued for gold redemption fund and interest 
 thereon : 
 
 PRINCIPAL INTEREST 
 
 $100,000,000 at 4 per cent for 30 years, original loan (1878) $120,000,000 
 
 50,000,000 at 5 per cent for 10 years (1894) 25,000,000 
 
 50,000,000 at 5 per cent for 9 years (1894) 22,500,000 
 
 62,315,400 at 4 per cent for 30 years (1895) 74,778,480 
 
 100,000,000 at 4 per cent for 30 years (1896) 120,000,000 
 
 $362,315,400 $362,278,480
 
 GOVERNMENT PAPER MONEY 
 
 The greenbacks are only $346,000,000 in amount, yet to 
 keep them alive and to keep them equal to gold we have 
 issued $362,000,000 of bonds and have obligated ourselves 
 for $362,000,000 more in the way of interest, and we still 
 owe the amount of the greenbacks. 1 
 
 The silver dollar is at par with gold at the present time 
 because it is not redundant. Moreover, the government 
 receives it as the equivalent of gold in payment of all dues 
 to itself. This is an indirect redemption, yet it cannot be 
 depended on to maintain parity under all circumstances. 
 If, by reason of bad times and slack trade, the quantity of 
 silver dollars and certificates should be greater than the 
 business of the country could absorb and find employment 
 for, they would accumulate in the Treasury. Eventually the 
 government's receipts would be wholly of silver and a panic 
 of more or less severity would be the probable consequence. 
 
 AUTHORITIES FOR CHAPTERS V AND VI 
 
 Noyes' Thirty Years of American Finance. 
 
 Taussig's Stiver Situation in the United States. 
 
 Final Report of the Monetary Commission of the Indianapolis 
 Convention (The University of Chicago Press, 1898). 
 
 Dunbar's article on " The Safety of Legal-Tender Paper " in 
 the Quarterly Journal of Economics, April, 1897. 
 
 Dunbar's Collection of Laws of the United States relating to 
 Currency, Finance, and Banking. 
 
 1 An official estimate by the chief of the Loan and Currency 
 Division of the Treasury Department, published in the Congressional 
 Record of April 29, 1908, p. 5638, shows that if the greenbacks had 
 been funded on the first day of January, 1879, into 4 per cent thirty- 
 year bonds and canceled, the total cost to the government for princi- 
 pal and interest to July i, 1907, would have been #741,897,340; 
 whereas the total cost and liability actually incurred on 'account of 
 them has been #1,081,881,562; the difference in favor of converting 
 into bonds being #339,984,222.
 
 y 
 
 BOOK III 
 
 fr 
 
 BANKING 
 
 CHAPTER I 
 FUNCTIONS OF A BANK 
 
 IN its original sense the word "bank" means a heap, a pile, 
 an accumulation, as bank of earth, sand bank, gravel bank. 
 In colonial times it was applied to any batch 
 or accumulation of paper money. Thus a 
 "new Rhode Island bank" meant a new 
 emission of bills of credit of that colony. In the early days 
 of the American republic a bank was an association whose 
 main business was the issuing of notes to circulate as 
 money, and the phrase " banking privileges " meant the 
 right to issue such notes. Daniel Webster even said that 
 the power to issue notes to circulate as money was the 
 feature which distinguished a bank from every other insti- 
 tution. At the present time the issuing of notes is not a 
 necessary function of banks, nor is it, in our large cities, 
 the chief part of their business. 
 
 A bank in the modern sense is a manufactory of credit 
 and a machine for facilitating exchanges. It is commonly 
 said that banking consists in receiving money from depos- 
 itors and lending it to borrowers. This is the proper func- 
 tion of a savings bank ; but it is only a part, and not the 
 largest part, of the business of a commercial bank. The 
 money deposited in such a bank forms only a portion of the 
 assets which go to make up the bank's credit, which it issues
 
 194 BANKING 
 
 to borrowers, sometimes in the form of circulating notes 
 payable to bearer, but oftener in the form of book entries 
 transferable by means of checks. 
 
 An analysis of modern banking is substantially this : A 
 man has $10,000 of his own money. He starts a bank. 
 His neighbors deposit $50,000 with him. This money 
 becomes the absolute property of the banker. The depos- 
 itors have simply a right to withdraw an equal amount 
 whenever they like, which right can be enforced by law. 
 The banker owns the money and the depositor has a claim, 
 or right of action, against him for an equal sum. But the 
 depositors will not draw the money out immediately ; if 
 they had intended to do so, they would not 
 
 have de P sited * at a11 - The banker finds 
 by experience that some of his customers will 
 bring in as much money as others draw out, so that $60,000 
 is on hand all the time. He infers that if his own $10,000, 
 in connection with his good reputation, is considered by the 
 public a guarantee for $50,000, then the whole $60,000 will 
 serve as a guarantee for a much larger sum. When he 
 begins, his balance sheet reads in this way : 
 
 RESOURCES LIABILITIES 
 
 Cash . . . ^60,000 Capital . . . $10,000 
 
 Deposits . . . 50,000 
 
 $60,000 $60,000 ! 
 
 1 In keeping the accounts of a bank, or of any other business, the 
 business itself is considered as indebted to the shareholders for the 
 money they have put into it, and for all the profits earned but not paid 
 to them. In the case we are now considering, although there is only 
 one shareholder, the same rule applies. The conception of a bank's 
 capital as a liability is the pans asinorum of banking science. It can 
 be understood best perhaps by observing how the assets of a failed 
 bank are disposed of. The receiver, in such a case, represents the bank. 
 Suppose that the assets realize more than the claims of all the creditors. 
 The excess is paid to the shareholders because the bank owes them 
 whatever remains after other claimants are paid in full. In short, there
 
 FUNCTIONS OF A BANK 195 
 
 The banker now begins to buy promissory notes, or bills 
 of exchange, due at a specified time in the future, paying 
 the face value of the same, minus interest at a certain rate 
 for the intervening time. This is called discounting com- 
 mercial paper. When he discounts for one 
 
 Discounting Com- f fa j customers a note for g looo runn i ng 
 mercial Paper. 
 
 ninety days, he deducts the interest (say $15), 
 
 entering the amount under the head of profits due to stock- 
 holders, and writes the remainder, $985, on the credit side 
 of the customer's pass book, entering a corresponding sum 
 as a credit to that person's account in his own books. This 
 credit is called a deposit, and properly so, since the net 
 purport of the transaction is that the banker has bought an 
 interest-bearing security and the seller has deposited the money 
 he received for it in the bank, to be drawn out at his pleasure. 
 If the customer had deposited $1000 gold simultaneously with 
 the foregoing transaction, his total deposit 
 
 would have been X 9 8 5- Yet there is a differ - 
 ence between the two kinds of deposits, the 
 
 one being of money and the other a bank credit. In practice, 
 the bank credits at any given time may be four or five times 
 as large as the amount of cash in the bank. 
 
 The process of discounting commercial paper continues 
 until the banker has $200,000 of bills receivable in his port- 
 folio. Then his account stands thus : 
 
 RESOURCES LIABILITIES 
 
 Cash $60,000 Deposits . $247,000 
 
 Loans and discounts 200,000 Capital . 10,000 
 
 Profit . . 3,000 
 
 $260,000 $260,000! 
 
 are preferred claims (those of creditors) and ordinary claims (those of 
 shareholders). Both are liabilities of the bank, and equally valid ones, 
 in their proper order. 
 
 1 Theory and Practice of Banking, by Henry Dunning Macleod 
 (fifth edition), I, 324.
 
 196 BANKING 
 
 Thus the business venture called a " bank " owes to depos- 
 itors and to the banker himself $260,000 ; and it has assets 
 which will produce that amount, but only $60,000 of it is 
 cash. It follows that the banker has manu- 
 Credits "* Bank ^ actured something which serves as a medium 
 of exchange to the extent of $197,000. This 
 is credit. Goods can usually be bought and sold with it as 
 readily as with money, since checks drawn against deposits 
 are accepted in trade by the whole community. The whole 
 $200,000 of bills are not discounted at one time, but gradu- 
 ally, so that some are always maturing and bringing in 
 money to meet the banker's liabilities. 
 
 Alexander Hamilton saw clearly how a bank serves as a 
 manufactory of credit, and how it economizes the use of cap- 
 ital. He had a clear understanding of the nature of deposits, 
 although there had not yet been published any scientific 
 analysis of banking operations. In his report on the Bank 
 of the United States he said : 
 
 Every loan which a bank makes is, in the first shape, a credit 
 given to the borrower on its books, the amount of which it stands 
 ready to pay, either in its own notes, or in gold or silver, at his 
 option. But, in a great number of cases, no actual payment is 
 made in either. The borrower, frequently, by a check or order, 
 transfers his credit to some other person, to whom he has a pay- 
 ment to make ; who, in his turn, is as often content with a similar 
 credit, because he is satisfied that he can, whenever he pleases, 
 either convert it into cash, or pass it to some other hand, as an 
 equivalent for it. And in this manner the credit keeps circulating, 
 performing in every stage the office of money, till it is extinguished 
 by a discount with some person who has a payment to make to the 
 bank, to an equal or greater amount. Thus large sums are lent 
 and paid, frequently through a variety of hands, without the 
 intervention of a single piece of coin. 1 
 
 1 Although this lucid conception of the philosophy of modern banking 
 was published in 1791, it was the task of Mr. H. D. Macleod (and not
 
 FUNCTIONS OF A BANK 197 
 
 The banker's deposits are payable on demand. In the 
 case considered above, the depositors might have drawn 
 
 their checks simultaneously for $247,000, pay- 
 Limit to Bank i 
 Credits e to P ersons wno were not depositors in 
 
 the same bank, in which event they could not 
 all have been paid, although the bank would be eventually 
 solvent. It would be able to pay in full, but not until its 
 bills receivable should mature. Probably such a case as a 
 simultaneous withdrawal of all deposits never happened in 
 the world, but it is quite conceivable that the depositors 
 might draw at once for more than $60,000, that is, for 
 more cash than the banker has on hand, in which case the 
 bank would have to close its doors. 
 
 Thus there is a limit to the banker's power of discounting 
 commercial paper. He is limited by the probable calls of 
 his depositors for money to be withdrawn from the bank. 
 
 The amount kept on hand to meet such demands 
 Bank Reserves. . . 
 
 is called the cash reserve. This reserve is 
 
 the bank, in the original meaning of the term, the heap, or 
 pile, from which daily payments are made and upon which 
 all the credit operations rest. The cash reserve may consist 
 of any kind of currency which is commonly accepted, but 
 preferably of legal-tender money, not the notes of other 
 banks. Its amount must be proportionate to that of the 
 deposits. The right proportion can be learned only by 
 experience and only approximately. It varies in different 
 countries, and at different places in the same country; 
 and the local banker, as the person most thoroughly con- 
 versant with local conditions, has, as one of his most 
 important duties, the ascertainment and preservation of 
 that reserve which most nearly meets the needs of his 
 community. 
 
 an easy one) to systematize and bring it into general recognition and 
 acceptance by economists more than half a century later.
 
 198 BANKING 
 
 Bank notes are the banker's promises to pay money to 
 bearer on demand. They are virtually orders of the presi- 
 dent and cashier on the paying teller. They 
 Bank Notes. 
 
 are of the same nature, and they operate in 
 
 the same manner as checks drawn by depositors. Checks 
 and notes are equally lawful demands upon the bank's cash 
 reserve. 
 
 Now, suppose that the bank above mentioned has the 
 right to issue circulating notes and that the customer, whose 
 paper has been discounted, desires to use the proceeds in 
 paying the wages of farm hands, or factory 
 operatives, or in buying country produce, or 
 in other ways and in places where checks are 
 not acceptable. He will ask for bank notes, in order to pay 
 them to the wage-earners, farmers, etc. He might ask for 
 gold, in which case the bank would be obliged to give it to 
 him, but the notes are more convenient and will be generally 
 preferred by the payees. The payees may demand gold 
 from the bank for the notes, if they choose, but generally 
 they will not do so. They will pay them to storekeepers 
 or others to whom they are indebted, and the latter will 
 deposit them in the issuing bank to their own credit, or in 
 other banks which will send them to the issuing bank for 
 redemption. Eventually they will be paid out of the bank's 
 cash reserve. They will be paid out of the same fund from 
 which the customer's checks would have been paid, if he 
 had drawn the money by means of checks payable to order, 
 instead of taking notes payable to bearer. 
 
 The banker cannot decide whether the credit he has 
 extended to his customer shall be used in the form of checks 
 or in the form of notes. Nor does this question concern 
 him in any way, except that the notes may stay out some- 
 what longer than the checks. His liabilities are the same 
 in either case. The only thing that need concern him is
 
 FUNCTIONS OF A BANK 199 
 
 the goodness of the paper which he bought when he issued 
 
 his credit to his customer. The form of issue, whether in 
 
 checks that may pass through one or two 
 
 issue of Notes hands, or in circulating notes that may pass 
 Automatic. 3 ' 
 
 through many hands, is of little consequence ; 
 
 and, even if it were of much consequence, it is beyond his 
 control. It is also beyond the control of the depositor. 
 He will call for notes only in cases where he cannot use 
 checks. The controlling force here is the public demand, 
 to which both the banker and his customers conform. The 
 public demand determines also how long the notes shall stay 
 out after they have been issued. Nobody keeps more notes 
 on hand than he needs. When a man finds that he has a 
 surplus, he returns it to the bank. Thus the outflow and 
 inflow of bank notes is automatic. 
 
 While it is immaterial to the banker whether the credit 
 which he issues shall take the form of checks or of notes, it 
 is important both to him and to the community that it shall 
 take one form or the other, since the alternative is the with- 
 drawal of gold for purposes of circulation and the conse- 
 quent lessening of his cash reserve ; and, as we have seen, 
 
 the lessening of his reserve by $1.00 usually 
 BankNotes lessens his ability to discount commercial 
 
 paper by $4.00 or more. If it is for the 
 interest of the community that the system of bank credits 
 should exist at all, it should be available in the form 
 of circulating notes, as well as of checks ; for banking 
 science consists in the substitution of less costly instru- 
 ments of exchange for more costly ones, according to the 
 demands of trade. The bank note, since it is one of the 
 less costly ones and is indispensable in the modern world, 
 should be readily available as needed. Its utility is greatest 
 in sparsely settled communities, where there are few or no 
 banks.
 
 200 BANKING 
 
 Bank notes were first issued in England in 1670 or there- 
 abouts. They were instruments of writing executed by 
 goldsmiths to people who had left money in 
 their custod y- Several of these notes were 
 found in a back room of Child's Bank (the 
 oldest of English banking houses) when it was removed 
 from the vicinity of Temple Bar a few years since. The 
 
 following are specimens : 
 
 Nov. 28, 1684. 
 
 I promise to pay unto ye Rt. honble ye Lord North & Gray, 
 or bearer ninety pounds at demand. 
 
 For Mr. Francis Child & myself 
 Jno Rogers. 
 
 Picture of ) XT 
 Temple Bar } N 9 21 - 
 
 London, Oct. 20, 1729. 
 
 I promise to pay to Mr. Richard Bannister, or order, on demand, 
 
 twenty pounds. 
 
 For Fras. Child, Esq. 
 
 Sam Child. 
 
 Picture of ) XT 
 Temple Bar { No1 792- 
 
 London, 8 December 1729. 
 
 I promise to pay to Mr. Chr. Diggs, or bearer, on demand thirty 
 
 pounds. 
 
 For Fras. Child & Co. 
 
 Sam Child. 1 
 
 Other similar examples of the origin and evolution of the 
 bank note might be cited. The right to issue such notes 
 was never questioned. They were simply evidences of claims 
 to money deposited with the goldsmith or the bank. As the 
 business grew, and the quantities of notes called for by 
 depositors increased, it became more convenient to print 
 blank forms, to be filled out with the names of the depositors 
 and of the amounts due them. Still later notes were printed 
 1 Macleod, I, 283.
 
 FUNCTIONS OF A BANK 2OI 
 
 for round sums, as, for example, five or ten pounds, 
 which could be handed in quantities to the persons entitled 
 to receive them ; and these were made payable to bearer, or 
 to order, according to the wish of the depositor. The busi- 
 ness of discounting commercial paper was added to the 
 goldsmith's vocation very soon after the practice of deposit- 
 ing money with him became common, and then the notes 
 
 re issued, if desired, to the persons getting the discounts. 
 
 Thus the issuing of such notes became recognized as a 
 right at common law. Anybody could issue them and put 
 them in circulation, if people were willing to take them. It 
 was found in course of time that the exercise of this right 
 
 was exposed to accident and liable to abuse, 
 ^Common-Law &nd ^ th(J g tate must interpose for the pro . 
 
 tection of society. At first it was believed 
 that such protection could be secured by restricting the 
 issue of circulating notes to a select number of persons of 
 well-known character, generally, but not always, incorporated 
 as a bank. Thus certain charters granted to banks in this 
 country before the adoption of the federal constitution (the 
 Bank of North America in Philadelphia, the Bank of Massa- 
 chusetts, and the Bank of New York, which still exist) 
 contain no mention of circulating notes, since the right to 
 issue them existed without legislative authorization. The 
 Bank of New York began business and issued circulating 
 notes seven years before it received a charter. 
 
 In the public discussions of recent years the question has 
 frequently been asked why the banker should receive inter- 
 est on his outstanding notes, while the customer 
 why interest is pays interest on the note which he gave in 
 
 paid for the Use 
 
 of Bank Notes. exchange for them. As both kinds of notes 
 are debts, why should one of these two 
 persons pay interest more than the other? There is, how- 
 ever, a vital difference between the two kinds of notes. The
 
 202 BANKING 
 
 banker's notes are payable on demand. Any person into 
 whose hands they come may demand gold for them imme- 
 diately. If he does not do so, it must be because he finds 
 the notes better adapted to his immediate wants. The 
 customer's note, on the other hand, is not payable till a 
 fixed time in the future. It is said in rebuttal that the right 
 to issue notes to circulate as money has been conferred 
 upon one of these parties by statute, and that he has thus 
 been given an artificial advantage. This is an error ; for, 
 as we have seen, the' statute, instead of conferring a right 
 on the banker, has curtailed a preexisting right. 
 
 Society derives an advantage from the banker's operations 
 which it can well afford to pay for, whether the credit which 
 he issues takes the form of deposits and checks, or of cir- 
 culating notes. The discount of commercial paper has 
 been aptly defined as " the swapping of well 
 HOW Banks aid known credit for less known credit." The 
 
 in the Work of . . 
 
 Production. bank first establishes its own credit. Then 
 
 it is the banker's business to find out what 
 persons in the community are worthy of its credit. Credit 
 enables persons to obtain the use of capital which they 
 could not otherwise acquire. For the present purpose 
 capital may be defined as anything which aids man to 
 produce wealth and is not gratuitously bestowed, such as 
 tools, materials, food, etc. The banker, if he understands 
 his trade, enables the most deserving persons in the com- 
 munity to get capital, that is, to get possession of the tools 
 and materials of industry without the use of money. The 
 most deserving persons, in the commercial sense, are those 
 who can make the most profitable use of tools and materials, 
 and who are believed to be honest. By_sw_ap_pjng _it. well, 
 known credit for their less known credit the bank performs 
 a service which they are willing to pay for, and it performs 
 a service to society by economizing tools and materials.
 
 FUNCTIONS OF A BANK 203 
 
 Anything which puts these things into the right hands and 
 keeps them out of the wrong hands is a gain to the world. 
 The continuing life of a bank is presumptive evidence that 
 it is doing this thing, for, if it were not, its own losses' and 
 expenses would eat it up. 
 
 RECAPITULATION 
 
 A bank is an institution where deposits of money are 
 received and paid, where credit is manufactured and ex- 
 tended to borrowers, and where the exchange of property is 
 facilitated. Having first acquired the confidence of the com- 
 munity, the bank extends its credit by purchasing interest- 
 bearing securities, mainly business men's notes, payable at 
 a fixed time and giving the sellers the right to draw checks 
 upon itself payable at sight. The amounts thus authorized to 
 be drawn are termed deposits, the bank being liable for them 
 in the same way as for actual money deposited. It is found 
 in practice that a bank may safely extend its credit to an 
 amount much larger than its cash on hand, the excess being 
 an inexpensive but useful addition to the world's instruments 
 of exchange. 
 
 A bank requires a certain amount of money over and 
 above its deposits as a capital, to secure and hold the con- 
 fidence of the community and to meet unforeseen emer- 
 gencies in business, but there is no definite proportion 
 between capital and deposits established either in law or in 
 practice. The capital invested is one of the liabilities of 
 the bank, but as a lien on the assets is secondary to the 
 claims of creditors. 
 
 Bank notes are the bank's promises to pay money to 
 bearer on demand. They are the president's checks on the 
 bank, and are payable out of the cash reserve, the same as 
 checks drawn by customers. When the bank extends its
 
 204 BANKING 
 
 credit to a customer, it is of little consequence whether the 
 credit shall be used in the form of checks or of notes. The 
 bank's liability is the same in either case, but notes usually 
 remain in the hands of the community somewhat longer 
 than checks. 
 
 Bank notes were originally instruments of writing, executed 
 by goldsmiths or other persons, promising to return the specific 
 sums of money lodged with them. The right to issue them 
 was consequent upon the right to receive the money deposited, 
 and thus became recognized as a right at common law. In 
 the early years of our government the right of a bank to exist 
 carried with it the right to issue circulating notes. At present 
 the right to issue notes is restricted in various ways in all 
 civilized countries. For wholesale and for many kinds of 
 retail, trade bank checks are the most convenient means of 
 payment, but for paying wages or carrying on some kinds 
 of business notes are preferred. It is the public demand, 
 not the preference of either the banker or his customer, that 
 decides what proportion of payments shall be made with 
 checks and what with notes. The public demand also deter- 
 mines how long the notes, when taken out of the bank, shall 
 remain in circulation. Bank notes are most useful in rural 
 communities where banks are few and population is sparse. 
 
 AUTHORITIES 
 
 Macleod's Theory and Practice of Banking. 
 
 Dunbar's Chapters in the Theory and History of Banking. 
 
 Conant's History of Modern Banks of Issue.
 
 CHAPTER II 
 A BANK STATEMENT 
 
 A BANK statement is an accounting, either voluntary or 
 compulsory, rendered by the bank's officers to its share- 
 holders, which is published for general information. The 
 bank, as an institution, is liable for all balances which have 
 accrued against it in the course of business and is also liable 
 to the shareholders for the capital and for all profits, whether 
 carried to the surplus fund or not. Thus there are two 
 kinds of liabilities, though they are generally put under a 
 single head. We will, however, separate them for the sake 
 of clearness, taking for illustration a statement of one of the 
 national banks of New York City dated September 30, 1901. 
 
 RESOURCES 
 
 I. Loans and discounts $48,719,212.94 
 
 ^"Overdrafts, secured and unsecured 32,507.06 
 
 United States bonds to secure circulation .... 50,000.00 
 
 Storks, securities, etc. . . . -. 309,720.99 
 
 Banking house, furniture, and fixtures 1,414,250.00 
 
 Other real estate owned 14,667.85 
 
 Due from national banks 5,904,767.29 
 
 Due from state banks and bankers 373>77 2 -55 
 
 -~9~T Checks and other cash items 361,627.10 
 
 ^jjOr'Exchanges for clearing house 5,011,772.87 
 
 diTT Notes of other national banks 11,500.00 
 
 /"! Lawful money reserve in bank, viz. : 
 
 Specie $i 1,905,413.29 
 
 Legal-tender notes 2,297,826.00 
 
 14,203,239.29 
 13. Redemption fund with United States Treasurer 
 
 (5 per cent of circulation) 2,500.00 
 
 Due from United States Treasurer, other than 
 
 5 per cent redemption fund 16,000.00 
 
 Total 76,425.537-94 
 
 205
 
 2O6 BANKING 
 
 LIABILITIES 
 To Creditors 
 
 ^"15. Individual deposits $29,923,255.97 
 
 16. Due to other national banks 26,368,474.36 
 
 17. Due to state banks and bankers 7,905,820.09 
 
 18. Due to trust companies and savings banks . . . 4,372,752.72 
 Demand certificates of deposit 135,205.69 
 
 I/ZQ. Certified checks 906,907.57 
 
 /x^i. Cashier's checks outstanding 794,499.40 
 
 i2'2. National bank notes outstanding 49,500.00 
 
 To Shareholders 
 
 1-23. Capital stock paid in 2,000,000.00 
 
 -247 Surplus fund 2,500,000.00 
 
 XXl- Undivided profits, less expenses and taxes paid . . 1,468,657.14 
 
 j 26. Dividends unpaid . 465-0 
 
 Total $76,425,537.94 
 
 i. Loans and discounts consist chiefly of promissory 
 
 notes, drafts, and bills of exchange, running for short 
 
 periods say, two to four months executed 
 
 Loans and . engaged in active business. As the 
 
 Discounts. ' 
 
 liabilities of a commercial bank are payable 
 on demand, it cannot safely make loans for long periods, 
 although it may renew short ones from time to time. Promis- 
 sory notes may be executed by one person, firm, or corpora- 
 tion and offered for discount without other security. Such 
 notes are called single-name paper. A promissory note 
 drawn by A to the order of B, indorsed by the latter and 
 offered for discount, is called double-name paper, since 
 both A and B are held for the payment of it. 
 
 Such paper, whether single or double-name, may or may 
 not have its origin in a sale of goods on time, for which 
 the seller wishes to obtain the money at once. If it does 
 not take its rise in any business transaction already con- 
 cluded, it is called accommodation paper. Bankers have
 
 A BANK STATEMENT 2O/ 
 
 no absolutely certain means of knowing whether a note 
 represents a concluded transaction or an intended one. 
 They are justly suspicious of accommodation 
 1111 paper, yet the difference between such paper 
 
 and other unsecured notes is not so great as 
 it seems. Both are loans on personal security, since in 
 neither case has the banker a lien on any particular goods. 
 
 The essential distinction between real and accommodation bills 
 is that one represents past and the other future transactions. In 
 a real bill goods have been purchased which are to meet the bill ; 
 in an accommodation bill goods are to be purchased which are to 
 meet the bill. But this is no ground for preference of one over 
 the other. A transaction which has been done may be just as 
 wild, foolish, and absurd as one that has to be done. The inten- 
 tion of engaging in any mercantile transaction is that the result 
 should repay the outlay with profit. There is no other test of its 
 propriety but this, in a mercantile sense. The true objections to 
 accommodation paper are of a different nature. As real bills 
 arise out of the transfers of property, the number of them must 
 be limited in the very nature of things. However bad and worth- 
 less they may be individually, they cannot be multiplied beyond a 
 certain extent. There is therefore a limit to the calamities they 
 cause. But accommodation bills are means devised to extract 
 funds from bankers to speculate with, and consequently these 
 speculations may be continued as long as these funds can be 
 extracted. 1 
 
 The Scotch banks have a system of " cash credits " which 
 consist largely of accommodation paper. There are ten 
 banks in Scotland, with about nine hundred branches, 
 bringing at least one branch within reach of every hamlet 
 in the country. The cash credits are authorizations granted 
 to persons to draw a maximum amount of money from the 
 bank within a given time and returnable within a given 
 
 1 Macleod, I, 308.
 
 208 BANKING 
 
 time, interest to be paid only for the amount drawn and the 
 
 time it is kept out. These are loans on personal security, 
 
 never less than two names being required, generally three 
 
 or more. A very large percentage of the 
 
 "Cash Credits." , , , ' , 
 
 cash credits of the Scotch banks are made to 
 the agricultural classes, but they are not made on mortgage 
 security and they are not allowed to stagnate. The cash 
 credits are entered as deposits on one side of the bank's 
 ledger that is, under the head of liabilities. On the other 
 side they appear under the title " bills discounted, cash 
 accounts and other advances," as resources. 
 
 Drafts and bills of exchange payable at a future time and 
 purchased by the bank are included under the head of loans 
 and discounts. In this country the two terms signify the 
 
 same thing, except that the word " draft " is 
 
 1 to instruments payable at some dis- 
 
 tance from the drawer but within the United 
 States, and the term " bill of exchange " to those payable in 
 foreign countries. They are orders in writing, drawn upon 
 the custodian of funds belonging to the drawer or for the 
 payment of goods sold to the drawee. 
 
 A draft or bill of exchange is usually made payable to the 
 order of a third person. If not payable at sight, it must be 
 presented to the drawee as soon as possible, and he must 
 write the word "accepted" on it and sign his name there- 
 under ; otherwise it must be at once protested for non- 
 acceptance. Then two persons are responsible to the 
 holder of it. If the holder gets it discounted at his bank, 
 he must indorse it, and thus he also becomes responsible 
 
 for it. It may go through several hands, 
 Acceptances. 
 
 each holder indorsing it before he parts with 
 
 it. It acquires strength with each transfer, since all the 
 persons who have indorsed it are successively responsible 
 for its payment. These are the most important circulating
 
 A BANK STATEMENT 2OQ 
 
 instruments of modern commerce, since nearly all the 
 wholesale transactions of the world are effected by them, 
 and since they range over the whole world and are not 
 limited, like bank notes, to their parent country. Two or 
 more bills of exchange may be in existence at one time 
 touching one lot of goods, since it is the transfer and not 
 the creation of them that gives rise to the bills. The chief 
 business of banks is to discount bills of exchange, so that 
 the maker or holder may have the present value of them 
 in cash. 
 
 Bills of exchange are sometimes accompanied by bills of 
 lading, warehouse receipts, stocks or bonds, which are spe- 
 cific titles to property, the bank having a lien 
 
 Bills of Lading. ., . . ... . ., _. 
 
 on the property until the bill is paid. Ihese 
 are simply a superior kind of bills. They command a lower 
 rate of interest because of their higher security, and in a 
 stringent money market they will command money when 
 other bills are refused. All other discounted bills are loans 
 on personal security. 
 
 Another variety of bills of exchange arises from the use of 
 letters of credit. These are instruments of writing issued 
 by a bank, authorizing the holder to draw upon the issuing 
 bank or upon some affiliated institution, at sight or other- 
 wise, and within a definite period of time, not exceeding in 
 the aggregate a certain sum. It is stipulated in the body 
 
 of the instrument that the amount of all 
 Letters of Credit. ...... . 
 
 drafts, or bills of exchange, negotiated under 
 
 it shall be indorsed upon it, so that it shall always show 
 how much of the credit remains unexhausted. The names 
 of the banks or persons in various parts of the world (corre- 
 spondents of the issuing bank) who will cash or discount 
 the drafts so drawn are printed on it. A large part of the 
 foreign purchases made by merchants is effected through 
 bills of exchange drawn under letters of credit. Such
 
 2IO BANKING 
 
 letters are also much used by tourists to pay their traveling 
 expenses. 
 
 2. Overdrafts, secured and unsecured, constitute an item 
 in nearly all bank statements. Strictly speaking, they ought 
 not to be there at all, but it sometimes happens that a depos- 
 itor overdraws his balance by mistake. In such a case the 
 bank's officers exercise their discretion, based upon their 
 knowledge of the man's character and resources, in deciding 
 whether they will pay the check which overdraws the balance 
 or not. Until the overdraft is made good or is proved uncol- 
 lectable it is properly reckoned as an unpaid debt among 
 the bank's resources. 
 
 3. United States bonds to secure circulation will be more 
 
 fully considered in the chapter on the national 
 banking system. It may be remarked at 
 present that this item. of $50,000 among the 
 
 resources is offset in large part by the outstanding circulating 
 
 notes ($44,520) among the liabilities. 
 
 4. It is desirable that a bank should have a portion of 
 its interest-bearing assets so invested that it can be quickly 
 turned into cash to meet a sudden emergency. This is 
 especially needful in the case of a bank which holds large 
 sums deposited by other banks, since a financial disturbance 
 occurring in a distant quarter may bring sudden demands for 
 cash from these depositing banks. Stock exchange securi- 
 ties are held by banks, partly because they 
 
 other interest- can be sold at short notice to meet such emer- 
 
 Bearing Securi- . . . 
 
 ties. gencies, partly because opportunities occur to 
 
 bankers for acquiring them at low prices, and 
 
 sometimes because they have been compelled to take the 
 
 securities for debts, which would otherwise have been lost. 
 
 5. Banking house, furniture, and fixtures are proper 
 resources of a bank ; for, if it does not own such property, 
 it must pay rent to others for equivalent accommodation.
 
 A BANK STATEMENT 211 
 
 6. Commercial banks do not usually lend money on the 
 
 security of real estate. Under our national 
 Real Estate. 
 
 banking law they are not allowed to do so, 
 
 but they may take such property for unpaid loans previously 
 made in good faith. 
 
 7, 8. There is always a current account between banks 
 
 for collections which they make for each 
 Banks n other. They also lend and borrow among 
 
 themselves and deposit money with each 
 other for the sake of interest. 
 
 9. Checks and other cash items include checks and drafts 
 on private banks in the city not members of the clearing 
 house, and small advances, payable on demand, which do 
 not go into the category of loans and discounts. 
 
 10. Exchanges for the clearing house are the checks, 
 drafts, and other claims on other banks, members of the 
 clearing house, which have not yet been collected. 
 
 11. Notes of other national banks are put in a place sep- 
 arate from the other cash, because under the national bank- 
 ing law they cannot be counted as a part of 
 
 the le S al reserve - For this reason the banks 
 do not keep any large amount of bank notes 
 
 on hand. They pay them out on checks, br send them to 
 
 Washington for redemption in lawful money. 
 
 12. These items constitute the bulk of the bank's cash 
 reserve, amounting all together to $14,203,239.29. The legal 
 reserve may consist of gold, gold certificates, legal-tender 
 notes, silver, and silver certificates. The banks keep very few 
 
 silver dollars and not more subsidiary silver 
 ^ an * s nee ded f r making change or meeting 
 the demands of customers. The use of silver 
 certificates, however, is increasing, since they are the only 
 paper currency of denominations less than $10 that can be 
 obtained in large amounts.
 
 212 BANKING 
 
 13. The national banking law requires that every bank 
 which issues circulating notes shall keep a deposit of lawful 
 
 money in the Treasury of the United States 
 equal to c per cent of the amount thereof for 
 
 demption Fund. * r 
 
 the redemption of the same. This deposit 
 may be counted as a part of the bank's legal reserve. 
 
 14. There is nothing to indicate what this sum may 
 represent. Money is constantly passing between the banks 
 and the Treasury. This item may represent subsidiary 
 coins sent to the Treasury for redemption but not yet 
 redeemed, or it may be money sent for the purchase of 
 subsidiary coins not yet received. 
 
 15. The first item of liabilities is individual deposits, 
 which have been sufficiently explained in the preceding 
 chapter. 
 
 16. 17, 18. Under the national banking law country banks 
 are allowed to keep three-fifths of their legal reserve in cer- 
 tain city banks approved by the comptroller of the currency. 
 We may infer from the magnitude of the sum " due to other 
 national banks " that this is one of the city banks so approved. 
 Apart from this provision of law it is customary for country 
 
 banks to keep considerable sums on deposit 
 * n c ^y banks, f r t ' ie convenience of making 
 remittances for customers and also for the sake 
 of the interest allowed by the city banks, which is usually at 
 the rate of 2 per cent per annum. It has been a question 
 much disputed in this country whether it is good banking 
 practice to allow interest on such deposits payable on 
 demand. It has been argued, in opposition to it, that it tends 
 to the accumulation in the city banks of large sums which 
 are liable to be called for suddenly whenever anything unu- 
 sual happens in financial circles elsewhere. Such deposits 
 are said to be in a high degree "explosive," tending to 
 cause panics, or to aggravate them when they come. But
 
 A BANK STATEMENT 213 
 
 \ 
 
 it is argued, on the other hand, that somebody will always 
 
 be found to pay interest on deposits. If the banks do not, 
 
 the trust companies and private bankers, who 
 
 kee P their de P sits in the cit y banks, will do 
 so ; and they will draw their own deposits 
 to meet the calls of the country banks as suddenly and as 
 freely as the country banks themselves would. The deposits 
 will then be as " explosive " in the one case as in the other. 
 Therefore the question to be considered is whether the city 
 banks shall reap the profits which arise from the deposits of 
 the country banks or allow other parties to do so. The 
 same principles apply to the deposits of state banks and 
 trust companies, etc. 
 
 19. Demand certificates of deposit are merely a change 
 of form of ordinary deposits for making remittances, or for 
 the use of travelers within the range of territory where the 
 credit of the issuing bank is known. John Doe, in New 
 
 York, for example, wishes to remit money to 
 R^hard Roe, in some town in which John 
 Doe's bank has no correspondent or on which 
 it does not draw. He cannot get a draft payable in that 
 town, but a bank's certificate, payable to the order of Richard 
 Roe, will answer the purpose equally well. Accordingly, 
 John Doe draws a check against his own deposit and asks 
 the bank to change the form of it into a certificate. 
 
 20. Certified checks are virtually certificates of deposit in 
 another form. They are the checks of depositors on which 
 
 the paying teller of the bank has stamped the 
 Certified Checks. , 
 
 words : " Certified by the Bank and 
 
 placed his initials or some device recognizable by the other 
 banks. A check so certified becomes the obligation of the 
 bank in the same sense as a certificate of deposit. The 
 amount is immediately charged against the account of 
 the drawer.
 
 214 BANKING 
 
 f 
 
 21. The cashier of a bank draws checks on the paying 
 teller for the purchase of securities from bill brokers, stock 
 
 brokers, and others. The sellers deposit these 
 
 Cashier's Checks. . . . . 
 
 checks in their own banks, and they are settled 
 
 at the clearing house like other checks. 
 
 22. The circulating notes of this bank are a very small 
 part of its total liabilities. This subject will be more fully 
 treated in the chapter on the national banking system. 
 
 23. 24. The capital of a bank is primarily a guarantee 
 fund contributed by the shareholders to give it stability and 
 
 to create confidence in its soundness. A 
 Capital and bank m j nt exist ' m fair weather for some 
 
 Surplus. 
 
 considerable time without capital, and many 
 attempts have been made by speculators to realize that 
 ideal, but any bank so launched has generally succumbed to 
 the first financial gale. The surplus is a portion of the 
 bank's profits not divided among the shareholders but 
 set aside as a permanent addition to the guarantee fund. 
 Under the national banking law the accumulation of a sur- 
 plus equal to 20 per cent of the capital of each bank is 
 made compulsory. Before the declaration of a dividend 
 one-tenth of the net profits must be deducted and set aside 
 for that purpose until that percentage is reached. For all 
 banking purposes the surplus becomes an integral part of 
 the capital. 
 
 25, 26. A bank statement must always show the amount 
 of the accrued profits not yet divided. Dividends are usually 
 paid the same day that they are declared, but it sometimes 
 
 happens that shares of stock have changed 
 Profits. 
 
 hands or have been involved in litigation, or 
 
 that the owners have died since the last payment was made. 
 In such cases the money remains in the bank awaiting the 
 rightful claimants, and appears among the liabilities as 
 "dividends unpaid."
 
 A BANK STATEMENT 215 
 
 RECAPITULATION 
 
 A bank statement is an exhibit of the bank's resources 
 and liabilities made by the officers to the shareholders, to 
 the depositors, and to the public generally. The resources 
 and the liabilities are placed in separate columns. The 
 resources consist of all the money in the bank, all the 
 things received in exchange for money, and all the claims 
 it holds against others. The liabilities embrace all that 
 it owes to depositors and other creditors, all the capital 
 contributed by shareholders, and all earnings undivided or 
 unpaid. Therefore the amounts of the two columns should 
 be exactly equal. If the inventory of the resources and the 
 value placed upon them by the officers are correct, the 
 statement shows the exact financial condition of the bank. 
 
 The national banking law requires each bank to make 
 at least five statements each year showing its condition 
 at dates already past, which shall be designated by the 
 comptroller of the currency. No bank can know before- 
 hand what date will be chosen by him. Consequently no 
 special preparations can be made. The statements must be 
 written on blanks furnished by the comptroller, which go 
 much more into details than those published in the news- 
 papers. The fact that these statements must be made, and 
 that they will be closely scrutinized by other bankers, as well 
 as by experts in the comptroller's office, operates as a spur 
 and incentive to correct methods and honest management 
 on the part of each individual banker, but is not an absolute 
 guarantee thereof.
 
 CHAPTER III 
 THE CLEARING-HOUSE SYSTEM 
 
 THE functions of a bank as a machine for facilitating 
 exchanges are shown on the most extensive scale in the 
 operations of the clearing house. This is 
 an association of banks whose primary object 
 is to settle the claims which the members 
 hold against each other. If there were only two banks in 
 a particular place, there would be no need of a clearing 
 house. Two clerks would meet at regular intervals, at the 
 banking house of one or the other, and compare the claims 
 that each held against the other. If Bank A held checks, 
 drafts, etc., for $10,000 drawn on Bank B, while the latter 
 held only $9000 drawn on the former, Bank B would pay 
 $1000 to Bank A and the checks, drafts, etc., would be 
 mutually surrendered. A clearing house merely enables 
 any number of banks to settle their balances in about the 
 same time that two banks could do so, the clearing house 
 being, for this purpose, the only creditor and the only debtor 
 of each bank. 
 
 The clearing-house system was first introduced in New 
 York in 1853. Prior to that time it had been customary 
 
 for each bank to send a messenger to every 
 The Old System. . . , 
 
 other bank each day with a pass book and a 
 
 package of claims. Thus, Bank A would sort out all the 
 checks and other claims it held against Bank B and, writing 
 the amount in the book on the debit side of the page 
 assigned to that bank, would send the book and package 
 
 216
 
 THE CLEARING-HOUSE SYSTEM 2 I/ 
 
 to the latter. Bank B would acknowledge receipt of the 
 checks and write on the credit side of the page the amount 
 of its claims on Bank A, delivering by its own messenger 
 the corresponding checks, etc., drawn on Bank A and hav- 
 ing the proper acknowledgment made on its own pass book. 
 As there were thirty-eight banks in New York at that time, 
 there were seventy-six bank messengers continually travers- 
 ing the streets, getting in each other's way and in the way 
 of the bank's customers, and liable to assault or accident. 
 The balances were shown each day by the footings of the 
 pass books but, on account of the labor of carrying and 
 counting gold coin, which was the only money receivable 
 between banks, the settlements were made only once a week, 
 and then by actual delivery of the coin, which was also car- 
 ried in bags through the streets. 
 
 Now there are forty-eight members of the New York Clear- 
 ing House, including the assistant treasurer of the United 
 States, and one new applicant for membership. 
 
 New York There are also seventy-nine banks and trust 
 
 Clearing House. J 
 
 companies in New York and the vicinity, not 
 members of the clearing house, that clear through other 
 banks. The Union Trust Company, for example, makes an 
 arrangement with the Bank of Commerce, by which all checks 
 drawn on the former may be presented at the clearing house 
 to the settling clerk of the latter and be treated by the latter 
 exactly like checks drawn on itself. In this case the Bank 
 of Commerce is responsible to its fellow-members of the 
 clearing house for checks drawn on the Union Trust Com- 
 pany in the same way as for its own checks. Accordingly, 
 it may happen that any bank may go to the clearing house 
 with checks and drafts drawn on one hundred and twenty- 
 seven different institutions, which it has received the previ- 
 ous day from its depositors or through the mail from its 
 correspondents elsewhere.
 
 2l8 BANKING 
 
 In order to expedite the work, it must separate these 
 checks into not more than sixty-one packages, one for each 
 member of the clearing house upon which it 
 holds any, and prepare a schedule showing 
 the total amount of its claim on each bank. 
 It must also have a debit ticket to be delivered to each 
 showing, for example, that Bank A has a total claim on 
 Bank B for so much money. It must also come to the 
 clearing house with a statement showing the aggregate of 
 all its claims on all the banks. This, which is its claim 
 against the clearing house for that day, is handed to the 
 manager of the clearing house or to the proof clerk immedi- 
 ately upon entering. All these things must be done before 
 the operation of clearing begins. 
 
 Each bank sends to the clearing house a delivery clerk 
 and a settling clerk. The settling clerks occupy seats in 
 three parallel rows running lengthwise of the clearing room, 
 each one having a sufficient amount of desk room for his 
 work. The delivery clerks, with their packages of checks in 
 separate envelopes, stand in an open space in front of the 
 settling clerks. 
 
 All are expected to be in their places about ten minutes 
 before 10 o'clock in the morning. At two minutes before 
 10 the manager of the clearing house strikes a bell; and, 
 if any clerk is not in his place at that time, he is fined $2. 
 The next movement is made with the precision, and with 
 something of the appearance, of a military drill. At exactly 
 10 o'clock the bell is sounded a second time. Each 
 
 delivery clerk then hands to the settling clerk 
 The Operation. . . 
 
 in front of him the package of checks, etc., 
 
 drawn upon the latter's bank, and at the same time drops 
 the debit ticket, which shows the aggregate amount of such 
 claims, into an aperture in the settling clerk's desk. The 
 delivery clerk then takes one step forward and repeats the
 
 THE CLEARING-HOUSE SYSTEM 2IQ 
 
 operation with the next settling clerk, and so continues until 
 he has handed out all his packages and tickets. Usually this 
 part of the operation is completed in ten minutes. Mean- 
 while the proof clerk, who occupies a desk near the manager, 
 has entered the claims of each bank under the head " Banks 
 Cr." on a schedule like that shown on page 244. 
 
 Inasmuch as the amount of each bank's claim against the 
 clearing house (entered under the head " Banks Cr.") is the 
 sum of all the tickets which its delivery clerk has pushed 
 into the letter boxes of the other banks, it follows that all 
 the tickets of all the banks should equal all the entries under 
 that head. The next step in the operation is for each set- 
 tling clerk to arrange the amounts of all his debit tickets 
 in a column, add it up, and send the amount to the proof 
 clerk, who transcribes and arranges it under the head 
 " Banks Dr.," so that the debit of Bank A shall be on the 
 
 same line with its credit. Then the differ- 
 The Result. .,11 
 
 ence between the two will show how much 
 
 the bank owes the clearing house or how much the clearing 
 house owes the bank. The time occupied by the settling 
 clerks in arranging their tickets and adding up the columns 
 is about half an hour. As fast as these footings are com- 
 pleted, they are sent to the proof clerk, who puts them in the 
 debit column opposite the credits of the banks respectively. 
 When all are completed, if no error has been made, the 
 footings of the credit and debit columns must be exactly 
 equal, and the footings of the columns, which show the 
 differences, must be exactly equal. Then these differences 
 are read off slowly and distinctly by the manager, so that 
 each settling clerk can write down the sum that his bank 
 has to pay or to receive. 
 
 As time is money at the clearing house, somebody is fined 
 for every error, for every delay in making footings, for 
 disobeying the orders of the manager or for any disorderly
 
 22O 
 
 BANKING 
 
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 M rS ro -<i-NO t^.o6 P PO -<5- toNO r^-oo O PO to 1^-00" o' i- PI PO -^-O O" P} *
 
 THE CLEARING-HOUSE SYSTEM 
 
 221 
 
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 222 BANKING 
 
 conduct. Forty-five minutes from 10 o'clock are allowed 
 for completing the proof. For all errors remaining undis- 
 covered at 11.15 the fines are doubled, and at twelve o'clock 
 quadrupled. The highest fine for an error discovered before 
 11.15 is $3- 
 
 The table on the preceding pages is an exact copy of a 
 proof sheet of the New York clearing house. It is obvious 
 that it makes little difference, as regards the time and labor 
 required to effect the clearings, whether the amount cleared 
 is large or small. The clearing house is thus seen to be one 
 of the great labor-saving machines of the modern world. 
 
 Payments of clearing-house balances are made with gold 
 coin, gold certificates, or legal-tender notes. Gold certificates, 
 when not otherwise defined, are those issued by 
 the United States Treasury ; but some clear- 
 ing houses which have vaults receive gold 
 deposited by their own members and issue certificates which 
 are available in making payments at the clearing house or 
 between members, but cannot be transferred to non-members. 
 Four-fifths of the payments at the New York clearing house 
 are made with clearing-house gold certificates. The debtor 
 banks must pay what they owe to the clearing house before 
 1.30 P.M., after which the clearing house pays the same 
 money to the creditor banks. The clearing house is not 
 responsible for the goodness of the checks, drafts, etc., 
 which pass through it, but each bank is responsible to its 
 fellow-members. 
 
 The clearings of the New York clearing house now average 
 $2 54,000, ooo per day and the balances, paid in about 1.30 P.M., 
 as above described, average $11,600,000 per 
 
 da y' or a Iittle less than 5 P er cent of the 
 clearings. It follows that about 95 per cent 
 
 of these transactions offset each other. The New York 
 clearings are, in point of magnitude, about two-thirds of
 
 THE CLEARING-HOUSE SYSTEM 223 
 
 all the clearings in the United States, since New York is 
 the place where other American cities most commonly settle 
 their balances with each other. 
 
 The members of the clearing house determine what kind 
 of claims shall be admitted to the clearings. Usually these 
 are checks, drafts, and certificates of deposit, 
 which are payable at sight or have already 
 matured. Yet the practice is not uniform. 
 Some clearing houses admit also the promissory notes and 
 acceptances of private individuals which are drawn "payable 
 
 at the Bank " and have matured. Others admit checks 
 
 and drafts drawn on out-of-town banks which are corre- 
 spondents of members of the clearing house. In some 
 clearing houses payment of balances may be made by drafts 
 drawn on other designated cities, or partly in cash and 
 partly in such drafts. In Boston the practice exists of 
 borrowing and lending balances among the members, on 
 the floor of the clearing house, immediately after the day's 
 balances are ascertained, and 60 per cent of the balances 
 are usually disposed of in this way. Thus, suppose that a 
 certain bank has a credit balance of $100,000 at the clearing 
 house for which it has no immediate use. In order to save 
 interest on this sum even for a single day, it lends its 
 balance to a debtor bank "on call " that is, repayable at 
 demand. The creditor bank, in that case, gives an order 
 in writing to the manager of the clearing house to transfer 
 so much of its balance to the borrowing bank. This practice 
 is so common in Boston that the clearing-house rate of inter 
 est is quoted regularly in the newspapers. 
 
 The clearing-house association is well fitted for the per- 
 formance of other duties than those of ascertaining and 
 settling balances among the members. It is especially 
 qualified for the task of checking financial panics. It 
 sometimes happens that the demands of depositors for
 
 224 BANKING 
 
 currency are so great that the cash reserves of the weaker 
 banks are at the point of exhaustion, rendering them liable 
 to suspend payments. As the suspension of one bank at 
 such a time may lead to excessive demands 
 u P on other banks, causing them to suspend 
 also, it is necessary to grapple with the crisis 
 before it becomes unmanageable. The banks therefore 
 unite, through the clearing house, in the issue of " clearing- 
 house loan certificates," in order to avert general disaster. 
 There have been six crises in which the New York banks 
 have adopted this method and in the later cases with very 
 complete success. The last one was in 1907, and a descrip- 
 tion of the process in this case will make clear the principles 
 involved. 
 
 The panic began with the suspension of the Knicker- 
 bocker Trust Company, October 22. The immediate con- 
 sequence was the rapid withdrawal of deposits from the 
 banks. Obviously, if all the deposits of a bank are de- 
 manded in this form at once, they cannot be paid out of a 
 reserve which is usually only one-fourth of that 
 Reserves 2 sum. But some banks have larger reserves 
 
 than others. Some are habitually more cau- 
 tious than others. Some have larger capital and surplus, in 
 proportion to their liabilities. Some have a more steady- 
 going class of depositors, less likely to be affected by panic, 
 than others. Such banks are able to help their weaker 
 neighbors. By combining or " pooling " the reserves of all 
 the banks, the weaker ones, or those most exposed to danger, 
 may be saved, and thus the panic may be restrained or 
 wholly averted. It is necessary, however, that the stronger 
 banks be secured for the advances which they make, and 
 the method successfully adopted in 1907 for aiding the 
 weaker banks, without injuring the stronger ones, was the 
 issue of clearing-house certificates.
 
 THE CLEARING-HOUSE SYSTEM 225 
 
 On the 26th of October, 1907, the Clearing-House Associa- 
 tion resolved that any member might present to the loan 
 
 committee its bills receivable or other securi- 
 Certtficates t * es > to g et h er w i^ ^s own obligation, and 
 
 receive, in exchange for such securities as were 
 approved by the committee, "certificates" for 75 per cent 
 of the par value of the same these certificates to be 
 accepted in lieu of cash in the payment of balances at the 
 clearing house. The certificates drew interest at 6 per cent, 
 payable to the holder, and were in the following form : 
 
 No.. 
 
 LOAN COMMITTEE OF THE NEW YORK CLEARING-HOUSE 
 ASSOCIATION. 
 
 This certifies that the [name of bank] has deposited with 
 this committee securities in accordance with the proceed- 
 ings of a meeting of the Association held 
 Dollars 10 " October 26, 1907, upon which this certificate is 
 
 issued. This certificate will be received in 
 payment of balances for the sum of Five Thousand Dollars 
 from any member ef the Clearing-House Association. 
 
 On the surrender of this certificate by the 
 
 depositing bank above named the committee 
 
 will endorse the amount as a payment on the 
 
 obligations of said bank held by them and 
 
 surrender a proportionate share of the collat- 
 
 eral securities held thereunder. 
 
 $5> 000 Committee. 
 
 The certificates could not be used for any other purpose ; 
 and, as they drew the highest legal rate of interest from the 
 time they were used, there was a pressure upon the banks 
 not to take out more than they really needed. On the 
 proof sheet shown above, the creditor banks were entitled 
 to receive $13,073,026.50, which might be paid to them
 
 226 BANKING 
 
 (except fractional sums) in the obligations of the debtor 
 banks, secured by these loan certificates. Thus the reserves 
 of all the banks were made a common fund. The total 
 reserve was not made any larger by this means, 
 ^ ut a ^ t ^ ie reserves f a ll tne banks were made 
 available for those banks which were in tem- 
 porary straits ; and the aggregate demand for currency was 
 lessened, because the union of the banks had a powerful 
 influence on the public imagination. It did not lessen any 
 real want of currency, but it quieted people's fears and 
 checked their imaginary wants. 
 
 Suppose that a " run on the banks " takes place in a 
 town which has only two such institutions Bank A with 
 a large cash reserve, and Bank B with a 
 
 sma11 one - Bank A ' instead o demanding 
 payment of the checks on Bank B, which it 
 receives in the course of business, may accept the obliga- 
 tions of the latter, secured by its assets, and leave it free to 
 use all its cash in meeting demands made directly upon it. 
 By this arrangement Bank A practically lends Bank B cash 
 for paying depositors as long as the reserves of the two hold 
 out. If the run should continue, however, both banks, 
 although essentially sound, would be forced into liquida- 
 tion, unless their creditors should be willing to accept 
 certified checks which could not be immediately paid. 
 Any creditor whose demand was not paid could force a 
 liquidation. 1 
 
 This represents on a narrow scale what takes place on a 
 wide scale in a city with a large clearing-house association 
 
 1 In the panic of 1893 there were three banks in the town of 
 Albany, Ga., which weathered the storm by means of clearing-house 
 loan certificates. In Vicksburg, Miss., five banks joined together in an 
 agreement that they would not pay more than $50 per day in cash to 
 any one depositor, and did so with impunity.
 
 THE CLEARING-HOUSE SYSTEM 227 
 
 issuing loan certificates in a panic. The combined reserves 
 of sixty-two banks are exhaustible in the same way as those 
 
 of two banks or of one bank, but a large 
 That oia Large g rou p o f banks united together inspires 
 
 confidence. People believe that it cannot 
 fail, and because they so believe, it does not fail. When 
 the combined reserves have been lowered to the danger 
 point, the banks, instead of paying cash on checks presented 
 to them, may stamp them " good through the clearing house"; 
 and in nine cases out of ten the holders of the checks will 
 accept them in this form and pay them to their creditors, 
 who will deposit them in their own banks. The checks 
 thus certified pass through the clearing house, where, 
 as we have seen, 95 per cent of them offset each other. 
 Every bank is required by law to pay every check on 
 demand in legal-tender money. Yet, if the holder of the 
 check accepts the stamp, "good through the clearinghouse," 
 in lieu of cash, the law is satisfied. If he insists upon pay- 
 ment at all hazards, the bank must pay or close its doors, and 
 in every such case it will try to pay. It keeps back some 
 of its cash for such emergencies and to meet the needs of 
 manufacturers for the payment of wages, or to answer 
 demands where special hardship would arise from the want 
 of currency. At such times the influence of public opinion 
 is all-powerful and does not allow men to exercise their full 
 rights. The fact is recognized that the banks cannot pay 
 all their deposits at once and that, when a crisis comes, 
 the banks can best judge what discrimination should be 
 made. 
 
 The whole amount of loan certificates issued by the New 
 York Clearing House in 1907 was $101,060,000, of which 
 $88,420,000 were outstanding at one time. This did not 
 prevent the partial suspension of cash payments. There 
 came a time when most of the banks made some difficulty
 
 228 BANKING 
 
 about the payment of checks over the counter, although the 
 
 clearing-house operations continued without interruption. 
 
 Then the phenomenon of a " premium on 
 
 suspension not currency was w i tne ssed in Wall Street, 
 always prevented. * 
 
 Certain persons who had currency in their 
 
 possession were glad to sell it at a profit, while others who 
 needed it, but who preferred not to add to the troubles of 
 the banks by demanding it from them, were willing to give 
 more than equal amounts in the form of certified checks for 
 it. In this way a brisk business sprang up and the pre- 
 mium of currency over certified bank checks rose as high 
 as 4 per cent. 
 
 The panic culminated about the i5th of December. Mer- 
 chants and others who were indebted to the banks began 
 then to pay their obligations, and the banks 
 began to redeem their loan certificates and 
 take up the securities pledged for them. The 
 premium on currency gradually subsided. The last loan cer- 
 tificates were redeemed and canceled on the 28th of March, 
 1908. Thus, although the issue of loan certificates did not 
 prevent suspension altogether, it did avert the worst con- 
 sequences of suspension. It prevented the actual closing 
 of any bank in New York City. It kept the trade of the 
 country in motion. It enabled employers of labor to keep 
 at work and prevented multitudes of business men from 
 falling into bankruptcy. In 1907 clearing-house loan cer- 
 tificates were issued also in Boston, Philadelphia, Baltimore, 
 Chicago, St. Louis, Pittsburg, Buffalo, Detroit, New Orleans, 
 and many smaller cities. 
 
 On five previous occasions (1860, 1873, 1884, 1890, and 
 1893) clearing-house loan certificates had been issued in New 
 York in order to curb panics, and with beneficial results in 
 each case. The last general bank suspension in which the 
 banks closed their doors took place in 1857. Although the
 
 THE CLEARING-HOUSE SYSTEM 22Q 
 
 clearing house existed then, the system of combining the 
 reserves had not been devised. 
 
 In the panic of 1893 various devices were resorted to in 
 the smaller cities, in order to procure substitutes for cur- 
 rency, for the payment of wages, and for retail 
 trade - In man y manufacturing towns of New 
 England checks were drawn on banks in de- 
 nominations from $1.00 up to $20 and stamped "payable to 
 the bearer through the clearing house only." These were 
 usually not certified by the banks, the credit of the drawers 
 being sufficient to make them pass current in their respec- 
 tive communities. In some cases railroad companies issued 
 to their employees pay-checks drawn on their own treasurers, 
 which were generally accepted along the line of the roads. 
 In some Southern towns clearing-house loan certificates were 
 issued for general circulation for $1.00 and upward, guaran- 
 teed by all the banks in the place where they were issued, 
 and secured by their bills receivable, deposited with a cus- 
 todian, for 50 per cent more than the amount of the total issue. 
 At Mount Vernon, in the state of Washington, the Red Cedar 
 Shingle Company sold shingles by the car load and received 
 due bills from the purchasers in small denominations, which 
 the company endorsed and paid to its employees. These 
 passed current in the community till they were redeemed. 
 In Birmingham, Ala., clearing-house loan certificates were 
 issued for sums as small as 25 cents. All of these temporary 
 devices of circulating medium were withdrawn from use and 
 redeemed as soon as the panic subsided. 1 In the panic of 
 1907 similar devices to supply a circulating medium were 
 used in all parts of the country. 
 
 1 A description of the various substitutes for money which the panic 
 of 1893 called into existence, with fac-similes of many of them, is given 
 in a speech of Hon. John DeWitt Warner in the House of Representa- 
 tives, June 2, 1894. See also Sound Currency, Vol. II, No. 6.
 
 230 BANKING 
 
 RECAPITULATION 
 
 Clearing is the settlement of mutual claims by the pay- 
 ment of differences. In bank clearings the clearing house 
 is the only creditor and the only debtor of each bank. It 
 ascertains the amount of each bank's balance, receives the 
 money due from the debtor banks, and distributes it to 
 the creditor banks. The clearing house is a labor-saving 
 machine ; and it makes little difference, as regards the time 
 and labor involved, whether the number of banks and the 
 amount of claims adjusted be large or small. 
 
 Clearing is susceptible of application to other kinds of 
 business than that of banks. There is a railway clearing 
 house in London, for the settlement of balances of railway 
 earnings. There is a stock exchange clearing house in 
 London, and one in New York, for settling differences 
 between stock brokers. There was a gold exchange bank 
 in New York during the suspension of specie payments, 
 which operated as a clearing house for dealers in that 
 metal. 
 
 A clearing-house association, as an organization of banks, 
 is well fitted for other tasks besides settling balances with 
 each other. It has been especially useful in calming the 
 public mind in times of financial panic. This it has accom- 
 plished by combining the cash reserves of all the banks, 
 putting them under the control of a committee, and issuing 
 loan certificates for the payment of balances at the clearing 
 house. By this means the banks lend to each other their 
 cash reserves, according to the discretion of the committee. 
 The repayment of the loans is secured by the bills receiv- 
 able, or other assets, of the borrowing banks. The union 
 of the banks in this manner has a quieting effect upon the
 
 THE CLEARING-HOUSE SYSTEM 23! 
 
 business community. The holders of checks are thus per- 
 suaded in most cases to accept certification of the same, 
 instead of demanding payment in cash, and the certified 
 checks for the most part balance each other at the clearing 
 house. Since 1857 there have been six financial panics 
 which have been greatly mitigated by the use of clearing- 
 house loan certificates, and there has been'no general bank 
 suspension since that year. 
 
 AUTHORITIES 
 
 Cannon's The Clearing House. 
 Bolles' Practical Banking. 
 Gibbons' Banks of New York. 
 Gilbart's Principles and Practice of Banking. 
 H. D. Lloyd's article on " Clearing and Clearing Houses," in 
 Lalor's Cyclopedia of Political Science.
 
 CHAPTER IV 
 COLONIAL BANKING 
 
 A PUBLIC bank in the American colonies, as we have 
 seen, was an emission of circulating notes by a provincial 
 government, with a promise of redemption of 
 the same from the proceeds of taxation at a 
 
 of Banking. 
 
 fixed time. A private bank was an emission 
 of notes by private persons, to supply a supposed deficiency 
 of the medium of exchange. In some cases there was a 
 specific promise of redemption of such notes. In others 
 there was merely an agreement among the subscribers to 
 accept them in trade. According to the latter plan it was 
 not necessary that a bank should have any capital, but 
 merely that it should have the means of putting its notes in 
 circulation. Consequently the subscribers to the undertak- 
 ing did not agree to pay money into the bank, but to take 
 out and keep out a quantity of the note issues proportioned 
 to their subscriptions, and to accept the same in trade as 
 the equivalent of money. As security for the fulfillment of 
 this promise, and for the ultimate redemption of the notes 
 in money or goods, they gave mortgages of land to the asso- 
 ciation of which they were members. The association was 
 both a lending and a trading company. It bought goods 
 with its notes, or loaned the notes at interest on the security 
 of land or personal property. 
 
 The current ideas of banking were derived from England, 
 and more remotely from the continent of Europe. The 
 Bank of Amsterdam was established by the city government 
 
 232
 
 COLONIAL BANKING 233 
 
 of that place in 1609, for the purpose of maintaining the 
 
 true standard of value in commercial transactions. The 
 
 coins then in circulation were not of uniform 
 
 The Bank of goodness. Some were worn by long use, 
 Amsterdam. * 
 
 others were mutilated, many were produced 
 
 by private mints. They were of almost countless variety 
 and were, on the average, about 9 per cent below their 
 nominal value. The Bank of Amsterdam served both as 
 an assay office and as a place of deposit. All sorts of coins 
 were received from depositors and their weight and fineness 
 determined, and the depositors were allowed to draw out 
 for their own use, or to transfer to others, the true value in 
 standard money, or in "bank money," as it was commonly 
 called. All bills of exchange payable in Amsterdam were 
 required by law to be paid in bank money. Transfers of 
 such money were at first made by the payer to the payee 
 personally in the bank, but this method was afterward super- 
 seded by orders in writing ; and here, perhaps, we find the 
 origin of the bank check. 
 
 The lesson which hacLbeen learned in England from the con- 
 tinental banks in the first half of the seventeenth century was that 
 if the degraded coin then in circulation should be deposited in a 
 bank and an equivalent credit in terms of standard coin be given 
 depositors, such credits could be made use of in the adjustment 
 of debts by transfers of account at the bank. The idea of mak- 
 | ing a bank thus act as a clearing house for the nation, through 
 the deposit in its vaults of all the current coin, and its conversion 
 into bank credits, soon led to propositions to comprehend goods 
 and merchandise with coin in the establishment of bank credits. 
 This was naturally followed by the argument that land, being 
 stable and unperishable, was even better for the purpose than 
 coin or goods. 1 
 
 v, * Currency and Banking in the Province of Massachusetts Bay, by 
 Andrew McFarland Davis, Part II, "Banking" (1901).
 
 234 BANKING 
 
 The assumption that giving security for the tiltimate pay- 
 ment of a paper currency is the same thing as providing for 
 its redemption at any time, or that it will answer the same 
 
 purpose, is a pernicious fallacy. It confounds 
 
 tne P rormse to P a 7 money with money itself. 
 
 The promise to pay is of full face value only 
 where there is certainty of its fulfillment at the demand of 
 the holder. Security, on the other hand, implies payment 
 at some future indefinite time; and, where land is the 
 security, the time is usually remote. A paper currency 
 must be promptly redeemable in coin. No kind of security, 
 not even that of government bonds, is a good substitute for 
 such redemption. Yet the idea of " basing " currency on 
 various kinds of property, and especially on land, has had 
 many advocates ; and many experiments invariably end- 
 ing in disaster have been made with currency of this kind. 
 This idea found lodgment on our shores in the latter part 
 of the seventeenth century. In September, 1681, there was 
 "The Fund at established in the colony of Massachusetts 
 Boston in New Bay a company called " The Fund at Boston 
 
 in New England," whose object was to facili- 
 tate the transfer of property and credits among the members 
 by book entries at the head office. The basis of the Fund 
 consisted of mortgages conveying to the trustees certain real 
 estate to be held by them for the purposes designated in the 
 articles of association. To each mortgageor was given a cor- 
 responding credit which he could transfer to any other member 
 in the form of a " change bill " for any debt, purchase, or obliga- 
 tion. Our knowledge of this institution is very slender, being 
 limited to one mutilated pamphlet and a few mortgages in the 
 Suffolk Registry of Deeds for the years 1681 and I682. 1 
 
 1 See essay on " The Fund at Boston in New England " by Andrew 
 McFarland Davis, in Proceedings of the American Antiquarian Society, 
 April 29, 1903.
 
 COLONIAL BANKING 235 
 
 This was followed in 1714 by a more elaborate scheme 
 of private banking entitled " A Projection for erecting a 
 Bank of Credit in Boston, New England, founded on Land 
 Security." The preamble recited that there was a sensible 
 decay of trade for want of a medium of exchange. To 
 supply this deficiency certain parties proposed to subscribe 
 ,300,000, every subscriber agreeing to "settle and make 
 over real estate to the value of his respective subscription, 
 to the trustees of the partnership or bank, to 
 
 tion" ofTr ke and remain as a fund or security for such 
 bills as shall be emitted therefrom." Each 
 subscriber was pledged to give the same credit to the bills 
 as to those of the province, and to accept them in all pay- 
 ments, "upon forfeiture of 50 for each refusal until the 
 refuser has forfeited his whole security and profits." Loans 
 of the bills might be made on " ratable estates," to the 
 amount of two-thirds of their value ; on " iron or other 
 unperishable commodities, as a pledge, for one-half or 
 two-thirds according to the market." Each subscriber was 
 obligated to take out, and keep out for two years, notes 
 of the bank equal to at least one-fourth part of the amount 
 of his subscription ; but he could transfer this obligation, or 
 privilege, to any other person on the books of the bank. 
 All loans were to bear 5 per cent interest. 
 tSs 6 C ncep " The form of the notes contained no promise 
 to pay, but merely the pledge of the sub- 
 scribers to " accept the same in lieu of - shillings in 
 all payments " and the pledge of the bank to accept them 
 "for the redemption of any pawn or mortgage in the said 
 bank." 
 
 The " Projection " led to a controversy which, the his- 
 torian Hutchinson says, "had an universal spread and divided 
 towns, parishes and particular families." Paul Dudley, the 
 Attorney-General, attacked it on legal grounds. No process
 
 236 BANKING 
 
 was indicated by which any holder could compel any sub- 
 scriber to receive the notes as the equivalent of silver money 
 in goods, nor was there any provision for fixing the price of 
 the goods. The General Court disapproved of the scheme 
 and, in order to create a division in the ranks of its support- 
 ers, passed a new loan act for ^50,000 of colonial bills of 
 credit. "This," says Hutchinson, " lessened the number of 
 the party for the private bank but it increased the zeal and 
 raised a strong resentment in those which remained." 
 
 Following this attempt, and evidently patterned on it, was 
 a company formed in Connecticut in 1732 under the name 
 of the New London Society United for Trade 
 and Commerce - A petition for a charter, 
 addressed to the colonial assembly in 1729 
 by Solomon Coit in behalf of the company, asked among 
 other things that the company be allowed to " emit bills for 
 currency upon our own credit as we may see occasion at 
 any time, for promoting or maintaining our trade " and that 
 the penalties for counterfeiting the bills should be the same 
 as for counterfeiting those of the province. 1 The petition 
 was refused, for the reason, evidently, that the assembly 
 was not willing to grant to a private company the power to 
 issue bills of credit as currency. Three years later a char- 
 ter was granted to the New London company without the 
 power to issue bills, but the company immediately passed 
 a vote to issue ,30,000 of bills and began to put them in 
 circulation by buying goods from persons who were willing to 
 take them. The bills recited on their face that they should 
 be " equal in value to silver at sixteen shillings per ounce, 
 or to bills of publick credit of this or the neighboring 
 governments." There was no- promise that money or any- 
 thing should be paid for them, but merely that they should 
 be accepted by the treasurer of the society " and in all 
 
 1 Davis, Banking, p. 105.
 
 COLONIAL BANKING 237 
 
 payments in said society from time to time." The society 
 had no capital, but the members had executed mortgages of 
 land which were supposed to secure the holders of the notes. 
 The bills of the New London company were eagerly 
 accepted in trade; but, as soon as the fact of their issue 
 came to the knowledge of Governor Talcott, 
 ne to ^ ste P s to suppress them. The colonial 
 assembly was called together to consider the 
 subject. It declared that it was not legal for private per- 
 sons to emit bills of credit to circulate as money without 
 authority from the government, and it repealed the charter 
 of the New London company for violation of its provisions 
 particularly because it had no capital paid in, as the 
 charter contemplated, but only mortgages as a basis of its 
 trading operations. The company was accordingly dissolved, 
 and the legislature made an issue of colonial bills of credit 
 with which to redeem the company's bills, taking the mort- 
 gages in the hands of the company's treasurer to reimburse 
 the government. 
 
 Rhode Island in 1731 struck terror into the business 
 
 communities of Massachusetts and Connecticut by a "new 
 
 bank," with an issue of ,100,000 in bills of 
 
 Private Note cre dit as loans to individuals. An attempt 
 Issues in 1731 . 
 
 was made in Massachusetts to forestall this 
 
 issue by an agreement of the leading citizens not to accept 
 them in trade. In order, at the same time, to preoccupy 
 the field of circulation, a number of Boston merchants of 
 high standing formed a partnership and issued .110,000 
 of notes intended for general circulation. They were issued 
 as loans at interest, repayable in notes of the same kind, 
 or in coined silver of specified weight and fineness, at 
 different periods during the next ten years. The details of 
 the issue are interesting, but the only fact of importance 
 now is that this was an attempt to drive out a bad currency
 
 238 BANKING 
 
 by issuing a better one to take its place. The result was 
 in strict accord with Gresham's Law. The Rhode Island 
 bills came in, despite the efforts made to keep them out. 
 They caused a further depreciation of the currency. The 
 merchants' notes, which had a fixed value in silver and were 
 supported by the credit of wealthy and well-known citizens, 
 commanded a premium and were consequently hoarded. 
 
 This kind of banking found imitators in the Province 
 
 of New Hampshire. In 1735 a number of merchants in 
 
 Portsmouth formed a partnership and issued 
 
 A New Hampshire notes of var i ous denominations, payable in 
 Experiment. 
 
 ten years " in silver or gold at the then cur- 
 rent price." The only important fact about this bank is 
 that the assembly of Massachusetts passed an act to pro- 
 hibit the circulation of these notes in the latter province, 
 and that the Lords of Trade in London disallowed it, on 
 the ground that, since nobody was obliged to take them, " it 
 would be a great hardship to set a public mark of discredit 
 upon the persons engaged in this undertaking." In other 
 words, the Lords of Trade recognized the fact that the issue 
 of notes by private persons to circulate as money was per- 
 missible, provided they were not made legal tender. 
 
 The next attempt to establish a bank in Massachusetts, 
 and the one most disastrous to the projectors, was made in 
 
 1740 under the name of the "Land Bank or 
 of h i e 7 4o and ^^ Manufactory Scheme." 1 It was an outgrowth 
 
 of the ideas which gave birth to the " projec- 
 tion" of 1714 and to the New London Bank of 1732. The 
 prospectus was published as a broadside on the roth of 
 
 1 See "A letter to a merchant in London concerning a late combina- 
 tion in the Province of Massachusetts Bay in New England to Impose 
 or Force a Private Currency called Land Bank Money ; printed for the 
 publick Good, 1741." This pamphlet is anonymous, but Mr. A. McFar- 
 land Davis says that it was written by Dr. William Douglass. The style 
 certainly resembles that of Douglass.
 
 COLONIAL BANKING 239 
 
 March, 1739-40. It proposed to found a bank with a capi- 
 tal stock of "^"150,000 lawful money" but did not provide 
 for paying in any money, except 4^. on each ^"1000, to 
 meet the expenses of organization. Each subscriber was 
 to "make over an estate in lands " to the satisfaction of the 
 directors and pay 3 per cent interest for the same, either in 
 the bills of the company or in various manufactured articles, 
 the produce of the provinces. The list of things so receiv- 
 able included hemp, flax, cordage, iron, wool, beeswax, 
 tallow, cord wood, and a dozen others, at prices to be fixed 
 by the directors. Five per cent of the principal of the 
 subscription was to be paid each year in the same articles 
 or in said bills. The form of the bills was appended to 
 the prospectus, thus : 
 
 Twenty Shillings. 
 
 We promise for ourselves and partners to receive this twenty 
 shilling bill of credit as so much lawful money in all payments, 
 trade and business, and after ye expiration of twenty years to pay 
 ye possessors ye value thereof in ye manufactures of this province. 
 
 The wording of the bills was subsequently changed to the 
 following form : 
 
 We jointly and severally promise, for ourselves and partners, 
 to take this bill as lawful money at six shillings eight pence per 
 ounce in all payments, trade and business and for stock in our 
 treasury at any time ; and after twenty years to pay the same at 
 that estimate on demand of Mr. Joseph Marion, or order, in the 
 produce or manufactures enumerated in our scheme, for value 
 received. 
 
 Although no method of issuing notes was described in 
 the prospectus, it was understood that the capital stock of 
 ^"150,000 was to consist of bits of paper of the foregoing 
 tenor, to be divided among the subscribers in proportion to 
 their subscriptions, and that they were to buy goods with
 
 240 BANKING 
 
 them, subject to the condition that they should accept 
 them in trade, at the rate of 6s. 8d. per ounce of silver 
 
 a phrase which, in the absence of any fixed 
 Its Note Issue. * 
 
 prices for the goods traded in, was quite 
 
 meaningless. But even if this had been a solvent specie- 
 paying bank, the net result would have been a donation 
 of the face value of the notes by the public to the bankers, 
 without any return whatever, since the notes were payable 
 only at the end of twenty years, and the prevailing rate 
 of interest was 5 per cent. At least one thousand men 
 of Massachusetts saw this prospect of gain, for fully that 
 number subscribed for shares in the " Land Bank or Manu- 
 factory Scheme." These men had large political influence. 
 They soon acquired a majority in the House 
 of Representatives, but Governor Belcher 
 and the Council were bitterly opposed to the 
 project. The governor issued a proclamation against it 
 and cautioned all persons, especially all office holders, against 
 receiving the bills of the Land Bank, saying that they tended 
 to defraud people of their property. 
 
 Notwithstanding this opposition, the Land Bank began 
 to issue its bills in September, 1740. Their appearance 
 in business circles caused much anxiety in 
 Boston, whose merchants could not fail to see 
 the mischievous and unsubstantial nature of 
 the scheme. One hundred and fifty of them signed an agree- 
 ment that they would not take the Land Bank bills on any 
 terms or countenance their use in any way. The Land Bank 
 now became the great issue of the day, overshadowing every 
 other. Governor Belcher removed from office several persons 
 who favored the bank after he had issued his proclamation 
 against it. Many others tendered their resignations, among 
 them Samuel Adams, Sr. The directors of the Land Bank 
 sent a copy of their articles of association to the Council for
 
 COLONIAL BANKING 241 
 
 record. The Council ordered the secretary not to receive it 
 and voted that the presentation of it was an indignity. 
 
 That the Land Bank was legal, in the absence of any 
 
 prohibition by the General Court, does not admit of doubt. 
 
 Governor Belcher, the Council, and the Boston 
 
 f^ 11 *??* merchants knew this. They knew also that 
 
 takes Action. * 
 
 they could not get the lower house to join 
 with the Council in prohibiting it. 'So they turned to 
 Parliament, and here they were more successful. On the 
 zyth of March, 1741, the House of Commons passed an 
 act extending the provisions of the so-called Bubble Act of 
 1720 to the American cn1o n ' p<; The latter act had been 
 passed in order to prohibit the transaction of business by 
 joint stock companies without special authority of statute, 
 and it imposed severe penalties upon those who should do 
 so. It was applicable only to the United Kingdom ; yet 
 Parliament now declared that it " did, does and shall extend 
 to America," and in the preamble it referred expressly to 
 the Land Bank as one of the offenders against it. This 
 was ex post facto legislation, based upon historical untruth. 
 Not only had the Lords of Trade, in the New Hampshire 
 case cited above, refused to put the stamp of illegality upon 
 a bank in the colonies, but the Attorney-General in 1735 had 
 declared in an official communication that there was no 
 objection in point of law to a land bank at that time pro- 
 jected " at Boston in the Massachusetts Bay."^ 
 
 Before the news of the act of Parliament reached Boston 
 the bills of the Land Bank had been somewhat discredited 
 by reason of the refusal of the principal merchants of 
 
 Boston to touch them. Their action caused 
 Mob Violence. 
 
 great exasperation in the rural districts, and a 
 
 movement was started to use mob violence against them. 
 Governor Belcher received information of the intended riot 
 and sent the sheriff to arrest the leaders of it.
 
 242 BANKING 
 
 The Land Bank men, in order to get their notes in circu- 
 lation, had bought any kind of goods for which the owners 
 would accept the notes in payment, and at such prices as 
 the individual traders could agree upon. There was noth- 
 ing like a uniform price of goods so bought. Now the 
 Bubble Act altered the terms of these private contracts by 
 giving the holders of the notes an immediate right of action 
 against every partner for their face value. Many of the 
 shareholders were ruined. Some of them withdrew to the 
 neighboring colonies where they could not be reached, leav- 
 ing a heavier burden upon others. The affairs of the Land 
 Bank occupied the attention of the General Court for a 
 quarter of a century, and the litigation growing out of its 
 affairs was protracted till 1767 or later. 1 
 
 No step taken by the mother country in reference to the 
 colonies was more maladroit than this. No other, not even 
 the Stamp Act, caused greater bitterness. It was also quite 
 unnecessary, for the Land Bank was doomed to an early 
 death by its inherent vices. Its weakness had already been 
 manifested in the early return of its bills to the company's 
 treasurer and to individual members, to be exchanged for 
 tangible property, lest they should fall in value. Just as it 
 was beginning to totter by reason of its own feebleness the 
 British government gave it an annihilating blow. All the 
 educating and helpful influence that would have followed 
 from a natural demise was lost, and in its place was planted 
 an undying animosity toward the mother country for an act 
 of glaring injustice. Massachusetts was nearly ripe for 
 revolution in 1741. 
 
 1 The history of the Land Bank of 1740, down to the smallest minu- 
 tiae, is given by Mr. A. McFarland Davis in the volume cited on 
 page 233.
 
 COLONIAL BANKING 243 
 
 RECAPITULATION 
 
 The principles of banking are the outgrowth of experi- 
 ment. They must be learned from the history of banking, 
 and particularly from the laws that have been enacted from 
 time to time. These laws are the crystallization of ideas 
 dominant at given periods. 
 
 The earliest ideas of banking in the American colonies 
 were drawn from the mother country, and, more remotely, 
 from the continent of Europe. The commonest conception 
 of a private bank in New England was that of a company 
 or partnership formed to supply circulating notes as a 
 medium of exchange, in addition to the bills of credit of the 
 colonial governments. It was believed that, if such notes 
 were bottomed on landed security, current redemption would 
 not be necessary. In this view no capital was required for 
 the starting of a bank, but merely confidence. Several 
 attempts were made to establish banks and to supply a 
 medium of exchange on this theory, but the experiments 
 were always checked or suppressed by the colonial or the 
 home government before the ultimate economic results had 
 manifested themselves. 
 
 AUTHORITIES 
 
 Dr. Wm. Douglass' Discourse concerning the Currencies of 
 the British Colonies in America. 
 
 Hutchinson's History of Massachusetts from 1628 to 1774. 
 
 Felt's Historical Account of Massachusetts Currency. 
 
 Trumbull's The First Essays at Banking and the First Paper 
 Money in New England. 
 
 C. H. J. Douglas' Financial History of Massachusetts. 
 
 Davis' History of Currency and Banking in the Province of 
 Massachusetts Bay : Vol. II, "Banking."
 
 CHAPTER V 
 EARLY AMERICAN BANKS 
 
 THE first bank in the United States was the Bank of 
 North America, at Philadelphia. It was planned and put 
 in operation in 1781 by Robert Morris, the 
 Superintendent of Finance of the Revolution, 
 in order to give financial support to Washing- 
 ton's army. It had been preceded by a so-called " Bank of 
 Pennsylvania," which was a private subscription of money, 
 not for the sake of profit, but to supply rations for the army 
 when the Continental currency was becoming worthless. 
 
 Morris conceived that a bank with a paid-up capital, on a 
 specie basis, and in high credit, " would have the interest 
 of a stock two or three times larger than that 
 . which ' lt reall y possessed." By this he meant 
 that it could lend its credit, and receive inter- 
 est therefor, to an amount two or three times larger than 
 its cash on hand, a sound conception. The project was 
 approved by Congress, which granted a charter to the bank 
 on May 26, 1781. The great difficulty was to secure the 
 necessary subscription. The capital stock was fixed at 
 $160,000, with power to increase it, but only $70,000 was 
 subscribed in the first four months. Fortunately a French 
 frigate arrived at Boston in September, bringing $462,862 in 
 specie to the government. Morris brought it in wagons to 
 Philadelphia and lodged it in the bank. He then increased 
 the capital stock to $400,000 and made a subscription of 
 $250,000 thereto for the government, paying in $200*000 of 
 
 244
 
 EARLY AMERICAN BANKS 245 
 
 the amount. This brought financial support to the bank 
 from private sources and gave it immediate credit, through 
 which it was enabled to make large advances to 
 B the government, besides doing a considerable 
 business in the discount of commercial paper. 
 Morris' anticipations were fully realized. The troops were 
 regularly fed, clothed, and paid ; industry revived ; the bank's 
 notes were redeemed in specie on demand ; and it was found 
 that there was no lack of a circulating medium. This magi- 
 cal transformation took place after the Continental currency 
 had disappeared, and largely because of its disappearance. 
 
 Doubts existed whether Congress had the power, under 
 the Articles of Confederation, to charter a bank. Conse- 
 quently, the Bank of North America sought 
 and obtained another one from the legislature 
 of Pennsylvania. After the termination of the 
 war the bank became very prosperous, paying dividends 
 of 14 per cent per annum. These gains prompted the 
 starting of another bank in Philadelphia ; but the Bank of 
 North America offered to enlarge its capital and take in the 
 subscribers to the new bank, and the offer was accepted. 
 
 Morris had remarked in 1784 that the bank had created 
 
 a habit of punctuality in the payment of debts and that 
 
 everybody felt the benefit of it, meaning 
 
 Attacks on the everybody who was in good credit. These, 
 
 Bank after the J 
 
 war. however, were far from being a majority of 
 
 the people. Complaints were made to the 
 legislature that the bank was guilty of favoritism, extortion 
 and harshness to debtors, and that it tended to destroy that 
 equality which ought to exist in a commercial country. A 
 petition embodying these and other accusations was pre- 
 sented from citizens of Chester County, with a hint that 
 bills of credit issued by the state would be more beneficial 
 than bank notes. This meant that bills of credit would be
 
 246 BANKING 
 
 distributed according to population or political influence, 
 whereas bank loans were at the service only of men who 
 could repay them at maturity. 
 
 The legislature took the matter into consideration and 
 appointed a committee " to inquire whether the bank estab- 
 lished at Philadelphia was compatible with the public safety 
 and that equality which ought ever to prevail between the 
 individuals of a republic." This idea, that the business of 
 banking savors of aristocracy and tends to the overthrow 
 of free institutions, had a strong hold on the public mind 
 in the early years of the republic 1 and has not yet wholly 
 disappeared, although it has undergone some modifications. 
 The legislature of Pennsylvania was so far 
 repealed"* 6 convinced of the tendency of banks to pro- 
 
 duce inequality among citizens that it repealed 
 the charter of the Bank of North America on September 3, 
 1785, within three years of the time when it had rendered ines- 
 timable services to the patriot cause. The bank protested 
 that the charter was irrepealable and continued its business, 
 but took steps to obtain a charter from Delaware, with the 
 intention of transferring itself to Wilmington. Such a charter 
 was granted early in 1786. Then Pennsylvania, fearing lest 
 it should lose the bank, in 1787 granted it a new charter 
 which was renewed from time to time and under which it 
 continued till the national banking law was passed. It 
 declined at first to enter the national system, because, under 
 the rules adopted by Secretary Chase, it would have been 
 obliged to change its name. But a dispensation was granted 
 to it, on account of its illustrious origin, to come in without 
 
 1 " Pope, of Kentucky, in the debate of 181 1, said that the Virginians 
 were known to be very poor financiers, ' for they were, a few years since, 
 frightened at the very name of a bank. ... It required all the eloquence 
 of [Brent of Virginia] to persuade the Legislature that the little Bank of 
 Alexandria would not sweep away their liberties.'" SUMNER, History 
 of Banking in the United States, p. 20.
 
 EARLY AMERICAN BANKS 247 
 
 such change. The Bank of North America is now one 
 hundred and twenty-seven years old, and has passed its semi- 
 annual dividend only five times. The benefit 
 
 And refinacted. . , 
 
 it has conferred upon the country, by setting 
 an example of sound principles and practice in banking, is 
 second only to its patriotic service in the Revolution ; and 
 for both we are indebted to Robert Morris, although he was 
 never president or even a director of the bank. 1 
 
 Ordinarily it would not be good banking practice to 
 advance large sums of money to the government or to have 
 the government for a shareholder of the bank, but both of 
 these features were necessities in the case of the Bank of 
 North America. Within the limits thus imposed, the bank 
 was conducted in a businesslike manner. The government 
 paid interest and principal on its loans like a private bor- 
 rower, and received dividends on its shares like a private 
 stockholder. It ceased borrowing and sold its shares as 
 soon as possible. 
 
 Next in point of time was the Bank of Massachusetts. Its 
 charter, granted by the legislature on February 7, 1784, con- 
 tained no restrictions or conditions except the 
 ^ n * t t f s MaSSa ' right of the legislature to examine its affairs. 
 No mention was made of circulating notes, 
 since the right to issue them was thought to be embraced 
 in the right to be a bank, though a subsequent law was 
 passed by the same legislature to punish persons who should 
 counterfeit the notes. The first restrictions on the bank 
 were imposed by a law passed in 1792. These were: (i) 
 that the bank should not issue notes smaller than $5.00 ; 
 (2) that the outstanding notes and loans should not exceed 
 
 1 A History of the Bank of North America down to 1882 has been 
 written by Lawrence Lewis, Jr. An interesting account of its origin 
 and early years is given in Sumner's Financier and Finances of the 
 American Revolution.
 
 248 BANKING 
 
 double the amount of the capital stock actually paid in ; 
 
 (3) in case of violation of this law, the directors were made 
 
 personally liable for the debts of the bank, but 
 
 those who were absent or had dissented might 
 Restrictions. 
 
 exonerate themselves by giving notice forth- 
 with to the governor of the state ; (4) statements of the 
 bank's affairs were to be given to the governor and council 
 every six months, but no form of statement was prescribed ; 
 (5) the bank was prohibited from dealing in merchandise or 
 in the shares of any bank. 
 
 The third in point of time was the Bank of New York, 
 founded or, at all events, proposed by Alexander 
 
 Hamilton in 1784, as an alternative to a 
 Y k land bank favored by Chancellor Livingston. 
 
 Under the Livingston plan one-third of the 
 bank's capital was to be paid in cash and the remaining 
 two-thirds was to consist of landed security in New York 
 and New Jersey. In March, 1784, Hamilton wrote a letter 
 to J. B. Church, counseling him against this project and 
 proposing a " money bank " in place of it. He dissuaded 
 several city merchants from taking an interest in the land 
 bank, and they then asked him to draw up articles for a 
 money bank, which he did. This was the Bank of New 
 York. It began business without a charter on June 9 of 
 the same year. As its application to the legislature for a 
 charter was refused, it began business without one ; but the 
 only penalty for doing so was the condition that the liability 
 of the shareholders for the debts of the bank was unlimited. 
 The bank, when organized, announced that the rate of 
 interest on loans would be 6 per cent, that loans should 
 run for thirty days only, that no note would be discounted 
 to pay a former one, that payments to the bank must be 
 made in its own notes or in specie, and that overdrafts 
 would not be allowed. Gold coins, which at that time were
 
 EARLY AMERICAN BANKS 249 
 
 more or less clipped or abraded, were to be received by 
 weight only. These regulations, especially the one requiring 
 punctual payment of debts, made the bank very prosperous 
 but very unpopular. 
 
 The directors were charged with working in the interest of 
 British capitalists and traders and with refusing discounts a few 
 days before the sailing of the European packet, that they, person- 
 ally, might profit by the distress thus occasioned. 
 Unpopular '^ e bank, ^ was contended, had destroyed private 
 
 credit, as well as that confidence, forbearance and 
 compassion formerly shown by creditors to their debtors. Such 
 was the result of enforcing the payment of a note at maturity 
 when lodged in the bank. And among the terrible consequences 
 to follow, it was predicted that " if their number is not restricted, 
 should banks be permitted in America, after the profits they yield 
 are known, we may not alone have one in every state but also in 
 every county of the different states." : 
 
 In 1786 the state made an emission of bills of credit, 
 with the result that the bank divided itself into two parts, a 
 specie bank and a paper bank, keeping the accounts of the 
 former in dollars and of the latter in pounds, making dis- 
 counts in paper on Tuesdays and in specie on Thursdays, 
 and issuing some of its circulating notes redeemable in 
 paper of the state and others redeemable in specie. 
 
 An application was made for a charter in 1785 and another 
 
 in 1789. Both were refused. A charter was finally granted 
 
 to the bank in 1791. It provided (i) that 
 
 the debts of the bank, " over and above the 
 
 ttustnc Lions 
 
 monies then actually deposited in the bank," 
 should not exceed three times the amount of the capital 
 actually paid in ; (2) that it should not hold real estate, 
 except such as might be requisite for the accommodation of 
 its own business or such as it should have taken as security 
 
 1 History of the Bank of New York, 1784-1884, by Henry W. Domett.
 
 250 BANKING 
 
 for debts previously contracted ; (3) that it should not 
 deal, or trade, in any kind of commodities, or in the stocks 
 of the United States, or of any state, though it might, when 
 necessary, sell any such stocks pledged to it by way of 
 security. 
 
 In the first list of shareholders of this bank are the names 
 of Alexander Hamilton, Aaron Burr, and Rufus King. One 
 of the depositors was Talleyrand, some of whose checks are 
 still preserved. 
 
 The earliest regulations of banking enacted by public 
 authority in the United States were those enumerated 
 above. The first regulation of Massachusetts had refer- 
 ence to the denominations of bank notes. The question 
 whether a bank should be allowed to issue 
 notes smaller than $S- or $10 was a matter 
 
 olTuill JXOl.CS. 
 
 of controversy in most of the states during 
 the first half of the nineteenth century. Legislation on the 
 subject was not uniform. It was contended, on the one 
 hand, that it was desirable to have a large amount of specie 
 in circulation, in order to give stability to the currency, and 
 that the way to secure this was to banish small notes. It 
 was also argued, on the other side, that the circulation of 
 specie, beyond the amount required for small change, 
 was an inconvenience and involved an appreciable loss 
 by abrasion. Experience in the United States has now 
 decided in favor of paper currency of denominations as 
 small as $1.00. 
 
 The restriction of notes and loans to twice the capital 
 stock actually paid in was intended to guard against undue 
 
 expansion of both debts and credits. In the 
 
 Restriction i a t er legislation of Massachusetts, as will be 
 
 of Debts and 
 
 Credits. seen, the restriction was changed so as to 
 
 provide that neither the credits nor the debts 
 of a bank (except for deposits) should exceed twice the
 
 EARLY AMERICAN BANKS 251 
 
 capital, the deposits not being reckoned as debts for this 
 purpose. (This restriction, as regards loans, has been 
 superseded in the national banking law by a require- 
 ment that a bank shall not make new loans when its 
 cash reserve is below a certain percentage of its deposits.) 
 In case of violation of the law, the directors were per- 
 sonally liable for the debts of the bank unless they took 
 immediate steps to make their dissent known to the public 
 authorities. 
 
 The reasons for requiring periodical bank statements 
 have been considered in Chapter II, but the Massachusetts 
 requirement was defective, since it gave opportunity to the 
 
 bank's officers to make special preparations 
 bitions* 1 therefor. The prohibition against trading in 
 
 merchandise was proper, since such trading 
 would have made the banker a rival in business of the 
 merchant and to that extent would have incapacitated him 
 for discounting the merchant's paper. The two vocations 
 should be cooperative, not competitive. It was inexpedient 
 also for a bank to buy its own shares, since by so doing it 
 impaired its capital. If Bank A, for example, with a paid 
 capital of $100,000, buys in all its shares, it stands just 
 where it was before any was paid. If Banks A and B buy 
 each other's shares, the result is the same as though each 
 one had bought its own shares. The community, in that 
 case, has no more banking capital than if neither of them 
 had ever existed. 
 
 As the debts of a bank consist, for the most part, of its 
 deposits and its circulating notes, the first legal restriction 
 
 on the powers of the Bank of New York was 
 New York practically that its note issues should not 
 
 Restrictions. * 
 
 exceed three times the amount of its paid-up 
 capital. If there was to be any legal restriction on note 
 issues, this provision was sufficiently liberal. At the time
 
 252 BANKING 
 
 when the charter was granted, and while there was no 
 restriction whatever on its note issues, its paid-up capital 
 was $318,250 specie, and its outstanding notes of the two 
 kinds only $360,000 specie value. The clause in reference 
 to the holding of real estate was a sound restriction. Since 
 a bank's liabilities are payable on demand, its investments 
 should be in quick assets. Real estate is not included in 
 that category. The prohibition against trading in commodi- 
 ties is a repetition of the law of Massachusetts, and the 
 reasons for it are the same. It does not, however, follow 
 that the banker should not buy or sell stocks of the state 
 or of the United States. Those are often highly desirable 
 forms of investment for some part of the funds of banks, by 
 reason of the facility with which they can be turned into 
 cash in emergencies. 
 
 RECAPITULATION 
 
 When the Federal Constitution was formed, there were 
 three banks in the United States, which still exist, the 
 Bank of North America at Philadelphia, the Bank of Massa- 
 chusetts, and the Bank of New York. All were issuing cir- 
 culating notes, and continued to do so, without dispute or 
 question, after the Constitution was adopted. It is plain, 
 therefore, that the clause of the Constitution which prohibits 
 the states from emitting bills of credit did not prohibit, or 
 have any reference to, bank notes. 
 
 One of these banks existed several years before it received 
 a charter from the legislature, and it exercised, without dis- 
 pute or question, the functions of issue and deposit. It is 
 evident, therefore, that the banking business was free in the 
 United States until it was restrained by statute. Restric- 
 tions were enacted by the state legislatures from time to 
 time, which reflect the state of public opinion at the several
 
 EARLY AMERICAN BANKS 253 
 
 
 
 times and places. The earliest regulations of law related to 
 the denominations of bank notes, to the proportions which 
 should exist between the capital on the one hand and the 
 debts and credits of banks on the other, to the holding of real 
 estate, and to the power of trading in goods and securities. 
 
 AUTHORITIES 
 
 Sumner's Financier and Finances of the American Revolution. 
 Lewis' History of the Bank of North America. 
 Domett's History of the Bank of New York, 1784-1884.
 
 E-MC^^W-^ ;0C- 
 
 CHAPTER VI 
 FIRST BANK OF THE UNITED STATES 
 
 THE next event of importance in the history of banking 
 in this country was the organization of the Bank of the 
 United States in 1791. This institution was established on 
 lines laid down by Alexander Hamilton, the 
 ReTrt n ^ rst Secretary of the Treasury, in a report dated 
 
 December 14, 1790, made in obedience to an 
 order of the House of Representatives. This report embraced 
 a statement of the principles which should, in his opinion, 
 govern such an institution and of the reasons why it might 
 be useful to the government in emergencies and to the busi- 
 ness community at all times. Hamilton took ground against 
 paper money issued by the government, either directly or 
 through a bank owned by itself, but he saw no reason why the 
 government should not be a partner in the bank, provided 
 the management was in the hands of the private owners. 
 
 The bank act passed by Congress followed, for the most 
 part, the plan which he proposed. The capital was to 
 be $10,000,000, divided into 25,000 shares of $400 each. 
 Eight millions of the capital stock was open to subscription 
 by the public, one-fourth to be paid in specie and three- 
 fourths in government obligations bearing 
 *> P er cent i nterest > tne subscriptions to 
 be paid within two years. The remaining 
 $2,000,000 of the capital might be subscribed by the United 
 States, payable in ten equal annual instalments with interest 
 at 6 per cent, and was so subscribed. Each shareholder 
 
 254
 
 FIRST BANK OF THE UNITED STATES 255 
 
 was entitled to cast one vote for one share, one vote for the 
 next two shares, and so on, no shareholder being entitled to 
 cast more than thirty votes. Foreign shareholders were not 
 allowed to vote by proxy, and therefore practically could 
 not vote at all. Not more than three-fourths of the directors 
 were eligible for the next succeeding year. The bank could 
 not hold real estate except for the immediate accommoda- 
 tion of its business, but it was not forbidden to lend on 
 mortgage security. The bank could not become indebted 
 for a greater amount than its capital stock, 
 
 ChSter iODS f ^ over and above the amount of its deposits, - 
 that is, the deposits were not to be counted 
 as liabilities, in estimating its right to contract debts. In 
 case of excess, the directors were to be personally liable to 
 creditors of the bank, but directors absent or dissenting 
 might exonerate themselves by notifying the President of 
 the United States and the stockholders at a meeting which 
 they should have the power to call for that purpose. There 
 was no other limit on the note issues of the bank than this. 
 It meant substantially that the circulating notes might be 
 equal in amount to the capital stock) The head of the 
 Treasury should have the right of inspecting all of the 
 affairs of the bank except the accounts of private individ- 
 uals and could call for reports as often as once a week if 
 he chose to do so. The notes of the bank should be 
 receivable for all public dues as long as said notes were 
 payable in gold and silver coin. The Treasury was not 
 required to deposit the public money in the bank. The 
 bank might have branches wheresoever the directors should 
 see fit. It might sell any part of the public debt of which 
 its stock was composed, but could not purchase any public 
 debt whatsoever, nor trade in goods except such as might 
 have been pledged for money loaned and not repaid. 
 The rate of interest on loans could not exceed 6 per cent.
 
 256 BANKING 
 
 ft 
 
 *The government pledged itself to grant no other charter for 
 
 a bank during the continuance of this one, which was lim- 
 ited to twenty years. The bill passed the Senate Decem- 
 ber 23, 1790, without a division. It passed the House 
 February 8, 1791; yeas 39, nays 20. All the affirmative 
 votes, except three, were from states north of the Potomac, 
 mostly of Federalists ; all the negative, except one, were from 
 states south of it, mostly of anti-Federalists, or Republicans, 
 as the followers of Jefferson were called. 
 
 President Washington called for the written opinion of 
 the Attorney-General, Edmund Randolph, on the constitu- 
 tionality of the bill. It was given adversely 
 
 constitutionality to the measure. He then asked for that of 
 of the Bill. 
 
 the Secretary of State, Mr. Jefferson. This 
 
 was also adverse. Jefferson held that there was no warrant 
 in the Constitution for the incorporation of a bank by Con- 
 gress, and that it could not be considered " necessary " for 
 carrying into effect any other power expressly conferred 
 upon Congress. He admitted, however, that if, in the Presi- 
 dent's mind, the pros and the cons were pretty evenly bal- 
 anced, the doubt ought to be resolved in favor of the bill, as 
 a matter of respect and deference to the legislative branch 
 of the government. The opinions of Randolph and Jeffer- 
 son were then sent to Hamilton for such answer as he might 
 be able to make, and he replied at considerable length and 
 with great force. He held that the word " necessary," as 
 used in the Constitution, did not mean absolutely necessary, 
 but fitting and appropriate. He said that no power had been 
 conferred upon Congress to establish lighthouses and buoys. 
 The power to erect and establish these things was inferred 
 from the power to regulate commerce and nobody questioned 
 it, yet commerce could be regulated without lighthouses and 
 buoys. Hamilton's arguments prevailed, and Washington 
 signed the bill.
 
 FIRST BANK OF THE UNITED STATES 257 
 
 Of regulations in the charter of this bank additional to, 
 
 or different from, those of the earlier ones, mentioned in 
 
 the preceding chapter, the most important 
 
 are those relating to the composition of the 
 
 bank's capital and to participation of the 
 
 government as a shareholder. In explanation and defense 
 
 of the provision which allowed three-fourths of the capital to 
 
 be paid in the 6 per cent obligations of the government, 
 
 Hamilton said in his report:. 
 
 The chief object of this is to enable the creation of a capital 
 sufficiently large to be the basis of an extensive circulation and 
 an adequate security for it. ... To collect such a sum in this 
 country in gold and silver into one depository may, without hesi- 
 tation, be pronounced impracticable. Hence the necessity of an 
 auxiliary, which the public debt at once presents. This part of 
 the fund will be always ready to come in aid of the specie; it will 
 more and more command a ready sale and can therefore be expe- 
 ditiously turned into coin if an exigency of the bank should at 
 any time require it. 
 
 No exception need be taken to this argument, considering 
 the time and circumstances of the case. Ordinarily it would 
 not be considered good banking practice to 
 wlshlSder. acce P t an yt hin g but money as a part of the 
 capital, even though some portion of it were 
 subsequently invested in government bonds. Such invest- 
 ment should be left to the discretion of the directors after 
 the organization is effected. Although, as Hamilton said, 
 the bonds were intended to be the basis of circulation and 
 an adequate security for it, they remained under the control 
 of the bank and might be converted into money at any time. 
 
 The government's participation as a shareholder was not 
 justified in this instance by necessity, as it had been, ten 
 years earlier, in the case of the Bank of North America. 
 Private persons were now eager to supply all the capital
 
 258 BANKING 
 
 required. If pecuniary gain were a sufficient reason for the 
 government's participation, it could have been obtained 
 more easily, and without risk, by a tax. Even if we conceive 
 it expedient for the government to have been a shareholder 
 at all, the clause which allowed it a long credit in paying for 
 its stock was indefensible. It was a speculation on the part 
 of the government, and a successful one as it turned out, 
 but it set the example of paying for shares with " stock 
 notes," which was the poison of banking in the United 
 States for the next fifty years. 
 
 The provisions giving to the small shareholders greater 
 voting power in proportion to their holdings than the large 
 ones and requiring one-fourth of the directors to retire at the 
 end of each year were intended to prevent the bank from 
 passing into the control of a clique. These methods of dis- 
 tributing power in the management of banks 
 Shareholders 1 ' were ver y generally adopted by the state legis- 
 latures in the first half of the nineteenth cen- 
 tury, but their importance was evidently overestimated, since 
 they have been wholly abandoned without any harmful con- 
 sequences. The provision which prohibited the foreign 
 shareholders from voting by proxy was intended to exclude 
 foreign influence from the management. As the owners 
 abroad would not be likely to cross the ocean in order to 
 vote, they would not be able to vote at all. Foreign influ- 
 ence was very much of a bugbear at that time, but it does 
 not appear that the shareholders in Europe ever betrayed 
 any desire to vote or to exercise any influence whatever on 
 the management. 
 
 The provision that the note issues of the bank should 
 not exceed the amount of the capital stock seems to have 
 been unnecessary, since no report of note issues exceeding 
 $5,157,378, or a little more than one-half of the capital, has 
 reached us. Very few reports of the condition of the bank,
 
 FIRST BANK OF THE UNITED STATES 259 
 
 however, were published. It is not known whether the 
 Secretary of the Treasury ever exercised his right of inspect- 
 ing, or how often he called for reports of its 
 Other Provisions. ,. . 
 
 condition. Only two such reports were sub- 
 mitted to Congress by Gallatin, both being in connection 
 with the proposal to renew the charter. 
 
 The Treasury was not required to keep the public money 
 in the bank, but it kept about two-thirds of it there, and the 
 balance in state banks selected by the President. The parent 
 bank was at Philadelphia. It had branches at Boston, New 
 York, Baltimore, Norfolk, Charleston, Savannah, Washington, 
 and New Orleans. It transferred the public funds from 
 place to place at its own expense and paid the money on the 
 order of the Treasurer of the United States wherever wanted. 
 
 The prohibition against the purchase of any public debt 
 was adopted because it was believed that the bank would 
 be able, with its large capital, to control the market and 
 put the price of government securities up or down at its 
 own pleasure. 
 
 The entire capital of the bank was subscribed for within 
 two hours after the books were opened. It was a great 
 financial success from the start. It began operations in 
 December, 1791, and paid a dividend of 4 per cent in July, 
 1792. In 1809 Mr. Gallatin reported that the 
 government had made a profit of $671,860 on 
 the sale of its shares besides receiving divi- 
 dends at the average rate of 8f per cent per annum. Of 
 the 25,000 shares, 18,000 were held abroad and 7000 in 
 the United States. The outstanding circulation at that 
 time was $4,500,000; specie on hand, $5,000,000 ; deposits, 
 $8,500,000; loans and discounts, $15,000,000, consisting 
 mostly of sixty-day paper. 
 
 The government, at that time, did not require the pay- 
 ment of customs duties on the delivery of the goods imported,
 
 26O BANKING 
 
 but accepted the bonds of the importers payable at a future 
 date. The bank collected the payment of the bonds, and it 
 refused to receive the notes of non-specie-pay- 
 in S banks - lt thus established a standard of 
 commercial honor and enforced it upon the 
 banks chartered by state authority. In this way it became 
 a regulator of the currency, but it incurred the enmity of 
 the slovenly and fraudulent bankers of the period and of the 
 second-rate traders and speculators by the rigidity of its 
 rules. 
 
 In 1809 Secretary Gallatin recommended a renewal of the 
 bank's charter with an increase of its capital to $30,000,000. 
 War with England was impending, and Mr. Gallatin proposed 
 that the bank should be bound in the new charter to lend 
 three-fifths of its capital to the government if required to do 
 so, and that it should pay interest on all government deposits 
 in excess of $3,000,000. A contest of extreme bitterness 
 ensued. The bank had been established in the first instance 
 by the Federalists, who had lost political 
 
 P W6r durin the P aSt ei ht vears ' but were 
 still strong in wealth and respectability. They 
 
 had established the bank against Mr. Jefferson's ideas ; and 
 he, although yielding to Mr. Gallatin on practical measures 
 and signing various bills supplementary to the original 
 charter, had remained, both in his administration and in 
 his retirement, a consistent foe to it. President Madison, 
 who, as a member of the House, had opposed the original 
 charter on the ground of unconstitutionality, was now dis- 
 posed to look at the question as res adjudicata. He neither 
 favored nor opposed a new charter. There was, however, 
 a faction opposed to Mr. Gallatin which had its principal 
 seat in Pennsylvania, its leaders being William Duane 
 and Michael Leib. These men wanted to have certain 
 changes made in the Federal offices in Philadelphia, which
 
 FIRST BANK OF THE UNITED STATES 26 1 
 
 Mr. Gallatin refused on public grounds. The spoilsmen 
 were determined to force Gallatin out of office if they could, 
 
 and to this end they opposed everything that 
 " ne f avore d- A clique in Maryland headed by 
 
 the Secretary of State, Robert Smith, and his 
 brother, Senator Smith, was equally bitter against Gallatin 
 and consequently against the bank. 
 
 Notwithstanding this factional opposition the usefulness 
 of the bank was so manifest that there would have been a 
 strong majority for the new charter, if the question had come 
 to a vote when the subject was first taken up. On the 
 2d of April, 1810, the House Committee, to whom the peti- 
 tion of the bank for a recharter had been referred, reported 
 favorably. On the 2ist of the same month a motion to post- 
 pone indefinitely was defeated ; yeas 46, nays 67. Then the 
 matter was laid over informally till January 4, 1811. The 
 state banks took advantage of the delay to bring pressure 
 on their local representatives against a recharter. They 
 wanted to secure the government's deposits for themselves 
 and to get rid of the competition of the great bank in other 
 
 ways. Some persons who had more political 
 New^harter* ** ' i n fl uence tnan credit were incensed because 
 
 their paper had been refused for discount at 
 the bank. The Republicans seized this opportunity to be 
 revenged on the Federalists. They denounced the bank as 
 an aristocratic, and especially as a foreign, institution. One 
 of the most vehement speakers against the bank, on account 
 of the foreign holdings of its shares, was Henry Clay, who 
 said in a speech in the Senate on February 15, 1811 : 
 
 Seven-tenths of its capital is in the hands of foreigners, and 
 these foreigners chiefly English subjects. We are possibly on the 
 eve of a rupture with that nation. Should such an event occur, 
 do you apprehend that the English premier would experience any 
 difficulty in obtaining the entire control of this institution?
 
 262 BANKING 
 
 Mr. Gallatin had exposed this fallacy two years earlier by 
 showing that the foreign shareholders had no vote in the 
 management and that, if the charter were not renewed, the 
 portion of the bank's capital held by foreign- 
 ers ( most ly Englishmen), and amounting to 
 $7,200,000, must be remitted to the owners at 
 once. This demonstration of the impolicy of liberating and 
 sending abroad more than $7,000,000 of specie at a time 
 when we were likely to need every dollar of coin that the 
 country contained had not the smallest effect on the anti- 
 Federalist faction, except to increase their fury. Mr. Desha, 
 a representative of Kentucky (February 12, 1811), con- 
 sidered this foreign capital one of the engines set to work to 
 overturn civil liberty. He had no doubt that George III 
 was a principal stockholder and that the latter would author- 
 ize his agent in this country to bid millions for a renewal 
 of the charter. The new charter was not wanted except 
 by a few speculating merchants who had become involved 
 in debt and had borrowed money from " this foreign bank." 
 The only way to save liberty, in his opinion, was " to 
 assist in strangling this infant Hercules in the cradle." 
 He concluded by suggesting that, unless the British gov- 
 ernment should rescind its clandestine measures affecting 
 our rights, rather than renew the charter of the bank we 
 ought to confiscate the British capital in it and use it in 
 conquering Canada. 
 
 The government had sold its own property in the bank 
 
 to foreigners at a large premium. The last sale of 2220 
 
 shares had been made in 1802 at 145 to 
 
 The Government's gj r Francis Baring, who had resold them 
 Shares in the 
 
 in England at 150. Ihe purchasers bought 
 
 them as shares in an active concern. Of 
 course, they were charged with knowledge that the charter 
 would expire in 1811 and that it might not be renewed,-
 
 FIRST BANK OF THE UNITED STATES 263 
 
 but it was not creditable in congressmen to declaim against 
 foreign holdings as a reason for refusing a charter, when 
 the government had pocketed a bonus of nearly $700,000 
 from these same foreigners in the expectation that it would 
 be renewed. 
 
 The bank was not without friends among the Republi- 
 cans. The best speech made for the new charter was that 
 of Senator Crawford of Georgia, a masterly effort from 
 
 nearly all points of view. Senator Lloyd of 
 Debate"** Massachusetts made a strong speech on the 
 
 same side, supplying some interesting items of 
 banking intelligence. As showing the great convenience to 
 the government of an apparatus by which payments could be 
 made at specie value everywhere, without cost for the trans- 
 mission of funds, he said that Penobscot bank notes would 
 not pass in Boston at all times, that Boston bank notes 
 passed with difficulty in New York and Philadelphia, while 
 those of New York were not readily current in Washington. 
 Mr. Clay held that Congress had no power to grant the 
 original charter or to renew it. On March 2 he presented a 
 report denying a petition of the bank for an extension of its 
 charter sufficiently long to wind up its affairs. The report 
 says that, " holding the opinion (as a majority of the com- 
 mittee do) that the Constitution did not authorize Congress, 
 originally, to grant the charter, it follows as a necessary con- 
 sequence of that opinion, that an extension of it, even under 
 the restrictions contemplated by the stockholders, is equally 
 repugnant to the Constitution." Five years later he was a 
 strong advocate of the charter of the second Bank of the 
 United States, saying that " that which appeared to him in 
 181 1 under the state of things then existing not to be neces- 
 sary to the general government, seemed now to be necessary 
 under the present state of things. Had he then foreseen 
 what now exists and no objection had lain against the
 
 264 BANKING 
 
 renewal of the charter other than that derived from the 
 Constitution, he should have voted for the renewal." l 
 
 The vote was taken in the House January 24, 1811, on a 
 motion to postpone indefinitely, which motion prevailed by 
 a majority of one, 65 to 64. The vote in the Senate on a 
 
 similar bill (February 20) was a tie, 17 to 
 Charter refused. 
 
 17, whereupon George Clinton, the Vice- 
 
 President, gave the casting vote against the bank. It was 
 accordingly put in liquidation. It paid the shareholders 
 $434 for each share of $400, i.e., a surplus of nearly 9 per 
 cent. Thus the country lost a most valuable financial insti- 
 tution. There was straightway a mushroom growth of new 
 state banks to fill the void, so that one hundred and twenty 
 were chartered and put in operation within three years. 
 The government went to war in 1812, leaning upon the 
 state banks for financial support. Most of them suspended 
 payments in September, 1814, after which the country 
 wallowed in irredeemable paper for several years. If the 
 charter of the great bank had been renewed in 1811, 
 specie payments would probably have been maintained 
 throughout that crisis. Mr. Gallatin, writing many years 
 later, said : 
 
 It is our deliberate opinion that the suspension might have 
 been prevented at the time when it took place had the former 
 Bank of the United States been still in existence. The exagger- 
 ated increase of state banks, occasioned by the dissolution of that 
 institution, would not have occurred. That bank would as before 
 have restrained within proper bounds and checked 
 
 Mr. Gallatin's their issues, and through the means of its offices 
 Opinion. 
 
 (branches) it would have been in possession of 
 
 the earliest symptoms of the approaching danger. It would 
 have put the Treasury Department on its guard ; both acting 
 in concert would certainly have been able at least to retard the 
 
 1 Annals of Congress, 1815-1816, p. 1194.
 
 FIRST BANK OF THE UNITED STATES 265 
 
 event, and as the treaty of peace was ratified within less than six 
 months after the suspension took place, that catastrophe would 
 have been altogether avoided. 
 
 By restraining the issues of the state banks within proper 
 bounds Mr. Gallatin meant that the bank would have pre- 
 sented their notes promptly for redemption, thus keeping 
 their issues within the limit of safety. 
 
 RECAPITULATION 
 
 The first Bank of the United States was devised by Alex- 
 ander Hamilton. It was one of a series of financial meas- 
 ures through which that statesman sought to bind the people 
 of the newly formed Union together, by giving them certain 
 pecuniary interests in common. The bank's charter was 
 supported by the Federalist party and opposed by the anti- 
 Federalists, or Republicans. It became a law in February, 
 1791, and the bank was put in operation in the following 
 December. The capital was $10,000,000, of which $2,000,000 
 was subscribed by the government. The private subscriptions 
 were payable within two years in half-yearly instalments ; 
 that of the government in ten equal annual instalments, 
 with interest at 6 per cent. The charter of the bank was 
 limited to twenty years, and the government agreed to 
 charter no other bank during that period. 
 
 The bank was a great financial success. It paid dividends 
 during the term of its existence, averaging 8| per cent per 
 annum, and accumulated a surplus equal to about 9 per cent 
 of its capital, which was eventually distributed to its share- 
 holders. The parent bank was in Philadelphia, with seven 
 branches in cities on the Atlantic seaboard and one in New 
 Orleans. It collected the bonds of importers for customs 
 duties and made transfers of money at the order of the 
 Treasury, without expense to the government. It also made
 
 266 BANKING 
 
 advances of money to the government, when required, at the 
 customary rate of interest. It served the purpose of a regu- 
 lator of the currency by maintaining the highest standard of 
 commercial honor, a standard to which other banks were 
 obliged to conform under penalty of being discredited in the 
 eyes of the business community. 
 
 When its charter was about to expire the bank applied to 
 Congress for a renewal of the same. The Federalist party 
 was now in the minority, and its opponents made the grant- 
 ing of the proposed new charter a political issue. The state 
 banks joined the opposition because they wished to get rid 
 of the competition of the great bank and its branches. In 
 the last year of its existence the bank was made a football 
 of politics. Its usefulness from a financial point of view 
 received very little attention in the debate on the recharter. 
 The final decision was adverse to it, by a majority of one 
 vote in the House and a tie in the Senate. 
 
 AUTHORITIES 
 
 Clarke and Hall's Legislative and Documentary History of the 
 Bank of the United States. 
 
 Hamilton's Writings, edited by H. C. Lodge. 
 
 Henry Adams' Life of Albert Gallatin. 
 
 Gallatin's Writings, edited by Henry Adams. 
 
 Von Hoist's Constitutional History of the United States. 
 
 Sumner's History of Banking in the United States.
 
 * 
 
 
 f 
 
 ^ 
 
 CHAPTER VII 
 SECOND BANK OF THE UNITED STATES 
 
 THE second war with Great Britain began in 1812. Specie 
 
 payments were suspended in September, 1814, by nearly all 
 
 the banks south and west of New England. 
 
 Financial Dis- Their notes fell to a discount ranging from 
 
 tress in 1814. 
 
 10 to 30 per cent. Ihe government had 
 defaulted on the interest of the public debt. Its money was 
 mainly in the suspended banks. The financial condition of 
 the country was desperate. 1 Naturally the statesmen of the 
 day bethought themselves of the Bank of the United States. 
 On the i yth of October the Secretary of the Treasury, Mr. 
 
 Dallas, recommended that a national bank 
 
 A National Bank b established with a cap ital of $50,000,000, 
 proposed. 
 
 of which one-tenth should be specie and the 
 
 remainder government securities of one kind and another. 
 It was to begin under a suspension of specie payments. As 
 Daniel Webster said in the debate : " It was to commence 
 its existence in dishonor; it was to draw its first breath in 
 disgrace." Webster's speech of January 2, 1815, was fatal to 
 this bill, for it was rejected by a tie vote. A reconsideration 
 was moved and carried, and the bill was amended by striking 
 
 1 " The government might possess immense resources in one State 
 and be totally bankrupt in another; it might levy taxes to the amount 
 of the whole circulating medium yet have only its own notes available 
 for payment of debt ; it might borrow hundreds of millions and be none 
 the better for the loan." HENRY ADAMS' History of the United States* 
 VIII, 215. 
 
 267
 
 268 BANKING 
 
 out the clause requiring a specific loan to the government 
 and the one authorizing the suspension of specie payments. 
 In this shape it was passed by both houses ; but it was 
 vetoed by President Madison because it did not furnish 
 sufficient financial aid to the government. The Senate 
 thereupon took up the original Dallas Bill and passed it on 
 February n. But news that a treaty of peace with Great 
 Britain had been signed at Ghent reached Washington on 
 the 1 3th, and on the i;th the House, by a vote of 74 to 73, 
 indefinitely postponed the measure. 
 
 As the war had come to an end, the Treasury was no 
 longer in the desperate condition of the preceding year ; yet 
 Mr. Madison, in his message of December 5, 1815, sug- 
 gested a national bank as an instrumentality for bringing 
 about a resumption of specie payments. A bill for this 
 purpose was reported to the House by Mr. Calhoun on 
 January 8, 1816. It passed both houses and was signed by 
 President Madison on April 10, 1816. The capital was to 
 
 be $35,000,000, four-fifths to be subscribed 
 teTofiSie C1 k v private persons and one-fifth by the United 
 
 States. There were to be twenty-five direc- 
 tors, five of whom should be appointed by the President of 
 the United States, by and with the advice and consent of 
 the Senate, and twenty elected by those stockholders who 
 resided in the United States. Foreign stockholders could 
 not vote either in person or by proxy. Both the notes and 
 the deposits of the bank were to be paid in specie. It was 
 authorized to issue post notes not smaller than $100 each, 
 payable not more than sixty days after date. No circulating 
 notes were to be issued of less amount than $5.00. All 
 notes were to be signed by the President and the principal 
 cashier. The notes should be receivable in all payments 
 to the United States. The bank was to provide facilities 
 for transferring the public funds, without expense to the
 
 SECOND BANK OF THE UNITED STATES 269 
 
 government, to any places within the United States where 
 payments were to be made. Section 16, regulating the 
 public deposits, provided : 
 
 That the deposits of the money of the United States in places 
 
 in which the said bank or branches thereof may be established 
 
 shall be made in said bank or branches thereof, 
 
 unless the Secretary of the Treasury shall at any 
 
 time otherwise order and direct ; in which case the Secretary of 
 
 the Treasury shall immediately lay before Congress, if in session, 
 
 and if not, immediately after the commencement of the next 
 
 session, the reasons of such order or direction. 
 
 The bank was forbidden " to purchase any public debt 
 whatsoever." In case the bank should fail to pay any note, 
 obligation, or deposit, in specie on demand, it 
 was to forfeit 12 per cent per annum on the 
 amount of the claim. The government's sub- 
 scription of $7,000,000 could be paid either in money or in 
 its own obligations bearing 5 per cent interest. It was, in 
 fact, wholly paid by the latter, i.e., by a stock note, and the 
 note was not fully paid until 1831. The bank was to pay 
 the United States the sum of $1,500,000 as a bonus for 
 the charter, which was to be exclusive and was to continue 
 twenty years. It was forbidden to pay dividends to stock- 
 holders whose shares were not fully paid for. The directors 
 were authorized to establish branch banks wheresoever, in 
 the United States or the territories thereof, they should 
 see fit. 
 
 Of the foregoing regulations the most important was the 
 one which required the deposits to be paid in specie. 
 Strictly speaking, all obligations payable in 
 dollars were payable in specie. There was 
 no other legal-tender money than gold and 
 silver coin. Yet the conception prevailed universally that 
 while a bank ought to pay its notes in specie on demand, it
 
 2/0 BANKING 
 
 might properly pay its deposits in the notes of other banks, 
 near or remote, provided the latter paid their notes in 
 specie. Consequently, even when the banks were solvent, 
 there were two kinds of currency in circulation in every 
 city : (i) specie and the notes of the local banks, which were 
 at par ; (2) the notes of banks of other cities and states, 
 which were at a discount greater or less according to the 
 difficulty of securing their redemption. This discount was 
 not observed by the masses of the 'people. To them one 
 dollar was as good as another. Anything that would pass 
 was gladly accepted. But to merchants the discount on 
 out-of-town bank notes was a considerable expense, and 
 they sought to recoup themselves by charging enough for 
 their goods to cover the loss. Daniel Webster was opposed 
 to the pending bill in any shape, but he struck a blow for 
 sound principles of currency by securing the adoption of an 
 amendment providing that the deposits as well as the notes 
 of the Bank of the United States should be paid in specie. 
 It did not abolish everywhere the bad practice of having 
 two kinds of bank notes in circulation at the same time and 
 place, one at par and the other at a discount, but it 
 abolished it in the operations of the great bank, and it 
 established a standard of good banking which was never 
 wholly lost sight of, and which reached its fulfillment in the 
 Suffolk Bank system a few years later. Mr. Webster made 
 another contribution to sound finance during this session of 
 
 Congress by securing the passage of a bill 
 T u x ies requiring the payment of all government dues 
 
 in specie, or in Treasury notes, or in notes of 
 the Bank of the United States. Previously, any bank notes 
 that were current at the places where the duties and taxes 
 were collected had been accepted by the Treasury, although 
 no banks except those of New England were at that time 
 paying specie.
 
 SECOND BANK OF THE UNITED STATES 
 
 The power of the bank to issue post notes was curtailed 
 in the charter, both as to the size of the notes and the time 
 
 they should run. Post notes were bank notes 
 Post Notes. .. 
 
 payable, not on demand, but at a future time. 
 
 They were a means of borrowing money from the public for 
 fixed periods with or without interest. They were in common 
 use in the first quarter of the nineteenth century. Some- 
 times the words containing the date of payment were printed 
 in very small type, so that they were not readily seen and 
 were accepted by some persons for demand notes. The 
 recipients were thus defrauded. The restriction of post 
 notes to denominations of $100 or more was made in order 
 to prevent deception, since anybody receiving a note as large 
 as $100 would be pretty sure to examine it carefully and to 
 know whether it was payable on demand or otherwise. 
 
 The provision requiring that all notes issued by the bank 
 
 should be signed by the president and the principal cashier 
 
 was adopted because that was the customary 
 
 Branch Drafts. . . . 
 
 way of issuing such notes. There was a simi- 
 lar provision in the charter of the earlier bank. The fact 
 that there are physical limitations on the power of a man to 
 write his name, and that this bank was three and one-half 
 times as large as the former one, did not occur to anybody 
 until after the bank had gone into operation. Then it was 
 discovered that no human being could perform the necessary 
 labor. The bank officers asked Congress to amend the law 
 so as to allow other persons to sign notes. There was no 
 reason why the request should not have been granted, but 
 Congress took no action. Consequently the bank adopted 
 the practice of issuing drafts of $5.00 and $10 at the several 
 branches, drawn on the parent bank. These drafts passed 
 into circulation, to the amount of several millions. When 
 the subject of a recharter of the bank came before Congress 
 the issuing of these drafts was assailed as a violation of law,
 
 2/2 BANKING 
 
 but an opinion had been obtained from Horace Binney, 
 Daniel Webster, and William Wirt, before any such drafts 
 were issued, that they would be legal. 
 
 The provision in reference to the deposit of the public 
 funds in the bank became very important in the subsequent 
 bank war in President Jackson's administration, and will be 
 considered in connection with that event. 
 
 The clause imposing a penalty of 12 per cent per annu* 
 on any failure to pay specie on demand for any obligation 
 of the bank was intended to make the suspen- 
 Suspension s * on * s P ec i e payments unprofitable. There 
 
 were in existence at that time many banks 
 which were doing a flourishing business and actually paying 
 dividends to their stockholders, but were not redeeming 
 their own notes, or paying their deposits, except in the 
 depreciated notes of other banks. If they had been under 
 a penalty of 12 per cent per annum on all their defaulted 
 paper, they would have made haste to resume specie payments. 
 
 It would not be good policy now to grant exclusive privi- 
 leges to a private bank, but if for any reason it were granted, 
 it would be proper to exact a bonus from the 
 Charter ' beneficiaries. The exclusive privilege granted 
 
 to the Bank of the United States consisted of 
 the deposits of the government without interest, of the right 
 to establish branches without consulting the state govern- 
 ments, and of the credit which those extensive privileges 
 gave it in the eyes of the people and of foreign nations. 
 
 The bank established twenty-five branches under the 
 authority granted to it. These were extremely useful to the 
 
 country in the way of distributing the capital 
 Branch Banks. 
 
 of the bank to the places where it was most 
 
 needed. Thus, if there was a stronger demand for money 
 at New Orleans than at Philadelphia, knowledge of that fact 
 would be quickly conveyed by the branch at the former
 
 SECOND BANK OF THE UNITED STATES 2/3 
 
 place to the parent bank, and funds could be quickly trans- 
 ferred, either from the parent bank or from any branch where 
 the demand was less pressing. One advantage of branch 
 banking consists in the facility which it affords for gaining 
 knowledge of the relative needs of business in different 
 places and of responding promptly to those needs through 
 agents already on the ground possessing the necessary local 
 knowledge. The benefit is shared equally by the borrower 
 and the lender. Branch banking tends to equalize the rates 
 of interest among different localities in the same country. 
 
 The charter of the bank was made the basis of a shame- 
 ful speculation, which brought it to the verge of ruin within 
 two years. The law provided that the stock 
 Beginnings subscriptions of individuals should be paid in 
 
 three instalments : 30 per cent at the time of 
 subscribing, 35 per cent in six months, and 35 per cent in 
 twelve months. One-fourth of the private subscriptions 
 ($7,000,000) were to be paid in specie and three-fourths in 
 specie or in the funded debt of the United States. When 
 the second instalment became due only $324,000 was paid in 
 specie where $2,800,000 was due ; and for the third, only a 
 trifling amount of specie or of anything else. The bank had 
 discounted the notes of the stockholders on the pledge of 
 their stock to the amount of more than $8,000,000. It 
 also allowed the stock to be sold and transferred by the 
 subscribers before it was paid for. This caused a great 
 deal of trading in shares and a rapid advance in the price. 
 When they rose above par the bank loaned more than par 
 on them. In August, 1817, it authorized loans as high as 
 $125 on $100 to shareholders who would furnish other 
 security for the extra $25. This was easily furnished, as 
 the shareholders indorsed for each other. 
 
 The provision of the charter prohibiting dividends on 
 shares that had not been paid in full had been systematically
 
 2/4 BANKING 
 
 violated. The Baltimore branch had been defrauded, by its 
 president and cashier, of $1,600,000. The bank at this 
 time was really insolvent and it was held up only by the 
 government's deposits, which amounted to $8,000,000. It 
 was saved from impending bankruptcy by Mr. Langdon 
 Cheves of South Carolina, who became its president in 
 March, 1819. One of his measures of relief was the bor- 
 rowing of $2,500,000 in Europe. Another was the require- 
 ment that the loans made on the security of the bank's 
 shares should be paid at the rate of 5 per cent every sixty 
 days. " Even this small reduction," said Mr. Cheves in his 
 first official report, " was the subject of loud, angry, and con- 
 stant remonstrance among the borrowers, who claimed the 
 privileges and favors which they contended were due to 
 stockholders." 
 
 The bank was put in a solvent condition by Mr. Cheves, 
 and in the course of the next ten years became established 
 in the confidence of the business community 
 anc * i nterwoven i n the policy of the nation as 
 fully as the leading banks of the old world 
 are now in their respective countries. It had five hun- 
 dred employees of high standing and social position. Nicho- 
 las Biddle of Philadelphia became its president in 1823. 
 
 Notwithstanding the cerulean aspect of the sky overhead, 
 there was a cloud gathering on the western horizon which is 
 depicted by the latest historian of the bank in the following 
 terms : 
 
 Democracy, devoted to the principle of equality, is opposed" to 
 all forms of privilege, and to none more than to a monetary monop- 
 oly. When it is recollected that the Bank of the United States 
 was at that time the one great monopoly in the country, and that 
 against it were directed all the passionate opposition and fear 
 which to-day fall upon banks, railroad companies, and trusts, its 
 danger from the rising power of that fierce Democracy which, with
 
 SECOND BANK OF THE UNITED STATES 2/5 
 
 Andrew Jackson, swept over the country, may be faintly measured. 
 The Democracy was positive that the bank was a menace to the 
 political and social interests of the United States ; that it made 
 the rich richer and the poor poorer ; that it depressed the weak 
 and made the potent more powerful ; that it accentuated the differ- 
 ences of society, creating on the one hand a powerful aristocracy 
 and on the other hand an impotent and beggarly proletariat. 
 These opinions were especially prevalent in the West, where 
 Democracy was most powerful. 1 
 
 Before he came to Washington as President, Jackson 
 entertained the opinion that Congress had not the consti- 
 tutional power to charter a bank outside of the District of 
 Columbia. He had also expressed a dislike to all banks. 2 
 
 RECAPITULATION 
 
 The second Bank of the United States was established in 
 1816, at the instance of President Madison, to put an end to 
 the disorders in the currency consequent upon the War of 
 1812. The capital was $35,000,000, of which $7,000,000 
 was subscribed by the government. During its early years 
 the bank was shamefully mismanaged and narrowly escaped 
 destruction, but it was restored to a sound position in the 
 year 1819, after which it became extremely prosperous. 
 The charter was for the most part a copy of that of the first 
 bank. The money owned or collected by the government 
 at places where the bank or its branches existed was to be 
 deposited in the bank or branches, but the Secretary of the 
 Treasury might remove the same for reasons which he should 
 communicate to Congress. 
 
 1 Catterall's The Second Bank of the United States, p. 167. 
 
 2 Catterall, pp. 183-184.
 
 CHAPTER VIII 
 THE BANK WAR 
 
 THE charter of the great bank, granted in 1816, was to 
 expire in 1836. When General Jackson came to Washington 
 City as President in 1829, the subject of a renewal of the 
 charter had not been discussed either in Congress or in 
 the press. Probably nobody had given it serious thought. 
 There had, however, been some conflicts be- 
 
 lReter n "' tween the bank and the state legislatures of 
 Ohio, Kentucky, and Georgia, prompted by the 
 jealousies of the local banks. The latter had accused the 
 great bank of " accumulating their notes " and then present- 
 ing them for redemption in coin, thus making money scarce 
 and disabling them from lending freely to their own cus- 
 tomers. But this accumulating of the notes of the local 
 banks resulted from receiving them as deposits. Not to 
 have received them would have discredited, and perhaps 
 ruined, the banks issuing them. To have received them as 
 deposits and not to have presented them for payment would 
 have been to transfer the capital of the great bank to the 
 local banks without interest. From this dispute had arisen 
 hostile legislation and prolonged litigation; but the con- 
 flicts had ceased, and the bank was at the height of its 
 popularity and strength at the beginning of Jackson's admin- 
 istration. 
 
 The first visible sign of the coming trouble was contained 
 in a letter written by Levi Woodbury, senator from New 
 Hampshire, to Samuel Ingham, Secretary of the Treasury, 
 
 276
 
 THE BANK WAR 
 
 making complaints against Jeremiah Mason, one of the 
 great jurists of New England, who was the president of the 
 branch bank at Portsmouth. Woodbury and Mason were 
 political rivals. The former accused the latter 
 of bad manners, of partiality in the making of 
 loans, and of using his financial influence for 
 political ends. Mr. Ingham referred the letter to Nicholas 
 Biddle, president of the bank, and added some comments 
 of his own, implying that he thought there might be some 
 truth in Woodbury's complaints. 
 
 Three weeks later Mr. Isaac Hill of New Hampshire, 
 second comptroller of the United States Treasury, wrote a 
 letter asking for a change in the board of directors of the 
 Portsmouth branch of the bank and for the removal of Mr. 
 Mason as president. The letter was addressed to two of 
 Hill's friends in Philadelphia, who were requested to present 
 to the parent bank two petitions to that end, signed by citi- 
 zens of New Hampshire, which were inclosed in his letter. 
 Hill had been the editor of a rancorous Demo- 
 
 Isaac Hill. 
 
 cratic newspaper and latterly president of a 
 small bank in Concord, for which he wished to secure the 
 pension deposits, which were placed by law in the Ports- 
 mouth branch of the great bank. 
 
 A few months later Amos Kendall, fourth auditor of the 
 Treasury, wrote a letter to Ingham, making accusations, 
 which were afterwards shown to be false, against the Louis- 
 ville branch of the bank, charging that it had 
 
 Amos Kendall. 
 
 interfered in an election there in 1825. These 
 letters proved that there were politicians in Washington, near 
 to the President, who had private and sinister ends to gain 
 by attacking the bank. They accomplished their object, by 
 persuading him that the bank was taking part in politics 
 secretly and against himself. The charge was false : the 
 bank never meddled with politics until compelled to do so
 
 278 BANKING 
 
 in self-defense. It is possible, however, that its enemies 
 believed that it was doing so. 1 
 
 Biddle was led to believe, by conversations with Major 
 Lewis, a close friend of Jackson, and also with Jackson him- 
 self, that the latter would favor, or at all events not oppose, 
 a renewal of the bank's charter. Yet an undated paper in 
 Jackson's handwriting, addressed to Biddle, was subse- 
 quently found among his manuscripts, saying that he 
 (Jackson) had read the opinion of Chief Justice Marshall 
 affirming the constitutionality of the bank, and that he 
 could not concur with it. Biddle was greatly surprised to 
 read in Jackson's first annual message to Congress, Decem- 
 ber 8, 1829, the following paragraph : 
 
 The charter of the Bank of the United States expires in 1836, 
 and its stockholders will most probably apply for a renewal of 
 
 their privileges. In order to avoid the evils result- 
 Jf c ( ing from precipitancy in a measure involving such 
 
 important principles, and such deep pecuniary 
 interests, I feel that I cannot, in justice to the parties interested, 
 too soon present it to the deliberate consideration of the Legisla- 
 ture and the people. Both the constitutionality and the expediency 
 of the law creating this bank are well questioned by a large portion 
 of our fellow-citizens; and it must be admitted by all, that it has 
 failed in the great end of establishing a uniform and sQund currency. 
 
 The statement that the bank had failed in the great 
 end of establishing a uniform and sound currency puzzled 
 
 1 " When, in any arena, a power is present which might be of decisive 
 importance as an ally of one party or the other, it is inevitable that its 
 alliance will be contended for by them. Its efforts to remain neutral 
 will be vain and will expose it to greater danger from both than an 
 alliance with either. Either party which thinks that it has lost the 
 chance of winning the alliance will turn against the intervening party 
 with fierce animosity and will try to destroy it or drive it from the 
 arena. This is what happened in the case of the United States 
 Bank." SUMNER'S Banking, p. 192.
 
 THE BANK WAR 279 
 
 everybody, since that was the very thing that the bank had 
 accomplished with conspicuous success. It remains doubt- 
 ful to this day what Jackson meant by it. 
 
 Albert Gallatin tried to find out from Jackson 
 himself in what particular the bank had so 
 failed, but could glean only mild surprise that such a ques- 
 tion should be asked. Gallatin inferred that Jackson meant 
 that the bank had not entirely abolished the rate of exchange 
 between different commercial centers. 1 
 
 The bank had been established expressly to restore specie 
 payments. This end had been accomplished mainly through 
 its efforts and example. In order to facilitate resumption 
 it had assumed at par $10,809,000 of government deposits 
 then in suspended banks, at a cost to itself of some $200,- 
 ooo. 2 The whole banking system of the country had been 
 wonderfully toned up since it came into the field. The rate 
 of exchange between the most widely separated commercial 
 centers ranged between par and one-half of i per cent, a 
 condition which, according to a report of the Senate Com- 
 mittee on Finance, existed in no other country. 8 
 
 On December 10 the part of the President's message 
 relating to the Bank of the United States was referred by 
 the House to the Committee of Ways and Means. Its 
 chairman (McDuffie of South Carolina) made a report on 
 April 13, 1830, controverting, in respectful and temperate 
 
 1 The average rate was probably from par to 1 1 per cent, the aver- 
 age for 1829 being less than | of i per cent. CATTERALL, p. 141. 
 
 2 Clarke and Hall, p. 777. 
 
 3 " Before this bank went into operation exchange was from eight to 
 ten per cent either for or against Charleston, which was a loss, to the 
 
 planter, of that amount on all the produce of Georgia 
 Benefits of the jo^u/-^ i- i j j -u^ 
 
 B . and bouth Carolina and indeed, you might say, all 
 
 the produce of the Southern and Western states. "- 
 Letter of a Charleston merchant to the chairman of the Committee 
 of Ways and Means (Clarke and Hall, p. 760).
 
 280 BANKING 
 
 terms, the President's position at all points. The report 
 was strong in its opposition to the statement that the bank 
 had failed in the great end of establishing a uniform and 
 sound currency. It was easy to prove by the market quo- 
 tations how far superior the currency was then to that 
 of any previous time, and especially to that 
 by c*ngress ned of the P eriod immediately before the establish- 
 ment of the bank, when the paper currency of 
 the middle states ranged from 7 to 25 per cent below par. 
 The report went beyond a mere statement of the fact that 
 the currency had been put on a uniform and sound basis. 
 It argued strongly that this improvement had been brought 
 about by the Bank of the United States and would not have 
 taken place otherwise. It said : 
 
 The Committee are aware that the opinion is entertained by 
 some that the local banks would, at some time or other, either vol- 
 untarily or by the coercion of the state legislatures, have resumed 
 specie payments. In the very nature of things this would seem 
 an impossibility. It must be remembered that no banks ever 
 made such large dividends as were realized by the local institu- 
 tions during the suspension of specie payments. A rich and 
 abundant harvest of profit was opened to them, which the resump- 
 tion of specie payments must inevitably blast. 
 While permitted to give their own notes bearing no 
 interest, and not redeemable in specie, in exchange 
 for better notes bearing interest, it is obvious that the more paper 
 they issued the higher would be their profits. The most powerful 
 motive that can operate upon moneyed corporations would have 
 existed to prevent the state banks from putting an end to the very 
 state of things from which their excessive profits proceeded. 
 Their very nature must have been changed, therefore, before they 
 could have been induced to cooperate voluntarily in the restora- 
 tion of the currency. It is quite as improbable that the state 
 legislatures would have compelled the banks to do their duty. . . . 
 The banks were, directly and indirectly, the creditors of the
 
 THE BANK WAR 28 1 
 
 whole community, and the resumption of specie payments neces- 
 sarily involved a general curtailment of discounts and withdrawal of 
 credit which would produce a general and distressing pressure upon 
 the entire class of debtors. These constituted the largest portion 
 of the population of all the states where specie payments were sus- 
 pended and bank issues excessive. Those, therefore, who controlled 
 public opinion in the states where the depreciation of the local 
 paper was greatest were interested in the perpetuation of the evil. 
 
 The report of the Committee was sustained by a decisive 
 majority of the House, and a similar one from the Senate 
 Committee on Finance was sustained by that body. 
 
 There was some correspondence between Biddle and 
 
 Ingham in reference to the charges made by Woodbury and 
 
 Hill against Jeremiah Mason. Biddle easily proved that 
 
 the charges were without foundation. It would 
 
 have been wel1 for him if he had rested there ' 
 but he thought that he had detected in Ing- 
 ham's letters the assertion of a right on the part of the 
 administration to control or influence the bank's selection 
 of its officers, and he wished to let Ingham know that this 
 was a mistake. He therefore added that the bank was 
 under no responsibility to the Secretary of the Treasury 
 respecting the political opinions of its officers. Ingham 
 retorted that the Secretary had power to remove the govern- 
 ment's deposits from the bank, and that he might exercise 
 that power, if he were convinced that the bank was exer- 
 cising political influence. In his literary and forensic zeal 
 Biddle had overlooked the power of coercion that lay in the 
 hands of the Secretary. He was worsted in this encounter, 
 but his error of tactics was not necessarily fatal. 
 
 In his message of 1830 the President again alluded to the 
 bank, and suggested that a bank might be established as a 
 branch of the Treasury Department, in order to avoid con- 
 stitutional objections. Such a bank, he said, having no
 
 282 BANKING 
 
 means to operate on the hopes, fears, or interests of large 
 
 masses of the community, would be shorn of the influence 
 
 which made the existing bank formidable. A 
 
 Jackson's Mes- mot j on was ma ^ e i n the House to refer this 
 sage of 1830. 
 
 part of the message to a special committee, 
 
 on the ground that the Committee of Ways and Means 
 had already given its opinion in favor of the present bank. 
 This motion was voted down, by 108 to 76. 
 
 In 1831 the message took a milder tone, saying that the 
 President had felt it his duty frankly to disclose his opinions 
 
 on the subject in former messages. 
 
 Milder Tone of . . ,. , , 
 
 the President Having thus conscientiously discharged a con- 
 
 stitutional duty [he continued], I deem it proper 
 on this occasion, without a more particular reference to the views 
 on the subject then expressed, to leave it for the present to the 
 investigation of an enlightened people and their representatives. 
 
 The bank's charter ran till 1836. There is good reason 
 to believe that if Biddle had postponed, until after the presi- 
 dential election of 1832, his attempt to procure its renewal, 
 he might have obtained it without any serious opposition and 
 with the concurrence of the President. All the members of 
 the cabinet, except Taney, were favorable to the bank, and 
 two of them (McLane and Livingston, of the Treasury and 
 State Departments) actively so. Both of these urgently 
 counseled him not to stir up the fighting element in Jack- 
 son, and not to incur the risk of embroiling the bank in the 
 political campaign. In a letter to James Hamilton (Decem- 
 ber 12, 1831), Jackson said : " Mr. McLane and myself under- 
 stand each other, and have not the slightest disagreement 
 about the principles which will be a sine qua non in my assent 
 to a bill rechartering the bank." 1 
 
 Biddle was a headstrong character and was the autocrat 
 of the bank. He had always maintained heretofore that the 
 1 Catterall, p. 213.
 
 THE BANK WAR 283 
 
 bank should not meddle with politics. He had once affirmed 
 in writing that if the bill for a new charter were brought 
 forward prematurely, it would be " blended up with the elec- 
 tion and become one of those political matters judged ex- 
 clusively by party considerations." He was warned by 
 McLane that if the bill were forced upon Jackson before 
 the election he would regard it as a challenge and would 
 veto it. Why, then, did Biddle, with this enormous responsi- 
 bility resting upon him, take the risk of giving the challenge ? 
 In the first place the party opposed to Jackson (the 
 National Republicans) made the bank question an issue in 
 their platform, adopted at the Baltimore Con- 
 vention in December, 1831. They declared 
 that the bank was a great, beneficent, and 
 necessary institution, and that the President was "fully and 
 three times over pledged~to the people to negative any bill 
 that might be passed for rechartering the bank." This con- 
 vention nominated Henry Clay for President in opposition 
 to Jackson. Mr. Clay, however, was not primarily an agent 
 in dragging the bank into politics. Mr. Catterall shows that 
 he deprecated the policy of making applica- 
 ^ on ^ or a new cnarter before the Presidential 
 election. He held to that opinion till the eve 
 of the Baltimore convention, but he sided with his party, 
 whose candidate he was, when its platform was promulgated. 
 The bank had been, until this time, a non-resistant, and 
 that was one reason why Jackson's animosity had cooled. 
 It was still reluctant to enter the political arena. Biddle 
 hesitated, but was finally persuaded by the argument that 
 the bank must put itself in the hands of its friends rather 
 than of its enemies. Accordingly, he wrote a memorial ask- 
 ing for a renewal of the charter, which was presented to the 
 Senate on the gth of January, 1832. The old charter still had 
 four years to run. The motion for a renewal of it at this
 
 284 BANKING 
 
 time was premature, unless the friends of the bank wanted 
 to make it a political issue against Jackson in the presidential 
 campaign. 1 
 
 Before any vote was taken in Congress, however, an inci- 
 dent occurred which led Jackson to think that the bank was 
 financially unsound. On the 24th of March, 
 l8 3 2 > Mr ' Asbury Dickins, Acting Secretary 
 of the Treasury, notified Mr. Biddle confiden- 
 tially that the government desired to apply a portion of its 
 money deposited in the bank to the payment of the out- 
 standing 3 per cents, a remnant of the revolutionary debt. 
 The public deposits now amounted to $12,000,000, and the 
 debt to be paid off .was $9,000,000. Secretary McLane 
 gave Mr. Biddle formal notice of this purpose on the 25th 
 of July, and Biddle replied that the bank would take the 
 necessary steps to get possession of the bulk of the 3 per 
 cents and would act in accordance with the wishes of 
 the government. In the meantime General Cadwalader, a 
 director of the bank, had been sent to London to make a 
 private arrangement with the Barings for postponing the 
 payment of $5,000,000 of the debt. A contract was made 
 with that house to extend as many of the 3 per cents as 
 possible and to buy up the rest. This was a violation of 
 the bank's charter, which prohibited it from purchasing any 
 public stocks. It was equally a violation of the under- 
 standing with the Treasury; since, under the Baring con- 
 tract, the 3 per cents would be kept alive, the bank 
 paying the interest and being responsible eventually for the 
 
 1 " The position then was that Jackson had made the challenge, had 
 receded from it, and his opponents had taken it up and turned it as a 
 challenge against him. What would he do ? It seems that no one who 
 knew the facts in his career could doubt what he would do. He would 
 return to the issue and would fight it out regardless of all considerations 
 whatever, to a definite and conclusive victory or defeat. That is what 
 he did do." SUMNER'S Banking, p. 200.
 
 THE BANK WAR 285 
 
 principal. Money was worth 7 per cent to the bank; and 
 by this scheme it would obtain the use of the government's 
 money at 3 per cent. 
 
 It was Biddle's intention to keep the matter secret, but 
 the Baring circular was published in the newspapers in 
 October. Biddle immediately disavowed Cadwalader's con- 
 tract with the Barings, in so far as related to the buying of 
 the debt, and proposed a different arrange- 
 ment Secretai T McLane called on Biddle 
 for explanations, and the latter replied that he 
 had taken this step for the public good. A visitation of 
 cholera was expected, which threatened, he said, " if it con- 
 tinued, to press with peculiar force on the public revenue, 
 more especially as the demand on account of the foreign 
 holders of 3 per cents on the first of October, at New York 
 and Philadelphia alone, would have exceeded five millions 
 of dollars." So the bank had interposed itself as a provi- 
 dence between the people and the government because 
 the cholera was expected, and had done so in a clandes- 
 tine manner. Jackson was fully justified in considering 
 this a subterfuge, and was freshly exasperated by it; 
 but it did not follow, as he supposed, that the bank was 
 insolvent. 
 
 The affair of the 3 per cents was going on while Con- 
 gress was acting on the new charter. On the gth of June 
 the bill passed its third reading in the Senate, by 25 to 20. 
 Now the friends of the bank, who were also friends of the 
 President, made one more effort to prevent a conflict. They 
 entreated Mr. Biddle to pause and let the bill rest until after 
 the election. If he had had his choice, he might have taken 
 this advice ; but he was " threatened with opposition from 
 the party, then his chief reliance, unless he went on." 1 
 They said that Jackson would not dare to veto the bill, and 
 1 Ingersoll, II, 269.
 
 286 BANKING 
 
 that if he did, he would be hurled from power by an indig- 
 nant people. So they passed the bill in both houses and 
 sent it to the President on the 6th of July. Then one 
 more challenge was given to him. The House 
 
 passed" 11 on t ^ ie 2 ^ t ^ 1 ^ J une ^ a< ^ vote< ^ to adjourn on 
 
 the gth of July, and the resolution was not 
 acted on by the Senate until the gth. Then Mr. Webster 
 said that there was an important measure under considera- 
 tion by the Executive, which he was not compelled to return 
 in less than ten days. The House resolution was then 
 amended, by inserting the i6th. This was equivalent to 
 saying to the President : " You must sign the bill or veto it. 
 You shall not kill it silently." 
 
 The next day, July 10, the veto came. It was perfectly 
 
 adapted to its purpose of winning votes. It dealt with the 
 
 bank as a monopoly, ringing all possible 
 
 vetoed " changes on that term, and in the most skillful 
 
 manner. It is supposed that Amos Kendall 
 
 wrote it ; for, although Jackson was no demagogue, this was 
 
 a most demagogical appeal. The friends of the bank were 
 
 in high glee when they saw it. Biddle wrote to Clay: 
 
 I have always deplored making the bank a party question, but 
 since the President will have it so, he must pay the penalty of his 
 own rashness. As to the veto message, I am delighted with it. 
 It has all the fury of a chained panther biting the bars of his cage. 
 It is really a manifesto of anarchy, such as Marat or Robespierre 
 might have issued to the mob of the Faubourg St. Antoine ; and 
 my hope is that it will contribute to relieve the country from the 
 dominion of these miserable people. You are destined to be the 
 instrument of that deliverance, and at no period of your life has 
 the country ever had a deeper stake in you. I wish you success 
 most cordially, because I believe the institutions of the Union are 
 involved in it. 1 
 
 ^Parton's Life of Jackson, III, 411.
 
 THE BANK WAR 287 
 
 This was not the first time that Biddle's literary talents 
 had betrayed him. Four months later he and Mr. Clay and 
 the bank went down with a grand crash, for 
 Jackson was reflected by 219 electoral votes, 
 to 67 for all" others. Mr. Clay received 49. 
 Nobody at the present day considers Biddle a good banker. 
 Few persons regret the Bank of the United States ; but if 
 its taking off was a national misfortune, Mr. Clay and his 
 party were as much to blame as General Jackson and his 
 party. They made the bank a political issue at a time when 
 defeat to them meant destruction to it. The attempt to pass 
 the bill over the veto failed in the Senate, 22 to 19. 
 
 The bank war continued through the whole of Jackson's 
 second administration, embracing several exciting episodes, 
 but they belong rather to the political than the financial his- 
 tory of the time. Early in 1833 the President 
 decided that the government's deposits ought 
 to be removed from the bank. He suggested 
 this project to Secretary McLane, who demurred. The mat- 
 ter was brought up in the Cabinet, and two-thirds of the 
 members sided with McLane. A vacancy happening in the 
 State Department, McLane was transferred to it, and William 
 J. Duane was appointed Secretary of the Treasury. Duane 
 had been opposed to the original charter of the bank and to 
 the recharter, but he looked upon the public deposits as a 
 part of a contract between the government and the bank. 
 He declined to transfer them, when requested by the 
 President to do so. Consequently he was removed from 
 office, and Roger B. Taney, the Attorney-General, was 
 placed at the head of the Treasury Department. Taney 
 began, in the autumn of 1833, to draw out the money 
 for ordinary disbursements, depositing the ordinary receipts 
 in certain state banks which had been selected for the 
 purpose.
 
 288 BANKING 
 
 When all hope of a renewal of the national charter had 
 disappeared, Mr. Biddle sought and obtained a charter from 
 the state of Pennsylvania. An enormous bonus was paid 
 to the state, $2,500,000 in cash and a promise of $100,000 
 per year for twenty years, besid'es various subscriptions to 
 the stock of railroads, canals, and turnpikes in the state. 
 Senator Benton said that every circumstance of its enact- 
 ment betokened bribery of the members who passed it and 
 an attempt to bribe the people by distributing the bonus 
 among them. The government was still a shareholder in 
 the bank to the par value of $7,000,000, and 
 
 The - P ^ ns Z 1 " there was some trouble in withdrawing this 
 vama Charter. 
 
 money, but it was paid in four annual instal- 
 ments at the rate of 1 15.58. New stock was sold in place of 
 it, so that the capital remained at $35,000,000, which was a far 
 greater sum than could be used in ordinary banking opera- 
 tions in its restricted territory. Jackson's plans were now 
 fully carried out, except that the bank was not killed. The 
 government had recovered every dollar of its own money, 
 and the bank was on the way to kill itself more miserably 
 than even its enemies could have wished. 
 
 When the bank found itself, with its enormous capital, 
 restricted to Philadelphia and the neighboring country, it 
 
 gradually changed its character. Hitherto it 
 
 Wild pecu- na( j con fl ne( j itself to its proper business, dis- 
 lation. 
 
 counting commercial paper, buying bills of 
 
 exchange, and dealing in coin and bullion. Now it advanced 
 money largely on stocks. Before March, 1836, it had 
 $20,000,000 thus invested. The country was in the fever 
 of speculation which culminated in the panic of 1837, and 
 the bank was the leading speculator. It suspended in 1837, 
 in common with nearly all the other banks ; again in 1838 ; 
 and a third and last time in 1841. Its liquidation was pro- 
 tracted through fifteen years. It paid its creditors in full,
 
 THE BANK WAR 289 
 
 principal and interest, but the shareholders lost every penny. 
 
 Biddle lost all of his own money. His town house and his 
 
 country house were sold by the sheriff. Old 
 
 Sthlalik 86 friends cut him on the street He was even 
 indicted by the grand jury for conspiracy to 
 
 defraud the shareholders of the bank, but the indictment 
 was quashed. He died in 1844, poor and broken-hearted. 
 
 RECAPITULATION 
 
 The second Bank of the United States became involved 
 in political strife through no fault of its own. In the year 
 1829 certain politicians, who were on terms of intimacy 
 with President Jackson, desired to have the president and 
 directors of the branch bank at Portsmouth, N. H., removed 
 for their own private ends. Mr. Biddle, the president of 
 the parent bank, refused to comply with their wishes. They 
 persuaded the President that the bank was secretly taking 
 part in politics adversely to himself. Although the charter 
 had seven years still to run, President Jackson, in his first 
 message to Congress (December, 1829), made a hostile ref- 
 erence to the bank, suggesting doubts as to its constitution- 
 ality and affirming that it had failed of the main purpose 
 for which it was established. Both houses of Congress took 
 action upon the message, in a sense favorable to the bank. 
 In 1830 the President again referred to the bank in his 
 annual message, but 'his tone was less hostile than before. 
 In 1831 he approached the subject again, but in a still milder 
 way, saying that he should now leave the question to the 
 enlightened judgment of Congress and the people. 
 
 The party opposed to Jackson mistook his change of tone 
 for a symptom of fear, and decided to make the recharter 
 of the bank the main political issue of the presidential cam- 
 paign of 1832. They framed their platform accordingly
 
 2QO BANKING 
 
 and nominated Henry Clay for the presidency. Jackson 
 accepted the challenge and resumed his fight against the 
 bank. While the political contest was going on, Congress 
 passed a bill for a new charter, the President vetoed it, and 
 the attempt to pass it over the veto failed. President Jack- 
 son-was reflected by a large majority in 1832. In the fol- 
 lowing year he caused the government's deposits, ia~th'e 
 bank to be removed from it. Before the charter expired the 
 president of the bank obtained a charter from the legis- 
 lature of Pennsylvania and reorganized the bank under it 
 with the same capital ($35,000,000). This was too large a 
 sum to be profitably employed in the discount of commercial 
 paper in Philadelphia. The bank then entered into various 
 speculations by advancing money on the shares of joint 
 stock companies in all parts of the Union. It failed dis- 
 astrously in 1841, and the shareholders lost their entire 
 capital. The government had ceased to be a stockholder 
 in 1836, its shares having been paid off at a premium of 
 15^ per cent. 
 
 Both the first and the second banks of the United States 
 became involved in political strife without any intention of 
 their own, and in spite of their earnest efforts to avoid such 
 entanglements. It therefore seems probable that any other 
 bank of the same kind would be exposed to the same danger 
 and would succumb to the conflicts incident thereto. 
 
 AUTHORITIES FOR CHAPTERS VII AND VIII 
 
 Parton's Life of Andrew Jackson. 
 
 Sumner's Life of Andrew Jackson. 
 
 Schurz's Life of Henry Clay. 
 
 Bolles' Financial History of the United States. 
 
 Bourne's History of the Surplus Revenue of 1837. 
 
 Duane's Narrative and Correspondence. 
 
 Catterall's The Second Bank of the United States.
 
 CHAPTER IX 
 THE SUFFOLK BANK SYSTEM 
 
 THE growth and development of banking in Massachusetts 
 not only form an interesting chapter in our economic his- 
 tory, but give us suggestions of the highest importance in 
 the consideration of current banking problems. 
 
 During the first half of the nineteenth century there was 
 a struggle in Massachusetts, as in nearly all the states, to 
 compel the subscribing shareholders of banks to pay for 
 
 their shares. Banking was the favorite form 
 Stock Notes. 
 
 of speculation. A bank lends its notes to 
 
 borrowers and receives interest on them, but the notes are 
 themselves debts of the bank. Thus banking presented 
 itself to the public mind seductively as a method of living 
 on the interest of the debts you owe. Bank charters were 
 eagerly sought. The speculators in shares were not slow to 
 perceive that, if they could put their own stock notes into 
 the bank instead of cash, they might get something for noth- 
 ing. 1 If the bank survived, the dividends would probably 
 exceed the interest on the stock notes, the difference being 
 a clear gain to the shareholders, without any investment of 
 their own money. The policy of Massachusetts in this 
 regard was generally sound, but it was variable, showing that 
 some people could get inserted in bank charters privileges 
 which others could not get. In 1795 the charter of the 
 Nantucket Bank contained a provision that no stockholder 
 
 1 Professor Sumner found two state bank charters, both in Louisiana, 
 which expressly authorized the payment of the capital in stock notes, 
 one dated 1811 and the other 1818. History of Banking, p. 61. 
 
 291
 
 292 BANKING 
 
 should be allowed to borrow at the bank, as or after any 
 instalment should become due, until he should have paid 
 his full proportion of such instalment. This did not, how- 
 ever, prevent borrowing the money after it had been paid in. 
 In the following year the Merrimac Bank of Newburyport 
 was chartered with a capital stock of not lees than $70,000, 
 nor more than $150,000. Here we find an attempt to evade 
 the principle affirmed in the charter of the Nan tucket Bank. 
 No loans were to be made to shareholders until they had 
 .paid their proportion of $70,000. If they should choose to 
 have a capital of $150,000, they might borrow from the bank 
 itself all except the first $70,000. 
 
 There was much contrariety of legislation until 1804, when 
 several charters contained an express provision that no 
 money should be loaned to anybody until satisfactory evi- 
 dence was presented to the governor and council " that the 
 whole capital stock aforesaid is actually paid in and existing 
 in gold, silver, or other coined metals, in their vaults." Even 
 this provision was not sufficient ; for it was 
 
 struggle to proved in more than one case that banks bor- 
 
 compel Payment . . 
 
 of capital stock, rowed the entire amount of their capital in 
 
 gold and silver coin from other banks and, 
 having exhibited it to the public officers, returned it to the 
 rightful owners the same day. Accordingly, in 181 1, a clause 
 was inserted in bank charters requiring the directors to take 
 an oath that the money paid in was intended to remain there 
 as the capital of the bank. This proviso was considerably 
 amplified and strengthened in 1813. Three commissioners 
 were to be appointed by the governor to count the gold and 
 silver and take the oath of the directors that it had been 
 paid in, bona fide, by the stockholders as the bank's capital 
 and for no other purpose, and that it was intended to remain 
 there. In 1822 it was enacted that no dividends should be 
 declared until the whole capital was paid in.
 
 THE SUFFOLK BANK SYSTEM 293 
 
 The currency was now very chaotic. Country bank notes 
 were at a discount of i to 5 per cent in Boston, according 
 to the difficulty of sending them home for redemption. It 
 was an advantage to a bank to place itself at a long distance 
 from the centers of business and on the worst possible road, 
 to avoid redemption. 1 Sharpers and speculators seized the 
 opportunity to make gains. They bought or established 
 banks for the purpose of putting notes in circulation at long 
 distances from their place of issue, in order to postpone the 
 redemption of them. They swapped notes with each other 
 for this purpose. The Boston Exchange Office 
 was incorporated in 1804 to facilitate the busi- 
 ness of swapping bank notes. One Andrew. 
 Dexter bought up the stock of the Exchange Office and used 
 it as a machine for swapping the notes of different banks 
 owned or controlled by him, till he brought ruin upon the 
 banks, the community, and himself. His failure was one 
 of the most direful events in the economic history of New 
 England. 
 
 The New England Bank, which was incorporated in 1813, 
 gave the first impulse to what was afterwards known as the 
 Suffolk Bank system, by publishing an adver- 
 tisement that it would receive country bank 
 notes and send them home for redemption, 
 charging only the actual cost. The average cost on those 
 of Massachusetts was one-half of i per cent. This became 
 the rate of discount on such notes in Boston. On those of 
 other New England banks it ranged from i to 5 per cent. 
 
 The country banks discounted commercial paper in Boston, 
 as well as at home, paying out their own circulating notes 
 therefor. As these notes were below par in Boston, but 
 
 1 " What New England did in the first decade of the century is what 
 the middle states did in the second and the Southwest in the fourth and 
 the Ohio states in the sixth." SUMMER'S History of Banking, p. 37.
 
 294 BANKING 
 
 were generally accepted by merchants, Gresham's Law came 
 in play ; that is, the worse money drove out the better. The 
 notes of the Boston banks were immediately returned to them 
 by depositors, because they were received at par, but those 
 of the country banks were paid out by manufacturers and 
 traders for wages and as change, and thus kept in circulation. 
 In the year 1818, when the Suffolk Bank was chartered, the 
 Boston banks, seven in number, having more than half of 
 the banking capital of New England, had only one twenty- 
 fifth part of the circulation. The New England Bank had 
 reduced the cost of redeeming country bank notes to a 
 
 minimum before the Suffolk entered the field, 
 The Suffolk Bank. , 
 
 but the cost was borne by the note holders. 
 
 The Suffolk managers conceived the idea of putting the cost 
 of redeeming them on the issuers, and of abolishing the dis- 
 count entirely. Its object was to make a profit for itself, 
 but it accomplished much more, as the sequel will show. 
 The plan proposed by the Suffolk was that it would redeem 
 any New England country bank notes at par if the issuing 
 banks would keep a permanent deposit of $5000 in the 
 Suffolk Bank (the interest on which should compensate it 
 for doing the business), plus a further deposit sufficient to 
 redeem such of their notes as should reach Boston in the 
 course of trade. 
 
 To the country bankers of that day nothing more exas- 
 perating than this plan could have been imagined,, They 
 
 declined it because it seemed likely to curtail 
 country Banks their circulation and the profits derived there- 
 *f B e ^ n r . edeem from. Then the Suffolk began to collect their 
 
 notes systematically and send them home for 
 redemption in specie. The country banks were furious. 
 They said that the Suffolk was demanding of them an 
 impossibility, that of redeeming their notes in two places 
 at once. The Suffolk had demanded no such thing. It
 
 THE SUFFOLK BANK SYSTEM 295 
 
 had merely offered them the alternative of redeeming their 
 notes in Boston. or at their own counters. The fight was 
 bitter. The Suffolk maintained it at first single-handed. 
 In 1824 the other Boston banks became convinced that it 
 was time to put an end to the uncurrent money that was 
 displacing their own notes in the field of circulation. They 
 joined the Suffolk and contributed a large fund to enable 
 the latter to extend its operations to all parts of New 
 England. The run on the resisting banks was continued 
 until they began to come in and make the deposits 
 required. The terms offered were that each country bank 
 
 should make a permanent deposit with the 
 Pr^cfss^ 118 Suffolk of $2000 or upwards, according to the 
 
 amount of its capital, and such additional sum 
 as might be necessary to redeem all of its notes that should 
 come to Boston. From banks which complied with these 
 conditions the Suffolk offered to receive at par the notes of 
 any New England bank in good standing. In other words, 
 the Suffolk would not require the country bank to remit 
 drafts on Boston payable in specie to make its balance good, 
 but would accept as specie the New England notes which 
 the country bank was habitually receiving in the course of 
 its business. Thus the Suffolk became a clearing house for 
 the notes of New England banks in Boston, balancing them 
 against each other every day. When the notes were sorted 
 and redeemed they were placed in packages and held subject 
 to the order of the issuing bank. 
 
 In 1845 the state of Massachusetts passed a law provid- 
 ing that no bank should pay over its counter any notes but 
 its own, and this law remained in force until the national 
 banking system superseded the Suffolk system. As no bank 
 could pay out the notes of any other bank, it was compelled 
 to send those which it took on deposit to the Suffolk at 
 once for redemption. This law enforced the principle that
 
 296 BANKING 
 
 everything paid over a bank's counter must be the equiva- 
 lent of specie. The whole Suffolk system was based on this 
 principle, and the battle which it started was fought in order 
 
 to enforce it. A slovenly idea had pervaded the 
 a " s Q _ e whole country that specie redemption, although 
 
 good in theory, was bad in practice. This 
 conception was only slowly uprooted, first in New England, 
 afterwards in New York, and later in Louisiana and in some 
 other spots, but it held the ground over the larger part of 
 the country until the Civil War. Mr. D. R. Whitney, in his 
 history of the Suffolk Bank, says : 
 
 It was the underlying principle of the Suffolk Bank system, 
 that any bank issuing circulation should keep itself at all times in 
 a condition to be able to redeem it ; that it should measure the 
 amount by its ability so to do; and that the exercise at any time 
 of the right to demand specie of a bank for its bills was something 
 of which the issuing bank had no right to complain. 
 
 Nevertheless, there were some complaining banks all the 
 time, though after the system had been fairly established 
 
 these were only a small minority. The panic 
 "^Success* 7 ^ J ^37 caused a general suspension of specie 
 
 payments. When the time came for a general 
 resumption, the question of renewing the Suffolk system 
 was open to debate. The banks of Massachusetts, New 
 Hampshire, Vermont, and Connecticut voted at once to 
 sustain it, whilst those of Maine and Rhode Island came 
 in soon afterwards. The Suffolk Bank system gave wide 
 credit to the New England banks, and in consequence their 
 notes gained an extensive circulation in remote parts of the 
 country and in Canada. In 1857 five hundred banks were 
 embraced in the system. 
 
 Under such circumstances the Suffolk took upon itself 
 the office of a comptroller of the currency. It did not 
 admit a new bank to the fellowship of the system merely
 
 THE SUFFOLK BANK SYSTEM 297 
 
 because it had procured a charter, perhaps by favoritism, 
 perhaps by bribery. It first satisfied itself that the share- 
 holders were men of good character and that the institution 
 had been started in good faith. Of course, the Suffolk 
 could not prevent the newcomer from issuing notes, but it 
 could withhold its passport and thus prevent it from getting 
 any extensive circulation. The precautions which it took in 
 admitting newcomers were taken for the credit and good 
 name of New England banking. 
 
 The Suffolk Bank suffered some losses in consequence 
 of advances to country banks, but these did not prevent it 
 
 from declaring dividends at the average rate 
 Small Losses. 
 
 of 1 1 per cent per annum. The losses which 
 
 it incurred from counterfeits and alterations in notes were 
 very small. From 1836 to 1846 the losses by counterfeit 
 notes were only $1107, from alterations $766, and from 
 counterfeit signatures on genuine notes $82, although the 
 redemption at that time exceeded $100,000,000 per year. 
 In 1824 two clerks could do all the work. In 1855 seventy 
 were required, and the redemptions reached $400,000,000 
 per year. As the circulation of the New England banks at 
 that time was about $40,000,000, the whole amount was 
 redeemed ten times each year, or about once in five weeks. 
 Any person engaged in a legitimate trade, in any part of 
 New England, could exchange his promissory note, running 
 sixty or ninety days, for the notes of a bank, 
 w ^ hich he could pay the wages of his 
 employees or buy the materials of his indus- 
 try in any part of the United States or Canada. The notes 
 would remain in circulation about five weeks, and then find 
 their way to the Suffolk Bank, where they were offset by the 
 notes of other banks which took their rise in the same way. 
 The man whose promissory note the bank had discounted, 
 and by means of which it had put its own notes in circulation,
 
 298 BANKING 
 
 had meanwhile sold his products. If he had sold them in 
 Boston, his draft on the Boston merchant would pay his 
 note at the local bank, and this would enable the latter to 
 keep its balance good at the Suffolk. If he had sold them 
 in New York or Chicago, he would get his pay in a draft on 
 Boston, which would answer the same end. If he had sold 
 them at home and had received New England bank notes 
 in exchange for them, the local bank could use these to 
 keep its balance good at the Suffolk. New England trade 
 was carried on by an endless chain of offsets and book 
 balances at the Suffolk Bank. The security for the notes 
 consisted of the bank's assets and the banker's moral 
 character and business sagacity. Both notes and deposits 
 rested upon the same security that deposits rest upon now, 
 and the volume of both was determined by the wants of 
 trade. 
 
 The foregoing method of issuing circulating notes is 
 called the "banking principle," - a term used in contra- 
 distinction to the " currency principle," which 
 
 Princi le'^ assumes that a certain amount of paper cur- 
 rency will be wanted by the community at all 
 times and that the government may advantageously issue 
 it, either directly or through an agency like the Bank of 
 England. As the latter principle is now operative in Eng- 
 land, the average amount which will always circulate and 
 which the community will never send in for redemption if 
 satisfied of its goodness, is first ascertained experimentally. 
 If, in the progress of time, more notes are wanted than the 
 ascertained sum, they must be bought with gold. Thus 
 the Bank of England is required to give its notes for all 
 the sovereigns offered to it, or for gold bullion of equal 
 value. In like manner the Treasury of the United States 
 must issue gold certificates to all persons tendering Ameri- 
 can gold coin to it.
 
 THE SUFFOLK BANK SYSTEM 299 
 
 Under the Suffolk system of bank-note redemption, specie 
 was seldom asked for, but it was always paid when de- 
 manded. The metallic reserve was the touch- 
 specie Reserve. , 1,1- 
 
 stone of the whole business. The banks 
 
 learned by experience how many notes would circulate and 
 how much specie was needed. It was not until 1858 that 
 the state of Massachusetts, in consequence of the panic of 
 1857, established a legal reserve of 15 per cent of specie 
 against both deposits and circulation. Country banks might 
 count their balances in Boston banks, payable on demand, 
 as specie, for experience had shown that notes were best 
 redeemed at a common center, where the gold reserve 
 should be kept. Prior to the passage of the law of 1858 
 the specie reserve had been extremely variable, rang- 
 ing from 44 per cent in 1843 to 7^- per cent in 1851. 
 There was a heated controversy over the passage of this 
 law. The bankers were generally opposed to it, on the 
 ground that it was unnecessary meddling, but public opin- 
 ion sustained it. After the passage of the law the specie 
 reserve rose considerably above the legal requirement and 
 afterwards oscillated around it, being sometimes a little 
 more, and sometimes a little less, than 15 per cent. This 
 law did not touch the other New England States, whose 
 banks were integral parts of the Suffolk system. In 1859 
 Maine, Rhode Island, and Connecticut each had 10 per 
 cent of specie as against circulation and deposits, New 
 Hampshire 7^ per cent, and Vermont only 6 per cent. 
 
 The Suffolk Bank system continued until it was super- 
 seded by the national banking system, which required each 
 bank to receive the notes of every other bank at par for all 
 dues to itself. 
 
 Massachusetts enacted general banking laws in 1805, in 
 1828, in 1835, in 1860, and in 1880, Her banking law, as it 
 existed before the national system came in force, consisted
 
 30O BANKING 
 
 of two parts, one relating to chartered banks, and the other 
 to free banks. A free banking law, which allowed persons to 
 organize banks at their own pleasure, on condition of deposit- 
 ing with the state officers bond security for 
 ^ eiT circulating notes, had been passed in 
 1851, but only seven banks were organized 
 under it. The following were among the provisions of law 
 relating to banks in i86o:'*No individual could hold more 
 than one-half the stock of any bankpfio person could be a 
 director of more than one bank no person could be a director 
 whose stock was pledged for debt. ' Neither the debts nor the 
 credits of a bank could exceed twice the capital stock paid 
 in, except for deposits and for debts to or from other banks. 
 No bank could pay out any notes but its own ; or issue any 
 notes, directly or indirectly, except at its own banking 
 house ; 'or issue any notes with the understanding that they 
 should be kept out a certain length of time.'" No bank could 
 make a loan repayable in anything except specie or its own 
 notes. In case of bank failure the note holders were to 
 have a prior lien on the assets. " If any new banks should be 
 chartered with greater privileges than those here enumerated, 
 the same privileges were to extend to all other banks. ' Three 
 bank commissioners were appointed to examine all banks 
 once each year or oftener if they deemed it expedient 
 and to publish the results of such examinations. 
 
 RECAPITULATION 
 
 In the first quarter of the nineteenth century the notes 
 of country banks were at a discount in all the commercial 
 centers. If the discount was not excessive, they passed from 
 hand to hand in trade, but they were not received by the 
 city banks except at their actual value. The notes of the 
 city banks, on the other hand, by reason of their goodness,
 
 THE SUFFOLK BANK SYSTEM 301 
 
 were promptly returned to them as deposits or in payment 
 of loans. Under the operation of Gresham's Law the worst 
 money that would circulate drove out the better. The Boston 
 banks, although possessing more than half the banking 
 capital in New England, had only one twenty-fifth part of 
 the circulation. Country bank notes accumulated in the 
 hands of merchants, and they either sold them to brokers or 
 sent them by messengers to the issuing banks for redemp- 
 tion. The discount in Boston on the notes of Massachu- 
 setts country banks averaged \ per cent. On those of the 
 other New England States it ranged from i to 5 per cent 
 according to the distance of the banks and the cost of 
 securing redemption. 
 
 The Suffolk Bank of Boston was chartered in 1818 as an 
 ordinary bank of issue and deposit. Its managers con- 
 ceived the idea of making a profit out of the redemption of 
 country bank notes. They offered to redeem all such notes 
 at par, if the issuing banks would provide funds for that 
 purpose and would also make permanent deposits in the 
 Suffolk Bank, the use of which should compensate it for its 
 trouble. At first only a few of the country banks acceded 
 to this proposal. The Suffolk Bank then sent home for 
 redemption all the notes of the non-assenting banks that it 
 could get. The other Boston banks joined the Suffolk and 
 contributed a fund for carrying on the campaign in all the 
 New England States. Eventually all the country banks were 
 forced into the arrangement, because it was found to be 
 cheaper to redeem their notes in Boston than at home. 
 They found also that under the Suffolk system their credit 
 was so much improved that their notes gained circulation in 
 all parts of the United States and Canada. The system was, 
 tn fact, advantageous to them as well as to the public. 
 
 When the system had been thoroughly established, the 
 Suffolk Bank accepted the notes of all solvent New England
 
 302 BANKING 
 
 banks at par and offset them against each other, thus serving 
 as a clearing house for New England bank-note issues. 
 The legislature of Massachusetts testified its approval of 
 the system by passing a law prohibiting banks from paying 
 out any notes but their own, thus making it necessary to 
 send to the Suffolk for prompt redemption the notes of 
 other banks which came into their hands. 
 
 The redemptions, or clearings, at the Suffolk Bank reached 
 the sum of $400,000,000 per year. As the total circulation 
 of New England banks at J:hat time was only $40,000,000, it 
 followed that the notes were redeemed, on the average, ten 
 times each year. The Suffolk system continued until 1865, 
 when it was superseded by the national banking system. 
 It brought banking in New England to a state of responsi- 
 bility, order, and solvency unknown before. 
 
 
 
 AUTHORITIES 
 
 Whitney's History of the Suffolk Bank. 
 Stetson's History of the State Bank. 
 
 Root's New England Bank Currency (" Sound Currency " 
 series). 
 
 Knox's History of Banking in the United States. 
 Reports of Bank Commissioners of Massachusetts.
 
 CHAPTER X 
 THE SAFETY FUND SYSTEM 
 
 NEW YORK has made two contributions of the first impor- 
 tance to banking science : (i) the safety fund system, or 
 mutual insurance of circulating notes ; (2) the free bank, 
 or bond deposit, system for securing circulating notes, which 
 was the precursor of the national banking system. 
 
 During the first half century banking in New York was 
 an integral part of the spoils of politics. Federalists would 
 grant no charters to Republicans, and Republicans none to 
 Federalists. After a few banks had been established they 
 united, regardless of politics, to create a monopoly by pre- 
 venting other persons from getting charters. 
 When charters were applied for and refused, 
 the applicants began business on the common- 
 law plan. Then, at the instigation of the favored ones, the 
 politicians passed a law to suppress all unchartered banks. 
 The latter went to Albany and bribed the legislature. In 
 short, politics, monopoly, and bribery constitute the key to 
 banking in the early history of the state. 
 
 The Bank of New York, described in a previous chapter, 1 
 
 was controlled by Federalists. As the anti-Federalists knew 
 
 that the legislature would not grant a charter to them, 
 
 Aaron Burr conceived the idea of procuring one by stealth. 
 
 The city had recently been scourged with yellow fever, the 
 
 ravages of which were attributed in part to the bad water. 
 
 Accordingly a petition was presented for a charter for a 
 
 1 See page 248. 
 
 303
 
 304 BANKING 
 
 company with a capital of $2,000,000 to supply New York 
 City with pure water. In it was a clause authorizing the 
 company to use any surplus of capital, over and above the 
 amount needed for the water works, in any 
 moneyed transactions not inconsistent with 
 the constitution and laws of the state or of the 
 United States. The Council of Revision (of which John Jay 
 was president), whose approval was necessary, did not suspect 
 that banking powers were concealed in the charter. The 
 charter was granted, and the company applied one half of its 
 capital to water works and the other half to the banking 
 business. This was the Manhattan Company, which ceased 
 to be a water company in 1840, but has continued as a bank 
 to the present day. 
 
 When the Republicans came into power they refused all 
 applications for bank charters to Federalists ; and the existing 
 banks, of which there were six in the state prior to 1804, 
 made common cause to prevent any new ones from entering 
 the field. In that year the Merchants' Bank of New York 
 City, which was already in operation under the common 
 law, applied for a charter. It was refused. The bank 
 bought its way through the legislature amid scenes of excite- 
 ment, which included fist fighting in open session. In i8ii 
 the Bank of America repeated the operation on a larger 
 scale. In 1821 the people of the state sought to put an 
 end to these scandals by a clause in the constitution of that 
 year requiring a two-thirds vote of both branches of the 
 legislature to pass a bank charter, but the only effect was 
 " to increase the evil by rendering necessary a more extended 
 system of corruption." 1 
 
 In 1828 forty bank charters were in force, out of forty- 
 three which had been granted, three small country banks 
 having become insolvent. The charters of thirty of the 
 
 1 Hammond's History of Political Parties in the State of New York,
 
 THE SAFETY FUND SYSTEM 305 
 
 survivors were about to expire, and all efforts to renew them 
 
 had failed to secure the necessary two-thirds vote. The 
 
 legislature was determined to impose on the banks some 
 
 new conditions, in the public interest. At 
 
 Joshua Forman. . % 
 
 this juncture (January 24, 1829) Mr. Joshua 
 Forman of Syracuse addressed a letter to Martin Van 
 Buren, governor of the state, proposing a plan for the 
 mutual insurance of banks. His suggestion was that each 
 bank should be required to contribute annually to a common 
 fund for the payment of the debts of such banks as should 
 fail, this contribution to continue till it should reach half a 
 million dollars and be kept up to that sum by further con- 
 tributions when needful. 
 
 Mr. Forman's plan was adopted, and a law was passed 
 providing that every bank whose charter should be granted 
 or extended thereafter should pay into a " bank fund " 
 one-half of i per cent of its capital each year, 
 unt '^ t ^ ie contr ib u tions should be equal to 
 3 per cent of its capital stock. This fund 
 was to be applied solely to the payment of the debts (exclu- 
 sive of the capital stock) of failed banks belonging to the 
 system. The fund was not to be used, however, until the 
 assets of the failed bank had been exhausted and the defi- 
 ciency determined by judicial proceedings. Whenever the 
 fund should be reduced in this way, the comptroller was to 
 call on the banks for fresh contributions, at the same rate, 
 as to time and amount, as the original ones. The same act 
 provided for the appointment of three commissioners to 
 examine all the banks three times each year, or oftener if 
 required to do so. Any three banks might call for a special 
 examination of any bank in the system. 
 
 In 1837 three safety fund banks, all in the city of Buffalo, 
 were reported to be in difficulties. The legislature passed a 
 law authorizing the comptroller to make immediate payment,
 
 306 BANKING 
 
 out of the bank fund, of the notes of any insolvent bank 
 whose liabilities, in excess of assets, should not exceed 
 two-thirds of the amount in the bank fund. This law was 
 applied to the three Buffalo banks. There was no deprecia- 
 tion of their notes, and the bank fund was restored out 
 of the assets of the failed banks. Two other banks went 
 into liquidation soon afterwards, and their notes were paid 
 and the fund replenished in the same way. There were no 
 more failures till 1840. During that and the two following 
 years eleven banks failed. The fund was now about $900,000, 
 of which $600,000 was applicable, under the law of 1837, 
 to the immediate redemption of circulating 
 Prior Uen * notes, the remainder being reserved for deposi- 
 
 tors. The first three banks in the order of 
 failure exhausted this sum. The bank commissioners, 
 in their annual report for 1841, said that the bank fund 
 was primarily intended for the protection of note holders, 
 not depositors or general creditors. The fact that the law 
 put all creditors on the same level was not understood by 
 the public or by the bankers themselves, and its expediency 
 was called in question. In 1842 the law was amended, so 
 that after the payment of all the liabilities charged against 
 the fund at that time the note holders should have the first 
 lien on it. 
 
 In the constitution of 1846 note holders were made pre- 
 ferred creditors of all failed banks. This valuable principle 
 had been adopted by the state of Connecticut in 1831. 
 The law of that state, however, gave the 
 
 Reason for this. , , 
 
 preference only to the holders of notes of the 
 denomination of $100 or less. One reason why note holders 
 ought to be preferred creditors of failed banks is that 
 usually it is not a matter of choice whether persons shall 
 or shall not accept bank notes offered in payment. This is 
 especially true of the poorer and more helpless classes of
 
 THE SAFETY FUND SYSTEM 307 
 
 the community, who are liable to lose situations, or favor, 
 or patronage, if they make objections to the kind of money 
 offered to them, and who are less able to form opinions for 
 themselves on the soundness and standing of particular 
 banks. 
 
 Unfortunately the charges against the bank fund before 
 
 the act of 1842 took effect were sufficient to absorb 
 
 everything it was likely to receive from the \ per cent 
 
 annual contribution for several years. Accordingly the 
 
 state issued its own stock for $900,000 to 
 
 Fraudulent over- k prompt payment to the creditors of the 
 issues. f .; 
 
 failed banks, taking a lien on the fund for 
 
 repayment; and eventually the state's advances were all 
 reimbursed out of the fund, principal and interest. More- 
 over, the fund redeemed about $700,000 of notes fraudu- 
 lently overissued, a consequence of the lack, in the origi- 
 nal act, of any system of public registration. The whole 
 amount of payments into the safety fund was $3,104,999. 
 
 The faults of the safety fund system were errors of 
 detail. The fund should have been liable only for circulat- 
 ing notes. By attempting too much, the system broke down. 
 When a bank failed the redemption of its notes from the 
 fund should have been immediate, so that the note holders 
 should not lose by delay and depreciation, and the fund 
 should have been reimbursed later out of the assets of the 
 failed banks and the legal contributions of the solvent ones. 
 On the assumption that the circulation only ought to be 
 
 protected, the contributions to the fund should 
 tile's S stem have been proportioned to the circulation, and 
 
 not to the capital stock, of each bank. The 
 notes should have been issued to the banks only by the state 
 comptroller, and duly recorded. In his report for 1848, 
 Millard Fillmore, the comptroller, said that "the Safety 
 Fund would have proved an ample indemnity to the bill
 
 3O8 BANKING 
 
 holder had it not been applied to the payment of other 
 debts of the banks than those due for circulation." 1 
 
 Although the safety fund system has passed away in the 
 place of its birth, it is alive and in high esteem in a neigh- 
 boring country. It was adopted in Canada in 1890, in order 
 to secure the prompt redemption of the notes of failed banks, 
 i.e., to avoid a discount on the notes of such banks pending 
 liquidation. Under the Canadian system the circulating 
 notes are the first lien on the assets, and it is believed that 
 the assets will always suffice to redeem the notes ; but the 
 delay in converting them into cash, prior to the establish- 
 ment of the safety fund, had led to a temporary discount 
 on such notes. The maximum amount of the fund is 5 
 
 per cent of the outstanding circulation of all 
 c?n a a f dI yFUnd the Canadian banks, and it must be kept up to 
 
 this maximum, the Minister of Finance having 
 power to call on the banks for additional contributions, when 
 necessary, not exceeding i per cent in any year. When the 
 assets of failed banks are paid in, however, refunds may be 
 made to the contributing banks of the excess over 5 per cent. 
 Under the Canadian law the notes of failed banks draw 
 interest at 6 per cent until redeemed. They are therefore 
 eagerly received by the other banks, and there has been 
 no depreciation on any such notes since the system was 
 adopted. 
 
 1 Mr. L. Carroll Root (Sound Currency, Vol. II, No. 5) has verified 
 Mr. Fillmore's statement by an independent examination of the figures. 
 " It is plain," he says, " as a result of calculation from experiments of 
 36 years (1829-1865), that, had the Safety Fund system as perfected 
 prior to and in the constitution of 1846 been left untouched as that 
 upon which New York State bank currency was based, not merely 
 would every dollar of circulation have been kept good, but the total 
 assessment to keep the fund good would have averaged less than \ per 
 cent on the banking capital, or about f per cent on the average circu- 
 lation outstanding."
 
 THE SAFETY FUND SYSTEM 309 
 
 RECAPITULATION 
 
 The safety fund system of New York was a mutual 
 insurance of banks, established by law in the year 1829, for 
 the protection of their creditors. It required an annual 
 contribution by all the banks in the state of a sum equal 
 to per cent of their capital, until the fund should reach 
 3 per cent thereof, out of which the remaining indebtedness 
 of insolvent banks was to be paid after their assets were 
 exhausted, the contributions to be renewed from time to 
 time at the same rate when necessary. The first bank failures 
 that took place after the system was adopted occurred in 
 1837. A law was then passed by the legislature authorizing 
 the immediate use of the money in the fund for the redemp- 
 tion of the notes of failed banks, provided the amount called 
 for did not exceed two-thirds of the whole fund then in 
 hand. The notes of the failed banks were redeemed imme- 
 diately, and they suffered no depreciation. In 1840-42 
 eleven banks failed, and the consequent demands to meet 
 the claims of both note holders and depositors were too 
 large to be satisfied out of the money in the fund. In 1842 
 a law was enacted that, after the existing claims were paid, 
 the fund should be applied only to the redemption of the 
 circulating notes of failed banks. This change came too 
 late to be of service ; for the claims on the fund were larger 
 than could be met out of the annual contributions for several 
 years. In the meantime the policy of the state in reference 
 to banks was radically changed by the constitution of 1846, 
 which prohibited the granting or extension of any special 
 charters for banks. As all of the safety fund banks were 
 in this category, the system was doomed to extinction when 
 the existing charters expired. All the claims against the 
 fund were eventually paid in full, including the redemption 
 of a large amount of notes fraudulently issued, and an
 
 3IO BANKING 
 
 unclaimed balance of $13,144 was turned into the state 
 treasury. The last charters of safety fund banks expired 
 in 1866. 
 
 Experience under the safety fund system showed that 
 the original act was defective in the following particulars : 
 (i) it should have required public registration of note issues 
 to prevent fraud ; (2) note holders should have been made 
 preferred creditors of failed banks ; (3) the safety fund 
 should have been applied only to the redemption of circu- 
 lating notes ; (4) the fund should have been applied to this 
 purpose immediately upon the failure of any bank (to prevent 
 depreciation of its notes), instead of awaiting the results of 
 liquidation of its affairs. All of these changes were made 
 by amendments to the law or the constitution of the state 
 between the years 1837 and 1846. If they had been 
 embodied in the original act, there would never have been 
 any loss to note holders under the system, by depreciation 
 or otherwise.
 
 / ^ 
 
 CS 
 
 
 / 
 
 CHAPTER XI 
 THE FREE BANK SYSTEM 
 
 THE next change in the banking system of New York 
 was even more radical than the one described in the pre- 
 ceding chapter. Until 1838 banking had 
 remained a monopoly. Nobody could get a 
 charter without a special act ot the legis- 
 lature, and nobody could invest even $100 in a new bank 
 without the consent of the bank commissioners of the 
 state. When a charter was granted these officials parceled 
 out, as a matter of favoritism and partisan spoils, the rights 
 to subscribe for shares. Contention and heart burning 
 were the necessary consequence, and no persons were more 
 keenly alive to the disgrace than the bank commissioners 
 themselves, who said in their report of 1837 : 
 
 The distribution of bank stocks created at the last session has 
 in very few, if any, instances been productive of anything like 
 general satisfaction. In most instances its fruits have been vio- 
 lent contention and bitter personal animosities, corrupting to 
 the public mind and destructive of the peace and harmony of 
 society. 
 
 These scandals caused nearly universal disgust and led 
 to a revolt in the Democratic party in 1835. A faction 
 sprang up calling themselves the Equal Rights party, known 
 afterwards as the " Locofocos." They adopted a platform 
 in which they declared " hostility to any and all monopolies 
 by legislation, because they are violations of the equal rights 
 of the people." As the Democratic party took no steps to 
 
 3 tl
 
 312 BANKING 
 
 reform the evils complained of, the Locofocos joined the 
 Whigs and carried the elections in the city of New York in 
 the autumn of 1836 and the spring of 1837, as well as the 
 state election in the autumn of the latter year, securing a 
 
 large majority of the legislature. This victory 
 
 Political Revolt. , . ' 
 
 led to the free banking law of 1838, the motive 
 
 for it being political rather than financial. A suggestion 
 for such a system had been made eleven years earlier by 
 the Rev. John McVickar, professor of political economy in 
 Columbia College, in a letter written to a gentleman in 
 Albany and published in a pamphlet. Professor McVickar 
 proposed that any individuals or associations might enter 
 into the banking business freely, but that nine-tenths of their 
 capital should be invested in government stock, of which 
 the bank should receive the interest, though the principal 
 should remain in the custody of the state as security for 
 the circulating notes of the bank. The remaining tenth of 
 the capital might, however, be invested as the officers of the 
 bank should see fit. 
 
 The free banking law of New York was introduced in 
 the legislature by Mr. Abijah Mann. As amended and 
 passed, it provided that any person, or association of per- 
 sons, might receive from the comptroller circulating notes, 
 and after signing them might issue them as money by first 
 depositing with him stocks of the United 
 Free Banking States> o f the state o f New Y ork, or of any 
 
 other state approved by the comptroller, made 
 equal to a 5 per cent stock of the state of New York, or 
 bonds and mortgages on improved, productive, and unincum- 
 bered real estate, worth double the amount of the mortgage, 
 exclusive of the buildings thereon, and bearing interest at 
 not less than 6 per cent per annum. The banks might 
 deposit stocks only, or half stocks and half bonds and 
 mortgages, and the printed notes should specify to which
 
 THE FREE BANK SYSTEM 313 
 
 class they belonged. In case default should be made in 
 the redemption of any such notes, the comptroller was to 
 sell the securities and apply the proceeds to the redemption 
 of the notes. The state was not in any way responsible 
 for the payment of the notes beyond the proper appli- 
 cation of the securities to that purpose. The persons or 
 associations depositing the securities were to receive the 
 interest on them as long as they redeemed their notes on 
 demand, unless in the opinion of the comptroller they had 
 depreciated so as to be no longer adequate security. 
 
 The bill became a law on April 18, 1838. There was an 
 immediate rush of people into the banking business. One 
 hundred and thirty-three new banks were organized, and 
 seventy-six started in business before December i, 1839. 
 Experience under the new system was at first disastrous. 
 The Bank of Tonawanda failed in 1840, and 
 
 A Bad Beginning. . . . 
 
 its securities realized only sixty-eight cents on 
 the dollar of its outstanding notes. This example led to a 
 change of the law regarding stock securities, which were 
 now restricted, as to banks subsequently established, to 
 those of New York. The mortality of the free banks was 
 so great, by failure or voluntary liquidation, that in 1842 
 only forty-six remained in operation. In 1844 the comp- 
 troller reported that twenty-six free banks had failed, and 
 that their circulation has been redeemed at the average rate 
 of seventy-six cents on the dollar. 
 
 The practice of issuing notes at interior towns by indi- 
 viduals residing in New York City, or even in other states, 
 was soon discovered to be prevalent. Hence, a law was 
 passed in 1840 requiring that all country banks should 
 redeem their notes in New York City or Albany at a dis- 
 count not exceeding one-half of i per cent. As they usually 
 passed at par, a man could issue and lend notes in New 
 York City, dating them at some remote place in the interior,
 
 314 BANKING 
 
 and then redeem them at a discount of ^ per cent at the 
 very place where he had issued them. The profit on $10,000 
 would be $50 each time that amount of notes was put 
 out and taken back, plus the interest paid 
 by the borrower. This was more freedom in 
 banking than had been contemplated. An 
 act was accordingly passed in 1844, providing that nobody 
 should transact business as a banker except at the place of 
 his actual residence, but this law was evaded. The banker 
 appointed a dummy in the interior town to sign the notes 
 for him, and then went on as before. Banks established 
 merely for the purpose of issuing notes were made the sub- 
 ject of examination and reproof by a committee of the senate 
 in 1845. Three years later a law was passed requiring that 
 all banking associations and individual bankers should be 
 banks of deposit and discount as well as of circulation ; but, 
 as there was no means provided for enforcing it, this law 
 was evaded also. In 1851 the legal discount on country 
 bank notes was reduced to \ per cent. 
 
 It was commonly supposed that security for bank notes 
 was the same thing as redemption of them ; and that, if the 
 notes were secured, redemption would not be demanded, 
 or if demanded would be easily met. All of these supposi- 
 tions were erroneous. Redemption of the notes was just as 
 necessary under this system as under any other ; and when 
 the test came, the security was found to be defective. The 
 event proved that there were other conditions requisite to a 
 good banking system, that the shareholders must be men 
 of substance and character, that the banks must have capital 
 and local habitations, and that they must do a real banking 
 business. The defects of the securities under the free 
 bank system were remediable, however. Experience having 
 proved that bonds and mortgages were not quick assets 
 and that they might become utterly unavailable in a panic,
 
 THE FREE BANK SYSTEM 315 
 
 they were finally cast out altogether, and the stock securi- 
 ties were toned up to par by being restricted to those of the 
 United States and of the state of New York. The state 
 constitution of 1846 also contained important 
 the^stem provisions. It made stockholders individu- 
 
 ally liable (after a specified date) for the 
 debts of banks to an amount equal to their respective 
 shares, in addition to the amount invested by them in the 
 bank. It provided that in case of insolvency note holders 
 should be preferred creditors ; that the legislature should 
 not pass any law sanctioning the suspension of specie pay- 
 ments ; that no special charters for banking purposes should 
 be thereafter granted or extended ; and that all future acts of 
 incorporation, whether general or special, might be altered, 
 amended, or repealed. All these provisions are traceable 
 to the Locofoco uprising of 1836-37. 
 
 From 1839 to 1850 thirty-two free banks failed, with a 
 circulation of $1,468,243, which was redeemed at various 
 
 rates from par down to thirty cents on the dol- 
 System perfected. . 
 
 lar, the aggregate loss being $325,487. From 
 
 1851 to 1861 there were twenty-five failures, with a cir- 
 culation of $1,648,000 and a loss of only $72,849. After 
 1 86 1 there were no failures that resulted in loss to note 
 holders, except by some small delay in realizing on the 
 securities. The system was now nearly perfect, so far as 
 security was concerned. 
 
 Comparison of the results of the safety fund and of the 
 free bank systems in the state of New York shows a marked 
 advantage for the former in the matter of elasticity of 
 note issues, or the power to respond quickly to the vary- 
 ing demands of business. It was not necessary for the 
 safety fund banks to invest additional capital, to buy 
 securities in the market and lodge them with the state 
 comptroller, and to go through other tedious formalities
 
 316 BANKING 
 
 before meeting the demand for more notes. They could 
 respond immediately, and in exact measure with the demand. 
 The free banks, after buying their notes from the state comp- 
 troller, could not put out any more of them 
 
 than the safet y fund banks could of theirs 
 
 which cost nothing, or keep them out any 
 longer. When the notes of the free banks came back to 
 their counters they became dead capital, earning no interest. 
 Hence those banks would take out no more than the aver- 
 age amount which they could keep in circulation. Thus 
 they would have no margin for special emergencies. 
 Accordingly there was a regular rise and fall of the circu- 
 lation of the safety fund banks according to the seasons 
 and the state of trade, while that of the free banks was 
 comparatively rigid. 1 
 
 The free bank system of New York harmonized so well 
 with the doctrine of equal rights and gave such promise of 
 abundance of money that it became very popular. Sixteen 
 states adopted it in whole or in part. The controlling motive 
 in most cases was to secure circulating notes in the largest 
 amount and with the greatest rapidity possible. The state 
 of Illinois passed her free banking law in 1851. In Novem- 
 ber of that year it was submitted to a vote of 
 the P e P le and ratified. It provided that any 
 number of persons might organize a bank, but 
 that no bank should have a less capital than $50,000. It 
 did not require that a bank should have any directors. The 
 bank's capital might consist wholly of bonds of states or the 
 United States, deposited with the state auditor as security 
 for its circulating notes. The auditor could deliver to the 
 
 1 Mr. L. Carroll Root, in his monograph on New York Bank Cur- 
 rency, presents a view of the working of the two systems as regards 
 elasticity, by charts showing the rise and fall of the circulation under 
 each from 1857 to 1861. Sound Currency, Vol. II, No. 5.
 
 THE FREE BANK SYSTEM 317 
 
 bank in circulating notes 80 per cent of the market value of 
 the securities. The banks were allowed to pay out the notes 
 of any specie-paying banks of the United States or of 
 Canada. This was virtually an authorization to banks to 
 pay their debts in something else than gold or silver and 
 hence was unconstitutional ; but, as it was in accord with 
 public opinion, nobody questioned it. One hundred and 
 twenty banks were established under this law. Most of them 
 were banks of circulation only. The banking business, in 
 their view, consisted in converting state bonds into circulat- 
 ing notes, getting these into the hands of the people for 
 value, and preventing note holders from calling on them for 
 specie. There were attempts at first to do a legitimate 
 banking business in the large towns under this law ; but they 
 were ineffectual, because the notes of such banks would be 
 returned for redemption, while those of remote and inacces- 
 sible places would remain in circulation. In practice it was 
 hardly necessary for the bank to have a place of business, if 
 its notes were secured. In some instances, where attempts 
 were made in Illinois to present notes for redemption at the 
 bank's counter^, no counter was found, but merely a hired 
 room in some place remote from any railway station and 
 situated on some bottomless prairie road. 
 
 The panic of 1857 caused a suspension of specie pay- 
 ments over the greater part of the country, including New 
 York and New England. With such illustrious examples 
 before them, the closing of the banks of Illinois was looked 
 upon as a matter of course. Exchange on New York rose to 
 15 per cent premium in Chicago. The country banks of Illi- 
 nois had nothing except security bonds which were held by 
 the state auditor. In many cases the bonds had been bor- 
 rowed and the resulting notes had been handed over to the 
 lenders. Nevertheless, the people were tolerant and allowed 
 the bankers time to recuperate. In 1861, when the Civil War
 
 3l8 BANKING 
 
 began, there were 112 so-called "solvent banks" in exist- 
 ence in the state, meaning those that had recovered from 
 the disasters of 1857 or had been established later. When 
 the clouds of the war began to lower, the security bonds, 
 many of which were those of Southern states, began to 
 decline in value, and the notes depreciated accordingly. 
 There was now no real money and no currency in Illinois, 
 but merely different varieties of uncurrent notes passing 
 at various rates of discount, the quotations varying from 
 day to day, from place to place, and even from street to 
 street. Lists of banks, with the rates at which their notes 
 would be received in trade, were posted in all shops, railroad 
 
 offices, and brokers' offices, and published in 
 Final Collapse. 
 
 the newspapers. There was a merchants list, 
 
 a bankers' list, and a railroad list, and these were subject 
 to change without notice. In August, 1861, the system col- 
 lapsed. At the end of the year only seven free banks 
 remained, with a total circulation of $147,000. The legisla- 
 ture was bewildered by the crumbling of the system on whose 
 security such extravagant hopes had been built. A law was 
 enacted providing that no bank should have a circulation 
 exceeding three times its capital, and that the bonds depos- 
 ited to secure its circulation should not be considered as 
 evidence of capital ; but the system never recovered from the 
 shock. The circulation outstanding at the beginning of 1861 
 was $12,320,694. The average loss to note holders was 40 
 per cent. But for the advent of the Civil War it is probable 
 that free banking in Illinois would have followed the same 
 course as in New York, that the securities would have 
 been gradually toned up to par, the laws made more stringent, 
 and central redemption required. 
 
 The free bank system was adopted in Indiana in 1852 
 and in Wisconsin in 1853. The law of the former state was 
 very similar to that of Illinois. The differences were that
 
 THE FREE BANK SYSTEM 319 
 
 in Indiana the auditor might issue circulating notes to the 
 full amount (instead of 80 per cent) of the face value of the 
 
 securities deposited, and that each bank must 
 Indiana. . . . 
 
 have specie in its own vaults equal to 12$ per 
 
 cent of its circulating notes, a requirement that was not 
 generally complied with. The downfall of the system in 
 Indiana was even more precipitate -and disastrous than in 
 Illinois. 
 
 The free banking law of Wisconsin allowed the bank 
 comptroller to issue circulating notes to the full amount of 
 the bonds of states deposited with him by banks. It allowed 
 him also to receive the first mortgage bonds of any railroad 
 in the state twenty miles long, or divisional mortgage bonds 
 on sections of road of not less than forty miles, such road to 
 be first inspected as to its physical condition 
 
 Wisconsin. 
 
 by the governor, the Attorney-General, and the 
 bank comptroller, or any two of them. On such securities 
 80 per cent of circulating notes could be issued, and 
 one-half of the securities of any bank might consist of rail- 
 road bonds of this description. Stockholders were required 
 to give their personal bonds to the extent of one-fourth of the 
 amount of the circulating notes, as security against deprecia- 
 tion of the other securities. Except in this particular the 
 shareholders were not liable beyond the amount of their 
 capital invested. This law was no better than those of 
 Illinois and Indiana, but it was better administered. The 
 comptroller was more careful about the securities he took, 
 and as a consequence the banks were better fortified when 
 the strain came. Yet they ended in disaster and disorder, 
 the city of Milwaukee being the scene of riots in June, 1861, 
 in consequence of the depreciated currency. 
 
 The free bank system was adopted permissively in Canada 
 in 1850. There it was brought in competition with the sys- 
 tem of chartered banks, which was then substantially the
 
 32O BANKING 
 
 same as that of the New England States. Only six banks 
 were organized under it, although special advantages were 
 offered in the way of exemption from taxation. Their cir- 
 culation, which reached $1,080,684 i n ^56, ran down to 
 $495,631 in 1860, and the next year three of 
 the six Poetically withdrew from the field, and 
 now only one remains. The reason for the 
 failure of the system was that the free banks could not com- 
 pete with their neighbors and rivals in business. When the 
 system was started, the Canadian government debentures 
 paid 6 per cent interest and could be bought at a price which 
 netted 7 per cent to the investor. The advocates of the sys- 
 tem said that this would furnish an ample margin of profit, 
 that the banks would get 7 per cent on their deposited 
 bonds, plus whatever they could obtain from the loan of their 
 circulating notes. This was a half truth. The fact was 
 overlooked that the other banks, having their capital free 
 (not locked up in government debentures), could lend three 
 or four dollars of credit for every dollar of cash in hand and 
 could use their circulating notes as well as the free banks 
 could use theirs. Thus the business opportunities were in 
 favor of the chartered banks. A similar competition, with 
 similar results, took place between free, or bond-deposit, 
 banks and chartered banks in Massachusetts, Ohio, and 
 Louisiana. The former were crowded out. 
 
 RECAPITULATION 
 
 Until the year 1838 nobody could engage in the business 
 of banking in the state of New York without a special 
 charter. Thus had grown up a bank monopoly which had 
 been the cause of political corruption and bribery of the legis- 
 lature. These abuses led to a popular reaction and to the 
 passage of a law enabling any person, or association of
 
 THE FREE BANK SYSTEM 321 
 
 persons, to engage in the business of banking on condition 
 of securing their circulating notes by the pledge of public 
 stocks, or of such stocks and bonds and mortgages together, 
 to be lodged in the hands of the comptroller of the state. 
 In case of the failure of any bank the comptroller was 
 required to sell the securities and apply the proceeds to the 
 redemption of the notes. 
 
 The first bank failure under this system took place in 1840. 
 Its securities realized only sixty-eight cents on the dollar of 
 its outstanding notes. Twenty-six free banks failed between 
 the years 1839 and 1844, and their notes were redeemed at 
 the average rate of only seventy-six cents on the dollar. 
 These results proved, not that the system was bad, but that 
 it was defective in details. Then the law was amended, so 
 that only the stocks of the United States and of the state of 
 New York should be accepted as security for the note issues 
 of the free banks, while bonds and mortgages were excluded 
 altogether. After these amendments had been made the notes 
 of banks which became insolvent were redeemed at par. 
 
 In several of the states which followed the example of 
 New York the free bank system proved a disastrous failure, 
 in consequence of the badness of the securities authorized 
 to be taken. Before these states had time to perfect the 
 system the Civil War began and the national bank act soon 
 afterward superseded all other systems. 
 
 AUTHORITIES FOR CHAPTERS X AND XI 
 
 Knox's History of Banking in the United States. 
 
 Root's New York Bank Currency (Sound Currency, Vol. II, 
 No. 5). 
 
 Hammond's History of Political Parties in the State of New 
 York. 
 
 Breckenridge's Canadian Banking System. 
 
 Reports of the Bank Comptroller of New York.
 
 '*, 
 
 ;/.^^ ! 
 
 if 
 
 CHAPTER XII 
 CHAOS OF BANKING IN THE XIX CENTURY 
 
 THE orderly conditions of banking at the beginning of the 
 twentieth century cannot be fully appreciated without a glance 
 at the chaos which prevailed during the greater part of the 
 nineteenth. Some of the disorders have been detailed in pre- 
 ceding chapters, but they give a very inadequate idea of the 
 miseries endured by the people before the second Bank of 
 the United States was established and for some thirty years 
 after it ceased to exist. 
 
 The usual method of starting a bank was as follows : First, 
 a charter was obtained from the state legislature. This 
 would form the basis of a speculation. It was customary to 
 subscribe for a much larger number of shares than one 
 expected to get. One bank is said to have had 
 Ban^charters an aut horized capital of $100,000, whereas the 
 subscriptions amounted to $8,000,000. In 
 Philadelphia the struggle at the windows of the offices where 
 subscriptions were taken was often attended with severe 
 personal injury. " The most disgraceful riots that occur in 
 Philadelphia," says Gouge, " are those which are produced 
 by the opening of the books of subscription for a new 
 bank." If the competition had been very brisk, the shares 
 would generally command a premium after the books were 
 closed. This was the chief aim of the speculators. Then 
 the capital would be paid mostly in stock notes. The inter- 
 est on the stock notes would be offset by the dividends on 
 the shares, with a surplus to the speculators, provided the 
 
 322
 
 BANKING IN THE XIX CENTURY 323 
 
 bank did not break. If the times happened to be unpropitious 
 and a suspension of specie payments followed, the state 
 legislatures were lenient, the banking fraternity was power- 
 ful, and public opinion was so lifeless that the business 
 might go on just as well as before, or even better, since 
 there would then be no restraint upon the bank's issues. As 
 the activities of banking at that time took the form of note 
 issues rather than of deposits, the losses resulting from bank 
 failures were widely diffused. They fell upon the whole 
 community, but especially upon farmers, mechanics, wage- 
 earners, washerwomen, and other poor people, who did not 
 have bank accounts, but into whose pockets the worthless 
 notes had found their way. 
 
 There were general suspensions of specie payments in 
 1814, 1818, 1837, J 84i, and 1857, besides the suspension of 
 the Civil War period, 1861-79. There were some crises in 
 which the banks which continued to pay specie were excep- 
 tions to the general rule. There were also many partial 
 suspensions, where large groups, although not a majority, 
 of banks failed : and there were individual 
 
 Bank Failures. ... 
 
 suspensions without number, many of them 
 fraudulent, and all entailing indescribable suffering on the 
 poorer classes. Such misery was inflicted upon the country 
 that some of the states in their constitutions entirely pro- 
 hibited the existence of banks within their limits. 1 Most 
 
 1 The writings of W. M. Gouge and Condy Raguet, like the pages of 
 Niles' Register, are filled with particular instances of downright fraud, 
 and of reckless speculation which can hardly be distinguished from 
 fraud, in the establishment, operation, and closing of banks in the first 
 half of the nineteenth century. For example : the Towanda Bank of 
 Pennsylvania established its credit and gained a large circulation by 
 having an agent to redeem its notes in Philadelphia. Suddenly the 
 agent stopped redeeming them. " Hundreds of poor laborers," said the 
 Public Ledger, " were to be seen running in every direction with their 
 hands full of the trash and not able to induce a broker to give a sixpence
 
 324 BANKING 
 
 commonly, however, the banking fraternity controlled the 
 state governments. 
 
 A report made to the legislature of North Carolina in 1828 
 disclosed the following facts. The bank of Cape Fear and 
 the bank of Newbern were chartered in 1804. The nominal 
 capital of each was $800,000. In each case the law required 
 that this should be paid in gold or silver, but 
 was not so P a ^- Upon this fraudulent basis 
 
 North Carolina 
 
 they issued notes to the amount of more than 
 
 $3,000,000, which they issued for discounting paper, drawing 
 6 per cent interest, "so that," says the report, "for the use 
 of their notes, which, intrinsically, were of no value at all, 
 the stockholders of these two banks have drawn from the 
 people byway of interest something like $200,000 annually." 
 The state bank of North Carolina was incorporated in 1810 
 with a capital of $1,600,000. In 1819 these three banks 
 entered into an agreement with each other not to pay specie, 
 and their circulating notes immediately fell to 15 per cent 
 discount. They then introduced a clause into the promissory 
 notes which they discounted, requiring payment in specie; 
 that is, they lent their own irredeemable notes to the public 
 on condition that payment should be made in coin. The 
 specie so received was used to buy up their own circulating 
 notes at a discount. At the time when the investigation was 
 made the state bank had less than $1000 specie in its vaults. 
 In view of these shocking revelations the recommendation 
 of the legislative committee was that the Attorney-General 
 should be directed to institute proceedings for forfeiture of 
 charter. Even that suggestion failed ; for, when the banks 
 
 on the dollar for them. We passed in the market a woman who makes 
 her living by selling butter, eggs, and vegetables, who had almost all 
 she was worth, about $17, in Towanda bank notes. When apprized 
 that it was worthless, she sank down in agony upon her stool and wept 
 like a child."
 
 BANKING IN THE XIX CENTURY 325 
 
 threatened to call in their loans, the legislature immediately 
 became deaf and the people dumb. 
 
 The state of Georgia in 1818 gave to the bank of Darien a 
 charter, which provided that in every case where a demand 
 was made on the bank for the redemption of its notes in 
 
 specie the cashier might require the person 
 In Georgia. 
 
 making the demand to take an oath in writing 
 
 "that such notes or bills so presented for payment are not 
 the property of any other bank, company, or incorporation." 
 The bank enlarged this privilege by adopting a rule that 
 every person presenting its notes for redemption must take 
 an oath in the bank, before a justice of the peace and in the 
 presence of five directors and the cashier, that he was the 
 owner of the notes and was not acting as the agent of anybody 
 else. Of course, if it was very inconvenient for the bank to 
 pay, it could thus protect itself; for it would be very diffi- 
 cult for the other party to bring a justice of the peace, five 
 directors, and the cashier together. In other words, the bank 
 assumed power to suspend and resume payments at its own 
 pleasure. 
 
 The exercise of this power as against strangers was favored 
 by public opinion, not only in Georgia, but throughout the 
 South and West. Anybody coming from a distance to draw 
 specie from a bank incurred the odium of the community. 
 In such cases the bank was considered justified in paying 
 the most inconvenient kind of coin and in taking the longest 
 time to count it. In some cases persons who claimed their 
 rights 'against banks in this way were threatened with tar 
 and feathers. Public authority over banks was equally 
 paralyzed. 1 
 
 a " We search almost in vain through the law reports for any decisions 
 on the rights or authority of the state over banks, or the duties of banks 
 to the state. It may be said that no attempts were made to test or 
 enforce the rights of the state against banks and that, as a matter of
 
 326 BANKING 
 
 A number of chartered banks existed in Michigan in 1837. 
 Early in that year she passed a banking law which, in some 
 of its features, anticipated the free bank act of New York. 
 It provided that any number of freeholders, not less than 
 
 twelve, might organize themselves as a bank 
 In Michigan. e . 
 
 and open books of subscription to the capital 
 
 stock thereof, 10 per cent to be paid in specie at the time 
 of subscribing, and not less than 30 per cent before com- 
 mencing business. The banks were required also to deposit 
 security with the auditor-general of the state for their circu- 
 lating notes and other liabilities. The securities might be 
 bonds and mortgages or the personal bonds of resident 
 freeholders, to be approved by the treasurer and clerk of the 
 county, and they were to be held for the debts of the banks 
 in case the other assets should prove inadequate. In the 
 following December another act was passed providing for 
 the appointment of three commissioners to visit and inspect 
 all the banks every three months and especially to examine 
 their specie. This act also made a change in the system of 
 deposited securities, by providing that they should consist 
 of bonds and mortgages only. 
 
 The commissioners started on their journey in January, 
 1838. They found that the state had been plentifully 
 littered with banks, but that the basis for most of them was 
 one lot of specie, which was used in each case until the 
 formalities of the law were complied with and then passed 
 on to the next. In other cases no specie had been seen at 
 any time, but incantations had been held with imaginary 
 
 practice, it had none. The banks were almost irresponsible. Such 
 decisions as bear at all on the authority of the state over banks proceed 
 from the attempts of the banks to resist the exercise of any authority 
 whatever. For instance, the banks which had charters resisted the 
 appointment of Bank Commissioners, which was an exercise of visitorial 
 power, and was the lever by which the state, after 1840, began to reduce 
 the banks to order." SUMNER'S Banking, p. 352.
 
 BANKING IN THE XIX CENTURY 327 
 
 gold in the form of specie certificates and specie checks. 
 The commissioners learned that a watch was kept on their 
 movements and that when they were expected to visit a cer- 
 tain bank the requisite amount of specie would be sent ahead 
 one day or one night, so that it might be inspected and then 
 withdrawn for the use of the next bank. But, as the specie 
 in circulation at that time was mostly of foreign origin, after 
 a particular lot had been inspected two or three times it could 
 be identified by the preponderance of coins of this or that 
 country, or by special marks on some of them. In this way 
 the commissioners easily discovered the deception. Yet in 
 every case somebody was found to swear that the specie 
 belonged to the bank and that it was intended to be kept 
 there for the sole business of that bank. Many of these 
 institutions were located in the depths of forests where there 
 were few human habitations, but plenty of wild cats. Thus 
 they came to be known as the "wild-cat banks." Forty of 
 
 these so-called banks went into operation 
 "Wild-Cat under the law of 1837, with a nominal capital 
 
 of $3,900,000, and all but four of them failed 
 before December, 1839. The failure of the free banks 
 discredited the chartered banks also and brought all of them 
 down except three. The people of the state, who did not then 
 number above 100,000 and were very poor, were left with 
 $1,000,000 of worthless bank notes in their hands, for which 
 they had given their products and their labor. When an 
 attempt was made to realize on the mortgage securities, the 
 Supreme Court pronounced the free banking act unconsti- 
 tutional and void. 1 
 
 The bewildering state of the paper currency before the 
 Civil War may be learned from the numerous bank-note 
 Reporters and counterfeit detectors of the period. It was 
 the aim of these publications to give early information to 
 
 1 Felch's Early Banks and Banking in Michigan.
 
 328 BANKING 
 
 enable the public to avoid spurious and worthless notes in 
 circulation. These were of various kinds : (i) ordinary 
 counterfeits ; (2) genuine notes altered from lower denomi- 
 nations to higher ones; (3) genuine notes of 
 Counterfeit and f ^ d banks j d h n g Q solvent 
 Spurious Notes. 
 
 banks ; (4) genuine notes of solvent banks 
 
 with forged signatures ; (5) spurious notes, such as those of 
 banks that had no existence; (6) spurious notes of good 
 banks, as ao's of a bank that never issued 2o's ; (7) notes of 
 old, closed banks still in circulation. 
 
 The number of counterfeit and spurious notes was quite 
 appalling, and disputes between payer and payee as to the 
 goodness of notes were of frequent occurrence, ranging over 
 the whole gamut of doubts, as to whether the issuing bank 
 was sound or unsound, whether the note was genuine or 
 counterfeit, and, if sound and genuine, whether the discount 
 was within reasonable limits. All merchants kept "bank-note 
 Reporters " for ready reference. If there was a bank in the 
 town, the cashier was appealed to constantly by citizens to 
 pass upon the goodness of notes in circulation. 
 
 BicknaWs Counterfeit Detector and Bank-Note List of 
 
 January i, 1839, contained the names of fifty-four banks 
 
 that had failed at different times ; of twenty 
 
 Counterfeit fictitious banks, the pretended notes of which 
 
 Detectors. 
 
 were in circulation ; of forty-three other banks, 
 
 for the notes of which there was no sale ; of two hundred 
 and fifty-four banks, the notes of which had been counter- 
 feited or altered ; and enumerated thirteen hundred and 
 ninety-five descriptions of counterfeited or altered notes then 
 supposed to be in circulation, of denominations from one 
 dollar to five hundred. 
 
 Twenty years later Nicholas 1 Bank-Note Reporter had fifty- 
 four hundred separate descriptions of counterfeit, altered, and 
 spurious notes. The number of this Reporter for November,
 
 BANKING IN THE XIX CENTURY 329 
 
 1858, described thirty different counterfeits of the notes of 
 the Bank of Delaware, Wilmington. They were one i, three 
 2*s, twelve 5's, seven ID'S, four 2o's, two 50*8, and one 100. 
 The known counterfeits of the Bank of Kentucky, Louisville, 
 were three I's, two 2's, two 3's, one 4, two 5's, four ID'S, 
 seven 2o's, four 50*5, two loo's, and one 500, twenty-eight 
 in all. The same number were catalogued of the State Bank 
 of Ohio, namely, four r's, five 2's, two 3's, four 5's, nine 
 xo's, two 2o's, one 50, and one 100, with the remark appended 
 to the last : " Bank never issued any." Descriptions of the 
 latest counterfeits were inserted conspicuously on the first 
 page of each number. Thus the first page of Thompson's 
 Reporter for June n, 1857, had warnings against fourteen 
 spurious and altered notes which had made their appear- 
 ance since its last issue. Extra sheets of the same publica- 
 tion in 1859 had notices like the following: 
 
 i's, 2's, 3's and 5's of the Wisconsin Miner's Bank are in cir- 
 culation ; there is no such bank. 
 
 Notes of the broken Farmer's Bank of Rhode Island are 
 appearing altered to the other Farmer's Banks in various cities and 
 States. 
 
 Counterfeiters have become possessed of a large batch of the 
 worthless notes of a concern called the Thames Bank, Laurel, 
 Ind., and have commenced altering them to represent bills of 
 various good banks the Thames Bank of Norwich, Conn., and 
 the Conway Bank, Mass., and others. 
 
 Bank of Mobile. Genuine impressions of the 2o's, 5o's and 
 loo's of this bank with forged signatures are in circulation. 
 
 There was a publication called Monroe's Descriptive List 
 of Genuine Bank Notes. This contained thirteen hundred 
 and twenty-three separate descriptions of notes. Frequently 
 the banks which found their notes successfully counterfeited 
 would destroy the plates and get new ones engraved, with 
 the result that they had two or three kinds of genuine notes
 
 330 BANKING 
 
 in circulation at once, thus, of course, adding much to the 
 confusion. There was also a list of broken, closed, and 
 worthless banks. This was kept standing in all the Reporters. 
 There were forty such credited to New York City at one 
 time and one hundred and twenty-five more to other parts of 
 the state. Rates of discount on all bank notes that were 
 not at par in New York were quoted in all the Reporters. 
 The auditor of Illinois advertised November 9, 1861, that 
 he would redeem the notes of one hundred and thirty-nine 
 banks named by him, at various rates ranging from 40 to 90 
 cents per dollar. 
 
 Among the minor abuses of banking was the practice of 
 requiring borrowers to leave on deposit a certain proportion 
 of the amount borrowed, in some cases 40 per cent, 
 so that the bank could lend the difference to somebody else 
 
 and thus get double interest. The practice of 
 Minor Abuses. . 11,. 
 
 issuing post notes, payable thirty or sixty days 
 
 after date, this feature being, in some cases, printed in 
 very small letters so that an ordinary observer would not 
 notice it, has been previously referred to. Laws were 
 enacted forbidding the issue of post notes; but they were 
 evaded by the device of lending netes on condition that they 
 should be put in circulation at a certain distance from the 
 bank, or should be kept out a certain length of time, or 
 should be used only as collateral security for loans at other 
 banks. One of the most common practices was to pay out 
 the notes of distant banks that were at a discount. This 
 practice prevailed largely in Chicago and the surrounding 
 country from 1854 to 1859. Most of the bankers in that city 
 owned banks in the state of Georgia, the notes of which they 
 paid out for the commercial paper which they discounted. 
 The same banks sold drafts on New York at per cent 
 premium in exchange for these notes ; in other words, they 
 paid out the notes at par and redeemed them at a discount.
 
 BANKING IN THE XIX CENTURY 331 
 
 This practice was sanctioned by law and public opinion, and 
 it turned out that these unsecured notes of banks in a distant 
 and then rather inaccessible state were intrinsically better 
 than the bond-secured issues of the banks of Illinois. The 
 former had assets without securities, and the latter had 
 securities without assets. None of the Georgia-Chicago 
 banks failed, nor did the discount on their notes ever exceed 
 i per cent. The condition was similar to that which existed 
 in New England before the corrective measures of the Suffolk 
 Bank system were applied. 
 
 RECAPITULATION 
 
 Grave disorders in banking prevailed in the United States 
 during the larger part of the nineteenth century. They were 
 due to the lack of public regulation, to the want of any 
 uniform system applicable to all parts of the country, and to 
 the significant fact that public opinion was both torpid and 
 unintelligent. The first and second Banks of the United 
 States had been overthrown and nothing had been substi- 
 tuted which could be applied to the entire nation. Their 
 place was filled by multifarious banks, under heterogeneous 
 special charters and systems, of which sharpers took advan- 
 tage to plunder the unwary. The lack of public regulation 
 led to innumerable frauds and miscalculations. Want of 
 uniformity opened the door to thousands of counterfeit and 
 spurious notes, by means of which many people lost their 
 earnings. 
 
 An active and intelligent public opinion is indispensable 
 to keep banks, as well as other institutions, in good order ; 
 and for this there is no possible substitute. It is not suffi- 
 cient that the banking laws be good. They must, above all, 
 be promptly and inexorably enforced, and this cannot happen 
 unless public opinion is well instructed and alert.
 
 332 BANKING 
 
 AUTHORITIES 
 
 Gouge's Short History of Banking and Paper Money in the 
 United States. 
 
 Raguet's Treatise on Currency and Banking. 
 
 Raguet's Financial Register. 
 
 Miles' Weekly Register, 1811-1848. 
 
 Felch's Early Banks and Banking in Michigan. 
 
 Kinley's Independent Treasury. 
 
 The Banker's Magazine and Statistical Register, \ 846 et seq.
 
 -I 
 
 CHAPTER XIII 
 SOME NOTABLE BANKS 
 
 NOTWITHSTANDING the disorders of banking in the West 
 
 and South described in the preceding chapter, there were 
 
 some bright spots in the prevailing gloom. 
 
 oftaduSi* The most notable of these was supplied by 
 the State Bank of Indiana. This was a sys- 
 tem, or group, of banks modeled, for the most part, upon the 
 Bank of the United States. It was established by the state 
 legislature in 1834, after the bill to recharter the Bank of 
 the United States had been vetoed by President Jackson. 
 The capital of the bank was $1,600,000, all of which was 
 paid in specie mostly in Spanish and Mexican silver 
 dollars. One-half of the capital was owned by the state 
 and the other half by private individuals ; but the state 
 advanced 62^ per cent of the private subscriptions as a loan 
 at 6 per cent interest, taking mortgage security and a lien 
 on the shares for repayment. The persons subscribing for 
 shares were required to pay 37^- per cent of their subscrip- 
 tions in specie before the state advanced the remainder. 
 The state procured the money by a 5 per cent loan nego- 
 tiated in New York. The securities issued were termed 
 " bank bonds." These were to run a little longer than the 
 charter of the bank and were specially secured by the state's 
 shares in the bank and her lien on those of the private 
 shareholders. The charter was to continue twenty-five years, 
 and no other banking corporation was to be created or 
 permitted in the state during that time. 
 
 333
 
 334 BANKING 
 
 The bank was to consist of one parent institution at 
 Indianapolis and ten branches. Each branch had a capital 
 of $160,000. The parent institution had no capital under 
 its immediate control, differing in this respect from the Bank 
 of the United States. It consisted of a presi- 
 dent and board of directors who supervised, 
 examined, and controlled the whole. The 
 president and four directors were chosen by the legislature 
 to hold office five years, and one director was chosen by the 
 private shareholders of each branch. The branches were 
 managed by the local shareholders, subject to the central 
 board at Indianapolis. The number of branches was after- 
 wards increased to thirteen by additional capita 1 !, of which 
 the state contributed one-half. The earnings of each branch 
 belonged to its own shareholders exclusively, but the divi- 
 dends were declared only by the parent bank. Unpaid 
 interest on loans, whether due or not due, could not be 
 included in dividends. Each branch was liable for the 
 debts of every other branch, and in case of the insolvency 
 of a branch had to pay them within one year; but the state 
 had a first lien on the assets of any failed branch for the 
 reimbursement of its stock. The branches were independent 
 of each other as to assets, but were united as to liabilities. 
 This had the effect of inducing vigilance on the part of all 
 the members in watching each other and of inspiring public 
 confidence in the stability of the whole institution. 
 
 No branch could lend money on the security of its own 
 stock. No officers or directors could borrow on terms unlike 
 those offered to the public, or indorse for 
 each other, or vote on questions wherein they 
 were financially interested. On all applica- 
 tions for loans above $500, a majority vote of five-sevenths 
 of the board was necessary, and this was to be entered on the 
 minutes with the names of the directors so voting. Directors
 
 SOME NOTABLE BANKS 335 
 
 were individually liable for losses resulting from infraction 
 of the law, unless they had voted against such infraction. 
 The insolvency of any branch, was to be deemed fraudulent 
 unless the contrary were proved. In any case of insolvency 
 adjudged to be fraudulent the directors were to be liable 
 for the debts without limit ; and after their estates were 
 exhausted the other stockholders were to be liable for an 
 amount equal to their shares, in addition to the amount that 
 had been paid, or ought to have been paid, thereon. 1 The 
 debts due to or from any branch (except for deposits) were 
 not to be more than double the capital of that branch. Theo- 
 retically, therefore, each branch might have notes outstand- 
 ing to double the amount of its capital. Its 
 maximum circulation was $4,000,000 (in 1851), 
 the capital being then $2,000,000. The notes 
 were signed by the president of the bank and were issued to 
 the branches by the parent bank. Each branch was required 
 to redeem its own notes in specie on demand and to receive 
 the notes of all the other branches at par. The notes were 
 usually taken from the parent bank by the presidents or 
 directors of the branches traveling on horseback. Mr. Hugh 
 McCulloch (afterwards Secretary of the Treasury) was presi- 
 dent of the Fort Wayne branch. He says : 
 
 Fort Wayne was three good days' ride from Indianapolis, 
 mostly through the woods. For fifteen years I made this journey 
 on horseback and alone with thousands of dollars in my saddle 
 bags, without the slightest fear of being robbed. I was well 
 known upon the road and it was well known that I had money 
 with me and a good deal of it, and yet I rode unharmed through 
 
 1 The clause of our national bank act which makes the share- 
 holders personally liable for all the debts of a bank to an amount equal 
 to the par value of their shares, in addition to the amount invested by 
 them in the bank, made its first appearance on this continent in the 
 charter of the Gore Bank of Hamilton, Canada, in 1835. The provision 
 in the charter of the State Bank of Indiana fell somewhat short of that.
 
 336 BANKING 
 
 the woods and stopped for the night at the taverns and cabins on 
 the way, in perfect safety. 1 
 
 Such were the leading features of this renowned bank. Its 
 
 success was due to the excellence of the rules adopted for 
 
 its government and to the sagacity and fidelity 
 
 of its management. It was always under the 
 
 control of men of prudence and probity. The 
 
 managers of the parent bank were empowered to examine the 
 
 branches as often as they saw fit and were required to do so at 
 
 least twice each year. The examinations were usually made 
 
 by the president. They were always thorough ; and, as no 
 
 notice was given of the time when the examiner would come, 
 
 no special preparations could be made. Mr. McCulloch 
 
 ascribed the success of the bank largely to the intelligence, 
 
 thoroughness, and frequency of the examinations. 
 
 The bank's charter expired in 1859, and it went into 
 
 liquidation. The state of Indiana realized a net profit 
 
 of $3,500,000 over and above the interest 
 
 paid on the bank bonds from the bank 
 
 Liquidation . 
 
 during the twenty-five years of its existence. 
 The private shareholders, on the average, received $153.70 
 for each $100 paid in, besides the annual dividends. While 
 the process of liquidation was going on, a bill was passed by 
 the legislature to incorporate the Bank of the State of 
 Indiana. This act was procured by certain scheming politi- 
 cians, for the purpose of selling their rights under it to the 
 owners of the expiring bank. In this they were successful. 
 The old bank stepped into the new charter and entered 
 upon a fresh career of prosperity, under the presidency of 
 Mr. McCulloch ; but the state had no share in it. It con- 
 tinued until 1865, when the federal tax of 10 per cent on 
 the notes of state banks crippled its operations. 
 
 1 McCulloch's Men and Measures of Half a Century.
 
 SOME NOTABLE BANKS 337 
 
 Considered as a continuous institution from 1834 to 1866, 
 this was a memorable bank, of whose history the country 
 may well be proud. It was another excellent illustration of 
 the " banking principle." l Its loans and discounts took the 
 form of note issues, rather than of deposits, in the proportion 
 of about seven of the former to one of the latter. This was 
 due to the nature of its environment, as it was situated in a 
 sparsely settled agricultural country, where bank checks 
 were not adapted to the conditions of society. For a circu- 
 lating medium bank notes were better adapted to the wants 
 of the people than specie. Such a medium was supplied by 
 the bank at all seasons of the year and in exact proportion 
 to the demand that is, in proportion to the offering of good 
 paper for discount. 2 After 1842 the notes of the bank were 
 always redeemed in specie, even during the 
 
 Crisis of 1857. .... ,,,,,. 
 
 crisis of 1857, when all the banks in New 
 England, and all in New York except one (the Chemical), 
 were obliged to close their doors. It is true that public 
 opinion in the West did not then require the payment of 
 deposits in specie. If a bank redeemed its notes in coin, it 
 might pay its depositors the same kind of currency that it 
 
 1 See page 297. 
 
 2 " It is of course true that for more than thirty years the entire ten- 
 dency of banking movements in the United States was toward making 
 the notes a preferred claim against the assets, and moreover against 
 a certain portion of the assets, set apart in a particular form for the 
 purpose of securing the notes. It goes without saying that the national 
 banking system, the culmination of that movement, furnishes the country 
 with the most reliable banknote circulation it has ever had. No one, 
 of course, would think of returning to the chaos that prevailed when 
 each State had its own system. Yet it is by no means certain that the 
 national banking system can be made permanent on the present basis 
 of bond security. If, then, it becomes necessary to reorganize the sys- 
 tem, it will be worth while to examine the merits of this Indiana sys- 
 tem of federal banks." HARDING'S Essay on the State Bank of 
 Indiana, Sound Currency, Vol. V, No. 16.
 
 338 BANKING 
 
 habitually received from them ; but the deposits of the 
 State Bank of Indiana were so small a part of its liabilities 
 that it could have met that test also. 
 
 When the bank began its operations in 1834, the state 
 had about one million inhabitants ; and of these less than 
 one thousand were engaged in mercantile pursuits, and a 
 still smaller number in manufactures. Accordingly, the 
 
 demands upon the bank were chiefly for 
 Mortgage Loans. . 
 
 mortgage loans. Such loans were made in 
 
 considerable amounts, and they proved embarrassing. When 
 the troubles of 1837 came the bank could not realize on its 
 mortgage securities. Its officers thus learned by their own 
 experience that loans on land security, although generally 
 safe in the long run, were not suitable for a bank whose 
 liabilities were payable on demand. It accordingly discon- 
 tinued them as soon as practicable. It continued, however, 
 to lend money largely to farmers and drovers on personal 
 security and on bills of exchange drawn against shipments 
 of agricultural products. Here it found its true source of 
 wealth, and here the agriculturists found an ever present 
 help in time of need, in the harvesting a*nd disposing of 
 their crops. 
 
 About the time that the State Bank of Indiana was started 
 a Scottish youth named George Smith, twenty-five years of 
 
 age, found his way to this country. A native 
 George Smith. ' . J J 
 
 of Aberdeenshire, he came hither to seek his 
 
 fortune, and he found it in due time. He arrived at Chicago 
 in 1834 and invested his small means in the purchase of 
 real estate there. Then he returned to Scotland, where 
 he persuaded certain friends, among whom was Alexander 
 Mitchell, to join him in the northwestern part of the United 
 States. In 1838 Smith conceived the idea of establishing 
 a bank. This, however, was not easy, for the western states 
 and territories were at that time intensely prejudiced against
 
 SOME NOTABLE BANKS 339 
 
 banks. Smith knew that he could not obtain a charter 
 
 directly, but thought that he might do so covertly. The 
 
 legislature of Illinois had recently granted a charter for 
 
 an institution called the Chicago Marine and 
 
 The Wisconsin fi re Insurance Company. Smith took a copy 
 
 Marine and Fire 
 
 insurance Co. of this instrument to Wisconsin and prevailed 
 
 upon the territorial legislature to pass a similar 
 one, which became law on February 28, 1839. This was a 
 charter for a joint stock company to transact the business 
 of marine, fire, and life insurance. It excluded " banking 
 privileges " in express terms from the powers of the corpora- 
 tors, but it authorized them to receive money on deposit and 
 to loan the same on satisfactory security. As the phrase 
 " banking privileges " meant the right to issue circulating 
 notes, this was prohibited. Nevertheless, Smith and his 
 associates began to issue certificates of deposit, in the 
 similitude of bank notes, payable to bearer. These certifi- 
 cates were in denominations of $1.00, $3.00, $5.00, and $10, 
 and were generally known as " George Smith's money." 
 They were at first redeemed in specie at Milwaukee ; but 
 as the business grew, Smith established agencies at Chicago, 
 Detroit, Buffalo, Galena, and St. Louis, where New York 
 drafts were given for them at the current rate of exchange. 
 The paid-up capital of the company was $225,000, all of 
 which came from Scotland. 
 
 As the legislature had never intended to grant a charter 
 for a bank, it had enacted no regulations for one. Smith 
 and Mitchell were therefore "wild catting" in 
 ^ e most barefaced manner and the legislature 
 was obliged to take notice of this fact. At the 
 session of 1843 a committee was appointed to investigate the 
 company. Its finances were found to be in a sound con- 
 dition ; yet, since it had issued certificates of deposit in a 
 form not contemplated by law, the committee recommended
 
 340 BANKING 
 
 that the charter be repealed. This recommendation was not 
 adopted then, but three years later the legislature did repeal 
 the charter by a decisive vote. The company contended 
 that the question of a forfeiture of its rights must be deter- 
 mined judicially, and it published a notice that in the mean- 
 time it would continue its business and redeem its certificates 
 in the usual manner at the head office and at the established 
 agencies. The legislature took no further steps, being 
 restrained perhaps by the belief that, although the business 
 transacted by the company was irregular, it was beneficial to 
 the infant community and that a sudden termination of it 
 might prove disastrous. So the Wisconsin Marine and Fire 
 Insurance Company's bank continued to exist. Its circula- 
 tion under the charter of 1839 reached the sum of $1,470,- 
 235. There were repeated runs on it for specie, but they 
 were always successfully met. 1 
 
 This institution supplies a fresh illustration of the "bank- 
 ing principle." Smith discounted the promissory note of 
 Mr. A, a wheat buyer, for say $10,000, by writing that sum, 
 minus the interest for ninety days, opposite A's name in the 
 bank's ledger and making a corresponding 
 
 Money 2 - Smith>S 6ntrv in A ' S P aSS b k ' That became A ' s 
 deposit and the bank's liability. The act of 
 
 writing was ipso facto the issuance of the bank's credit. It 
 was immaterial whether A exercised his right by drawing 
 his checks and handing them to various people or by taking 
 the whole amount in circulating notes, but he took notes 
 
 1 " During this fruitful period (1850 to 1860) of immigration, settle- 
 ment, rapid growth and marvelous development of the resources of this 
 great commonwealth, the Wisconsin Marine and Fire Insurance Com- 
 pany was able, in spite of a dubious charter and hostile legislation, to 
 supply all the channels of money circulation in the Northwest and in the 
 valley of the Mississippi, with a constantly increasing stream of currency, 
 the integrity of which remained to the last absolutely unquestioned." 
 HADDEN'S History of State Banks of Wisconsin.
 
 SOME NOTABLE BANKS 341 
 
 because the people from whom he bought wheat could not use 
 bank checks. He disbursed them among farmers, who paid 
 them to country storekeepers, to farm laborers, teamsters, 
 school teachers, clergymen, doctors, etc. By and by they 
 reached the hands of the city merchant, who wished to make 
 remittances to New York or Boston. He took the notes to 
 Smith and obtained drafts on those cities at the current rate 
 of exchange. It was no advantage for him to draw gold for 
 the notes, because he could not send it to the East as cheaply 
 as he could buy Smith's drafts. The wheat buyer, mean- 
 while, had shipped his grain to a consignee in New York, 
 taking a bill of lading from a steamboat. He had made a 
 draft on the consignee, had attached the bill of lading to it, 
 and sold it to Smith, thus paying his indebtedness to the 
 bank and having something left over for his own profit. 
 This draft had enabled Smith to have funds in New York 
 to pay the drafts which he sold to the merchants. 
 
 The farmers would have received gold for their wheat, if 
 they had not taken Smith's notes ; but they would have been 
 obliged to wait till the wheat could be sent to the eastern 
 market and the proceeds returned, or else to secure advances 
 of money from somebody who would wait for repayment till 
 the crop had been sold. Thus, while Smith's profits were 
 large, he did not alone reap the advantages of a paper medium 
 of exchange, which was sound in fact, although unsound in 
 principle. It was sound in fact because Smith and Mitchell 
 were good bankers. It was unsound in principle because it 
 was not accompanied by safeguards to protect the community 
 against the doings of less honorable and less prudent men. 
 
 " George Smith's money " was an elastic currency. There 
 was no limit to his issues, except his ability to redeem them, 
 of which he was the sole judge. Within this limit he dis- 
 counted all the paper that he considered good. He gave his 
 own paper payable on demand for that of merchants payable
 
 342 BANKING 
 
 at a fixed time. His own paper passed from hand to hand 
 and might stay out a whole year. In the fall, when the crops 
 began to move, there was no lack of money for legitimate 
 
 trade, because it was as easy to put out these 
 d'etre ^ aiS certificates at one time as at another. In the 
 
 winter, when lake navigation was closed, the 
 certificates answered all the purposes of a local circulating 
 medium. In the spring, when steamboats began to move on 
 the Great Lakes, bringing new settlers and cargoes of goods, 
 the certificates came back to headquarters mainly for the 
 purchase of New York drafts, after which they took their 
 usual round again. 
 
 In 1853 the state of Wisconsin passed a law requiring all 
 banks to deposit security with the state comptroller for 
 
 their circulating notes. As this kind of bank- 
 Retirement in & ^^ not su ^ Smith, he sold his interest 
 
 in the Wisconsin Marine and Fire Insurance 
 Company and established at Chicago an institution called 
 the Bank of America. He then bought two banks in Georgia, 
 the notes of which he paid out at the Bank of America by 
 discounting commercial paper. These notes he redeemed by 
 giving drafts on New York for them at f per cent premium. 
 This was a strictly legal operation and a profitable one. The 
 people had confidence in Smith, and the business prospered 
 until the approach of the Civil War admonished him to 
 abandon his connection with Georgia. He then retired to 
 his native land and, when he died in London in the year 
 1900, he left one of the most colossal fortunes in the United 
 Kingdom. The Wisconsin Marine and Fire Insurance Com- 
 pany became a free bank under the state law of 1853, and 
 is now a national bank. 
 
 The state of Louisiana in 1842 passed a general banking 
 law which was fit to be a model for other states. Its princi- 
 pal features were : (i) the specie reserve was to 
 
 4
 
 SOME NOTABLE BANKS 343 
 
 to one-third of all liabilities to the publjiL^z) the other 
 
 two-thirds of the liabilities were to be represented by com- 
 mercial paper having not more than ninety 
 days to run ; (3) all commercial paper to be 
 paid at maturity, and if not paid, or if an 
 extension were asked for, the account of the party to be 
 closed and his name sent to the other banks as a delinquent ; 
 (4) all banks to be examined by a board of state officers 
 quarterly or oftener ; (5) bank directors to be individually 
 liable for all loans or investments made in violation of the 
 law, unless they could show that they had voted against the 
 same, if present ; (6) no bank to have less than fifty share- 
 holders, having at least thirty shares each ; (7) any director 
 going out of the state for more than thirty days, or absenting 
 himself from five successive meetings of the board, to be 
 deemed to have resigned and this vacancy to be filled at 
 once ; (8) no bank to pay out any notes but its own ; (9) 
 all banks to pay their balances to each other in specie every 
 Saturday, under penalty of being immediately put in liquida- 
 tion. This was the first law passed by any state requiring 
 a definite percentage of specie reserve against deposits, and 
 the proportion was larger than is now considered necessary. 
 Under this law Louisiana became in 1860 the fourth state 
 of the Union in point of banking capital and the second in 
 point of specie holdings. It is a matter of history that the 
 Louisiana Bank Act of 1842 was strictly and intelligently 
 enforced until the city of New Orleans was captured during 
 the Civil War, twenty years later. 
 
 The State Bank of Ohio (established in 1845), like tne 
 State Bank of Indiana, was composed of branch banks under 
 a central board of control. The law of 1845 provided that 
 any number of banks not less than seven, then existing or 
 to be organized thereafter, might become branches of the 
 State Bank of Ohio. It started with a capital of $3,300,000.
 
 344 
 
 BANKING 
 
 Note issuing was to be proportioned to capital, in the fol- 
 lowing manner : any branch might issue $200,000 of notes 
 for the first $100,000 of capital, $150,000 for the second 
 $100,000 of capital, and so on. In this way a bank of 
 $500,000 capital might issue $650,000 of notes. Each branch 
 was required to deposit with the board of control 10 per 
 cent of the amount of its circulating notes, either in specie 
 or in bonds of the state of Ohio or of the United States, as 
 a safety fund for the protection of the holders of notes of all 
 the branches. The board of control might invest any money 
 belonging to the safety fund in the bonds of Ohio or of the 
 United States, or in mortgage on real estate in the county 
 where the branch was situated, worth double the amount of 
 the loan, exclusive of buildings or other destructible property. 
 The interest on the invested fund was paid to the branch 
 making the deposit. Each branch was liable for the circu- 
 lating notes, but not for the general debts, of the other 
 branches. In case of the failure of any branch to redeem 
 its notes, the board of control was to make an assessment 
 pro rata on the other branches and reimburse them as soon 
 as the assets in the safety fund could be disposed of ; and 
 then the safety fund was to be reimbursed out of the assets 
 of the failed branch before any other creditors were paid. 
 The State Bank of Ohio had thirty-six branches and was 
 highly successful. Its charter expired in 1866. 
 
 RECAPITULATION 
 
 In the State Bank of Indiana (1834-66) we observe in a 
 primitive community the working of sound rules of banking 
 under good administration. One-half of this bank was 
 owned by the state and the other half by private citizens. 
 It consisted of: (i) a president and a central board of 
 directors, whose powers were those of general supervision
 
 SOME NOTABLE BANKS 345 
 
 and regulation only; and (2) a number of banks in different 
 parts of the state, termed branches of the state bank. The 
 members of the central board had nothing to do with the 
 investment of funds ; consequently they were not exposed to 
 the temptation of making loans to themselves or to favorites, 
 in contravention of good business principles. The capital 
 and profits of each branch belonged to its own shareholders 
 exclusively, but each branch was liable for the debts of every 
 other branch. The branches thus had a motive for keeping a 
 watch upon each other. In case of the insolvency of a branch 
 by reason of fraud in the management, the directors of that 
 branch were personally liable for the debts. This rule was 
 prescribed in order to insure vigilance on the part of the 
 directors in keeping watch upon the administrative officers. 
 The central board was required to examine the affairs of each 
 branch in detail, at least twice each year. These examina- 
 tions were made without previous notice and with the utmost 
 thoroughness, usually by the president in person. Each 
 branch was allowed to have circulating notes outstanding 
 equal to twice its capital ; but the notes were issued to them 
 only by the central board, and, as the central board could not 
 issue any notes to the public, the danger of overissues was 
 practically nil. The bank was very successful ; for no branch 
 ever became insolvent and it maintained specie payments 
 during the financial crisis of 1857. The state of Indiana 
 reaped a large pecuniary profit from it. 
 
 The Wisconsin Marine and Fire Insurance Company was 
 chartered by the territorial legislature of Wisconsin in 1839, 
 at the instance of a Scotchman named George Smith, who 
 became its president. Under the terms of the charter he 
 established a bank, although banking privileges had been 
 excluded from the powers granted to the incorporators. The 
 company issued certificates of deposit in the similitude of 
 bank notes, and by prudent management secured for them
 
 346 BANKING 
 
 a general credit and acceptance in all the states and terri- 
 tories north and west of Indiana. The company became the 
 most important financial institution in that region and for a 
 long time was the only one whose notes enjoyed a general 
 circulation there. The illegal character of the business 
 transacted by the company attracted the attention of the 
 territorial legislature, which, in 1845, repealed its charter, but 
 did not direct the Attorney-General to bring suit against it 
 for forfeiture. It accordingly continued its business without 
 interruption and its circulation eventually reached nearly 
 $1,500,000. Its notes were always redeemed in specie at its 
 head office in Milwaukee and in drafts on New York, at the 
 current rate of exchange, at its agencies in Chicago, St. Louis, 
 Galena, Detroit and Buffalo. Notwithstanding the taint of 
 illegality, its career was honorable and useful to the commu- 
 nity, as well as the source of large profits to its founders. 
 The Wisconsin Marine and Fire Insurance Company's Bank 
 still exists at the place of its birth. 
 
 The banks of Louisiana, established under a law of that 
 state passed in 1842, were among the soundest institutions in 
 the country or in the world. Their strength was due to the 
 excellent rules enacted for their guidance and to the strict 
 enforcement of the same by public officials, who were 
 required to examine their affairs at least once every three 
 months. This law was the first one enacted in America 
 requiring banks to keep a cash reserve in a definite propor- 
 tion to their deposits and circulation. 
 
 The State Bank of Ohio (1845-66) was composed of a 
 central board of control, similar to that of the State Bank of 
 Indiana, and of branch banks (eventually thirty-six in num- 
 ber), each of which was liable for the note issues, but not for 
 the general debts, of all the others. Each branch was 
 required to make a deposit with the board of control equal 
 to 10 per cent of its circulation, either in money or in bonds
 
 SOME NOTABLE BANKS 347 
 
 of the state or of the United States, as a safety fund for the 
 security of the notes of all the branches. Each was entitled 
 to the interest derived from its share of the safety fund. 
 The State Bank of Ohio was always solvent and successful. 
 
 AUTHORITIES 
 
 Sumner's History of Banking in the United States. 
 Knox's History of Banking in the United States. 
 Harding's " State Bank of Indiana " (Sound Currency, Vol. V, 
 No. 1 6). 
 
 Hadden's History of State Banks of Wisconsin. 
 
 Strong's History of Wisconsin Territory. 
 
 The Banker's Magazine and Statistical Register, 1 846-66.
 
 CHAPTER XIV 
 THE NATIONAL BANK SYSTEM 
 
 THE national bank act was a product of the Civil War. 
 In 1861 Mr. Chase, the Secretary of the Treasury, conceived 
 the plan of making the bank-note circulation of the country 
 a means of enlarging the sales of government 
 securities. In his report for that year he sug- 
 gested that Congress should take control of 
 the national circulation and require that it be secured by the 
 deposit of government bonds in the Treasury. Among the 
 advantages to be gained, he said, would be uniformity of 
 style, uniformity of goodness, and a large demand for gov- 
 ernment securities. Of these three merits the last was not 
 the most important, although it then seemed so. Uniformity 
 of the currency, in both appearance and quality, was a boon 
 of inestimable value, upon which rests Mr. Chase's title to 
 fame ; yet the expectation that the scheme would be a 
 great financial aid to the government was the real motive 
 for its adoption. In point of fact it contributed very little 
 aid. The transition from the old system to the new was 
 so slow that only $98,896,488 of national bank notes were 
 outstanding on the 3d of April, 1865, the month in which 
 General Lee's army surrendered. This was less than 
 4 per cent of the money borrowed by the government for 
 the war. 
 
 The first attempt to pass a national bank bill in the House 
 was defeated on July 12, 1862. In the following Decem- 
 ber the Secretary renewed his recommendation with great 
 
 348
 
 THE NATIONAL BANK SYSTEM 349 
 
 earnestness, and President Lincoln repeated it in his annual 
 message, notwithstanding which it was defeated again in 
 January, 1863. Recourse was then had to the Senate, where 
 it was passed by the close vote of 23 to 2 1. Then the House 
 yielded and passed the Senate bill without amendment by 78 
 votes to 64. It became a law on February 25, 1863. Mr. 
 Hugh McCulloch of Indiana, who had come to Washington to 
 oppose it, became the first comptroller of the 
 currency under it. He suggested so many 
 amendments that a complete revision of the 
 act was made by Congress the following year, and passed on 
 June 3, 1864. There was no discriminating tax on the notes 
 of state banks in the original, or in the amended, act. In 
 February, 1865, a bill imposing a tax of 10 per cent on such 
 notes was passed in the House by a majority of one vote 
 and in the Senate by a majority of two. It did not become 
 operative, however, until August i, 1866. 
 
 The most important features of the national bank act at 
 the present time are the following : 
 
 There is a bureau in the Treasury Department having 
 charge of all matters relating to national banks, the chief 
 
 officer of which is the comptroller of the cur- 
 Comptroller. . 
 
 rency. His term of office is five years. He 
 
 is required to present to Congress an annual report showing 
 the condition of each national bank and an abstract of the 
 condition of all of them. 
 
 Any number of persons not less than _five_may form an 
 
 association for banking purposes, to continue not more than 
 
 twenty years. After the association is formed it is \vithin 
 
 the discretion of the comptroller to give it 
 
 Organization. . 
 
 a certificate (which is the equivalent of a 
 charter) or not. The law requires that, before granting a 
 certificate, he shall satisfy himself that the persons forming 
 the association are of good character, and that they have 
 
 ^w<
 
 350 BANKING 
 
 paid in the amounts of money required for the legitimate 
 objects contemplated by the national bank act. He may 
 ascertain these facts by means of a special commission 
 appointed by him for the purpose, if he chooses ; and if, for 
 any reason, he declines to grant the certificate, he is not 
 required to give his reasons for withholding it. 
 
 No national bank can be organized with a capital smaller 
 than $25,000, and banks of this size can be organized only 
 in places of three thousand inhabitants or less. Banks with 
 a capital of not less than $50,000 may be organized in 
 places of not exceeding six thousand inhabitants. In places 
 of more than six thousand and less than fifty thousand 
 inhabitants there shall be no bank with a capital smaller 
 
 than $100.000. In cities of fifty thousand 
 Capital Stock. 
 
 inhabitants, or more, there shall be no bank 
 
 with a capital smaller than $200,000. The sanction of the 
 Secretary of the Treasury, in addition to that of the comp- 
 troller of the currency, is required for the granting of 
 a certificate for a bank of less than $100,000 capital, 
 because greater precautions are supposed to be needed 
 in the establishment of the smaller banks than of the 
 larger ones. Yet experience has not proved that the 
 former are more liable to failure than the latter. At least 
 50 per cent of the capital must be paid in before the bank 
 can begin business, and the remainder must be paid in 
 monthly instalments of not less than 10 per cent each. If 
 any instalments are not so paid, the shares must be adver- 
 tised and sold to other persons. If no purchaser is found 
 within three weeks, the amount already paid must be for- 
 feited to the association. The shares of the bank must be 
 of $100 each. 
 
 The powers of banks are limited to the discounting and 
 negotiating of promissory notes, drafts, bills of exchange, 
 and other evidences of debt ; receiving deposits ; buying
 
 THE NATIONAL BANK SYSTEM 351 
 
 and selling exchange, coin, and bullion ; loaning money on 
 personal security ; 1 and issuing circulating notes. They are 
 
 not allowed to hold real estate permanently 
 Powers. 
 
 except such as may be necessary for the trans- 
 action of their business. If they acquire other real estate as 
 security for bad debts, they must sell it within five years. If 
 a bank were allowed to hold, for indefinite periods, lands and 
 buildings thus acquired, its whole capital might gradually be 
 absorbed in that way, and thus, although solvent, it might 
 cease to be a bank. 
 
 Each bank, before commencing business, must deposit 
 with the Treasurer of the United States a certain amount of 
 registered bonds of the United States, whether it issues cir- 
 culating notes or not.. If the capital of the bank exceeds 
 $150,000 it must deposit at least $50,000 of bonds. If the 
 capital is $150,000 or less, it must deposit an amount equal 
 to one-fourth of its capital. The act of 1864 required all 
 
 banks to deposit bonds to the amount of one- 
 Deposit of Bonds. ,.,,,. . , ,, . , 
 third of their capital. The mam purpose of 
 
 the clause was to sell bonds in the exigency of war. After 
 the exigency had passed away the clause was modified so 
 that a bank of $10,000,000 capital is not required to deposit 
 more than one of $200,000. No good reason now exists why 
 
 1 The act of 1863 authorized banks to make loans " on real and per- 
 sonal security." In the act of 1864 the words "real and" were omitted. 
 It is therefore unlawful for a national bank to lend money on mortgage 
 security but it may, in order to save a bad debt, take such security 
 for loans previously made in good faith. The prohibition of mortgage 
 loans as a feature of banking law is first found, on this side of the 
 ocean, in the charter of the Bank of Montreal, dated March 17, 1821, 
 where it stands in these words as one of the powers granted : " To take 
 and hold mortgages and hypotheques on real property for debts con- 
 tracted to it in the ordinary course of its dealings, but on no account to 
 lend on land, mortgage, or hypotheque, nor to purchase them on any pre- 
 text except as here permitted." BRECKENKIDGE'S Canadian Banking 
 System, p. 24.
 
 io 
 
 352 BANKING 
 
 a bank without circulation should keep any permanent 
 deposit of bonds in the Treasury. 
 
 The business of a bank must be managed by a board of 
 not less than five directors, each of whom must own not less 
 
 than ten shares of the capital stock not 
 Directors. 
 
 hypothecated or pledged as security for debt. 
 
 If any director shall cease to be the owner of ten shares, he 
 shall thereby cease to be a director. Vacancies in the 
 board of directors shall be filled by appointment made by 
 the remaining directors. 
 
 State banks may enter the national system by conforming 
 to the provisions of the national bank act, and any state 
 bank having branches may continue to have the same 
 branches after entering the national system. 
 
 The shareholders of a national bank shall be held indi- 
 vidually responsible for all the debts of the bank, to an 
 amount equal to the par value of their shares, 
 Shareholders ^ n addition to the amount invested therein. 
 An exception was made in favor of any bank 
 " now existing under state laws having not less than 
 $5,000,000 of capital actually paid in and a surplus of 20 
 per cent on hand." There was only one such bank existing 
 when the law was passed, the Bank of Commerce in New 
 York, the shareholders of which are accordingly exempt 
 from the double liability clause. 
 
 Each bank shall be entitled to receive from the comp- 
 troller of the currency an amount of circulating notes equal 
 to the par value of the bonds deposited by it, 
 kut not exceeding the market value thereof, 
 and not exceeding its capital stock actually 
 paid in. Whenever the market value of the bonds deposited 
 is reduced below the amount of the circulation, the comp- 
 troller may demand the deposit of additional bonds, or of 
 money, equal to the deficiency. Bonds may be withdrawn
 
 THE NATIONAL BANK SYSTEM 353 
 
 by banks by retiring their circulating notes or by depositing 
 lawful money to an equal amount in the Treasury. Only 
 $9,000,000 in the aggregate can be thus retired in one 
 month, nor can the amount of bonds deposited be reduced 
 below the limitations above stated. The notes are receiv- 
 able at par for all dues to the United States except duties on 
 imports, and are payable for all debts owing by the United 
 States within the United States, except for interest on the pub- 
 lic debt and for redemption of the national currency. Every 
 bank must receive the notes of every other bank at par in 
 payment of any debt due to itself. No notes shall be issued 
 of less denomination than $5.00, and only one-third of the 
 amount issued to any bank shall be of the denomination of 
 $5.00. Each bank must redeem its circulating notes on 
 demand at its own counter. It must also 
 
 Sin* RedemP ~ have and kee P on de P sit in the Treasury 
 of the United States, in lawful money, a sum 
 equal to 5 per cent of its circulation, to be held for the 
 redemption of such circulation when presented in sums of 
 $1000 or any multiple thereof. The cost of transportation 
 and of assorting the notes must be paid by the bank issuing 
 the same. All defaced and mutilated notes received at the 
 Treasury shall be replaced by new ones at the expense of 
 the issuing bank. 
 
 Any bank depositing lawful money in the Treasury for 
 
 retiring its circulation shall pay in advance for transporting 
 
 and redeeming the same a sum equal to the 
 
 Circulation. average cost of the redemption of national 
 
 bank notes for the preceding year. At the 
 
 expiration of the charter of any bank all of its outstanding 
 
 notes shall be redeemed as they reach the Treasury ; and if 
 
 the charter is renewed, new notes of different design and 
 
 corresponding amount shall be issued to the bank. At the 
 
 end of three years from the expiration of the old charter the
 
 354 BANKING 
 
 bank shall deposit in the Treasury lawful money sufficient 
 to redeem the old circulation still outstanding. Any gain 
 resulting from the loss, destruction or disappearance of 
 notes shall inure to the benefit of the United States. 1 No 
 bank can issue post notes or any notes to circulate as 
 money except as authorized by the national bank act. 
 
 In case of default by any bank in the redemption of its 
 
 circulating notes, the comptroller must declare the security 
 
 bonds forfeited to the United States and 
 
 Redemption of g i ve no tice to the holders of the notes to 
 
 Failed Bank 
 
 Notes, present them at the Treasury for payment, 
 
 " and the same shall be paid as presented, in 
 the lawful money of the United States." Then the comp- 
 troller may in his discretion cancel the bonds to an equiva- 
 lent sum, or sell at public or private sale so much of them 
 as may be necessary. In case of a deficiency in the pro- 
 ceeds of all the bonds to reimburse the government for the 
 redemption of the notes, the United States shall have a 
 paramount lien on all the assets of the bank (which includes 
 the liability of shareholders), and the deficiency must be 
 made good before any other debts are paid. When the 
 notes are paid, they must be canceled. 
 
 Uch bank must pay to the Treasurer of the United 
 s a tax of one-fourth of i per cent each half year on 
 the average amount of its notes in circulation 
 
 Tax on Cucu- w hen said notes are secured by the deposit of 
 lation. 
 
 bonds of the United States bearing interest 
 
 at 2 per cent per annum. When secured by bonds bearing 
 
 1 The gain resulting to the government after the expiration of the 
 first series of twenty-year charters and until November i, 1901, from the , 
 non-presentation of bank notes for redemption has been $2,975,250. 
 The amount of notes outstanding during the period fluctuated between 
 $100,000,000 in 1865 and $340,000,000 in 1875. The rate of destruc- 
 tion and loss of notes in the hands of the people may be roughly esti- 
 mated at i per cent in twenty years.
 
 THE NATIONAL BANK SYSTEM 355 
 
 a higher rate of interest, the tax is one-half of i per cent 
 each half year. The tax does not apply to circulation, for 
 the retirement of which lawful money has been deposited in 
 the Treasury. 
 
 All notes used for circulation as money other than those 
 issued under these conditions by national banks are subject 
 to a tax of 10 per cent, to be paid by the person, firm, asso- 
 ciation, corporation, state bank, town, city, or municipal 
 corporation which issues or pays them out. 
 
 Every bank in certain cities of 500,000 or more inhabit- 
 ants, called reserve cities, must keep a reserve of lawful 
 money equal to 25 per cent of its deposits. All other banks 
 must keep a like reserve of 15 per cent, but three-fifths of 
 the said 15 per cent may consist of balances on deposit in 
 
 banks approved by the comptroller, in the 
 Legal Reserve. 
 
 reserve cities. Any bank in the reserve cities 
 
 may keep one-half of its reserve as deposits in a " central 
 reserve city," i.e., New York, Chicago, or St. Louis. Both 
 gold certificates and silver certificates shall be counted as 
 part of the reserve. The 5 per cent redemption fund on 
 deposit with the Treasurer of the United States shall also 
 be counted as part of the reserve. Failure to keep the legal 
 reserve is followed first by notice from the comptroller to 
 make good the reserve within thirty days. In case of fail- 
 ure to do so, the comptroller may, with the concurrence of 
 the Secretary of the Treasury, put the bank in liquidation. 
 This clause is rather for warning than for immediate 
 enforcement. No bank would be excused for stopping pay- 
 ment of its deposits when it still had 25 per cent of the 
 same in cash. Whether severe measures should be taken, 
 in case the reserve were below the legal limit, would depend 
 upon the general character of the bank and the nature of 
 its assets. Banks when below their legal reserve are not 
 allowed to increase their liabilities by making new loans or
 
 356 BANKING 
 
 discounts otherwise than by purchasing bills of exchange 
 payable at sight, or to make any dividend of profits until 
 their. reserve has been restored. 
 
 ^X*Banks are allowed to charge such rates of interest on 
 
 loans as are allowed by the law of the state in which they 
 
 are situated, and no more, but in discounting 
 
 bills of exchange on other places they may 
 
 charge the current rate of exchange in addition. 
 
 One-tenth of the net profits must be carried to the surplus 
 fund of each bank until the surplus is equal to 20 per cent 
 of the capital. 
 
 A bank must not lend more than one-tenth of its capital 
 to one person, corporation, or firm, directly or indirectly. 
 But the discount of bills of exchange drawn in good faith 
 against actually existing values, and the discount of commer- 
 cial or business paper actually owned by the 
 Restrictions. . . , ' 
 
 person negotiating the same, shall not be con- 
 sidered as money borrowed. A bank must not lend money 
 on the security of its own shares, nor be the purchaser or 
 holder of its own shares unless they are taken as security 
 for a debt previously contracted in good faith, and shares 
 so taken must be sold within six months. 
 
 No bank can become indebted to an amount exceeding its 
 unimpaired capital except for circulating notes, deposits, 
 drafts drawn against its own funds, and dividends due to its 
 own shareholders. No bank can permit any part of its cap- 
 ital to be withdrawn in the form of dividends or otherwise. 
 If the capital is impaired by bad debts or otherwise, the 
 deficiency must be made good within three months after 
 receiving a requisition from the comptroller, under penalty of 
 being put in liquidation. No bank can certify a check for a 
 customer for more money than he has on deposit at the time. 
 
 Each bank must make to the comptroller not less than five 
 reports each year, showing its condition at dates, already
 
 THE NATIONAL BANK SYSTEM 357 
 
 past, to be designated by him, and he may call for special 
 reports from any particular bank whenever he chooses to 
 
 do so, which reports shall be published in a 
 Reports. . i i 
 
 newspaper in the place where the bank is 
 
 situated, and at the expense of said bank. 
 
 The shares of national banks are liable to taxation by 
 authority of the states in which they are situated, at the 
 
 same rates as other moneyed capital owned 
 State Taxation. . . 
 
 by the citizens of such states, but the shares 
 
 of any national bank owned by non-residents of a state shall 
 be taxed in the city or town where the bank is located and 
 not elsewhere. 
 
 The comptroller of the currency, with the approval of 
 the Secretary of the Treasury, shall appoint suitable persons 
 
 to make examinations of the affairs of every 
 Bank Examiners. 
 
 bank and to make full and detailed reports 
 
 thereon to the comptroller. The fees allowed by law to the 
 examiners shall be paid by the banks examined. 
 
 In case of the insolvency of a national bank the comp- 
 troller of the currency may appoint a receiver, who shall take 
 possession of its books, records, and assets and proceed to 
 wind up its affairs and enforce the personal liability of the 
 
 shareholders. A receiver may be appointed 
 Receivers. . . 
 
 also in case the capital stock of a bank is 
 
 reduced below the legal minimum and remains so for thirty 
 days ; also for failure to make good its lawful money reserve 
 within thirty days after notice ; also for purchasing or acquir- 
 ing its own stock except to prevent loss upon a debt previ- 
 ously contracted in good faith ; also for the false certification 
 of a check. 
 
 No bank can either give or receive national bank notes or 
 United States notes, or gold certificates, or silver certificates 
 as security for a loan of money, or agree for a consideration 
 to withhold such notes or certificates from use.
 
 358 BANKING 
 
 It is not lawful for any person to design, engrave, print, 
 or use any handbill or advertisement in the likeness or sim- 
 ilitude of the circulating notes or other obligations of any 
 national bank, or intentionally mutilate, deface, or disfigure 
 any such notes or obligations. 
 
 The penalty of fine and imprisonment is imposed for 
 counterfeiting bank notes or knowingly passing or attempt- 
 ing to pass counterfeited notes; also for issuing the circu- 
 lating notes of banks that have expired; also for falsely 
 certifying checks; also for embezzling the funds of banks 
 or putting the notes of a bank in circulation without author- 
 ity from the directors ; also for making a false entry in the 
 books or reports of a bank with fraudulent intent, or aiding 
 or abetting the same. 
 
 Any national bank may be designated by the Secretary of 
 the Treasury as a depositary of public money. A certain 
 number have been so designated, in places where no sub- 
 treasury exists, for the convenience of the 
 
 Public Deposits. . 
 
 government in making local disbursements. 
 These are called regular depositaries, and the deposits of 
 the government therein are running accounts like those 
 of private persons, upon which no interest is paid. Deposits 
 made in banks for the purpose of restoring funds to the 
 money market are termed special deposits, for the with- 
 drawal of which notice is given in advance, and upon these 
 the act of May 30, 1908, provides that interest shall be paid 
 at such rate as the Secretary of the Treasury may prescribe, 
 not less than i per cent per annum. 
 
 On August 22, 1907, the number of national banks exist- 
 ing was 6542^ The table on the following page is a con- 
 densed abstract of their condition at that time as shown in 
 the comptroller's annual report : 
 
 1 October 31, 1907, the number of banks was 6650, and the capital 
 #959.786,314.
 
 THE NATIONAL DANK SYSTEM 
 
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 360 BANKING 
 
 RECAPITULATION 
 
 The national banking system was born of the financial 
 exigencies of the Civil War. Its plan was outlined by 
 Secretary Chase in 1861, and was recommended by him 
 to Congress as a means of promoting the sale of govern- 
 ment bonds, and incidentally of securing uniformity of 
 design and uniformity of value in the national currency. 
 The sale of government bonds was to be promoted by 
 requiring that all national bank notes be secured by the 
 deposit of such bonds in the Treasury. Congress did not, 
 however, approve of the plan when first presented. The 
 bill to carry it into effect was twice rejected by the House 
 of Representatives, but was passed by both houses in Febru- 
 ary, 1863, and revised and repassed in June, 1864. In 
 1865 an act was passed imposing a tax of 10 per cent on 
 the notes of state banks. The intention and effect of this 
 act were to compel such banks either to come into the 
 national system or to cease issuing notes to circulate as 
 money. 
 
 The regulations of banking adopted in the act of 1864 
 were selected from state bank systems then or previously in 
 existence. Most of these regulations can be found in the 
 preceding pages of this work. The supreme merit of the 
 national system consists in the unification of banking in all 
 the states and territories. Aside from this, the only new 
 ideas embodied in the law were the government's immediate 
 responsibility for the note issues and the requirement that 
 each bank should receive the notes of every other bank at 
 par in the payment of dues to itself. The government's 
 immediate responsibility for the notes, however, is merely a 
 corollary of the requirement that all notes shall be secured 
 by United States bonds deposited in the Treasury.
 
 CHAPTER XV 
 STATE BANKS AND TRUST COMPANIES 
 
 ALONGSIDE of the 6500 national banks, and competing 
 with them, are 9967 commercial banks operating under state 
 charters, with an aggregate capital of $471,663,037 and 
 
 deposits amounting to $3, 068,649, 860. The 
 State Banks. , . . , ,. , , , , 
 
 general principles applicable to the former 
 
 apply also to the latter, but there are differences of detail : 
 (i) state banks are prevented, by the 10 per cent federal 
 tax, from issuing circulating notes ; (2) national banks are 
 required by law to keep a cash reserve of 25 or 15 per cent, 
 as already specified, while the reserve requirements of the 
 several states are various, but usually smaller than those of 
 the national law ; (3) no national bank can exist with a 
 smaller capital than $25,000, but some states allow banks of 
 $5000 capital, while in ten states there is no minimum of 
 capital fixed by law; 1 (4) national banks are not permitted 
 to make loans on real estate security ; there is no such re- 
 striction on state banks, but in some states the amount loan- 
 able on mortgage is limited to a certain proportion of the 
 capital ; (5) national banks are subject to examination and 
 supervision by the comptroller of the currency. State super- 
 vision of incorporated banks is of various kinds. In some 
 states regular examinations are made by public officers ; in 
 others they are made only at the instance of stockholders 
 or creditors of particular banks ; in others the only require- 
 ment is a report from the bank's officers to be published in 
 the newspapers. 
 
 1 Barnett's State Banking in the United States, p. 26. 
 361
 
 362 BANKING 
 
 These differences in law and practice account for the 
 existence of the two kinds of banks running on parallel lines 
 throughout the country. 1 Some of the state banks are incor- 
 porated under special charters of ancient date. Of this kind 
 is the Manhattan Company of New York. Others have 
 been organized under general banking laws, and still others 
 under general incorporation laws of their states. 
 
 In addition to these are many private banking houses not 
 incorporated, which transact the business of deposit and dis- 
 count. Some of these in the large cities are 
 
 Private Banks. , , 
 
 of great magnitude, but do not usually dis- 
 count commercial paper, although they receive deposits. 
 They are financial houses engaged in promoting new enter- 
 prises, issuing letters of credit, selling bonds of railroads 
 and other corporations, making loans to state and city gov- 
 ernments, etc. The rapid growth of private banking in recent 
 years, however, has been chiefly in the western and southern 
 and Pacific states, in communities not large enough to sup- 
 port incorporated banks. In some states private bankers are 
 subjected to the same supervision as incorporated banks, 
 but usually they are a law unto themselves, and this laxity 
 has led to disastrous consequences in certain places and 
 especially in New York City, where foreign immigrants have 
 been defrauded by men of their own nationality, setting 
 themselves up as bankers, accumulating deposits, and even- 
 tually absconding with the proceeds. 
 
 1 In the starting of towns in the West a bank is one of the first 
 adornments of the new community, and it commonly happens that the 
 organizers have less than $25,000 with which to begin operations. So 
 they start a state bank, knowing that they can obtain a national charter 
 at a later period, if they desire it. A recent writer says that in some 
 cases two or three banks are started before the town is a month old 
 all being state banks. Generally the managers combine the banking 
 business with real estate agencies, fire insurance, life insurance, and 
 farm mortgages.
 
 STATE BANKS AND TRUST COMPANIES 363 
 
 The question has been raised in recent discussions whether 
 the cash reserves of state banks may consist in whole or in 
 part of national bank notes, and what would be the conse- 
 quences of so using them. The answer is that bank notes 
 
 are not cash, and that any bank which treats 
 Cash Reserves. . . 
 
 them as such incurs the risk of being caught, 
 
 in some financial exigency, without sufficient lawful money 
 to meet its demand obligations. As a state bank cannot 
 ordinarily acquire national bank notes for less value than an 
 equal amount of gold or greenbacks, there seems to be no 
 good reason for incurring that risk. The national banking 
 law does not concern itself with the reserves of state banks, 
 but it prohibits any national bank from pledging, or hypoth- 
 ecating, its circulating notes for the purpose of procuring 
 money to be used in its banking operations, or otherwise. 
 Therefore any arrangement made between a national bank 
 and a state bank to swap temporarily the notes of the one 
 for the gold of the other would be unlawful. 
 
 A trust company, as its name implies, is a corporation 
 
 organized to receive and perform trusts for a compensation 
 
 fixed by law, or agreed upon by the parties to the trust. One 
 
 of the most common forms of trust is that of 
 
 Trust Companies. 
 
 railway mortgages, where the trust company 
 becomes the mortgagee in trust for the bondholders, registers 
 the bonds, collects the interest as it becomes due, pays it to 
 the bondholders, and in case of default takes legal steps to 
 protect their interests. But in the progress of time the trust 
 companies drifted into the banking business, buying com- 
 mercial paper, lending on collaterals, etc., so that in the 
 large cities the trust business became an insignificant part 
 of their total business, perhaps not more than 5 or 6 per 
 cent of the whole. Thus they have become important rivals 
 of the national banks in the principal cities of the Union. 
 Seven hundred and four trust companies reporting to the
 
 364 BANKING 
 
 comptroller of the currency in 1907 show a capital of $276,- 
 146,081, and deposits amounting to $2,061,623,035. In the 
 year 1905 the thirty-three trust companies of New York City 
 held $1,008,000,000 of deposits, while the national banks in 
 the same territory held only $947,000,000, and a portion of 
 the latter consisted of deposits made by and belonging to the 
 former. The bulk of the reserves of the trust companies 
 was kept as deposits in the banks, for which deposits they 
 received a low rate of interest. They were thus enabled to 
 pay interest to individual depositors, which the banks did 
 not do, and in this way they attracted deposits which would 
 otherwise have gone to the banks. Thus there was an ever 
 present temptation to incur demand liabilities resting upon 
 inadequate cash reserves, and this constituted an element of 
 danger in the financial situation, upon which public attention 
 was at once focused when the first symptoms of panic were 
 shown in October, 1907. 
 
 The inherent danger of the trust company aiming to do a 
 trust business and a banking business simultaneously was 
 shown by the sudden failure of the Knickerbocker Trust 
 Company, which had 17,000 demand deposit accounts. This 
 failure started the panic in New York, for which there was 
 plenty of inflammable material. The demonstration of the 
 weakness of trust-company banking made so great an im- 
 pression on the public mind that Governor Hughes appointed 
 a commission, with A. B. Hepburn, ex-comptroller of the 
 currency, at its head, to investigate and report upon the 
 subject, with a view to remedial legislation. In pursuance 
 of the report of this commission the Legisla- 
 ture passed a law requiring trust companies 
 in the borough of Manhattan, New York City, 
 to keep a cash reserve of 15 per cent against all deposits 
 payable on demand, or at less than thirty days' notice, 
 except such as are secured by New York state bonds.
 
 STATE BANKS AND TRUST COMPANIES 365 
 
 This reserve must consist of lawful money of the United 
 States, gold certificates, silver certificates, or national bank 
 notes. Trust companies in other boroughs of New York City 
 may keep one-third of their reserves as deposits in other 
 banking institutions approved by the superintendent of banks. 
 Trust companies in other parts of the state may keep one-half 
 of their reserves as deposits in other banking institutions so 
 approved. Accordingly there is no legal requirement of any 
 cash reserve at all in any trust company in New York, since 
 the reserve may consist of bank notes, or New York state 
 bonds, or partly of one and partly of the other. The same 
 rule applies to state banks, except that those in the borough 
 of Manhattan must keep 25 per cent of reserves ; in other 
 boroughs of New York City, 20 per cent, and elsewhere 15 
 per cent. 
 
 This condition is not so menacing as it appears, when we 
 reflect that the enactment of a minimum cash reserve is the 
 exception and not the rule in the bank legislation of the 
 world. It must be considered indiscreet, however, for if it 
 is desirable to regulate cash reserves by law they should at 
 least consist of cash. National bank notes, which are the 
 debts of certain banks, are in turn bottomed on the debts of 
 the government. Thus the legal reserves of New York trust 
 companies are two removes distant from cash, and the only 
 reason for allowing this practice is that it saves 
 the trouble of sorting and separating the cur- 
 
 . 
 
 rency that comes in as deposits. But it checks 
 the wholesome process of bank-note redemption. The trust 
 companies cannot obtain national bank notes for less than one 
 hundred cents per dollar, gold value. Therefore they might 
 have gold if they would take the necessary pains to get it. 
 
 Eighteen states of the Union require no cash reserve at all 
 for their banking institutions. They leave this to the discre- 
 tion of the bankers themselves, as is the custom in nearly all
 
 366 BANKING 
 
 countries. Of the states that fix a minimum reserve some 
 require that it shall consist of "lawful money"; others, 
 "lawful money of the United States"; others, "money," 
 
 "cash," "actual cash," "cash in hand," and 
 Cash Reserves. 
 
 "available funds." Five states (California, 
 
 Connecticut, Minnesota, New York, and Pennsylvania) 
 specify national bank notes as lawful reserves. Several 
 states allow a portion of the reserves to consist of bonds 
 of the state itself, or of the United States. 1 
 
 If state banks and trust companies may use national bank 
 notes as cash reserves, why may not such notes be manu- 
 factured expressly for such use ? This question has been 
 brought forward by testimony given before the House Com- 
 mittee on Banking and Currency. 2 There are two obstacles 
 to the process. One is that the national banking law forbids 
 national banks to pledge or hypothecate their 
 notes for S ld for an y P^pose. The other is 
 that as the profit on circulation at the present 
 time is only 0.95 per cent, there would be less than one 
 per cent profit to be divided between the bank manufactur- 
 ing the circulation and the one receiving it as reserve 
 money. This is not sufficient to warrant the transaction. 
 
 1 This is a misuse of terms, since a bank reserve signifies some- 
 thing which can be immediately used to pay the demand obligations 
 of the bank. Whole days have passed in New York during panics, 
 when no bid could be obtained for any kind of bonds, even those of 
 the United States. Therefore a law authorizing a given percentage 
 of bank reserves, to be held in any securities whatever, is a reduction 
 of the reserve itself by that percentage, and ought to be so expressed 
 in the law. 
 
 2 " Last fall all the banks in Chicago increased their circulation 
 very largely, and all through the country they did the same thing. We 
 increased our circulation $3,000,000, and I am free to say that I used 
 as much of it as I could, selling it to state banks, iniquitous as the 
 system is ; and we should not be permitted to do it, and the state
 
 STATE BANKS AND TRUST COMPANIES 367 
 
 The instance cited by Mr. Forgan was an unusual one, 
 occurring in the midst of a panic, where considerations of 
 profit did not enter into the case. 
 
 The question whether inflation would be the result of such 
 a practice, if it were allowed, is raised by Mr. Forgan's testi- 
 mony, but it is not apparent where that evil is to be found. 
 The state bank, or trust company, whose gold he received in 
 
 exchange for his bank notes, is in the same 
 Is it Inflation ? , . 
 
 position as before, as regards its ability to dis- 
 count commercial paper. Mr. Forgan's bank is in a better 
 position by $2,000,000 than it was before. It can discount 
 commercial paper to whatever extent this addition to its 
 reserves will warrant. But if the paper so discounted is 
 sound, the act of discounting it is not inflation. His bank 
 has merely taken a call loan from the other bank. 
 
 RECAPITULATION 
 
 State banks exist and transact business in competition 
 with national banks in all parts of the country, but are pre- 
 vented by the federal tax from issuing circulating notes. 
 The cash reserves of state banks are usually a smaller per- 
 centage of their deposit liabilities than those of national 
 
 banks should not take it. It is a bolstering up, a most unwarranted 
 expansion of credits, because it is basing credits on a false reserve. 
 Bank notes are promises to pay, and they cannot be reserves for 
 state banks or anybody else without a most unwarranted expansion; 
 but expansion at the time was what we wanted, and I am free to say 
 that I exchanged a couple of millions of them for gold as soon as I 
 could lay my hands on them, because when you get in a corner you 
 have to do anything you can to scramble out, and we were scrambling, 
 because we did not have the proper facilities to come out coolly and 
 collectedly as bankers do in other countries, and we had to do every- 
 thing we could and take the chance of breaking the law." Testimony 
 of James B. Forgan, President of the First National Bank of Chicago, 
 before the House Committee on Banking and Currency, April 15, 1908.
 
 368 BANKING 
 
 banks. Some of them are allowed to use the bonds of the 
 state in which they are incorporated, or those of the United 
 States, or both, as a part of their cash reserves. The use of 
 bonds for that purpose is equivalent to a reduction of the 
 reserve itself, since bonds are not cash. 
 
 Trust companies, incorporated under state laws, exist and 
 transact business in competition with both state banks and 
 national banks. Originally designed to administer trusts, 
 such as decedent estates, guardianships, mortgages, etc., of 
 which the liabilities are payable at fixed periods, they have 
 gradually entered the field of banking and incurred large 
 demand liabilities for individual deposits, for which they 
 allow interest, and which they redeposit in national banks. 
 With the money thus attracted from depositors they make 
 loans on collateral security, buy commercial paper, and 
 transact a general banking business ; and for their unused 
 balances receive interest from the regular banks. In other 
 words, they receive interest on their cash reserves, keeping 
 no cash in their own vaults except a small amount of till 
 money. Thus they have a manifest advantage over the 
 banks and have grown enormously in recent years at the 
 expense of the banks, but at the risk of disaster to themselves 
 and to the community. To correct this growing menace 
 legislation has been lately invoked and laws have been 
 enacted (in New York) requiring trust companies to keep 
 a fixed percentage of cash reserve in their own vaults. 
 Banks in some cities, where the competition of trust com- 
 panies has been severe, have organized, under state laws, 
 trust companies composed of their own shareholders, as an 
 annex to their own business, but separately managed and 
 officered, and in these annexes they pay interest on deposits 
 and safeguard the business which might otherwise be taken 
 from them.
 
 CHAPTER 
 FOREIGN BANKING SYSTEMS 
 
 THE BANK OF ENGLAND 
 
 IN order to obtain money to carry on a war in which the 
 fate of the dynasty and of the Protestant religion was sup- 
 posed to be involved, Parliament in 1694 passed an act 
 creating a corporation for ten years, to be 
 
 Bank of England. ' 
 
 called the Governor and Company of the 
 Bank of England. On condition that the said corporation 
 should lend to the government at once the sum of ,1,200,- 
 ooo the' government was to pay 8 per cent interest, plus 
 ^4000 per year for expenses, - a rate much less than the 
 treasury had been accustomed to pay. The bank was 
 empowered by its charter to deal in bills of exchange, to 
 buy or sell coin and bullion, to lend money on the security 
 of goods, wares, and merchandise, and to sell such goods 
 if the loan was not repaid. It was not permitted to incur 
 debt exceeding ,1,200,000 or to deal in goods, wares, or 
 merchandise except as above stated. 
 
 The subscription to the capital was completed within ten 
 days after the books were opened, and with the money thus 
 obtained the war was brought to a successful termination. 
 The scheme was well conceived ; for it established a credit 
 by means of which the wealth of the commu- 
 nit 7 could be mobilized for the use of the 
 army. The bank advanced its capital to the 
 government, but recovered it presently by issuing an equal 
 amount of its own notes, which the public accepted at par 
 
 3 6 9
 
 37O BANKING 
 
 because they had confidence in the bank. The notes of the 
 bank were to pass by indorsement, were payable at such 
 times as the bank might determine, and were not legal 
 tender. An amendment to the charter passed in 1697, pro- 
 viding for an increase of the capital stock by .1,001,171, 
 authorized the issue of notes to the same amount, payable 
 to bearer on demand, and required that they should have a 
 mark to distinguish them from the earlier issue. The first 
 notes issued were post notes drawing interest. The next 
 batch (those of 1697) were demand notes drawing no inter- 
 est. The people accepted them at par, and the bank again 
 loaned an equivalent amount of specie to the treasury. 
 
 In 1709 Parliament granted a quasi monopoly to the bank 
 by a provision that no other corporation and no private 
 partnership composed of more than six persons should 
 exercise the right of issuing circulating notes 
 " in that part of Great Britain called Eng- 
 land." This was reenacted in 1742, with the 
 added provision that the said Governor and Company of 
 the Bank of England were thereby " declared to be and 
 remain a corporation with the privilege of exclusive banking 
 as before recited" The terms used show that in common 
 acceptation the word " banking " was inseparable from the 
 issue of circulating notes ; and, in fact, for more than a 
 hundred years everybody understood that this was a pro- 
 hibition against deposit banking, as well as against note 
 issues, by stock companies. 
 
 The charter was renewed from time to time, on varying 
 
 conditions, usually on the condition of fresh loans to the 
 
 government or a reduction of the rate of inter- 
 
 The Restriction. 
 
 est on former ones. It passed through many 
 vicissitudes, the most important of which was the suspen- 
 sion of specie payments for a period of twenty-four years, 
 from 1797 to 1821. This suspension of cash payments
 
 FOREIGN BANKING SYSTEMS 371 
 
 is commonly called the "Jtenkjrf England Restriction,," 
 because the bank was restricted, first by the Privy Council, 
 and afterwards by Parliament, from paying specie for its 
 obligations. The suspension was not due to commercial 
 causes but to the large subsidies advanced by the bank, and 
 paid by the government to continental powers, for carrying 
 on the war against revolutionary France. 
 
 Until Jt82Q bank notes of the denomination of i were 
 in common use in all parts of the United Kingdom. In 
 consequence of the panic of 1825, which was attributed to 
 excessive issues of bank notes, an act was passed, and is 
 still in force, prohibiting the issue of notes in England 
 smaller than ^5. It did not apply to Scotland or Ireland. 
 The intention and effect of this act were to saturate the 
 currency with a larger infusion of gold. This gave greater 
 stability to commerce but also entailed loss resulting from 
 the abrasion of coin, which has been and is still a source of 
 anxiety to English statesmen and financiers. 1 
 
 In 1833 Parliament passed an act making the notes of 
 the Bank of England, so long as they are redeemed in gold 
 on demand, legal tender at all places in England and Wales 
 except at the bank itself. 
 
 Not until the year 1844 was any novelty introduced into 
 the bank's methods of business. At that time the opinion 
 prevailed generally that commercial crises were caused by 
 excessive issues of bank notes. The exclusive right of issue 
 
 granted to the bank in 1709 and 1742 had 
 Sir Robert Peel. 
 
 been so far relaxed in 1826 that joint stock 
 
 banks were allowed to issue notes at a distance of sixty-five 
 miles from London ; and seventy-two such banks had been 
 established. England had beep afflicted with commercial 
 crises in 1825, 1836, and 1839. These were ascribed to over- 
 issues of bank paper. Sir Robert Peel, the prime minister, 
 
 1 See page 24.
 
 3/2 BANKING 
 
 was of the opinion that bank notes ought to be kept 
 under rigid limitations, although book credits in the form of 
 deposits might be safely left to the discretion of the banker. 
 At his instance the charter of the bank (which was about 
 expiring) was amended in the following manner : The issue 
 department was to be wholly separate from the banking 
 department. The sum of ,14,000,000 of securities, includ- 
 ing the government's debt to the bank, was to be transferred 
 
 to the issue department, which should there- 
 The Act of 1844.. . . . 
 
 upon turn over to the banking department 
 
 .14,000,000 of notes. This was the average amount of 
 the bank's notes then outstanding. Any person should be 
 entitled to receive notes from the issue department addi- 
 tional to the aforesaid sum, in exchange for gold coin or for 
 standard gold bullion at the rate of 5 17-$-. 9^. per ounce. 
 Banks and banking firms having the right to issue notes at 
 that time might continue to issue the same average amount; 
 but if any should cease to do so, the Bank of England 
 might be authorized by the Privy Council to issue two-thirds 
 of the amount so withdrawn, by adding an equivalent sum to 
 the government securities in the issue department. Under 
 the operation of this clause the circulation of the bank 
 against securities has been raised to .18,450,450. 
 
 The effect of the act of 1844 was to make the issue of 
 notes automatic. Nobody has any discretion as to the 
 amount of notes which shall be in existence at any time. 
 Setting aside the fixed sum issued against securities, the 
 remainder of the circulation is just what it would be if it 
 were composed of gold exclusively. The additional notes 
 represent merely the superior convenience of paper over 
 coin in the way of manipulation and carriage. The bank 
 itself cannot get notes on terms different from those 
 open to the public. To get fresh supplies it must take 
 gold out of the banking department and transfer it to the
 
 FOREIGN BANKING SYSTEMS 373 
 
 issue department, and to recover the gold it must reverse 
 the process. 
 
 The restriction put upon the credit circulation in England 
 in 1844 was coincident with a great increase of deposit 
 banking, and it produced no immediate pinch. As popu- 
 lation and trade enlarged, more media of exchange were 
 needed. These came partly in the form of gold and of 
 notes issued for gold, but chiefly in the form of bank 
 checks. As the latter were the creation of trade, they were 
 always commensurate with the wants of trade among urban 
 populations and in places where banking facilities existed. 
 It was an advantage also that they were available in sums 
 smaller than ^5. So Peel's Act gave general 
 satisfaction. Yet it has been the object of 
 attack by some of the foremost English econ- 
 omists and writers on banking. 1 No other economic ques- 
 tion, not even that of free trade, has been so hotly and 
 persistently debated. The opponents of the act contend that 
 it prevents the bank from using its credit in the only mode 
 available for quelling panics, that is, by the free issue of a 
 currency that everybody will accept. They point to numer- 
 ous crises prior to 1844 where the bank averted disaster by 
 the policy of expanding its note issues. They point to three 
 crises since 1844, those of 1847, 1857, and 1866, in each 
 of which the government suspended the restrictive clause of 
 the act and authorized the bank to issue notes at its own 
 
 1 For an argument of great force against Peel's Act, see that of 
 H. D. Macleod in the History of Banking in All Nations, Vol. IT, 
 pp. i73- J S3- 
 
 John Stuart Mill, when called as a witness before the House of 
 Commons Committee in the crisis of 1857, said that he was against 
 any restrictions by law of the issue of notes, except that of convertibility. 
 He was in favor of removing the restrictions from the Bank of England 
 and from all other banks. LEVI'S History of British Commerce^ 
 P- 399-
 
 3/4 BANKING 
 
 discretion. 1 In all these instances the panic subsided as 
 soon as it was known that notes could be had at a reason- 
 able price. Suspension of the bank act, however, did not 
 mean suspension of specie payments, but merely that the 
 bank might issue notes at its own risk without a correspond- 
 ing deposit of gold. Whatever notes the bank puts out at 
 any time it must redeem in gold on demand. 
 
 Thus the opponents of the act contend that it works well 
 only in fair weather, but that in times of stress and danger it 
 prevents the use of an adequate existing remedy, namely, 
 the credit of the Bank of England. In such cases, they say, 
 safety can be found only by annulling the act. 
 The Arguments The defenders of the act are compelled to 
 Pro and Con. 
 
 _____ . admit this ; but they maintain that the restric- 
 tion on note issues tends to check, although it does not 
 altogether prevent, the speculations which lead to panics 
 and crises. They think erroneously that notes are different 
 from other forms of bank credit in their effect upon the 
 prices of commodities and upon the foreign exchanges, and 
 should therefore be restrained by law, even though they are 
 immediately redeemable in gold. This was the main con- 
 tention of Sir Robert Peel when he brought in his bill. It 
 was repeated by Professor Jevons in 1875. 2 Mr. H. D. 
 Macleod has overthrown the argument of the former, in so 
 far as it rests upon cited instances of experience. 3 The 
 argument of the latter is inconclusive, to say the least. 
 
 1 In 1857 the extra notes, if issued, were to be loaned at not less 
 than 8 per cent interest ; in 1866 at not less than 10 per cent; and the 
 interest was to inure to the benefit of the government, not of the bank, 
 so that the public should not seek and the bank should not issue more 
 notes than were actually necessary. In 1847 and in 1866 the bank 
 did not make use of its permission to issue extra notes, but the panic 
 ceased. 
 
 2 Money and the Mechanism of Exchange (American edition), p. 314, 
 8 Theory and Practice of Banking, Vol. II, p. 150.
 
 FOREIGN BANKING SYSTEMS 3/5 
 
 Yet, whatever the statesman of the present day might 
 wisely and safely do if he had a tabula rasa on which 
 to write the bank's charter, he must have regard, first of 
 all, to the fact that British commerce and British modes 
 of thought have fashioned themselves upon the present 
 system. It must be said also that with the passage of 
 the act all anxiety respecting the goodness of the circula- 
 tion disappeared. 
 
 Another peculiarity of the Bank of England is that it 
 holds the reserves of the other London banks and prac- 
 tically those of the whole United Kingdom. All British 
 banks, including those of Scotland and Ire- 
 
 The Bank keeps land, keep a portion of their reserves in Lon- 
 
 the Gold Reserve ,,,,. , 
 
 of the Nation, _ don. ^" tne j omt: stock and private banks 
 
 of London deposit in the Bank of England 
 all of their money except the small amount needed for pay- 
 ing over the counter. It is more convenient for them to 
 keep it in the vaults of the bank than in their own. Their 
 reserves range from 10 to 15 per cent of their liabilities. 
 The bank, in order to make a profit for its own share- 
 holders, lends to borrowers about 60 per cent of its 
 deposits. If a country bank keeps one-half of its reserve 
 in a London joint stock bank and the latter lends 85 per 
 cent of this to its customers, while the Bank of England 
 lends 60 per cent of the remaining 15 per cent to its cus- 
 tomers, it follows that only 6 per cent of the country bank's 
 deposit in the city bank is available anywhere in the form 
 of cash. 
 
 Probably the ultimate reserve of the British banks reck- 
 oned in this way is less than 6 per cent of their demand 
 liabilities. The remaining 94 per cent is credit. It is pos- 
 sible to transact the business of the United Kingdom on this 
 small percentage of cash because the credit of the Bank of 
 England is so good. Neither the great bank nor the lesser
 
 376 BANKING 
 
 ones are required by law to keep any fixed percentage of 
 reserve, but keep such proportion as experience shows to 
 be needful. The Bank of England has found that its line 
 of safety ranges between 33 and 47 per cent. The other 
 London banks find that theifneeds are much less. 1 The 
 system under which this bank among many has become 
 the keeper of the ultimate reserve of all, and under which the 
 amount has so dwindled, is the growth of centuries. It was 
 never invented by anybody, and if it did not now exist 
 would be pronounced impossible. When the bank finds its 
 metallic reserve running low it raises the rate of discount 
 in order to attract gold from abroad. It sometimes happens 
 that the London joint-stock banks continue lending at the 
 lower rate after the great bank has raised its rate. In such 
 cases the bank sends its agent into the street and borrows 
 all the floating money that can be found, giving consols as 
 security therefor. In common parlance "the bank borrows 
 from the market," and thus creates a vacuum which can be 
 filled only by money from foreign countries. 
 
 The Bank of England has branches, nine in number, in 
 the principal commercial cities of England. It pays to the 
 government a fixed sum for the privilege of note issue, and 
 it manages the public debt for an agreed compensation. It 
 receives all the collections of revenue of the imperial govern- 
 ment in England, pays the interest on the government's 
 obligations, and, in general, performs the duties which in 
 this country devolve on the Treasurer of the United States. 
 Although it performs these functions, it is a private 
 
 1 Mr. Goschen, when holding the office of chancellor of the exchequer 
 a few years ago, made a public speech at Leeds, arguing that the 
 London joint stock banks ought to have much larger reserves than 
 they habitually keep, and intimating that if they did not voluntarily 
 adopt that policy he should bring before Parliament a measure to 
 compel them to do so. Not one of them ever adopted this advice, nor 
 did Mr. Goschen ever bring in any measure to compel obedience to it.
 
 FOREIGN BANKING SYSTEMS 377 
 
 corporation managed by directors chosen by the share- 
 holders. Its public duties are regulated by contract. 
 Aside from these duties, the government has no more 
 control over it than over any other London bank. 
 
 The following statement shows the condition of the Bank 
 of England on April 8, 1908. 
 
 ISSUE DEPARTMENT 
 
 LIABILITIES RESOURCES 
 
 Notes issued . . .55.724,495 Government debt ,11,015,100 
 
 Other securities . . 7,434,900 
 
 Gold coin and bullion 37,274,495 
 
 ;55>724.495 55.724,495 
 
 BANKING DEPARTMENT 
 
 LIABILITIES RESOURCES 
 
 Proprietors' capital 14,553,000 Government securitiesi3,757,493 
 
 Rest 3,184,943 Other securities . . 30,780,629 
 
 Public deposits . . 11,223,495 Notes 26,810,275 
 
 Other deposits . . 43,742,329 Gold and silver coin . 1,406,495 
 Seven-day and other 
 
 bills 5 I , I2 5 
 
 72,754,892 72,754,892 
 
 In 1844, when the issue department was separated from 
 the banking department, the government owed the bank 
 "11,015,100. This debt has remained unchanged to the 
 present time. The phrase " other securities," where it 
 occurs under the issue department, means government 
 securities other than this old debt. The same phrase, 
 where it occurs under the banking department, means bills 
 discounted and assets other than government securities. 
 In the issue department notes are liabilities, but in the 
 banking department they are resources because they are 
 certificates for gold deposited in the issue department. 
 In the foregoing statement the reserve is 51 per cent of 
 the liabilities to the public.
 
 7 2 
 
 378 BANKING 
 
 Points of similarity and of difference between the English 
 bank-note system and our own may be here noted : 
 
 ENGLISH AMERICAN 
 
 An arbitrary amount of notes All bank notes issued against 
 
 issued against government securi- government securities in the cus- 
 
 ties in the custody of the bank ; tody of the Treasury ; no notes 
 
 no notes smaller than ^5. smaller than $5.00. 
 
 Bank notes in addition to the Gold certificates issued by the 
 
 foregoing issued in unlimited Treasury in unlimited amounts on 
 
 amounts on the deposit of gold the deposit of gold coin ; none 
 
 coin or bullion. smaller than $20. 
 
 THE SCOTCH BANK SYSTEM 
 
 The monopoly of banking which existed in England from 
 1709 to 1826 did not prevail in Scotland. In the latter 
 country there was room for a development unrestrained by 
 legal enactment, and this freedom led to interesting results. 
 The Bank of Scotland was chartered in 1695 
 Bankt C tCh with unlimited powers of note issue and with 
 
 monopoly privileges for twenty-one years. 
 When the monopoly expired in 1727, it was not renewed, but 
 the bank continued to exist. In that year the Royal Bank 
 was chartered. This institution, finding a scarcity of com- 
 mercial paper in the market, devised a new method of using 
 its unemployed capital, known as the system of cash credits, 
 which forms a peculiar feature of Scotch banking. 
 
 A cash credit is a permission extended by the bank to a 
 borrower to draw money as it is wanted, not exceeding a 
 certain sum, paying interest for the time and amount actu- 
 ally used. The principal difference between a cash credit 
 
 and an ordinary discount is that the former is 
 
 Cash Credits. . ,, , , , 
 
 "accommodation paper, that is, not based 
 
 upon any completed commercial transaction. For this reason 
 personal security, in addition to that of the borrower, is
 
 FOREIGN BANKING SYSTEMS 379 
 
 required. The indorsers, or " cautioners," as they are 
 termed in Scotch law, are never less than two in number 
 and frequently three or more. The cautioner has the right 
 to inspect the account of the borrower at any time, and to 
 stop the credit at any point, if he wishes to terminate his 
 liability there. Cash credits are based upon knowledge of 
 the character of the borrower and of the responsibility of the 
 cautioners. By means of cash credits young men of enter- 
 prise and integrity are enabled to make a start in the world 
 without waiting to accumulate capital from their own earn- 
 ings. Sometimes, too, a business opportunity presents itself 
 which a man would not undertake unless he could be sure 
 of finding a certain amount of money before its completion. 
 He may need it or he may not. A cash credit enables him 
 to go forward with confidence. If he needs the money or 
 some part of it, he pays interest for what he uses. Other- 
 wise he pays nothing. Cash credits have played a large 
 part in the development of agriculture in Scotland. The 
 money advanced to farmers is not, however, loaned on 
 mortgage, but on personal security, and the accounts are 
 not allowed to stagnate. As a corollary to the system of 
 cash credits, the Scotch banks pay interest on the time 
 deposits of their customers and thus stimulate among the 
 people the habit of saving. 
 
 Another peculiarity of Scotch banking is its remarkable 
 development of the branch system by which deposits are 
 secured from every nook and corner of the country and by 
 which capital is transferred easily and quickly 
 to the P laces where tne demand for it is greatest. 
 There are twelve banks in Scotland, and they 
 have 1065 branches. The system has been so developed 
 and extended that b'anking facilities reach every town and 
 hamlet in the land. Whatever assistance banks can give to 
 industry is available to the poor and to the rich on equal
 
 380 BANKING 
 
 terms. In no other country has the principle of equality in 
 bank favors been carried further. In no other has greater 
 pains been taken to bring them to the poor man's door. 
 
 Until 1845 there was no legal limitation upon the note 
 issues of Scotch banks. When Peel's Act was passed in 
 England, as described above, the principles embodied in 
 it were applied to Scotland in a modified form. It was 
 
 enacted that each bank might have an issue 
 Note Issues. 
 
 of notes equal to the amount of notes and 
 
 coin then issued and held by it. This is called the "fixed" 
 circulation, and it amounts to ,2,676,350. For any additional 
 notes it was to hold an equal additional amount of coin, but 
 it was not required that this coin should be held specially for 
 the redemption of the notes ; nor was there any provision 
 for ascertaining whether the law was complied with in this 
 particular. 
 
 Notes are issued in denominations of one pound and 
 upward. They are exchanged daily at the Edinburgh clear- 
 ing house, and settlements are made between banks by drafts 
 on London. The notes remain in circulation on the average 
 eighteen days after each issue, the whole circulation being 
 redeemed twenty times each year. No deposited security 
 for bank notes has ever been required in Scotland, but note 
 holders have a prior lien on the assets. Moreover, the lia- 
 bility of shareholders for note issues is unlimited. For these 
 reasons the note .issues of insolvent banks in Scotland are 
 always accepted at par by the other banks and are never 
 depreciated. There have been only three bank failures of 
 any importance in Scotland : those of the Ayr Bank in 1772, 
 of the Western Bank in 1857, and of the City of Glasgow 
 Bank in 1878. These might perhaps have been prevented 
 by proper public examinations. 
 
 Although deposits are received and loans are made at 
 each branch, the branches pay out only the notes of the
 
 FOREIGN BANKING SYSTEMS 381 
 
 parent bank, which are redeemable at the head office. So 
 
 it is necessary to have real money only in one place, instead 
 
 of in perhaps one hundred different places. 
 
 Economy in the Thug h maximum of business is done with 
 Use of Gold. 
 
 the minimum of gold, which is the raison d'etre 
 
 of banking. Credit has been systematized in Scotland to 
 the last degree, and has been found to answer all purposes 
 so long as the paper sovereign can be converted into the 
 gold sovereign, at a convenient commercial center. The gold 
 held by the banks is usually not more than 5 per cent of 
 their deposits, yet the Scotch banks possess the undoubting 
 confidence of the people whom they serve. 
 
 The notes of the Bank of England are not legal tender in 
 Scotland. There is no legal-tender paper there, nor has 
 the want of it ever been a cause of complaint. 
 
 In 1907 the average liabilities and resources of the twelve 
 banks of Scotland, in thousands of pounds, were as follows: 
 
 LIABILITIES RESOURCES 
 
 Capital paid . . . ,9,166 Loans and discounts .72,069 
 
 Surplus 7)557 Government securities 4,938 
 
 Circulating notes . 6,776. Other securities . . 21,644 
 
 Deposits .... 109,208 Specie 5>5 ! 9 
 
 Acceptances . . . 4,832 Call money .... 25,470 
 
 Other liabilities . . 1.337 Acceptances .... 4,832 
 
 Other assets .... 4,404 
 
 138,876 138.876 
 
 THE CANADIAN BANK SYSTEM 
 
 In Canada there are thirty-five banks, with capitals rang- 
 ing from $12,000,000 (the Bank of Montreal) to $200,000 
 (the St. Stephen's Bank of New Brunswick). 
 No new bank can be established with less than 
 $500,000 subscribed, of which at least $250,000 
 must be paid before beginning business. All of the larger 
 banks have branches, of which there are 1841 in the Dominion,
 
 382 BANKING 
 
 and 48 in other countries. Each bank is allowed to issue 
 notes to an amount equal to its paid capital, but competition 
 and the prompt return of the notes for redemption have al- 
 ways kept the circulation below the authorized amount. It 
 ranges between 40 and 50 per cent of their capital and sur- 
 plus. All banks are required by law to make arrangements 
 to insure the par value of their circulation in any and every 
 part of Canada, and for this purpose to establish redemption 
 agencies at the chief city of each of the seven provinces and 
 at such other places as may be determined by the treasury 
 
 board. In practice the notes of the different 
 Note Issues. . 
 
 > banks are exchanged daily at the clearing 
 
 houses in the larger cities. At other places they are 
 exchanged between the nearest branches, and balances are 
 paid either in Dominion notes or by drafts on the commercial 
 centers. The notes remain in circulation on the average 
 thirty days after each issue, the whole circulation being 
 redeemed twelve times each year. 
 
 Nor is there any discount on the notes of failed banks. 
 The law provides for the protection of note holders (i) by 
 giving them a prior lien on all the assets of failed banks, in- 
 cluding a liability on the part of shareholders of double the 
 amount invested by them ; (2) by a bank circulation redemp- 
 tion fund contributed by all the banks, equal to 5 per cent 
 of the average circulation of each; and (3) by a provision 
 that the notes of failed banks shall draw 5 per cent interest 
 from the time of default till public announcement is made 
 of readiness to redeem them. There have been three bank 
 failures since 1890, when these provisions of law took effect, 
 but the note holders lost nothing; nor did the other banks 
 lose anything from the common redemption fund. 
 
 This fund was established by Parliament, at the instance 
 of the bankers themselves. The law called for a contri- 
 bution from each bank equal to i per cent per annum of
 
 FOREIGN BANKING SYSTEMS 383 
 
 its circulation until the total amount should be equal to 
 5 per cent thereof. It is in the custody of the Minister of 
 .^-Finance. It is invested in Dominion securities at 3 per 
 cent, and the interest is paid to the contrib- 
 uting banks. In case of the failure of a bank 
 its notes are redeemed out of this fund, and then the amount 
 so expended is restored to the fund (with interest at 3 per 
 cent) from the assets of the failed bank before any other 
 claims are paid. The banks may be called upon for addi- 
 tional contributions if needed, in order to keep the fund up 
 to 5 per cent of the outstanding circulation, but the rate of 
 contribution is not to exceed i per cent per annum. 
 
 The Canadian system of note issues is based upon the 
 
 "banking principle." It supplies an "elastic" currency, 
 
 expanding and contracting with the variation of seasons 
 
 and the wants of trade. Its system of branches tends to 
 
 equalize the rates of interest in different parts 
 
 Branch Banks. rlT ^.. . , , i 
 
 of the Dominion. A bank receiving deposits 
 in Halifax, Montreal, and Toronto may lend them the follow- 
 ing day through its branches, and by the issue of its own 
 notes, at Winnipeg, Vancouver, and Victoria, the branches 
 redeeming the notes by drafts on the head office when they 
 are presented for that purpose. The rate of interest in the 
 smaller towns of the West is only i or 2 per cent higher 
 than in the large cities of the East on the same kind of loans. 
 To this equalization of the rate of interest both the branch 
 system and the freedom of note issue contribute. 
 
 Under the Canadian law a bank may suspend payments 
 for ninety days without going into liquidation ; but it must 
 not, in that interval, issue notes in payment of deposits, 
 since that would increase the prior lien on the assets and 
 the charge upon the common redemption fund. 
 
 The weak point of the Canadian system, as of the Scotch, 
 is the lack of government inspection. The Minister of
 
 384 BANKING 
 
 Finance can call for a report of the condition of a bank at 
 any time, but there is nothing which corresponds to our 
 system of bank examination. In default of 
 tn ^ s t ^ ie bankers have procured for their own 
 chartered association legal powers of super- 
 vision over the making of circulating notes and the delivery 
 thereof to the banks, the disposition made by the banks of 
 such notes, and penalties for the breach or non-observance 
 of the regulations applicable thereto. Thus the banks have 
 the legal right to inspect each other so far as their note 
 circulation is concerned, but in no other particular. 
 
 The Canadian banks are not allowed to issue notes smaller 
 
 than $5.00. The Dominion government, however, has legal- 
 tender notes outstanding to the amount (March 31, 1908) of 
 $60,455,991, against which there is a gold reserve of 25 per 
 cent for the first $30,000,000. and 100 per cent for all above 
 that sum. Canadian' banks are required by law to keep 40 
 per cent of their cash reserves in Dominion notes, but this 
 law, formerly obligatory, is now practically of no consequence, 
 since the banks, as a matter of convenience, hold much more 
 than 40 per cent of their reserves in that form. 
 
 There was no bank suspension in Canada during the 
 commercial crisis of 1907. The government offered to loan 
 the banks $10,000,000 at 5 per cent interest for sixty days 
 as a help to the movement of the crops, on collateral to be 
 approved and guaranteed by the Bank of Montreal, but only 
 about one-half of the amount was accepted, and this has 
 since been repaid. In order to avoid the necessity of resort- 
 ing to this expedient hereafter, a bill has been proposed in 
 the Dominion Parliament by the Minister of Finance, pro- 
 viding that during the crop-moving season (October i to 
 January 31) the banks may issue notes to the amount of 15 
 per cent of their combined capital and surplus, in addition 
 to the amount outstanding at the beginning of the season.
 
 FOREIGN BANKING SYSTEMS 
 
 335 
 
 The thirty-five Canadian banks have a paid capital of 
 $96,137,611 and a rest, or surplus, of $71,215,644, and their 
 circulation on February 29, 1908, was $68,548,075. 
 
 The chief points of similarity and of difference between 
 the Canadian system and our own,are these : 
 
 Bank notes are secured by a 
 prior lien on assets including 
 shareholders' double liability, and 
 by a common safety fund equal 
 to 5 per cent of total circulation. 
 Failed bank notes draw interest at 
 5 per cent. 
 
 Banks are required to redeem 
 their notes at the capital of each 
 province and to keep them at par 
 everywhere. 
 
 Banks are allowed to have 
 branches in all parts of the 
 Dominion. 
 
 AMERICAN 
 Bank notes are secured by gov- 
 ernment bonds and by a 5 per cent 
 redemption fund in the Treasury, 
 and by the government's promise 
 to redeem at once without waiting 
 to sell the securities. 
 
 Banks are required to receive 
 each other's notes at par in all 
 payments to themselves, and to 
 redeem their own notes at their 
 counters and at Washington City. 
 
 Branch banks not permitted 
 under the national bank system, 
 but any state bank having branches 
 and entering the national system 
 may retain such branches. 
 
 THE BANK OF FRANCE 
 
 The Bank of France was founded, with a capital of 
 30,000,000 francs, in the year 1800, at the instance of 
 Napoleon Bonaparte, then first consul. It was an ordi- 
 nary bank of discount, deposit and note issue, like the first 
 and second banks of the United States, which 
 character it still retains ; but Jthe government 
 has never been a shareholder in it. It was 
 placed under the "management of fifteen regents and three 
 inspectors, called "censors," chosen by the shareholders. In 
 1803 the exclusive right of note issue in the city of Paris 
 
 The Bank of 
 France.
 
 386 BANKING 
 
 was conferred upon it. In 1806 a law was passed provid- 
 ing that the chief of the state should appoint from among 
 the shareholders a governor and two deputy governors,^ 
 tihe^bank. Under the present law the governor must be the 
 owner of one hundred shares of 1000 francs each, and 
 each deputy governor must hold fifty shares. The governor 
 has general direction of the affairs of the bank, .presides at 
 all meetings of the regents, and may veto any of their acts. 
 No paper can be discounted that he disapproves of. He 
 also appoints all the employees. This feature of the bank's 
 organization has been retained under all changes of the 
 government of France. The bank performs the same 
 duties in the management of the public debt that the Bank 
 of England performs in that country. 
 
 In 1848 the exclusive right of note issue in the whole of 
 France was conferred upon the bank, but it was required to 
 buy the other note-issuing banks, which it did by increasing 
 its own capital stock to 91,250,000 francs. The monopoly 
 
 of note issue was bestowed upon the bank in 
 VNote Issues/A . .... 
 
 order to give greater stability to the paper 
 
 currency, and it had that effect. The goodness of the notes 
 of the Bank of France is never questioned, and its monopoly 
 is not complained of. In consideration of the bank's serv- 
 ices to the state, the government exacts no special compen- 
 sation for the right of note issue, but requires it to pay the 
 same taxes as other banks are liable to and also exacts 
 a small stamp duty on its notes. The amount of notes 
 issuable is fixed by law from time to time. In the last 
 act (February n, 1906) the maximum sum was fixed at 
 5,800,000,000 francs. The legislative body usually antici- 
 pates the demands of commerce by extending the limit 
 before the maximum is reached. The restriction upon its 
 issues is, therefore, more apparent than real. The Bank of 
 France is perhaps the most notable example and illustration
 
 FOREIGN BANKING SYSTEMS 387 
 
 of the " banking principle " of note issues that the world 
 has ever seen. 
 
 The amount of the bank's uncovered notes is relaftvel^ 
 small. On April 9, 1908, its total issue was 4,869,281,000 
 francs and its specie on hand 3,678,546,000 francs. About 
 one-fourth of the specie consists of silver five-franc pieces, 
 which are available for the internal traffic of the country 
 
 but not for foreign trade, since their metallic 
 Cash Reserves. % . , . -11 
 
 is much less than their nominal value. As 
 
 they are legal tender, the bank must receive them as the 
 equivalent of gold, but it may also pay them at par for all 
 claims against itself. Accordingly, when depositors want 
 gold for exportation, the bank is enabled to charge a pre- 
 "rnium for it, the alternative being payment in silver. This 
 premium is a source of profit to the bank. The limit to the 
 possible premium is the cost of collecting gold coins, of 
 which there is always a large amount in circulation, and 
 which brokers are ready to supply if they are paid for their 
 trouble. Usually the bank charges no premium, but at times 
 it charges a fraction less than the cost of obtaining gold 
 from brokers. If it should charge more, the public would 
 sell its gold to brokers and deposit only silver at the bank. 
 
 Sometimes we hear that the Bank of France or the Impe- 
 rial Bank of Germany is buying gold with its notes and 
 allowing the importer of the metal interest during the time 
 of transit from the United States. This can be done with- 
 out loss whenever there is a fresh demand for its notes, pro- 
 vided the demand keeps the notes in circulation during the 
 time the gold is in transit. Of the probable duration and 
 extent of this demand the bank is well able to judge through 
 the knowledge, which it derives from its branches, of the 
 internal trade of the country. 
 
 In the revolution of 1848 the bank suspended specie pay- 
 ments, and its notes were made legal tender, but it was
 
 388 BANKING 
 
 prepared to resume at the end of three months. The govern- 
 ment, however, prevented it from doing so until August, 
 1850, at which time resumption took place and the legal- 
 tender act was repealed. The bank suspended again in 
 C , 1870, at the beginning of the Franco-German 
 
 Inpayments. War ' and itS n teS W6re a g ain made le g al 
 tender. The bank at that time held specie 
 
 nearly equal in amount to its outstanding notes, and equal 
 to about 75 per cent of all its demand liabilities ; and its 
 officers were prepared to meet a run, besides making the 
 usual advances to the mercantile community and the unusual 
 ones which, it was foreseen, would be required by the gov- 
 ernment. Rumors had, however, gained credence that specie 
 was flowing out of the country in large amounts to Prussia, 
 and so public opinion demanded that the bank should stop 
 payments and that its notes should be made legal tender. 
 On August 12, 1870, a law was passed to that effect. The 
 same act limited the note issues to 1,800,000,000 francs. 
 Two days later the limit was raised to 2,400,000,000 francs, 
 and by subsequent steps to .3,200,000,000 francs in July, 
 1872. The bank advanced to the government during the 
 war with Germany and the later conflict with the commune 
 761,000,000 francs, and continued to make advances while 
 the new republic was establishing itself, until they reached 
 the maximum sum of 1,530,000,000 francs. About one-half 
 of the sum thus advanced was specie. The premium on 
 specie at any time was, however, slight. Once it was as high 
 as 4 per cent, but only for a short time. After the sup- 
 pression of the commune it fell to i per cent. 
 
 While Paris was besieged the parent bank could do nothing 
 to assist the government, but the branches were able to do so. 
 The Morgan loan of October, 1870, for 250,000,000 francs was 
 guaranteed by the Bank of France. Specie payments were 
 resumed on January i, 1878, but the legal-tender quality of the
 
 FOREIGN BANKING SYSTEMS 389 
 
 notes of the bank was not repealed. It was retained at the 
 instance of the business community outside of Paris, as a 
 matter of convenience in the handling and transfer of money. 
 
 The Bank of France is required by law to have at least 
 one branch in each department of France. It has also a 
 large number of subsidiary offices in places too small to 
 support a branch with the usual complement of officers and 
 employees. The j^te of discount is uniform 
 msc D o C ^ e t S s and / at the parent bank and aTTlfbranches and" 
 offices. During recent years it has been 
 usually 2^ to 4 per cent, and is less fluctuating than in 
 any otheT~country. No paper is rejected on account of its 
 smallness. In 1889 there were at the parent bank nearly 
 20,000 discounts of 10 francs ($1.93) or less each, and more 
 than 1,000,000 ranging in size from 51 to 100 francs. 
 
 The chief points of difference between our banking system 
 and that of France, as regards note issues, are these : 
 
 if^ 
 
 FRENCH AMERICAN 
 
 One bank of issue with numer- Any number of banks of issue, 
 
 ons branches. no branch banks. 
 
 Cash reserve fixed by the bank. Cash reserve fixed by law. 
 
 Notes secured by the bank's Notes secured by government 
 
 assets. bonds. 
 
 Maximum amount of notes Amount of notes not to exceed 
 
 fixed by law from time to time. the bank's paid capital. 
 
 The following is a condensed statement of the condition of 
 the Bank of France in thousands of francs on April 9, 1908 : 
 
 LIABILITIES FRANCS RESOURCES FRANCS 
 
 Capital 182,500 Gold 2,776,033 
 
 Surplus 381519 Silver 902,513 
 
 Circulating notes . . . 4,869,281 Discounts 1,046,796 
 
 Deposits 440,000 Advances on securities . 541,196 
 
 Other liabilities . . . 375,243 Other resources . . . 639,005 
 
 5'95.543 5'95.543
 
 390 BANKING 
 
 Although the Bank of France has a monopoly of note 
 issues, it has numerous competitors in the field of deposit 
 and discount, the largest being the Credit Lyonnais with a 
 capital of 250,000,000 and a surplus of 125,000,000 francs. 
 Five such banks have aggregate deposits of 3,424,000,000 
 francs, sevenfold the amount of the deposits of the Bank of 
 France. The deposits are exclusively in cash or bank notes. 
 Securities cannot be converted into sight deposits, although 
 the bank may undertake their sale and conversion into cash 
 for the depositors' credit when sold. These five banks hold 
 2,414,000,000 francs of short-time commercial paper, and 
 883,000,000 francs of advances on securities. This great 
 development of discount and deposit banking in France has 
 taken place mainly during the past twenty-five y 
 
 THE IMPERIAL BANK OF GERMANY 
 
 The Reichsbank, or Imperial Bank of Germany, was 
 
 grafted upon the stem of the Bank of Prussia in the year 
 
 '1875. Prior to that event there had been five different 
 
 monetary systems in the Germanic confederation, with a 
 
 heterogeneous coinage, a variety of legal-tender 
 
 imperial Bank no t; es issued by the several governments, and 
 of Germany. * 
 
 numerous banks whose circulating notes were 
 
 generally at a discount except at their place of issue. The 
 establishment of a central bank was one of the measures 
 adapted to bring order out of this financial chaos, and it 
 has been successful even beyond the expectations of its 
 promoters. The Bank of Prussia was originally owned by 
 the government, which had contributed its capital of 2,000,- 
 ooo thalers, but it had grown to 20,000,000 thalers by 
 the admission of private stockholders. The government, 
 however, continued to control it. The German Empire 
 bought the Prussian government's interest, raised the capi- 
 tal to 120,000,000 marks, and disposed of the whole by
 
 FOREIGN BANKING SYSTEMS 391 
 
 private subscription, retaining, however, absolute control 
 over it by means of an imperial board of directors, subject .-) 
 "ToTHe chancellor of the empire. By the bank act of 1875 
 the president and the members of the board of directors 
 are appointed by the Kaiser for life, on the recommendation ^ 
 of the federal council. The officers of the bank, although 
 
 paid by it, are considered government officials, 
 Its Organization. 
 
 and they are not allowed to hold shares in 
 
 the bank. The shareholders choose from their own number 
 a central committee, who act in an advisory and supervisory 
 capacity, but receive no salary. The central committee 
 elects three members^ from its own number to sit with the 
 imperial board of directors in an advisory capacity, and 
 they are authorized and required to inspect the books and 
 accounts of the bank " in the presence of a bank director " 
 and to make reports thereupon to the central committee. 
 
 At the time when the bank act of 1875 was passed there 
 were thirty-two indepenjlent banks in the empire which had 
 the right of note issue. The general provisions of the act 
 applied to them as well as to the Reichsbank. They were 
 
 allowed to issue in the aggregate 135,000,000 
 Note Issues. 
 
 marks and the Reichsbank 250,000,000 marks 
 
 of uncovered notes. It was provided also that, if any of the 
 independent banks should for any reason cease to issue 
 notes, their rights of issue should pass to the Reichsbank. 
 All but seven of them either abjured the right of issue or 
 lost it by expiration of their charters on or before January i, 
 1894. The uncovered issues of the Reichsbank have since 
 been raised to 472,829,000 marks, which is called the "con- 
 tingent circulation." 
 
 Some provisions of the German system are of great 
 importance, and should be compared with the English 
 system, as established by the bank act of 1844. The 
 German law, like the English, requires that, for all note
 
 392 BANKING 
 
 issues above the foregoing limits, the banks must have an 
 equal amount of cash in their reserves, but it does not 
 require them to hold "This- T^cstr^as a "special redemption 
 
 fund for the notes. Nor is the regulation an inflexible one, 
 like that of the English act. Any bank may 
 
 The Elastic exceed the limitation of the cash reserve by 
 
 Feature. J 
 
 paying to the imperial treasury a tax of 5 per 
 
 cent on the surplus issue, provided that the Reichsbank 
 shall maintain at all times a reserve equal to one-third of its 
 notes in circulation the other two-thirds to be covered by 
 discounted bills running not more than three months and 
 having at least two signatures of undoubted responsibility. 
 The lax, was originally imposed for the purpose of restricting 
 the note issues, but experience has led to the abandonment 
 of that motive, as is shown by the fact that frequently the 
 rate of interest charged to the borrowers is less than the tax. 
 Each note-issuing bank is required to publish, four times 
 each month, a report of its assets and liabilities, showing 
 particularly the state of its note circulation and of its reserve 
 fund. If the note issues are in excess of the limitations 
 above described, the tax is imposed immediately, and is 
 repeated each week as long as the excess continues. Evi- 
 dently this system of note issue was modeled upon the 
 English one, but modified by English experience in the 
 crises of 1847, 1857, and 1866, when it was found necessary 
 to "suspend the bank act." To avoid the necessity of 
 breaking the law on such occasions, the German act was 
 made flexible and has been found to avert trouble in times 
 of severe stringency. It must, therefore, be considered 
 preferable to the English act. 
 
 Bank notes are not legal tender in Germany. No bank 
 note can be issued of less denomination than 100 marks 
 ($23.80), but smaller ones are issued by the imperial 
 treasury. The Reichsbank is obliged to give its notes in
 
 TORE1GN BANKING SYSTEMS 393 
 
 exchange for gold bullion, at the rate of 1392 marks per 
 pound fine. Banks may count the notes of other specie- 
 paying banks in Germany and notes of the 
 imperial treasury as a part of their cash 
 reserve. The Reichsbank has hundreds of 
 branches, divided into classes according to the importance 
 of the places where they are situated and the kind of busi- 
 ness transacted by them. The rate of interest is uniform 
 at the head office and all branches. The Reichsbank usu- 
 ally redeems its notes at its branches, as well as at its head 
 office in Berlin. The independent banks are required to 
 redeem their notes at an agency either in Berlin or in 
 Frankfort, as well as at their own counters. All note- 
 issuing banks are required to receive, in payments to them- 
 selves, the notes of other banks, and must at once present 
 them (except those of the Reichsbank) for redemption, or 
 use them in payments to the issuing bank, or in other pay- 
 ments in the town where it is situated. 
 
 A law was passed in 1900 to increase the capital of the 
 Reichsbank to 180,000,000 marks by the sale of new shares 
 at 135, the premium to be added to the surplus fund. This 
 increase was effected in 1905. 
 
 The annual profits. of the Reichsbank are apportioned in 
 the following manner : (i) 3^ per cent (originally 4^ per 
 cent) on the capital stock goes to the shareholders ; (2) 
 20 per cent of the excess goes to the surplus fund, until it is 
 equal to one-fourth of the capital ; (3) the remaining surplus 
 
 is divided equally between the shareholders 
 Dividends. 
 
 and the imperial treasury, until the dividend 
 
 to the shareholders reaches 8 per cent ; (4) any ultimate 
 residue is divided in the proportion of one-fourth to the 
 shareholders and three-fourths to the imperial treasury. 
 If the net profits fall short of 3^ per cent on the capital 
 Stock, the residue is to be taken from the surplus fund.
 
 394 
 
 BANKING 
 
 The profits of the bank have advanced by leaps and bounds 
 during recent years. In 1899 tne shareholders received 
 10^ per cent and in 1900 n per cent, and the imperial 
 treasury in the latter year received nearly 20,000,000 marks. 
 The chief points of difference between our banking system 
 and that of the German Reichsbank are these : 
 
 GERMAN 
 
 Bank controlled by govern- 
 ment exclusively. 
 
 Circulating notes secured by 
 bank's assets. 
 
 A certain amount of notes 
 issuable without conditions. 
 
 Issues over and above the fore- 
 going to be covered by an equal 
 reserve of cash, otherwise a tax 
 of 5 per cent on the excess. 
 
 AMERICAN 
 
 Banks controlled by share- 
 holders exclusively. 
 
 Circulating notes secured by 
 government bonds. 
 
 Amount of notes not to exceed 
 bank's capital. 
 
 Each bank to keep a deposit 
 in the treasury, equal to 5 per 
 cent of its circulating notes, for 
 the redemption thereof. 
 
 The following is a condensed statement of the condition 
 of the German Reichsbank in thousands of marks on Jan- 
 uary i, 1906 : 
 
 LIABILITIES 
 
 MARKS 
 
 RESOURCES 
 
 MARKS 
 
 Capital 180,000 
 
 Surplus 65,379 
 
 Circulating notes . . . 1,656,682 
 
 Deposits 636,851 
 
 Other liabilities . . . 33*271 
 
 2,572,183 
 
 Coin, 1 bullion, and notes 831,132 
 
 Discounts 1,228,614 
 
 Loans on securities . . 204,340 
 Investments .... 214,855 
 Current accounts . . . 14,846 
 Other resources . . . 78,396 
 2,572,183 
 
 1 About one-fourth of the metallic reserve consists of silver thalers 
 or three-mark pieces, which are legal-tender coins akin to the five-franc 
 pieces of France, or to our silver dollars.
 
 FOREIGN BANKING SYSTEMS 395 
 
 RECAPITULATION 
 
 The Bank of England is a private corporation which ren- 
 ders certain financial services to the government. In con- 
 sideration of a loan of money Parliament, in 1694, granted it 
 a charter with banking powers, and an annual payment for 
 interest on the loan. The bank paid the stipulated sum to 
 the government and issued its own interest-bearing notes 
 for an equal amount, which were bought by the public. With 
 the capital thus replaced it began the business of discount 
 and deposit. Three years later the bank made a new loan 
 to the government and was authorized by Parliament to issue 
 demand notes payable to bearer for an equal amount. These 
 were likewise accepted by the public at par. In 1709 the 
 government virtually granted to the bank the exclusive 
 privilege of note issue " in that part of Great Britain called 
 England." From that time the indebtedness- of the gov- 
 ernment to the bank, and also the amount of its note issues, 
 increased gradually until 1797, when the bank was forced to 
 suspend specie payments on account of its large advances of 
 money to the treasury for war purposes. The suspension 
 continued until 1821. In 1826 the monopoly of the bank 
 was relaxed, and the privilege of note issue was granted 
 to joint stock banks at a distance of sixty-five miles from 
 London. There were severe commercial crises in England 
 in 1825, 1836, and 1839, and the opinion prevailed that they 
 were caused by excessive issues of bank notes. This belief 
 led to the passage of an act by Parliament in 1844, at the 
 instance of Sir Robert Peel, by which the issue of notes as 
 credit instruments of the bank was forbidden. By the terms 
 of this act the function of note issue was wholly separated 
 from that of deposit and discount, and became an automatic 
 exchange of notes for government securities or for gold. 
 The bank was allowed to transfer to the issue department a
 
 396 BANKING 
 
 fixed amount of such securities and to receive an equal 
 amount of notes. In addition to this fixed amount, the 
 issue department was to give notes in exchange for gold and 
 not otherwise, and was to redeem all notes in gold on demand. 
 The same principle was applied to all note-issuing banks in 
 England. When the note-issuing privileges of any country 
 banks should lapse, those of the Bank of England were to 
 be increased, on condition that government securities of equal 
 amount were placed in the issue department. In practice 
 this system, which was adopted to prevent panics, has failed 
 to do so, and it has been found necessary in times of great 
 stringency to suspend the operation of the act and to allow 
 the bank freedom to issue notes without the deposit of corre- 
 sponding amounts of gold. No notes can be issued in Eng- 
 land or Wales smaller than ^5. The notes of the Bank of 
 England are legal tender at all places in England and Wales 
 except at the bank itself. 
 
 The banks of Scotland are distinguished by the great 
 extension and perfection of their branch system and by a 
 kind of loans known as cash credits. There are only eleven 
 banks in the country, but they have all together more than 
 one thousand branches. Every hamlet in the country has 
 at least one office connected with a bank in a large city. At 
 this office, or branch, deposits are received and loans are 
 made with the same facility and freedom, and on substan- 
 tially the same terms, as in the cities. The branches, how- 
 ever, pay out only the circulating notes of the bank, which 
 are redeemable at the head office. It is unnecessary, there- 
 fore, to keep gold at more than one place. A cash credit is 
 an authorization extended to a borrower to draw from the 
 bank, within a certain period of time, a certain sum, or any 
 part thereof, and requiring him to pay interest only for the 
 amounts drawn and for the time they are kept. Cash credits 
 are loans on personal security, not less than two indorsers
 
 FOREIGN BANKING SYSTEMS 397 
 
 being required, frequently three or more. Loans of this 
 kind to farmers are common, and they have been greatly 
 conducive to the agricultural prosperity of the country. 
 Cash credits are economical to the borrower because he 
 pays nothing for his right to draw upon the bank but only 
 for what he actually draws. Interest is allowed on all 
 deposits. The note issues of the Scotch banks are regu- 
 lated on the same principles as those of the Bank of Eng- 
 land. Each bank is allowed to issue a certain amount of 
 notes against its general assets. For all issues above that 
 sum it must have a gold sovereign for each paper sovereign 
 outstanding, but it is not required, as the Bank of England 
 is, to keep this gold separate from its other assets. The gold 
 held by the Scotch banks is usually not more than 5 per cent 
 of their deposits. Each bank has an office in London and a 
 balance on deposit in the Bank of England. The Scotch 
 banks issue notes in denominations of i and upward. No 
 bank notes are legal tender in Scotland. There is no system 
 of public inspection or supervision of banks in Scotland. 
 
 In Canada there are thirty-five banks. They have a sys- 
 tem of branches like that of the Scotch banks, but their note 
 issues are regulated on a different plan. They are allowed 
 to issue notes to the amount of their paid capital, but are 
 required to make arrangements which shall keep them at 
 par in all parts of the country, and to this end they must 
 have at least one redemption agency in each province of the 
 Dominion. Each bank is required also to contribute a sum 
 equal to 5 per cent of its circulation as a common fund to 
 secure the prompt redemption of the notes of failed banks. 
 This fund, held in the custody of the Minister of Finance, is 
 invested in Dominion securities which draw interest at 3 per 
 cent, and the interest is paid to the banks in proportion to 
 their contributions. Note holders also have a prior lien on 
 the assets of failed banks, including the double liability of
 
 398 BANKING 
 
 the shareholders. The notes of failed banks draw interest 
 at 5 per cent. The safety fund, the prior lien, and the inter- 
 est clause have been effectual to prevent any depreciation of 
 the notes of failed banks in Canada since those provisions of 
 law went into force. There is no government inspection 
 of banks in Canada, but the incorporated association of 
 Canadian bankers is empowered by law to inspect the note 
 issues of all banks and to keep them within the limitations 
 of the law, with power to punish infractions. 
 
 The Bank of France is a private corporation which dis- 
 charges public functions similar to those performed by the 
 Bank of England. Its affairs are managed by a board of 
 regents chosen by the shareholders. They act, however, 
 under the general direction of a governor chosen from 
 among the shareholders by the chief of the state. The 
 governor has power to veto any act of the regents. He 
 also appoints all employees of the bank. The bank has the 
 exclusive right of note issue in France, and its notes are 
 legal tender. The maximum amount of its issues is fixed by 
 law from time to time. Its metallic reserve is not regulated 
 by law, but is usually 80 per cent or more of its note circu- 
 lation. In specie holdings it is the strongest bank in the 
 world. The government does not exact any compensation 
 from the bank for the monopoly of note issue, but it imposes 
 a small stamp duty on the notes. The bank suspended 
 specie payments in 1870, during the Franco-German war. 
 The suspension was prolonged, at the instance of the gov- 
 ernment, till 1878, but the discount on its circulating notes 
 during the greater part of this time was so small as to be 
 scarcely noticed. The bank has a large number of branches 
 and subsidiary offices in all parts of France, where commer- 
 cial paper is discounted and loans are made on securities. 
 The rate of interest on loans is uniform at the parent bank 
 and at all branches and offices. In its system of note issue
 
 FOREIGN BANKING SYSTEMS 399 
 
 the Bank of France is a conspicuous example of the " bank- 
 ing principle," as the Bank of England is of the " currency 
 'principle." 
 
 The Imperial Bank of Germany is owned wholly by private 
 shareholders, but is under the exclusive control of the gov- 
 ernment. Its board of directors is appointed by the emperor, 
 on the nomination of the federal council, and all the officers 
 of the bank are considered as government employees. The 
 directors are responsible to the chancellor of the empire. A 
 committee of the shareholders sits with the board of directors 
 in an advisory capacity, inspects the accounts from time to 
 time, and makes reports thereon to the shareholders. The 
 bank has the right of note issue, a right which will become 
 exclusive whenever the issues of certain independent banks 
 shall have ceased. The method of note issues is a modifica- 
 tion of that of the Bank of England. The bank is allowed a 
 fixed amount of uncovered notes. For all above that sum it 
 must have in its reserves an equal amount of cash, but this 
 is not, like the English law, an inflexible rule. The bank 
 may issue uncovered notes in excess of the prescribed limits, 
 on condition of paying a tax of 5 per cent per annum on the 
 excess, but its reserve must not at any time be less than one- 
 third of its outstanding circulation. This elastic clause has 
 been vindicated by experience. It has afforded relief to the 
 business community in several periods of monetary stringency, 
 and without any harmful consequences. The Imperial Bank 
 is required to give its notes in exchange for gold coin or 
 bullion, but bank notes are not legal tender in Germany. 
 All note-issuing banks are required to receive each other's 
 notes at par and to redeem their own notes at Berlin or 
 Frankfort, as well as at their own counters. The net profits 
 of the Imperial Bank are divided between the shareholders 
 and the imperial treasury in a proportion fixed by law. The 
 Imperial Bank has many branches.
 
 400 BANKING 
 
 AUTHORITIES . 
 
 Francis' History of the Bank of England. 
 
 Rogers' First Nine Years of the Bank of England. 
 
 Levi's History of British Commerce. 
 
 A History of Banking in All Nations, published by the Journal 
 of Commerce and Commercial Bulletin (New York, 1896). 
 
 Macleod's Theory and Practice of Banking. 
 
 Somers' Scotch Banks and System of Issue. 
 
 Breckenridge's Canadian Banking System. 
 
 Dunbar's Chapters in the Theory and History of Banking. 
 
 Conant's History of Modern Banks of Issue. 
 
 New York Chamber of Commerce Report on the Currency 
 (October 4, 1906).
 
 CHAPTER XVII 
 RECENT HISTORY 
 
 IT has been the author's aim in the preceding chapters to 
 enable the reader to reach right conclusions in reference to 
 the currency problems now (1908) confronting us. 
 
 The principal defect of our national bank system is the 
 rigidity of its note circulation. In a broad sense the vol- 
 ume of notes is regulated, not by the wants of 
 trade, not by the amount or kind of commer- 
 cial paper offered for discount, but by the mar- 
 ket price of United States bonds. Even if the bonds were 
 sufficient in amount and satisfactory in price, the note circu- 
 lation would still be lacking in the elasticity which should 
 characterize a good system. By elasticity is meant the 
 capacity to increase or diminish in volume in accordance 
 with the needs of the community, and simultaneously there- 
 with. It has been shown in a previous chapter that where 
 note issues are unrestricted the amount of notes outstanding 
 at any time depends not upon the volition of either the 
 banker or the depositor, but upon the public demand. 
 There are some seasons of the year, also, when a greater 
 quantity is wanted than at others, and these familiar ebbs 
 and flows vary in different localities and in different 
 trades. A flexible currency is one which rises and falls 
 in volume harmoniously and simultaneously with these 
 trade movements. 
 
 Note issuing is, to the banker, simply a question of profit. 
 When he buys bonds and deposits them in the Treasury as 
 security for circulation, he virtually buys notes from the 
 
 401
 
 402 BANKING 
 
 government; and his question is whether he can get more 
 profit by such an investment than by using his capital in other 
 ways. Aside from the interest on the bonds, 
 k' s gains arise only from the average amount 
 of his notes which the public will take and 
 hold. There will always be some notes in transit to Wash- 
 ington for redemption and thence back to the bank ; and 
 after they come home they will remain unused for a while. 
 During this period they are unproductive capital. Therefore 
 the banker will take from the government no more notes than 
 he thinks he can keep in circulation. He will hold none for 
 emergencies. Thus the national bank currency remains for 
 long periods nearly uniform in amount, while in countries 
 where notes are issued according to the "banking principle" 
 there is a seasonal outflow and inflow of notes correspond- 
 ing to the greater or less demand for them. The contrast 
 between Canada and the United States in this particular is 
 very marked, as appears from the charts on the next page. 
 
 In every country the alternations of seedtime and harvest 
 have a marked influence upon the currency movement. 
 During the spring and early summer, when the farmers are 
 engaged in planting and tilling their crops, they usually 
 incur debt to the country merchants for household supplies; 
 and the currency movement is then sluggish. When harvest 
 comes, a great deal of work must be done within a short 
 space of time, and this requires a large amount of currency 
 to pay the wages of laborers and to meet the various claims 
 against the farmers which then mature. These seasonal 
 demands are imperative. They come almost simultaneously 
 in large sections of the country. Every other demand for 
 currency is secondary to this, since the only time to harvest 
 the crops is when they are ripe. 
 
 The annual crop movement in Canada is marked by an 
 uplift of the note circulation, while no corresponding rise is
 
 RECENT HISTORY 
 
 403 
 
 observable in the United States. What takes place among 
 us is a withdrawal of the cash reserves of the banks and a 
 
 NOTE ISSUES OF THE CANADIAN BANKS 
 
 1894 
 
 1895 
 
 NOTE ISSUES OF THE NATIONAL BANKS OF THE UNITED STATES 
 
 transference of the same from the commercial centers to the 
 farming districts, causing a contraction of loans and dis- 
 Unnecessa counts to a much larger amount than that of 
 
 Contraction and the cash so withdrawn. A reverse movement 
 takes place after the crops are moved. It is 
 the opinion of good judges that these alternate contractions 
 and expansions exceed two hundred million dollars in both 
 instances. No such unsettlement of bank reserves takes
 
 404 BANKING 
 
 place in Canada because the banks can issue their own 
 notes without cost in the autumn and retire them without 
 cost after they are sent home for redemption. 
 
 When proposals were made in 1892 and succeeding years 
 for a bank-note circulation based on the assets of the banks 
 instead of government bonds, 1 one of the reasons advanced 
 for the change was that with the extinction of the national 
 debt the bond security of the notes would be withdrawn and 
 that the existing system would necessarily come to an end. 
 
 At that time nobody had conceived the idea of extending 
 a public debt already matured if the government had the 
 money with which to pay it and stop the interest. Nobody 
 would have dared to propose it, for at that time the national 
 finances were the leading issue in politics. But new politi- 
 cal issues arose. The Spanish War came. The public mind 
 was no longer centered on finance. So the men in authority, 
 who ought to have foreseen the coming crisis and made 
 plans for bank circulation on some other basis, extended a 
 large part of the maturing public debt for thirty years, al- 
 though they had the money in hand, or in sight, to pay it 
 off and stop the interest. 
 
 In preparation for this step Congress passed the act of 
 
 March 14, 1900, authorizing the Secretary of the Treasury 
 
 to refund the outstanding debt maturing in 
 
 SS n ebt the I 94, '97, and 1908 into new bonds to run 
 
 thirty years, bearing interest at 2 per cent per 
 
 annum. Prior to the passage of this act it had always been 
 
 the policy of the government to pay its interest-bearing debts 
 
 as soon as possible, in order to avoid unnecessary burdens 
 
 upon the taxpayers. To this end bonds redeemable at the 
 
 1 One such proposal was made by the American Bankers' Associa- 
 tion at its annual meeting at Baltimore, in October, 1894. Another 
 was made by the Secretary of the Treasury (Hon. John G. Carlisle), 
 in his annual report of that year.
 
 RECENT HISTORY 
 
 405 
 
 pleasure of the government after some short period were 
 generally preferred. Thus the 5-20 bonds issued during the 
 war were made redeemable at any time after five years but 
 payable at the end of twenty years. Under this system 
 the Treasury could use its surplus revenues to pay bonds 
 at par instead of buying them in the market at a premium, 
 and the money would be restored to the channels of business 
 promptly. 
 
 How this change of policy was carried into effect was 
 shown in the Treasury report for 1904, in the following 
 tabular statement : 
 
 
 3 PER CENTS 
 
 4 PER CENTS 
 
 5 PER CENTS 
 
 TOTAL 
 
 Amount refunded 
 
 
 
 
 
 into 2 per cent 
 consols of 1930 
 Interest saved on 
 
 $II9,26O,OOO 
 
 $351.578,000 
 
 $72,071,300 
 
 $542,909,960 
 
 old bonds to ma- 
 
 
 
 
 
 turity .... 
 Interest to be paid 
 on new bonds to 
 
 27,283,662 
 
 89,852,710 
 
 ^'OS^SSS 
 
 130,186,727 
 
 maturity of old 
 bonds .... 
 Premium paid for 
 old bonds . . 
 Premium received 
 
 l8,l89,I08 
 6,239,833 
 
 44,926.355 
 36,432,250 
 
 5,220,142 
 6,872,572 
 
 68,335.605 
 49,544,655 
 
 for new bonds . 
 Net profit . . . 
 
 4O7,6o6 
 3,262,327 
 
 1,513.778 
 
 10,025,883 
 
 957,641 
 
 1, 939'3 8 4 
 14,245,851 
 
 In this way the policy of the government was reversed, 
 and nearly $550,000,000 of the public debt was put beyond 
 the chance of extinction for nearly a quarter of a century, 
 except by purchase in the open market. For the privilege 
 of making this swap the government paid a bonus of nearly
 
 406 BANKING 
 
 $50,000,000 on the old bonds, of which it recovered less 
 than $2,000,000 as premium on the new ones. 
 
 The foregoing tabular statement purports to show a net 
 profit on the refunding operation by ignoring the interest 
 (amounting to $257,837,642) on the new bonds after the 
 maturity of the old ones. After deducting the apparent 
 profit shown above ($14,245.851), the loss on the whole 
 transaction is enormous, but we cannot reduce it to exact 
 figures, because we do not know how much of the extended 
 debt we might have paid off if it had not been thus extended. 
 We know, however, that a surplus of $240,000,000 was on 
 hand in 1907, .and that the interest on that amount might 
 have been extinguished. Of course the premium on the 
 maturing bonds would have extinguished itself. 
 
 The 4 per cent bonds of 1907 were not all included in the 
 list embraced in the Treasury report quoted above. Some 
 of them were left to run to maturity (July i, 1907), so that 
 
 they might be paid if the government should 
 Loss of Interest. 
 
 then have the money in hand. The govern- 
 ment did have the money, but instead of applying it to that 
 purpose, $50,000,000 of bonds were extended for twenty- 
 three years at 2 per cent interest, and the money which 
 might have been employed in payment of debts was deposited 
 in banks. The interest which the government is thus obli- 
 gated to pay, and which it might have wholly saved in this 
 instance, was $23,000,000 literally cast away by a stroke 
 of the pen. 
 
 The excuse for this kind of financiering was that if the 
 government's interest-bearing debt were paid, there would 
 be a shortage of bonds to be held as security for national 
 bank notes. If that is a good reason for keeping $240,000,- 
 ooo of bonds alive when the government has the money in 
 hand to pay them off, then the same reasoning would justify 
 the selling of new bonds when there is no use for the money
 
 RECENT HISTORY 4O/ 
 
 which they bring in except to deposit it back in the banks. 
 And that is what the Secretary of the Treasury did in No- 
 vember, 1907. Leaving out of account the money paid for 
 the bonds and redeposited in the banks (as equal quantities 
 
 on the opposite sides of an equation cancel 
 
 Bad Financiering. ... , , T i 
 
 each other), this is a case where the United 
 
 States, in its capacity as a government, gives the banker its 
 note bearing semi-annual interest, and payable at the end of 
 thirty years and not before, and in its capacity as a body 
 of citizens takes in exchange the banker's note payable 
 without interest at no particular time. But even this device 
 of extending a debt and continuing needlessly to pay inter- 
 est on it will not suffice much longer, since population and 
 trade are growing more rapidly than our financiers can add 
 to the public debt. Hence the proposal to use other bonds 
 than those of the government as security for national bank 
 notes. 
 
 In 1902 the Secretary of the Treasury (Hon. Leslie M. 
 Shaw), finding the element of elasticity wanting in our cur- 
 rency system, sought to supply the defect with- 
 
 out anv chan g e in the law - He first made a 
 rule changing the security required for the de- 
 posit of government money in national banks. By the terms 
 of the law this security was to be "United States bonds and 
 otherwise," the word " otherwise " having been inserted, as 
 the debates of Congress prove, in order to include the per- 
 sonal bonds of the bank's officers. No record could be 
 
 various Bonds as found of an y deposit having ever been made 
 security for GOV- in a bank on any other collateral security than 
 ernment Deposits. United ^^ ^ Q ^ undl Mr ghaw dedded 
 
 that the word " and " was equivalent to the word " or." State 
 and municipal bonds were accepted under the new rule. In 
 making the announcement of this change of practice, how- 
 ever, the Secretary stipulated that any government bonds
 
 408 BANKING 
 
 released as security for deposits should be used as security 
 for additional bank notes, and in this way an artificial 
 stimulus was applied to the taking out of new circulation. 
 Two years later the Secretary added railroad bonds to the 
 list of securities acceptable for deposits. 
 
 Simultaneously with the foregoing rule Secretary Shaw 
 made another which released the national bank depositaries 
 from the requirement of keeping a cash reserve against 
 government deposits. Although the law requires the reserve 
 to be held by each bank against " the aggregate amount of 
 its deposits," the Secretary argued that the government was 
 abundantly protected by the securities held, and hence that 
 a cash reserve was, in this case, a superfluity. 
 Wo Bank Reserve The New York Clearing House took the view 
 
 against Govern- 
 
 ment Deposits. that the law could not be repealed by the 
 Secretary, and hence that its members should 
 continue to maintain a reserve of 25 per cent against all 
 deposits, including those of the government. The act of 
 Congress of May 30, 1908, however, repealed the reserve 
 requirement as to government deposits. 
 
 In 1903 Mr. Shaw made a fresh ruling, that national banks 
 which have been designated as depositaries of public money 
 are branches of the Treasury, and hence that public funds 
 may be transferred to or from such banks at any time. This 
 rule is of no importance except as showing the drift of the 
 Secretary's mind and his purpose to get the public funds 
 into shape, to be expeditiously moved hither and thither for 
 what he considered to be the advantage of trade and com- 
 merce from time to time. 
 
 In 1896 there was an international movement of gold 
 toward this country, which Mr. Shaw thought needed to be 
 accelerated. He accordingly notified two New York banks 
 privately that if they would engage gold for importation he 
 would deposit an equal amount of the metal in their vaults
 
 RECENT HISTORY 409 
 
 so that they should not lose the interest during the time of 
 transit from the foreign port to the United States, and a few 
 days later he gave public notice that he would do the same 
 
 for other depositary banks. This announce- 
 GoiTimporfs rnent lowered the gold import point and 
 
 hastened the arrival of the amount of metal 
 which the conditions of international trade called for, but 
 did not increase the amount in the aggregate. It had the 
 effect also of giving the depositary banks an advantage 
 over all other persons, firms, and corporations engaged in 
 the business of importing gold. 
 
 In the same year the Secretary made such arrangements 
 for moving the crops in the coming autumn as he thought 
 would avert the usual autumnal pinch. He withdrew $60,- 
 000,000 of public money from the banks and locked it up, 
 in order to have a supply to put out again in the harvest 
 season. On September 27 he announced that $26,000,000 
 
 would be put in the banks to relieve the money 
 
 Moving the Crops. . 
 
 market, but that it should not be used to foster 
 speculation in the stock market. It would be widely dis- 
 tributed far from the purlieus of Wall Street, among the 
 banks of the West and South. In spite of this elaborate plan 
 of campaign the speculators had the best of it. 1 
 
 In his annual report for 1906 Mr. Shaw expressed the 
 opinion that the Secretary of the Treasury ought to be clothed 
 with full power over the bank circulation, so as to expand or 
 
 1 " Notwithstanding his announcement as to the distribution of the 
 deposits, it soon appeared that probably half of the $26,000,000 had 
 found a resting place in the banks of New York. Amounts at first 
 offered to banks in other cities were declined, because the banks 
 could not supply the required collateral, and other deposits actually 
 made in interior cities were reconsigned to New York because of the 
 higher rates of profit there prevailing." " The Treasury and the 
 Banks under Secretary Shaw," by A. P. Andrew, in the Quarterly 
 Journal of Economics, August, 1907.
 
 41 BANKING 
 
 contract it at his own volition. Also that he ought to have 
 
 authority " to require all banks, at certain times fixed by 
 
 him, to slightly and gradually increase their 
 
 Omniscience in reserves and hold the same within their own 
 
 the Treasury . . 
 
 Department. vaults, with corresponding authority to release 
 
 the same from time to time, as in his judgment 
 will best serve the business interests of the country." He 
 did not claim as his exclusive possession the omniscience 
 needed for the exercise of such powers, but generously con- 
 ceded it to all his predecessors and all his successors in 
 office. Shortly after writing this report he ceased to be 
 Secretary of the Treasury. 
 
 All of the acts above enumerated were either violations of 
 the statute law or assumptions of power never contemplated 
 by the law makers. They were glaring examples of " pater- 
 nalism in government," which assumes that the holders of 
 public office know how private business ought to be con- 
 ducted better than business men themselves, and think that 
 their powers ought to be made commensurate with their 
 superior knowledge. The natural and immediate conse- 
 quence of Mr. Shaw's action was that the speculators in 
 Wall Street cast prudence to the winds and clamored for 
 " Treasury relief " whenever their own speculations had pro- 
 duced tightness in the money market. Among the causes 
 of the panic of 1907 the action of the Treasury must be 
 counted as one, and it is to be regretted that Mr. Shaw's 
 policy still rules the Department. It is now paternalism 
 tempered by a deficit.
 
 CHAPTER XVIII 
 THE PANIC OF 1907 
 
 EARLY in October, 1907, there were signs of trouble in the 
 New York Stock Exchange. Prices of securities fell with 
 great violence. On the i6th there was a crash in the market, 
 started by the failure of certain speculators in copper-mining 
 stocks. Public attention was thus directed to a group of 
 banks in the management of which these persons were influ- 
 ential. These banks fell under suspicion and 
 TheKnicker- the rumors extended to other speculators and 
 
 bocker Trust ...... . 
 
 Company. banking institutions supposed to be affiliated 
 
 with them. On the 2ist the National Bank of 
 Commerce announced at the clearing house that it would 
 no longer be responsible for checks drawn on the Knicker- 
 bocker Trust Company, one of the largest, and perhaps the 
 most conspicuous, of the financial institutions of the city. 
 On the following day there was a run on it by depositors, 
 and it closed its doors after paying $8,000,000 over its 
 counter. 1 
 
 With the failure of the Knickerbocker Trust Company the 
 panic became general. Prominent bankers held a meeting 
 at midnight to take measures to stop it, and the Secretary of 
 the Treasury, Mr. Cortelyou, came from Washington and 
 promised to assist. 
 
 On the 23d a run on the Trust Company of America began, 
 and the bankers gave it assistance so that it was able to pay 
 out $13,000,000 in cash in one day without closing its doors. 
 
 1 The Knickerbocker Trust Company was resuscitated after the 
 panic by new subscriptions to its capital stock. 
 
 411
 
 412 BANKING 
 
 On the same day a run was started on the Lincoln Trust 
 
 Company, but was successfully met. There was a renewed 
 
 and heavy break on the stock exchange, and 
 
 S Compares! the rate for cal1 mone y rose to 9 Per cent; 
 time loans could not be had on any terms. 
 The Westinghouse companies of Pittsburg were placed in 
 the hands of receivers for inability to meet maturing obli- 
 gations. 
 
 October 24 the panic reached its height ; call money was 
 not obtainable. A bankers' pool was organized to deal with 
 the situation. By offering $25,000,000 at 10 per cent they 
 broke the deadlock. Secretary Cortelyou deposited $19,- 
 000,000 in the banks. The run continued on the two trust 
 companies, but all demands were met. 
 
 During this time there had been a heavy drain on the 
 New York bank rese'rves from banks in other parts of the 
 country. On the 26th the clearing house decided to issue 
 loan certificates in the mode prescribed in the panic of 1893. 
 This was virtually a general bank suspension, but while most 
 of the banks used their discretion either to pay checks pre- 
 sented at their counters in cash, or to stamp 
 
 ResvT s Bank them "g od throu g h the clearing house," 
 several of them paid all checks presented 
 without any discrimination whatever. The example of New 
 York was followed almost instantaneously by all the clearing 
 houses of the country, including that of Chicago, which had 
 never before issued a loan certificate. A premium on cur- 
 rency made its appearance on'November 2, as in the panic 
 of 1893, and the various devices employed in that year for 
 paying wages and carrying on retail trade by means of small 
 certificates and pieces of stamped cardboard, were repeated 
 everywhere. The premium on currency increased gradually 
 to 4 per cent, as quoted in the newspapers, but in fact it 
 reached 5 and 6 per cent in some instances where large sums
 
 THE PANIC OF 1907 413 
 
 were imperatively required. This was a case where whole- 
 
 sale prices were higher than retail. The exchanges of the 
 
 country were thrown into confusion. On Oc- 
 
 cITrrency n tober 2 9 Chica S drafts on New York were 
 
 quoted at $2.50 per $1000 discount. In other 
 
 places the usual country balances in New York had been 
 so far drawn down that the banks in the interior, although 
 having plenty of cash in hand, could not sell drafts on New 
 York at all. 
 
 It happened that we had been blessed with an abundant 
 wheat harvest, while there had been a shortage in all European 
 countries except France. The price of wheat was accord- 
 ingly the highest that had been known for several years, and 
 the export of this staple gave our bankers an abundance of 
 commodity bills with which to command gold abroad. Ster- 
 ling exchange fell to 4.82 on October 26, and to 4.80 on 
 October 28, on which day $18,750,000 in gold was engaged 
 in London for importation. This movement continued until 
 December 23, during which time $107,000,000 in gold was 
 imported, all of which was paid for with exported grain and 
 cotton. During a part of this movement the quotations for 
 demand sterling were above par (4.86.6), and 
 l even went as high as 4.91, so that some people 
 
 said we were buying gold at a premium. But 
 the quotation 4.91 was not a quotation of cash, but of bank 
 checks that were selling in Wall Street at about 96 cents on 
 the dollar. The premium on currency continued until the 
 last of December. During this interval of two months foreign 
 bills of exchange drawn on American houses, banks, or cor- 
 porations were of uncertain value. They might be paid at 
 par or at varying rates of discount according to the will of 
 the debtor. Interest due on bonds and other obligations 
 held abroad was subject to the same uncertainty, for although 
 legally payable at par, few creditors could afford to lose time
 
 BANKING 
 
 and hire lawyers to bring suit to recover the difference. 
 This was the most humiliating feature of the panic. It justi- 
 fied the saying of a foreign critic that the United States was 
 " a great international financial nuisance." 
 
 On November 17 announcement was made at Washington 
 that the Treasury would come to the relief of the business 
 community by issuing $50,000,000 of Panama canal bonds, 
 and $100,000,000 of one-year 3 per cent certificates of in- 
 debtedness. As both of these operations contemplated the 
 borrowing of money from a market already staggering with 
 the demands upon it, the promised relief was 
 Government 6 never experienced. The design of the Presi- 
 dent and Secretary was to issue a security 
 which, by the offer of 3 per cent interest, would draw hoarded 
 money out of its hiding places, and also to increase the 
 amount of 2 per cent bonds in the market which could be 
 used as security for national bank notes. There was a brief 
 spurt on the stock exchange when this plan was promul- 
 gated, but on the next day the depression was as great as 
 before, and on the three following days it became still greater. 
 Critics said that the proposed issue of certificates was not 
 authorized by law, and that the proposed issue of bonds, 
 if lawful and successful, would be a fresh drain on the cash 
 reserves of the banks which could not be recouped in months. 
 Announcement was subsequently made that 75 per cent of 
 the subscriptions for 3 per cent certificates would be allowed 
 to remain as deposits in the vaults of the subscribing banks 
 and 90 per cent of the subscriptions for Panama bonds. On 
 that basis $25,000,000 of Panama canal bonds were sold and 
 $35,000,000 of 3 per cent certificates. Banking opinion was 
 nearly unanimous that the government's intervention had not 
 been helpful, but the contrary. 
 
 The cause of the panic was the existence of a large num- 
 ber of debts that could not be paid at maturity. Some debts
 
 THE PANIC OF 1907 41$ 
 
 are maturing all the time that cannot be paid. These cause 
 a small crisis in each case, but it is noticed only by the 
 individuals immediately concerned. If all persons who are 
 in debt could pay their obligations when they 
 ^ a ^ ^ ue > there could be no financial crisis, 
 large or small. The cause of an excessive 
 amount of debt that cannot be paid, must be sought in the 
 varying conditions of trade, which are simply the indices of 
 varying states of the public mind. 
 
 There are periods when all or nearly all men in business 
 are very hopeful and enterprising. They are then apt to 
 extend their business and take risks. They are eager to 
 borrow money, purchase goods on credit, enlarge their works, 
 buy more land, erect new buildings, buy stocks on margin, 
 in other words, to speculate. The prices of the things 
 bought are forced up by the competition of buyers, but the 
 necessity always exists of paying for the things purchased 
 and meeting the obligations incurred in terms of gold dollars. 
 
 A time comes in the upward rush when this cannot be 
 done because the prices are too high. Then the speculators 
 begin to fail. Those whose liabilities are largest in propor- 
 tion to their capital fail first. Their failure brings down 
 others, who, in ordinary times, would " pull through," even 
 though they might incur losses through improvident ven- 
 tures. Presently the whole business community perceives 
 a danger impending the danger that any person owing 
 money and not having it in his immediate possession may 
 not be able to get it. This starts the panic. 
 
 Perhaps the most striking phenomenon of the panic was 
 the rush of the country banks to draw their money out of 
 the central reserve cities, where the bulk of it was held. 
 This proves that there is much human nature in bankers, 
 but it proves even more conclusively that our banking sys- 
 tem is behind the age and needs betterment.
 
 CHAPTER XIX 
 PRESENT PROBLEMS 
 
 THE panic of 1907 directed public attention sharply to 
 the currency question as an unsolved problem, and it soon 
 became apparent that there was a preponderance of opinion 
 among the commercial classes in favor of " asset currency." 
 The supporters of the latter system, as opposed to the ex- 
 isting bond deposit system, hold that a bank 
 note is the same in principle as a deposit pay- 
 able on demand, and that the same percentage 
 of cash reserve that suffices for the one will suffice for the 
 other. They maintain that the assets, i.e., the short-time and 
 constantly maturing obligations of the bank's customers, are 
 a better basis for the prompt redemption of all of the bank's 
 obligations than any long-time securities, and that asset cur- 
 rency adjusts itself automatically to the public demand and 
 hence is an elastic currency. 1 
 
 Many commercial bodies took action on the currency 
 question after the panic came, but two important ones be- 
 gan to investigate it in a systematic way, earlier, the New 
 York Chamber of Commerce and the American Bankers' 
 
 1 Mr. Alexander Gilbert, president of the New York Clearing 
 House, testified before the House Committee on Banking and Cur- 
 rency, April 13, 1908, that his bank made loans of $25,000,000 to $30,- 
 000,000 on commercial paper in 1907, and that the losses on such 
 paper for fifteen months (to April i, 1908), including the whole of the 
 panic, had not exceeded one-fifth of one per cent. In this computa- 
 tion he had reckoned as losses all paper not paid at maturity, although 
 a large percentage or even the whole might be eventually collected. 
 New York City bonds had declined in the same period 13.3 per cent. 
 
 416
 
 PRESENT PROBLEMS 417 
 
 Association, both of which decided in favor of an asset 
 currency, with some differences of detail. 1 The former pre- 
 ferred a central bank if such an institution were feasible, 
 but evidently did not consider it practicable in a political 
 sense. The latter prepared a bill for an asset currency and 
 forwarded it to Congress for consideration. 
 
 The prime defect of the existing system is the requirement 
 that the bank shall purchase its circulating notes by deposit- 
 ing an equal or greater value in the Treasury beforehand. 
 In this way the element of credit is expunged, 
 Defect of the an( j the only benefit remaining is the greater 
 
 Bond Deposit . . . 
 
 System. convenience in carrying and handling paper 
 
 instead of metal. After the notes are bought 
 a loss can be avoided by the banker only by keeping them 
 in circulation. He receives only ij per cent interest on his 
 deposited bonds after paying the circulation tax. 2 The mo- 
 ment the notes come back to him they begin to burn his 
 pocket. The Canadian banker loses nothing by locking up 
 his circulating notes after the demand slackens, since they 
 did not cost him anything in the first instance. 
 
 For the foregoing reasons our banker will not take out 
 more notes than he thinks he can keep in circulation all 
 or nearly all the time. He will not provide himself with a 
 surplus for harvest time or other emergencies. Such a cur- 
 rency cannot be elastic. It will be just as rigid and inelastic 
 when based upon state and municipal bonds as it is now. 
 
 The question may be asked, Why did we have a panic in 
 the autumn of 1907, and a general bank suspension lasting 
 two months, while no other country was thus afflicted, and 
 
 1 See Appendices A and B. 
 
 2 The comptroller of the currency, in his report for 1907, shows 
 that the banker's profit on circulation, after deducting all expenses, 
 is only 0.95 per cent in excess of the profit he could get by lending at 
 6 per cent the money invested in the deposited bonds.
 
 418 BANKING 
 
 even our neighbors in Canada avoided the cataclysm ? The 
 trade conditions of Canada were akin to our own, if not 
 worse, and she is now suffering the consequences of specu- 
 lation and trade reaction, but without becoming like our- 
 selves "an international financial nuisance." The reason is 
 not far to seek. Canada has a credit system 
 
 NO Panic in under which the banks have no motive for 
 
 Foreign Countries 
 
 in 1907. depleting each other s reserves. There are 
 
 thirty-five banks in the Dominion, with 1841 
 branches, situated in 1016 towns. None of the branch banks 
 can make a run on its parent bank. None of the parent 
 banks would make a run on the others even if it could, be- 
 cause a common interest binds them together, and they are 
 not too numerous to have a common understanding. As they 
 do not make runs on each other the public do not make 
 runs on them. In England, France, Germany, and the other 
 European countries, the bank reserves are even more scien- 
 tifically guarded and husbanded. The ultimate cash reserve 
 in each country is in one central bank. 1 No inferior bank 
 in any crisis will draw more from the central bank than it 
 really needs. No individual will draw from it more than he 
 wants to-day, for fear that he may not be able to get it to- 
 morrow or next week. What happens among us when a panic 
 
 1 Mr. F. S. Mead, in the Quarterly Journal of Economics (May, 1907), 
 gives a computation of the ultimate cash reserves held in the United 
 States, Canada, and Great Britain, consolidating the institutions of 
 all kinds, in each country, that do a banking business. Thus the 
 banks in the United States, national, state, and private, are treated 
 as a whole, the deposits which they make with each other being elimi- 
 nated. The liabilities of the banks to the public, including that of 
 circulating notes and government deposits, in November, 1906, were 
 approximately $9,945,615,713, and the cash in hand, $969,904,523 O r 
 9.73 per cent. But assuming that $25,000,000 of the reserves of state 
 banks and trust companies consisted of national bank notes which 
 cannot be termed cash, the reserve would be reduced to 9^ per cent. 
 The national banks alone held 13.39 per cent against individual and
 
 PRESENT PROBLEMS 419 
 
 comes was thus described by a witness of all the panics that 
 have visited us since the New York Clearing House was 
 organized : 1 
 
 By far the largest cause of currency hoarding is the fact that 
 the batiks throughout the country all proceed to fortify themselves. 
 There are 6600 national banks, all of them outside of New York, 
 hoarding centers, I will not say all of them, but the majority of 
 them, hoarding centers, dominated by an idea of self-preserva- 
 tion, each seeking to fortify its own reserves. And why is that? 
 Simply because there is no central agency of relief to which they 
 can apply for help in time of trouble. Every banker feels that he 
 must stand alone. 
 
 These facts emphasize the advantages of a central bank 
 like those of Europe, or a system of branch banks like those 
 of Canada and of Scotland, as a preventive of bank suspen- 
 sion. But in every case where branch banking has achieved 
 
 great success it has been coupled with sub- 
 Branch Banks. . 
 
 stantial freedom of note issue. However use- 
 ful it may be as a means of economizing cash reserves, it is 
 still more so as an instrument of credit. A Scotch bank with 
 one hundred branches does not divide its cash reserve into 
 one hundred parts. It lends its notes at the branches and 
 
 government deposits and circulation. The state banks and trust 
 companies held 6.35 per cent and the private banks 5.24 per cent. 
 
 The reserves of the Canadian banks against circulation and de- 
 posits at the same period (1906) were 9.09 per cent cash in hand, but 
 10.88 per cent if we count, as is proper, their deposit balances in 
 banks in foreign countries. 
 
 The ultimate banking reserve of Great Britain was found by 
 Mr. Mead to be 7.6 per cent, counting Bank of England notes as 
 cash, or 6.5 per cent in specie alone. The reserve of the joint stock 
 banks was only 5.5 per cent in specie and bank notes together, or 3.8 
 percent in specie alone. 
 
 1 Testimony of Alexander Gilbert before the House Committee on 
 Banking and Currency, April 13, 1908.
 
 420 BANKING 
 
 redeems them at the head office. A multiplicity of reserves 
 is dispensed with, local redemption is unnecessary. Economy 
 of capital, of time, and of labor are here conjoined, but this 
 would not be possible without practical freedom of note 
 issue. A Canadian bank may receive deposits in Halifax 
 to-day and lend them in .Winnipeg to-morrow, 
 ^Note issued because it can issue its notes promptly at the 
 latter place. If it were obliged to wait till it 
 could transmit the money from Halifax by express, time and 
 interest would be lost. If it could not issue its own notes 
 without first buying bonds, lodging them in a government 
 office, and " taking out " currency, the entire profit of the 
 loan might be dissipated. 
 
 The questions whether the law ought to fix a minimum 
 cash reserve for banks, and if so what the reserve should 
 consist of, are occasionally brought into debate. The United 
 States is the only country which requires a fixed percentage 
 of reserve and this is only for national banks. Ordinarily, 
 however, the national banks keep a larger reserve than the 
 law prescribes, and the country banks fre- 
 quently keep a larger percentage than those 
 of the cities, although their legal requirement 
 is less. Therefore it cannot be said at the present time that 
 the law is a hardship to any class. Among thousands of 
 banks scattered over a wide territory there will always be 
 some reckless or ignorant or unprincipled managers who, in 
 their eagerness for profit, will allow their reserves to fall 
 below the danger point. In other kinds of business the 
 penalty of bankruptcy is the most fitting end to recklessness 
 in business, but in the banking world a fire once started is 
 apt to spread rapidly. One failure begets others and may 
 bring ruin upon a whole community. Therefore the legal 
 reserve provision of our national bank act must be con- 
 sidered wise under present conditions.
 
 PRESENT PROBLEMS 421 
 
 Should a bank be allowed to count the notes of other 
 banks as a part of its cash reserve ? Nobody would think 
 of allowing a bank to count its own notes, which are its 
 debts, as a part of its cash. Obviously, then, it would not 
 be wise to allow two banks to count each other's notes as 
 reserves. Such a result might be achieved by 
 serves* 6 simply exchanging notes, and then they might 
 
 report full reserves when they had no real cash 
 at all. This would be an infraction of law, but if there were 
 sufficient motive for it, ways for concealing it could be easily 
 devised. Indeed, it is a common belief among bankers that 
 the reserves consist in part of national bank notes now, 
 which are included in the mass of reserves in order to avoid 
 the trouble of sorting them out and sending them to Wash- 
 ington for redemption. It is most desirable that they should 
 be so sent, since it prevents stagnation of the note currency. 
 It compels each bank to keep its assets in a liquid state, so 
 that it may always have the means of redemption in legal 
 tender at hand. Under the Suffolk system the 
 bank notes of the New England states were 
 redeemed, on the average, ten times each 
 year ; and there can be no doubt that the spur of frequent 
 redemption was a most potent aid to sound banking. Our 
 national bank act needs amendment in its note-issuing 
 feature, not in the direction of making redemption more 
 sluggish than it now is, but the contrary. Elasticity of the 
 note circulation, which was so marked under the Suffolk 
 system and which prevails in Scotland and in Canada, re- 
 quires frequent redemption of note issues. Expansion of the 
 currency, when need arises, implies contraction when it has 
 passed away. The one process is the complement of the 
 other. 
 
 Advocates of the policy of allowing national banks to 
 count each other's notes as cash reserves point to the fact
 
 422 BANKING 
 
 that state banks are authorized by law to use them as such 
 in New York and in some other states. The answer is that 
 a bad practice ought not to be extended. The state laws 
 ought to be changed in this particular so that nothing but 
 money of full legal tender should be used as bank reserves, 
 and preferably gold. It is true that Bank of England notes 
 are counted as reserves in Great Britain, but they are legal 
 tender and are now issued by the bank only in exchange 
 for gold. 
 
 Most of the plans proposed for an elastic note system 
 provide for a special tax on what is called " emergency cir- 
 culation." This is a misleading phrase. It im- 
 plies that there is a fixed standard of quantity 
 in bank-note circulation, regardless of the 
 state of trade, and that any demand for notes above that 
 sum is an emergency. 1 If that were true it would constitute 
 no reason for imposing an extra tax on the currency issued 
 to meet it, since the tax would tend to defeat the very pur- 
 pose for which it was issued. It is said that the tax is 
 
 1 Mr. James B. Forgan, in his testimony before the House Commit- 
 tee on Banking and Currency, gave an additional reason for discarding 
 the phrase " emergency currency," in answer to a question put to him 
 by Mr. Prince of Illinois, thus : 
 
 " Mr. Prince. Do you think there is now need of emergency cur- 
 rency legislation ? 
 
 "Mr. Forgan. I do not; and I do not think that a condition can 
 ever exist in this country or any other country that will warrant the 
 
 use of the issue of anything that could bear such a 
 "What 'sin a ... . 
 
 Name?" terrifying name as 'emergency currency, because as 
 
 soon as you use it, and you say that a single bank 
 has issued emergency currency, you have got the whole of your deposi- 
 tors on your back. Now, suppose that emergency does exist; if they 
 believe an emergency exists, they will do as they have always done, 
 run on the banks. A proper currency prevents any such thing as 
 an emergency ever getting into the minds of the public. They never 
 know that an emergency exists."
 
 PRESENT PROBLEMS 423 
 
 intended to prevent inflation, by driving the notes home 
 when they are no longer needed. But there is no way to 
 determine when inflation exists except by the return of the 
 notes to the issuing banks. An emergency 
 The Proposed exists when there is a demand on the banks 
 
 laX. 
 
 for additional notes. Inflation exists when the 
 reverse process sets in. There is no other criterion. A tax 
 to prevent inflation is a superfluity. 
 
 The German bank law imposes a tax at the rate of 5 per 
 cent on circulating notes of the Reichsbank in excess of the 
 cash reserve, but the tax is not imposed for the purpose 
 of sending the notes home. This is made clear by the fact 
 that the notes are generally loaned at a less 
 rate ^ i nterest th an th e tax itself frequently 
 at rates ranging from 3 to 4^ per cent. In the 
 period from January i, 1901, to July 7, 1906, there were 
 thirty-seven occasions of overissue. In only twelve of these 
 cases was the interest rate as high as the tax, while there 
 were twenty-five when it was lower than the tax. Such 
 emergencies in Germany come and go before the public 
 are aware of them. 
 
 The Chamber of Commerce Committee and the American 
 Bankers' Commission, in their respective reports on currency 
 reform, in 1906, recommended the imposition of special taxes 
 at varying rates on circulating notes in excess of a certain 
 percentage of the capital of the issuing bank. Both followed 
 the German example in the matter of the tax, but for differ- 
 ent reasons the former " for the prevention of excessive 
 issues," the latter to " produce a guaranty fund sufficient to 
 redeem the notes of failed banks." The latter is the more 
 rational of the two. Obviously a time would come when the 
 guaranty fund would be full, and then presumably the tax 
 would cease.
 
 CHAPTER XX 
 THE CENTRAL BANK QUESTION 
 
 LOOKING at the past we find that we have had an average 
 of one general bank suspension for each decade since 1837, 
 while Europe has had none during the past 
 ofcre fl dit ti0n fift y y ears except those due to non-financial 
 causes, such as wars or the action of govern- 
 ments. The saving quality of the European methods con- 
 sists in the fortification of credit by a central bank. 
 
 Business conditions in the United States in 1907 were 
 similar to those prevailing in other civilized countries, but 
 our resources were greater in the aggregate than those of 
 any other. This is proved by the fact that we were able to 
 draw $107,000,000 of gold from the world's supply in the 
 short space of two months by bills of exchange drawn 
 against our current exports. Yet we alone suspended. 
 
 The central bank of the Old World type is a bank of banks. 
 Its primary function is to rediscount bills of exchange which 
 have their origin in various parts of the country and which 
 pass through inferior banks whose indorse- 
 
 ment the y bean These bills f exchange 
 must be backed by two or more names of un- 
 doubted solvency, must run not more than ninety days, and 
 must represent actual business transactions. All bills of this 
 kind will be discounted by the central bank, which will give 
 in exchange cash, or its own notes redeemable in gold on 
 demand. The bank does not incur a deposit liability in the 
 act of discounting bills. 
 
 The bank also makes advances, in the discretion of the 
 managers, on goods unsold and on securities, but not as a 
 
 424
 
 THE CENTRAL BANK QUESTION 425 
 
 matter of course, and not to an unlimited amount. Such 
 advances are placed in a different category from that of bills 
 of exchange. 
 
 The power of note issue is granted to the central bank in 
 Germany on condition that it shall hold a cash reserve of 
 not less than 33 per cent against the same. All the revenues 
 
 of the government are deposited in the bank, 
 Its Note Issues. . 
 
 and its disbursements are made by checks 
 
 drawn on the bank. The "shareholders of the bank are pri- 
 vate individuals. In Germany the bank is managed by the 
 government; in France by the government and the share- 
 holders together, the government being supreme; in Eng- 
 land by the shareholders alone. 
 
 The issue of the bank's notes, as above described, takes 
 place in obedience to the demands of business and simul- 
 taneously therewith. The notes return to the bank in pay- 
 ment of maturing bills, or as deposits at the 
 BankReserves head bank or its branches. Thus the credit 
 of the country is organized to carry on the 
 business of the country with the minimum of cash. The cur- 
 rency is perfectly elastic. No inferior bank and no indi- 
 vidual has any motive to draw on the reserves of the central 
 bank for purposes of internal trade. No drain upon those 
 reserves can take place except when gold is wanted for ex- 
 port. In such cases, if the drain becomes heavy, the bank 
 raises the rate of discount till it ceases. 
 
 Drains on the bank reserves in the United States usually 
 run in the contrary direction. They are internal, not exter- 
 nal. In the recent panic the depletion of bank reserves was 
 most violent while we were importing gold from abroad. 
 The country banks were draining the city banks. Mr. J. 
 B. Forgan 1 said that during the week before the 28th of 
 
 1 Testimony before the House Committee on Banking and Cur- 
 rency, April 15, 1908.
 
 426 BANKING 
 
 October the First National Bank of Chicago alone shipped 
 $7,000,000 out of a legal reserve fund of $15,000,000 "for 
 the purpose of taking care of country banks who feared 
 that there was going to be a panic and made 
 HOW Banks drain a drive at the nearest reserve city they had." 
 
 Each Other in the . J J 
 
 United states. This was before private depositors had made 
 ^S. any run on the banks at all. Twelve thousand 
 small banks were drawing simultaneously from the large 
 banks of the reserve cities, reducing the big piles of cash 
 that the public were accustomed to see reported in the news- 
 papers, and accumulating twelve thousand small piles that 
 the public never saw or heard of. No wonder if the private 
 depositors took the alarm also. 
 
 Apparent obstacles to the adoption of the central bank 
 system in this country are twofold : first, the wide extent of 
 the territory to be served; second, the habits of our people, 
 who are accustomed to a system based upon 
 Bank Feasible? individualism. Are these difficulties insuper- 
 able? The Second Bank of the United States 
 and President Jackson's war against it will doubtless occur 
 to readers as a warning against fresh experiments of that 
 kind. But President Jackson had no objection to a bank 
 controlled by the government. In fact he recommended 
 one to Congress at the time when he was fighting against 
 " Biddle's bank." Our habit of falling prostrate once in 
 every ten years, and exposing ourselves to the jeers of man- 
 kind, is the worst banking habit we have, and the one which 
 we could most advantageously lay aside. 
 
 Most of the plans for banking reform now or lately under 
 discussion contemplate the cooperation of 
 banks in a certain number of geographical 
 units. The aim is to bind them together like 
 the bundle of sticks with which the old man in the fable in- 
 structed his sons. The idea is an outgrowth of the clearing
 
 THE CENTRAL BANK QUESTION 427 
 
 house association. It seeks to utilize the same for other 
 purposes than that of clearing. It is the nucleus of the bill 
 passed at the recent session of Congress, and was embodied 
 in the Fowler bill also. Thus the country has turned its 
 face toward centralization, and the question is whether pub- 
 lic opinion is prepared to go farther in the same direction. 
 
 In a recent brochure suggestions have been made for 
 overcoming the obstacles mentioned above.' The plan pro- 
 poses a central bank with a capital of $100,000,000, to be 
 owned for the first ten years wholly by the 
 ^.government, and afterwards by private indi- 
 viduals, if then deemed advisable, but with 
 dividends limited to 4 per cent per annum. The country 
 is to be divided into Bank District Associations, not more 
 than twenty in number, membership in which shall be volun- 
 tary and open to any bank situated therein, state or national. 
 Each District Association shall be entitled to one seat in 
 the general council of the central bank, which shall consist 
 of forty-one members. The Secretary of the Treasury, the 
 Comptroller of the Currency, the Treasurer of the United 
 States, three senators and three representatives shall be 
 members of the council, and the shareholders shall elect 
 twelve members. During the first ten years all of the twelve 
 shall be chosen by the government. 
 
 The central bank would have power to issue circulating 
 
 notes payable in gold on demand, against a reserve of not 
 
 less than 33^ per cent gold and 66J per cent 
 
 central Bank commercial paper, having not more than ninety 
 
 days to run. There is no other limitation on 
 
 the issues. Commercial paper must consist of foreign bills of 
 
 exchange or " certificates of guaranty " issued by the Bank 
 
 District Associations. The certificates of guaranty are to be 
 
 the equivalent of the domestic bills of exchange discounted 
 
 by the central banks of the Old World. Each certificate must
 
 428 BANKING 
 
 specify the nature of the collateral security held for it, which 
 collateral may embrace ordinary commercial paper, United 
 States bonds, state and municipal bonds, and first mortgage 
 railroad bonds, approved by the. Secretary of the Treasury. 
 The collateral need not be transferred to the custody of the 
 central bank. Loans may be made by the central bank to 
 the District Associations in the form of deposits, on the same 
 kind of security, and deposits may be made in the central 
 bank by members of the District Associations, which de- 
 posits may be counted as a part of their legal reserves. 
 Deposits are not to be received from other persons or cor- 
 porations. All loans to District Associations will be made 
 in cash or in the bank's demand notes, which shall be re- 
 ceivable by the government and by other banks, the same 
 as the existing national bank notes. The central bank shall 
 receive all the government revenues without giving special 
 security therefor, and shall pay out the same as may be 
 directed by law. 1 
 
 The comptroller of the currency, 2 in his annual report 
 for 1907, makes a strong argument in favor of a central 
 bank. He thinks that if we had had such a bank, there 
 
 would have been no general bank suspension 
 The Comptroller , 
 
 of the Currency l as t year. He thinks also that we shall COn- 
 favors a Central tinue to have such suspensions from time to 
 
 Bank. 
 
 time " until we learn the plain lesson from 
 experience, and adopt the only efficient, scientific, and proper 
 means to protect our people in business from such disasters." 
 
 1 The author of this plan for a " modified central bank of issue" 
 is Mr. Paul M. Warburg, of New York City, who is also the writer of 
 an essay on " American and European Banking Methods," in the 
 volume entitled 77ie Currency Problem ami the Present Financial Situa- 
 tion, issued by the Columbia University Press, 1908. 
 
 2 Hon. William B. Ridgely, comptroller of the currency, the author 
 of the report here referred to, has resigned his office to take the presi- 
 dency of a bank in Kansas City.
 
 THE CENTRAL BANK QUESTION 429 
 
 He would recommend that the capital stock of the central 
 bank be owned by the national banks in proportion to their 
 capital, and that subscription thereto be obligatory the 
 stock to be non-transferable, any shares owned by banks 
 which go into liquidation being returned to the central bank 
 and canceled. 1 He would have two-thirds of the directors 
 of the bank chosen by the shareholders, and one-third by the 
 government, the latter to have -a power of veto, as the gov- 
 ernment of France has in the affairs of its central bank. 
 The regular dividends should be limited, and all profits 
 above 3 or 4 per cent should be divided, one-fourth to the 
 shareholders and three-fourths to the government, as in 
 Germany. It would be well also to provide that no share- 
 holding bank should have more than a given number of 
 votes, however large its capital. 
 
 The comptroller's plan obviates the objection of paternal- 
 ism which might be raised against a central bank owned 
 by the government. Although this objection 
 
 Desirable may be more imaginary than real, it is well to 
 
 Features of Ms J . 
 
 Plan. bear in mmd that popular elections bring un- 
 
 certain results, and that it is best to minimize 
 the interference of the government with the business of the 
 people. We have too much paternalism in banking now. 
 The comptroller's plan also provides easily for the capital 
 needed to start a central bank, whereas the government is 
 not likely to have the money to spare for that purpose soon. 
 
 For the sake of economy of time and labor the location 
 of a central bank should be at the commercial center of the 
 nation. 
 
 The principal banking peeds qf [ftf /-! nn try nro~ 
 
 i. A credit currency which shall rise and fall rhythmically 
 with the pulsations of business, and shall be redeemable in 
 gold with ease and frequency. 
 
 1 The corporation of the Associated Press is organized on this plan.
 
 430 BANKING 
 
 2. A fortification of banking credit which shall inspire 
 confidence that all solvent persons and corporations engaged 
 
 in the work of production shall always be able 
 Conclusion. . . 
 
 to obtain the necessary bank accommodation 
 
 for carrying on their legitimate, non-speculative business. 
 
 The former desideratum is obtainable by means of an 
 "asset currency," and the latter by the agency of a central 
 bank. There may be other ways of accomplishing the same 
 ends. 
 
 RECAPITULATION 
 
 A central bank is the keeper of the ultimate gold reserve 
 of the nation, which it regulates by raising or lowering the 
 rate of discount. Its chief function is the rediscounting of 
 commercial paper for other banks. It organizes credit by 
 requiring that all paper offered for discount shall be sound, 
 and that all such paper offered shall be discounted at a uni- 
 form rate of interest. It has the power of note issue limited 
 only by its cash reserve. The power of note issue is not 
 necessarily exclusive, but it has been found in practice that 
 other banks in the same country, which have that power, 
 gradually abandon it without compulsion. The organization 
 of credit by means of a central bank of sufficient capital pre- 
 vents panics by assuring the commercial community that all 
 persons worthy of credit can at all times obtain it. A central 
 bank may or may not be controlled by the government. Its 
 usual form of control is in part by the government and in 
 part by private shareholders.
 
 APPENDIX A 
 
 NEW YORK CHAMBER OF COMMERCE REPORT ON 
 THE CURRENCY 
 
 THE year 1906 marked a considerable advance of public 
 opinion in the direction of currency reform. A special com- 
 mittee of five members of the Chamber of Commerce of New 
 York was appointed by that body in the month of March to 
 inquire into the condition of the currency and to suggest 
 desirable changes, Mr. John Claflin being the chairman, and 
 Mr. Joseph French Johnson the secretary. The committee 
 made an investigation of our own national banking system 
 and of the systems of foreign countries and submitted a 
 report on the first of October following, recommending the 
 creation of a central bank of issue like those of Germany 
 and France, under the control of the government, which 
 bank should have branches in the principal cities and should 
 have dealings only with banks; its stock to be owned in part 
 by banking institutions, and in part by the government, but 
 in its management the government to be supreme. The 
 central bank should have power to issue currency, redis- 
 count for other banks, hold public money, and act as agent 
 of the government in redeeming its paper money and making 
 its disbursements. 
 
 If a central bank should not be deemed advisable by Con- 
 gress, the committee made the following recommendations 
 in lieu thereof : 
 
 Let any national bank whose bond-secured circulation equals 
 50 per cent of its capital have authority to issue additional notes 
 equal in amount to 35 per cent of its capital.
 
 432 APPENDIX 
 
 Let such additional notes be subject to a graduated tax as , 
 follows : the first 5 per cent, taxed at the rate of 2 per cent per 
 annum ; the second 5 per cent, taxed at the rate of 3 per cent ; 
 the third 5 per cent, taxed at the rate of 4 per cent ; then an issue 
 equal to 10 per cent of capital, taxed 5 per cent; then an issue 
 equal to 10 per cent of capital, taxed 6 per cent. 1 
 
 Let the proceeds of this graduated tax constitute a guaranty 
 fund, in the custody of the government, for the redemption of the 
 notes of failed banks. 
 
 To insure the prompt retirement of notes when not needed, 
 let redemption agencies be established at sub-treasuries and other 
 convenient points. 
 
 Let all the notes of a bank be alike in form, and let it be the 
 duty of the United States Treasury to redeem all the notes of a 
 failed bank, as at present, in full on presentation, and to recoup 
 itself from the assets of the failed bank and from the guaranty 
 fund. 
 
 That the law restricting the retirement of national bank 
 notes to $3,000,000 per month by the deposit of lawful money be 
 repealed. 
 
 That future issues of United States bonds be not made avail- 
 able as a basis for the issue of national bank notes. 
 
 That the laws regulating the operations of the United States 
 Treasury be amended in such a manner that they shall not, as 
 now, interfere with the money market ; and to this end we sug- 
 gest a law requiring that all money in the general fund of the 
 Treasury above a reasonable working balance be deposited in 
 national banks. 
 
 The report was adopted by the Chamber of Commerce 
 after debate by a nearly unanimous vote. It did not receive 
 any attention from Congress. 
 
 1 The declared object of the graduated tax was " the prevention of 
 excessive issues."
 
 APPENDIX B 
 
 AMERICAN BANKERS' COMMISSION REPORT ON 
 THE CURRENCY 
 
 SIMULTANEOUSLY with the foregoing investigation, a simi- 
 lar one was in progress at the hands of a Commission ap- 
 pointed by the American Bankers' Association at its annual 
 meeting. This committee consisted of fifteen members, of 
 which Hon. A. B. Hepburn was the chairman. The committee 
 made a report on the first of November, 1906. They were 
 unanimously of the opinion that the present currency was 
 not responsive to the demands of commerce and that it re- 
 quired change. " It does not expand," they said, "with the 
 need for currency in the crop-moving period, causing strin- 
 gency, nor does it contract when the uses for currency are less 
 extensive, causing redundancy. We find that the banks are 
 under the necessity of parting with their reserve money to 
 supply the demand for currency at certain seasons, although 
 that demand would be quite as well satisfied if banks could 
 supply their credit notes instead of depleting their reserves 
 and causing a contraction injurious to business. ... A bank 
 note is essentially the same in principle as a deposit payable 
 on demand. It is a book deposit converted into such form 
 that it passes current. It resembles in character a demand 
 certificate of deposit, or a cashier's check simply a current 
 deposit liability of the bank." 
 
 On the i8th of January, 1908, the Commission held a 
 meeting at Chicago and embodied their views in the 
 
 433
 
 434 APPENDIX 
 
 following bill for enactment, if it should be found accept- 
 able by Congress : 
 
 Be it enacted by the Senate and House of Representatives of the 
 United States of America, in Congress assembled, that from and 
 after the passage of this Act, any national banking association 
 which has been in business for one year, and has a surplus fund 
 equal to twenty per centum of its capital may take out for issue 
 and circulation national bank notes without a deposit of United 
 States bonds as now provided by law. Said notes shall be known 
 as " National Bank Guaranteed Credit Notes." Said notes shall 
 be issued in such form and denominations, and under such rules 
 and regulations as the Comptroller of the Currency shall fix. The 
 amount of said notes so taken out by any national banking asso- 
 ciation may be equal to forty per centum of the amount of its 
 national bank notes at any time outstanding, which are secured 
 by the deposit of government bonds, but shall not exceed in 
 amount twenty-five per centum of its capital ; provided, however, 
 that if at any time in the future the present proportion of the total 
 outstanding unmatured United States bonds to the total capitali- 
 zation of all national banking associations in active operation 
 shall diminish, then the authorized issue of national bank guaran- 
 teed credit notes shall be increased to a correspondingly greater 
 percentage of the bond-secured notes. 
 
 SEC. 2. That every national banking association taking out 
 national bank guaranteed credit notes in accordance with the fore- 
 going section, shall pay to the Treasurer of the United States in 
 the months of January and July a tax of one and one-quarter 
 per centum upon the average amount of such notes in circulation 
 during the preceding half year. 
 
 SEC. 3. That any national banking association which has taken 
 out national bank guaranteed credit notes in accordance with the 
 provisions of section I of this Act, may take out a further amount 
 of national bank guaranteed credit notes equal to twelve and one- 
 half per centum of its capital, but it shall pay to the Treasurer of 
 the United States in the months of January and July a tax of two 
 and one-half per centum upon the average amount of such notes 
 in circulation during the preceding half year.
 
 AMERICAN BANKERS' COMMISSION REPORT 435 
 
 SEC. 4. That the total amount of bank notes issued by any 
 national banking association, including national bank guaranteed 
 credit notes taken out in accordance with the provisions of this 
 Act, shall not exceed the amount of its paid-up capital. 
 
 SEC. 5. That any national banking association situated and 
 doing business in a central reserve city, or a reserve city, shall 
 at all times have on hand in lawful money of the United States, 
 an amount equal to at least twenty-five per centum of its national 
 bank guaranteed credit notes in circulation ; and every other 
 national banking association shall at all times have on hand in 
 lawful money of the United States an amount equal to at least 
 fifteen per centum of its guaranteed credit notes in circulation ; 
 provided, however, that any national banking association situated 
 and doing business in a reserve city may keep one-half of its law- 
 ful money reserve on deposit in a national bank in a central re- 
 serve city, or in a reserve city, and that every national banking 
 association situated and doing business outside of a central re- 
 serve city, or a reserve city, may keep three-fifths of its lawful 
 money reserve, on deposit in a national bank in a central reserve 
 city, or in a reserve city. 
 
 SEC. 6. That the taxes upon national bank guaranteed credit 
 notes, provided for in sections 2 and 3 of this Act, shall be paid 
 in lawful money to the Treasurer of the United States. Said 
 taxes, when received, shall constitute a guaranty fund to redeem 
 the notes of failed banks, and to pay the cost of printing and 
 current redemption. 
 
 SEC. 7. That when any national banking association takes out 
 any national bank guaranteed credit notes for issue and circula- 
 tion, it shall deposit with the Treasurer of the United States in 
 lawful money an amount equal to five per centum thereof. The 
 amount so deposited shall be placed in the guaranty fund for the 
 purposes thereof. But said amount shall be refunded to the re- 
 spective banks as soon as the taxes provided for in sections 2 and 
 3 of this Act maintain said guaranty fund above five per centum 
 of the maximum amount of national bank guaranteed credit notes 
 taken out for issue and circulation, but that no bank shall with- 
 draw any part of its deposit of said five per centum until it shall 
 have to its credit in said fund more than five per centum.
 
 43 6 APPENDIX 
 
 SEC. 8. That the Comptroller of the Currency shall designate 
 certain cities conveniently located in the various sections of the 
 United States for the current daily redemption of said national 
 bank guaranteed credit notes ; he shall fix rules and regulations 
 for such redemption ; and, before authorizing and permitting any 
 national banking association to take out for issue and circulation 
 any national bank guaranteed credit notes, he shall require such 
 bank to make arrangements satisfactory to him for the current 
 daily redemption of such notes in every redemption city so 
 designated. 
 
 SEC. 9. That said national bank guaranteed credit notes, issued 
 in accordance with the provisions of this Act,*shall be received at 
 par in all parts of the United States in payment of taxes, excises, 
 public lands, and all other dues to the United States, except 
 duties on imports ; and also for all salaries and other debts and 
 demands owing by the United States to individuals, corporations, 
 and associations within the United States, except interest on the 
 public debt and in redemption of the national currency. Said 
 notes shall be received upon deposit and for all purposes of debt 
 and liability by every national banking association at par and 
 without charge of whatsoever kind. 
 
 SEC. 10. That the holder of any national bank guaranteed 
 credit note shall have a prior lien on the assets of the national 
 banking association issuing it and on the statutory liability of 
 shareholders. 
 
 SEC. ii. That upon the failure of a national banking associa- 
 tion, all outstanding national bank guaranteed credit notes taken 
 out by it in accordance with the provisions of this Act, shall, upon 
 presentation to the United States Treasury, be paid in lawful 
 money out of the guaranty fund ; but the United States Treas- 
 urer shall recover in lawful money from the assets of the failed 
 bank the amount of the guaranteed credit notes of such bank out- 
 standing at the time of failure, and the same shall be paid into 
 the guaranty fund as provided in section 10 of this Act. 
 
 SEC. 12. That any national banking association desiring to 
 retire its national bank guaranteed credit notes or to go into 
 liquidation shall pay into the guaranty fund an amount of lawful
 
 AMERICAN BANKERS' COMMISSION REPORT 437 
 
 money equal to the amount of its national bank guaranteed credit 
 notes then outstanding. 
 
 SEC. 13. That any national banking association desiring to 
 take out national bank guaranteed credit notes and having notes 
 outstanding in excess of sixty-two and one-half per centum of its 
 paid-up capital, to secure the payment of which United States 
 bonds have been deposited, may, upon the deposit of lawful money, 
 redeem such excess without reference to the limitation of nine 
 million dollars each month prescribed in the Act approved March 
 fourth, nineteen hundred and seven. 
 
 The plan of the American Bankers' Association was one 
 of the topics discussed at the last meeting of the American 
 Economic Association at Madison, Wisconsin, December 28, 
 1907. Professor Davis R. Dewey, of the Massachusetts 
 Institute of Technology, made some remarks in reviewing 
 the plan, from which the following is an extract : 
 
 The plan of the American Bankers' Association is frequently 
 spoken of as a plan for asset currency. It will be observed, how- 
 ever, that it is simply a proposition for the issue of notes equal to 
 125 per cent upon bonds, 100 per cent of which shall be, as at 
 present, taxed J of i per cent, and 25 per cent shall be taxed 2| 
 per cent. The ostensible object of this plan is to provide a certain 
 portion of currency which will adjust itself to the periodic move- 
 ments of the money market, and which will presumably flow and 
 ebb according to the demands for the movement of crops and for 
 special emergencies. Advocates of this plan, so far as I am 
 aware, do not emphasize the need of a permanent addition to the 
 total supply of bank-note money. They are, however, desirous of 
 introducing some element of elasticity. The question therefore 
 before us is, Will a currency issued in this way, which is based 
 primarily upon the amount of bond-note circulation and conse- 
 quently upon the amount of bonds available for notes, create this 
 elasticity ? 
 
 It is estimated that this plan would provide, on the basis of 
 present circulation, a possible increase of a little over 300 millions
 
 438 APPENDIX 
 
 of credit notes. In this connection it is to be noted that during 
 the past ten years there has been an increase of bank-note circu- 
 lation of 400 millions. If the bonded indebtedness of this country 
 should increase so as to make a larger amount of bonds available 
 for bank-note circulation, then there would be a possibility of still 
 further increase in the credit-note circulation: the two credit- 
 note and bond-note circulation would go hand in hand. 
 
 Elasticity apparently is to be secured by two forces: first, a tax 
 of 2| per cent ; and second, an extension and improvement in re- 
 demption facilities. If, however, there is to be a system of real 
 and effective redemption, why a tax of 2|- per cent? If, however, 
 there is not to be automatic redemption, as works out, for example, 
 in the Canadian system, is a tax of 2\ per cent sufficient to force 
 retirement? Is there not the possibility, therefore, that the credit 
 notes in times of industrial prosperity may stay out continuously? 
 And may not the financial demand for this credit currency be as 
 urgent as the commercial crop-moving demand? 
 
 Elasticity of circulation presupposes effective agencies for re- 
 tirement and redemption of notes. Does the plan of the American 
 Bankers' Commission provide any way by which these credit notes 
 will inevitably flow back ? The report says that " the Comptroller 
 of the Currency shall designate numerous redemption cities con- 
 veniently located in the various parts of the country. Through 
 the agency of the banks in such cities adequate facilities shall be 
 provided for active daily redemption of the credit notes." But 
 will the establishment of " adequate facilities " necessarily result 
 in the retirement of such notes? We have in this country 6000 
 individual national banks, each independent of the others. Our 
 banks have not been trained in redemption and there is not that 
 rivalry between a few competing bank systems such as obtains in 
 Canada, which would lead banks, to present for redemption the 
 notes of other banks. Can this redemption be obtained except by 
 the passage of a law forbidding any bank to pay out the credit 
 notes of any other bank ? And does not effective redemption in- 
 volve the machinery of either a central bank or of a system of 
 branch banks? It must also be remembered that bank notes are 
 regarded by the people at large as absolutely sound, as good
 
 AMERICAN BANKERS' COMMISSION REPORT 439 
 
 as government legal tender, and that consequently they stay out 
 in the hands of the people for a considerable period of time. We 
 must also remember that the Treasury department has, for gov- 
 ernmental ends, actively opposed the retirement of bank notes, 
 and practically held out special privileges to banks which would 
 run counter to commercial forces. If elasticity can be secured 
 in as simple a way as that implied in the bankers' plan, why would 
 it not be possible to improve the present methods of redemption 
 so that there would be an ebb and flow ? 
 
 The plan of the American Bankers' Commission is confessedly 
 a compromise. It is believed by many, however, to be a step 
 toward asset banking. If the bond circulation should decrease, 
 the plan provides that the authorized issue of credit notes shall 
 be increased to a correspondingly greater percentage of its bond- 
 secured notes. We must therefore face this contingency and pass 
 judgment upon the wisdom of indirectly introducing the "banking 
 principle" into our monetary circulation. If this principle is to 
 be adopted, we should do it with our eyes wide open and judge 
 of the present proposal by its possible consequences. If, how- 
 ever, our national indebtedness increases, so that our bank-note 
 circulation is still harnessed to government bonds, will any real 
 advance be made toward an elastic credit currency?
 
 APPENDIX C 
 
 CURRENCY BILLS IN CONGRESS 
 
 THE ALDRICH VREELAND BILL, OR THE ACT OF 
 MAY 30, 1908 
 
 ON May 28, 1908, the House of Representatives, after a 
 debate of one hour, passed a bill, in which the Senate con- 
 curred, to amend the national banking laws. It had not 
 been considered by any regular committee of either branch 
 of Congress, but was hastily put together by a republican 
 caucus committee as a political rather than a financial ex- 
 pedient, so that the Republicans might be able to say in 
 the coming campaign that they had made provision for an 
 "emergency currency" in case of a renewal of the stringency 
 of the preceding autumn. The bill consisted of a part of a 
 measure prepared somewhat earlier by Congressman Vree- 
 land of New York, and of a part of the Aldrich bill which had 
 previously passed the Senate. It embraces the principles of 
 an " asset currency," which neither house of Congress had 
 ever previously accepted. It must therefore be considered 
 a step in the right direction. The bill was signed by the 
 President and is now a law. The text of the measure follows : 
 
 Be it enacted by the Senate and House of Representatives of the 
 United States of America, in Congress assembled, that national 
 banking associations, each having an unimpaired capital and a 
 surplus of not less than twenty per centum, not less than ten in 
 number, having an aggregate capital and surplus of at least five 
 millions of dollars, may form voluntary associations to be desig- 
 nated as national currency associations. The banks uniting to 
 
 440
 
 CURRENCY BILLS IN CONGRESS 441 
 
 form such association shall, by their presidents or vice-presidents, 
 acting under authority from the board of directors, make and 
 file with the Secretary of the Treasury a certificate setting forth 
 the names of the banks composing the association, the principal 
 place of business of the association, and the name of the associa- 
 tion, which name shall be subject to the approval of the Secre- 
 tary of the Treasury. Upon the filing of such certificate the 
 associated banks therein named shall become a body corporate, 
 and by the name so designated and approved may sue and be 
 sued and exercise the powers of a body corporate for the pur- 
 poses hereinafter mentioned : Provided, that not more than one 
 such national currency association shall be formed in any city : 
 Provided, further, that the several members of such national 
 currency association shall be taken, as nearly as conveniently 
 may be, from a territory composed of a State or part of a State, 
 or contiguous parts of one or more States : and Provided, further, 
 that any national bank in such city or territory, having the quali- 
 fications herein prescribed for membership in such national cur- 
 rency association, shall, upon its application to and upon the 
 approval of the Secretary of the Treasury, be admitted to mem- 
 bership in a national currency association for that city or terri- 
 tory, and upon such admission shall be deemed and held a part 
 of the body corporate, and as such entitled to all the rights and 
 privileges and subject to all the liabilities of an original mem- 
 ber: and Provided, further, that each national currency associa- 
 tion shall be composed exclusively of banks not members of any 
 other national currency association. 
 
 The dissolution, voluntary or othenvise, of any bank in such 
 association shall not affect the corporate existence of the asso- 
 ciation unless there shall then remain less than the minimum 
 number of ten banks : Provided, however, that the reduction of 
 the number of said banks below the minimum of ten shall not 
 affect the existence of the corporation with respect to the asser- 
 tion of all rights in favor of or against such association. The 
 affairs of the association shall be managed by a board consisting 
 of one representative from each bank. By-laws for the govern- 
 ment of the association shall be made by the board, subject to
 
 44 2 APPENDIX 
 
 the approval of the Secretary of the Treasury. A president, vice- 
 president, secretary, treasurer, and an executive committee of not 
 less than five members, shall be elected by the board. The powers 
 of such board, except in the election of officers and making of 
 by-laws, may be exercised through its executive committee. 
 
 The national currency association herein provided for shall 
 have and exercise any and all powers necessary to carry out the 
 purposes of this section, namely, to render available, under the 
 direction and control of the Secretary of the Treasury, as a basis 
 for additional circulation any securities, including commercial 
 paper, held by a national banking association. For the purpose 
 of obtaining such additional circulation, any bank belonging to 
 any national currency association, having circulating notes out- 
 standing secured by the deposit of bonds of the United States to 
 an amount not less than forty per centum of its capital stock, and 
 which has its capital unimpaired and a surplus of not less than 
 twenty per centum, may deposit with and transfer to the associa- 
 tion, in trust for the United States, for the purpose hereinafter 
 provided, such of the securities above mentioned as may be satis- 
 factory to the board of the association. The officers of the asso- 
 ciation may thereupon, in behalf of such bank, make application 
 to the Comptroller of the Currency for an issue of additional 
 circulating notes to an amount not exceeding seventy-five per 
 centum of the cash value of the securities or commercial paper 
 so deposited. The Comptroller of the Currency shall immedi- 
 ately transmit such application to the Secretary of the Treasury 
 with such recommendation as he thinks proper, and if, in the 
 judgment of the Secretary of the Treasury, business conditions 
 in the locality demand additional circulation, and if he be satis- 
 fied with the character and value of the securities proposed and 
 that a lien in favor of the United States on the securities so 
 deposited and on the assets of the banks composing the associa- 
 tion will be amply sufficient for the protection of the United 
 States, he may direct an issue of additional circulating notes to 
 the association, on behalf of such bank, to an amount in his dis- 
 cretion, not, however, exceeding seventy-five per centum of the 
 cash value of the securities so deposited : Provided, that upon the
 
 CURRENCY BILLS IN CONGRESS 443 
 
 deposit of any of the State, city, town, county, or other munici- 
 pal bonds, of a character described in section three of this Act, 
 circulating notes may be issued to the extent of not exceeding 
 ninety per centum of the market value of such bonds so deposited : 
 and Provided, further, that no national banking association shall 
 be authorized in any event to issue circulating notes based on 
 commercial paper in excess of thirty per centum of its unimpaired 
 capital and surplus. The term " commercial paper" shall be held 
 to include only notes representing actual commercial transactions, 
 which when accepted by the association shall bear the names of 
 at least two responsible parties and have not exceeding four 
 months to run. 
 
 The banks and the assets of all banks belonging to the asso- 
 ciation shall be jointly and severally liable to the United States 
 for the redemption of such additional circulation ; and to secure 
 such liability the lien created by section fifty-two hundred and 
 thirty of the Revised Statutes shall extend to and cover the assets 
 of all banks belonging to the association, and to the securities 
 deposited by the banks with the association pursuant to the pro- 
 visions of this Act ; but as between the several banks composing 
 such association each bank shall be liable only in the proportion 
 that its capital and surplus bears to the aggregate capital and 
 surplus of all such banks. The association may, at any time, 
 require of any of its constituent banks a deposit of additional 
 securities or commercial paper, or an exchange of the securities 
 already on deposit, to secure such additional circulation ; and in 
 case of the failure of such bank to make such deposit or exchange 
 the association may, after ten days' notice to the bank, sell the 
 securities and paper already in its hands at public sale, and 
 deposit the proceeds with the Treasurer of the United States as 
 a fund for the redemption of such additional circulation. If such 
 fund be insufficient for that purpose the association may recover 
 from the bank the amount of the deficiency by suit in the circuit 
 court of the United States, and shall have the benefit of the lien 
 hereinbefore provided for in favor of the United States upon the 
 assets of such bank. The association or the Secretary of the 
 Treasury may permit or require the withdrawal of any such
 
 444 . APPENDIX 
 
 securities or commercial paper and the substitution of other 
 securities or commercial paper of equal value therefor. 
 
 SEC. 2. That whenever any bank belonging to a national 
 currency association shall fail to preserve or make good its re- 
 demption fund in the Treasury of the United States, required by 
 section three of the Act of June twentieth, eighteen hundred and 
 seventy-four, chapter three hundred and forty-three, and the pro- 
 visions of this Act, the Treasurer of the United States shall notify 
 such national currency association to make good such redemption 
 fund, and upon the failure of such national currency association 
 to make good such fund, the Treasurer of the United States may, 
 in his discretion, apply so much of the redemption fund belonging 
 to the other banks composing such national currency association 
 as may be necessary for that purpose ; and such national currency 
 association may, after five days' notice to such bank, proceed to 
 sell at public sale the securities deposited by such bank with the 
 association pursuant to the provisions of section one of this Act, 
 and deposit the proceeds with the Treasurer of the United States 
 as a fund for the redemption of the additional circulation taken 
 out by such bank under this Act. 
 
 SEC. 3. That any national banking association which has 
 circulating notes outstanding, secured by the deposit of United 
 States bonds to an amount of not less than forty per centum of 
 its capital stock, and which has a surplus of not less than twenty 
 per centum, may make application to the Comptroller of the 
 Currency for authority to issue additional circulating notes to be 
 secured by the deposit of bonds other than bonds of the United 
 States. The Comptroller of the Currency shall transmit immedi- 
 ately the application, with his recommendation, to the Secretary 
 of the Treasury, who shall, if in his judgment business conditions 
 in the locality demand additional circulation, approve the same, 
 and shall determine the time of issue and fix the amount, within 
 the limitations herein imposed, of the additional circulating notes 
 to be issued. Whenever after receiving notice of such approval 
 any such association shall deposit with the Treasurer or any assist- 
 ant treasurer of the United States such of the bonds described in 
 this section as shall be approved in character and amount by the
 
 CURRENCY BILLS IN CONGRESS 445 
 
 Treasurer of the United States and the Secretary of the Treasury, 
 it shall be entitled to receive, upon the order of the Comptroller 
 of the Currency, circulating notes in blank, registered and counter- 
 signed as provided by law, not exceeding in amount ninety per 
 centum of the market value, but not in excess of the par value of 
 any bonds so deposited, such market value to be ascertained and 
 determined under the direction of the Secretary of the Treasury. 
 
 The Treasurer of the United States, with the approval of the 
 Secretary of the Treasury, shall accept as security for the addi- 
 tional circulating notes provided for in this section, bonds or other 
 interest-bearing obligations of any State of the United States, or 
 any legally authorized bonds issued by any city, town, county, or 
 other legally constituted municipality or district in the United 
 States which has been in existence for a period of ten years, and 
 which for a period of ten years previous to such deposit has not 
 defaulted in the payment of any part of either principal or inter- 
 est of any funded debt authorized to be contracted by it, and 
 whose net funded indebtedness does not exceed ten per centum of 
 the valuation of its taxable property, to be ascertained by the last 
 preceding valuation of property for the assessment of taxes. The 
 Treasurer of the United States, with the approval of the Secre- 
 tary of the Treasury, shall accept, for the purposes of this section, 
 securities herein enumerated in such proportions as he may from 
 time to time determine, and he may with such approval at any 
 time require the deposit of additional securities, or require any 
 association to change the character of the securities already on 
 deposit. 
 
 SEC. 4. That the legal title of all bonds, whether coupon or 
 registered, deposited to secure circulating notes issued in accord- 
 ance with the terms of section three of this Act shall be trans- 
 ferred to the Treasurer of the United States in trust for the 
 association depositing them, under regulations to be prescribed 
 by the Secretary of the Treasury. A receipt shall be given to 
 the association by the Treasurer or any assistant treasurer of the 
 United States, stating that such bond is held in trust for the asso- 
 ciation on whose behalf the transfer is made, and as security for 
 the redemption and payment of any circulating notes that have
 
 44^ APPENDIX 
 
 been or may be delivered to such association. No assignment or 
 transfer of any such bond by the Treasurer shall be deemed valid 
 unless countersigned by the Comptroller of the Currency. The 
 provisions of sections fifty-one hundred and sixty-three, fifty-one 
 hundred and sixty-four, fifty-one hundred and sixty-five, fifty-one 
 hundred and sixty-six, and fifty-one hundred and sixty-seven and 
 sections fifty-two hundred and twenty-four to fifty-two hundred 
 and thirty-four, inclusive, of the Revised Statutes respecting 
 United States bonds deposited to secure circulating notes shall, 
 except as herein modified, be applicable to all bonds deposited 
 under the terms of section three of this Act. 
 
 SEC. 5. That the additional circulating notes issued under 
 this Act shall be used, held, and treated in the same way as 
 circulating notes of national banking associations heretofore 
 issued and secured by a deposit of United States bonds, and 
 shall be subject to all the provisions of law affecting such notes 
 except as herein expressly modified : Provided, that the total 
 amount of circulating notes outstanding of any national banking 
 association, including notes secured by United States bonds as 
 now provided by law, and notes secured otherwise than by deposit 
 of such bonds, shall not at any time exceed the amount of its 
 unimpaired capital and surplus : and Provided, further, that there 
 shall not be outstanding at any time circulating notes issued 
 under the provisions of this Act to an amount of more than five 
 hundred millions of dollars. 
 
 SEC. 6. That whenever and so long as any national banking 
 association has outstanding any of the additional circulating notes 
 authorized to be issued by the provisions of this Act it shall keep 
 on deposit in the Treasury of the United States, in addition to 
 the redemption fund required by section three of the Act of June 
 twentieth, eighteen hundred and seventy-four, an additional sum 
 equal to five per centum of such additional circulation at any 
 time outstanding, such additional five per centum to be treated, 
 held, and used in all respects in the same manner as the original 
 redemption fund provided for by said section three of the Act of 
 June twentieth, eighteen hundred and seventy-four.
 
 CURRENCY BILLS IN CONGRESS 447 
 
 SEC. 7. In order that the distribution of notes to be issued 
 under the provisions of this Act shall be made as equitable as 
 practicable between the various sections of the country, the Secre- 
 tary of the Treasury shall not approve applications from associa- 
 tions in any State in excess of the amount to which such State 
 would be entitled of the additional notes herein authorized on the 
 basis of the proportion which the unimpaired capital and surplus 
 of the national banking associations in such State bears to the 
 total amount of unimpaired capital and surplus of the national 
 banking associations of the United States : Provided, however, 
 that in case the applications from associations in any State shall 
 not be equal to the amount which the associations of such State 
 would be entitled to under this method of distribution, the Sec- 
 retary of the Treasury may, in his discretion, to meet an emer- 
 gency, assign the amount not thus applied for to any applying 
 association or associations in States in the same section of the 
 country. 
 
 SEC. 8. That it shall be the duty of the Secretary of the 
 Treasury to obtain information with reference to the value and 
 character of the securities authorized to be accepted under the 
 provisions of this Act, and he shall from time to time furnish 
 information to national banking associations as to such securities 
 as would be acceptable under the provisions of this Act. 
 
 SEC. 9. That section fifty-two hundred and fourteen of the 
 Revised Statutes, as amended, be further amended to read as 
 follows : 
 
 "SEC. 5214. National banking associations having on deposit 
 bonds of the United States, bearing interest at the rate of two 
 per centum per annum, including the bonds issued for the con- 
 struction of the Panama Canal, under the provisions of section 
 eight of 'An Act to provide for the construction of a canal con- 
 necting the waters of the Atlantic and Pacific oceans,' approved 
 June twenty-eight, nineteen hundred and two, to secure its circu- 
 lating notes, shall pay to the Treasurer of the United States, in 
 the months of January and July, a tax of one-fourth of one per 
 centum each half year upon the average amount of such of its 
 notes in circulation as are based upon the deposit of such bonds ;
 
 448 APPENDIX 
 
 and such associations having on deposit bonds of the United 
 States bearing interest at a rate higher than two per centum per 
 annum shall pay a tax of one-half of one per centum each half 
 year upon the average amount of such of its notes in circulation 
 as are based upon the deposit of such bonds. National banking 
 associations having circulating notes secured otherwise than by 
 bonds of the United States shall pay for the first month a tax at 
 the rate of five per centum per annum upon the average amount 
 of such of their notes in circulation as are based upon the deposit 
 of such securities, and afterwards an additional tax of one per 
 centum per annum for each month until a tax of ten per centum 
 per annum is reached, and thereafter such tax of ten per centum 
 per annum, upon the average amount of such notes. Every 
 national banking association having outstanding circulating notes 
 secured by a deposit of other securities than United States bonds 
 shall make monthly returns, under oath of its president or cashier, 
 to the Treasurer of the United States, in such form as the 
 Treasurer may prescribe, of the average monthly amount of its 
 notes so secured in circulation ; and it shall be the duty of the 
 Comptroller of the Currency to cause such reports of notes in 
 circulation to be verified by examination of the banks' records. 
 The taxes received on circulating notes secured otherwise than by 
 bonds of the United States shall be paid into the Division of Re- 
 demption of the Treasury and credited and added to the reserve 
 fund held for the redemption of United States and other notes." 
 
 SEC. 10. That section nine of the Act approved July twelfth, 
 eighteen hundred and eighty-two, as amended by the Act approved 
 March fourth, nineteen hundred and seven, be further amended 
 to read as follows : 
 
 " SEC. 9. That any national banking association desiring to 
 withdraw its circulating notes, secured by deposit of United 
 States bonds in the manner provided in section four of the Act 
 approved June twentieth, eighteen hundred and seventy-four, is 
 hereby authorized for that purpose to deposit lawful money with 
 the Treasurer of the United States and, with the consent of the 
 Comptroller of the Currency and the approval of the Secretary of 
 the Treasury, to withdraw a proportionate amount of bonds held
 
 CURRENCY BILLS IN CONGRESS 449 
 
 as security for its circulating notes in the order of such deposits : 
 Provided, that not more than nine millions of dollars of lawful 
 money shall be so deposited during any calendar month for this 
 purpose. 
 
 " Any national banking association desiring to withdraw any 
 of its circulating notes, secured by the deposit of securities other 
 than bonds of the United States, may make such withdrawal at 
 any time in like manner and effect by the deposit of lawful money 
 or national bank notes with the Treasurer of the United States, 
 and upon such deposit a proportionate share of the securities so 
 deposited may be withdrawn: Provided, that the deposits under 
 this section to retire notes secured by the deposit of securities 
 other than bonds of the United States shall not be covered into 
 the Treasury, as required by section six of an Act entitled ' An 
 Act directing the purchase of silver bullion and the issue of 
 Treasury notes thereon, and for other purposes,' approved July 
 fourteen, eighteen hundred and ninety, but shall be retained in 
 the Treasury for the purpose of redeeming the notes of the bank 
 making such deposit." 
 
 SEC. 1 1. That section fifty-one hundred and seventy-two of the 
 Revised Statutes be, and the same is hereby, amended to read as 
 follows : 
 
 "SEC. 5172. In order to furnish suitable notes for circulation, 
 the Comptroller of the Currency shall, under the direction of the 
 Secretary of the Treasury, cause plates and dies to be engraved, 
 in the best manner to guard against counterfeiting and fraudulent 
 alterations, and shall have printed therefrom, and numbered, such 
 quantity of circulating notes, in blank, of the denominations of 
 five dollars, ten dollars, twenty dollars, fifty dollars, one hundred 
 dollars, five hundred dollars, one thousand dollars, and ten thou- 
 sand dollars, as may be required to supply the associations entitled 
 to receive the same. Such notes shall state upon their face that 
 they are secured by United States bonds or other securities, certi- 
 fied by the written or engraved signatures of the Treasurer and 
 Register and by the imprint of the seal of the Treasury. They 
 shall also express upon their face the promise of the association 
 receiving the same to pay on demand, attested by the signature of
 
 APPENDIX 
 
 the president or vice-president and cashier. The Comptroller of 
 the Currency, acting under the direction of the Secretary of the 
 Treasury, shall as soon as practicable cause to be prepared circu- 
 lating notes in blank, registered and countersigned, as provided 
 by law, to an amount equal to fifty per centum of the capital stock 
 of each national banking association ; such notes to be deposited 
 in the Treasury or in the sub-treasury of the United States nearest 
 the place of business of each association, and to be held for such 
 association, subject to the order of the Comptroller of the Cur- 
 rency, for their delivery as provided by law : Provided, that the 
 Comptroller of the Currency may issue national bank notes of the 
 present form until plates can be prepared and circulating notes 
 issued as above provided : Provided, however, that in no event 
 shall bank notes of the present form be issued to any bank as 
 additional circulation provided for by this Act." 
 
 SEC. 12. That circulating notes of national banking associa- 
 tions, when presented to the Treasury for redemption, as provided 
 in section three of the Act approved June twentieth, eighteen 
 hundred and seventy-four, shall be redeemed in lawful money of 
 the United States. 
 
 SEC. 13. That all acts and orders of the Comptroller of the 
 Currency and the Treasurer of the United States authorized by 
 this Act shall have the approval of the Secretary of the Treasury 
 who shall have power, also, to make any such rules and regula- 
 tions and exercise such control over the organization and manage- 
 ment of national currency associations as may be necessary to 
 carry out the purposes of this Act. 
 
 SEC. 14. That the provisions of section fifty-one hundred and 
 ninety-one of the Revised Statutes, with reference to the reserves 
 of national banking associations, shall not apply to deposits of 
 public moneys by the United States in designated depositaries. 
 
 SEC. 15. That all national banking associations designated as 
 regular depositaries of public money shall pay upon all special 
 and additional deposits made by the Secretary of the Treasury in 
 such depositaries, and all such associations designated as tempo- 
 rary depositaries of public money shall pay upon all sums of public 
 money deposited in such associations interest at such rate as the
 
 CURRENCY BILLS IN CONGRESS 451 
 
 Secretary of the Treasury may prescribe, not less, however, than 
 one per centum per annum pon the average monthly amount of 
 such deposits: Provided, however, that nothing contained in this 
 Act shall be construed to change or modify the obligation of any 
 association or any of its officers for the safe-keeping of public 
 money : Provided, further, that the rate of interest charged upon 
 such deposits shall be equal and uniform throughout the United 
 States. 
 
 SEC. 1 6. That a sum sufficient to carry out the purposes of the 
 preceding sections of this Act is hereby appropriated out of any 
 money in the Treasury not otherwise appropriated. 
 
 SEC. 17. That a Commission is hereby created, to be called 
 the " National Monetary Commission," to be composed of nine 
 members of the Senate, to be appointed by the Presiding Officer 
 thereof, and nine members of the House of Representatives, to 
 be appointed by the Speaker thereof ; and any vacancy on the 
 Commission shall be filled in the same manner as the original 
 appointment. 
 
 SEC. 1 8. That it shall be the duty of this Commission to 
 inquire into and report to Congress at the earliest date practi- 
 cable, what changes are necessary or desirable in the monetary 
 system of the United States or in the laws relating to banking 
 and currency, and for this purpose they are authorized to sit 
 during the sessions or recess of Congress, at such times and 
 places as they may deem desirable, to send for persons and papers, 
 to administer oaths, to summons and compel the attendance of 
 witnesses, and to employ a disbursing officer and such secretaries, 
 experts, stenographers, messengers, and other assistants as shall 
 be necessary to carry out the purposes for which said Commission 
 was created. The Commission shall have the power, through 
 subcommittee or otherwise, to examine witnesses and to make such 
 investigations and examinations, in this or other countries, of the 
 subjects committed to their charge as they shall deem necessary. 
 
 SEC. 19. That a sum sufficient to carry out the purposes of 
 sections seventeen and eighteen of this Act, and to pay the neces- 
 sary expenses of the Commission and its members, is hereby 
 appropriated, out of any money in the Treasury not otherwise
 
 452 APPENDIX 
 
 appropriated. Said appropriation shall be immediately available 
 and shall be paid out on the audit and order of the chairman or 
 acting chairman of said Commission, which audit and order shall 
 be conclusive and binding upon all Departments as to the correct- 
 ness of the accounts of such Commission. 
 
 SEC. 20. That this Act shall expire by limitation on the thir- 
 tieth day of June, nineteen hundred and fourteen. 
 
 Approved May 30, 1908. 
 
 The Commission appointed in pursuance of the foregoing 
 act consists of : 
 
 SENATORS REPRESEOTATIVES 
 
 Nelson W. Aldrich, R.I. E. B. Vreeland, N.Y. 
 
 Wm. B. Allison, Iowa Jesse Overstreet, Ind. 
 
 Eugene Hale, Maine J. W. Weeks, Mass. 
 
 P. C. Knox, Pa. Theo. E. Burton, Ohio 
 
 J. C. Burrows, Mich. S. C. Smith, Cal. 
 
 J. W. Bailey, Tex. G. F. Burgess, Tex. 
 
 H. D. Money, Miss. A. P. Pujo, La. 
 
 J. W. Daniel, Va. L. P. Padgett, Tenn. 
 
 H. M. Teller, Colo. R. W. Bonynge, Colo. 
 
 Thus the act of May 30, 1908, authorizes, in two different 
 ways, the issue of national bank notes additional to those 
 heretofore existing, namely : 
 
 i. By the pledging of any securities including commercial 
 paper, representing actual commercial transactions and bear- 
 ing two or more responsible signatures, and running not 
 more than four months. Such securities and paper shall 
 remain in the custody of the national currency association 
 to which the bank applying for the circulating notes belongs. 
 The amount of notes i-ssuable thereon shall not exceed 75 
 per cent of the cash value thereof. All the banks in the 
 currency association are jointly and severally liable for all 
 the circulating notes so issued.
 
 CURRENCY BILLS IN CONGRESS 453 
 
 2. By the transfer to the custody of the Treasurer of 
 the United States of any bonds, or other interest bearing 
 obligations, of any state of the United States, or of any legally 
 authorized bonds of any city, town, county, municipality, or 
 district in the United States. Against such securities circu- 
 lating notes may be issued not exceeding 90 per cent of their 
 market value. 
 
 All of the securities in both categories are subject to the 
 approval of the Secretary of the Treasury, who may require 
 additional securities, or a substitution of other securities, in 
 any case where he deems the existing ones insufficient. The 
 national currency associations may exercise the same powers 
 and make the same requirement in respect of the securities 
 deposited with them by any bank in their respective associ- 
 ations. 
 
 Bank notes in either of these categories shall be subject 
 to a tax of 5 per cent per annum for the first month and 
 afterwards to an additional tax of i per cent for each month 
 until a tax of 10 per cent per annum is reached, which rate 
 shall continue as long as they remain outstanding. For all 
 such notes the issuing bank must keep a redemption fund 
 in the Treasury of the United States of 10 per cent, i.e., 5 
 per cent more than the amount required for the redemption 
 of notes issued against government bonds. The Treasury 
 assumes the responsibility of redeeming the notes of all 
 failed banks. 
 
 A national currency association has been formed in New 
 York City under the terms of this act, and similar movements 
 are in progress in other parts of the country, but it is doubt- 
 ful whether any applications will be made for bank notes 
 subject to the taxes imposed thereon.
 
 454 APPENDIX 
 
 THE FOWLER BILL 
 
 Hon. Charles N. Fowler, chairman of the House Commit- 
 tee on Banking and Currency, introduced a bill, January 8, 
 1908, which proceeded upon what is known as the " asset 
 currency" plan of issuing frank notes, and introduced radical 
 changes, which were mainly wholesome ones, in the national 
 banking system. It was bottomed upon the sound principle 
 that gold, not government debt, should be the basis of 
 our currency system, and it provided means for gradually 
 retiring the greenbacks and substituting gold certificates in 
 their place. It provided for dividing the country into redemp- 
 tion districts, with a redemption city in each, where all banks 
 in the district should be required to redeem their notes on 
 demand. Each redemption district should choose a board 
 of managers, who should be required to examine all banks 
 in their district from time to time. A general guaranty fund 
 of 5 per cent on both circulation and deposits should be 
 contributed as a fund to guarantee the payment of all notes 
 and deposits of failed banks, and in case of the failure of 
 any bank in the district the others would be responsible for 
 one-tenth of the loss, this being a penalty for negligence 
 in the mutual examinations aforesaid. It provided for the 
 gradual retirement of the existing bond-secured currency 
 and the issue of circulating notes based upon the commercial 
 assets of the banks ; also for the redemption of the out- 
 standing bonds of the United States at the price paid for 
 them by the holders. Any bank having a capital and surplus 
 equal to $150,000 might do a trust company business. The 
 government should deposit all its receipts in national banks 
 without special security and receive interest thereon at the 
 rate of 2 per cent per annum. 
 
 The Fowler Bill received the approval of a majority of the 
 House Committee on Banking and Currency, but no further
 
 CURRENCY BILLS IN CONGRESS 455 
 
 action was taken on it. In principle it was a sound measure, 
 but it sought to accomplish more reforms than the public 
 mind could assimilate at one time, and its progress in the 
 halls of legislation was too slow for the supposed exigencies 
 of an approaching presidential election.
 
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 INDEX 
 
 Abrasion of coin, 24. 
 Acceptances, 208. 
 Accommodation paper, 207. 
 Aldrich-Vreeland bill, 440. 
 Allison, William B., 170. 
 American Bankers' Commission 
 
 Report on the Currency, 433. 
 Aristotle on the origin of money, 2. 
 Attributes of good money, 10-12. 
 Australia, gold production of, 50, 
 
 54- 
 
 Austria-Hungary adopts gold 
 standard, 69. 
 
 B 
 
 Bank, functions of a, 193-204; 
 meaning of term, 193; a manu- 
 factory of credit, 1 94 ; discounts, 
 195 ; deposits, 195 ; reserves, 
 197, 211 ; circulating notes, 198, 
 335' 35 2 ; utility of, 199; origin 
 of, 200; statement, 205-215; 
 note redemption fund, 212, 353. 
 
 Banking, colonial, 232-243 ; early 
 American, 244-253. 
 
 "Banking principle" of note 
 issues, 297, 387. 
 
 Banking system : Bank of Amster- 
 dam, 233 ; Bank of the United 
 States, first, 254-265 ; second, 
 267-302 ; Suffolk, of Massa- 
 chusetts, 291-302 ; safety fund, 
 
 303-310; bond deposit, 311- 
 321 ; Canadian, 381 ; Scotch, 378. 
 
 Biddle, Nicholas, 274-289. 
 
 Bills of credit, colonial, 79-89; 
 revolutionary, 91-105; post-revo- 
 lutionary, 104. 
 
 Bills of exchange, 208. 
 
 Bills of lading, 209. 
 
 "Black Friday," 128. 
 
 Bland, R. P., 169. 
 
 Bonds of the United States, no, 
 117, 151, 182, 184, 351, 414. 
 
 Boutwell, George S., 153. 
 
 Branch banks, 272, 334, 379, 383, 
 419. 
 
 C 
 
 California, private gold coinage of, 
 8, 9 ; first gold discovered in, 
 50; present production of, 54; 
 adheres to gold standard, 129; 
 specific contract law in, 132. 
 
 Canadian Bank system, 381-385. 
 
 Carlisle, John G., 177, 181-187. 
 
 Cash credits, 208, 378. 
 
 Central Bank question, 424-430. 
 
 Certified checks, 213. 
 
 Chamber of Commerce of New 
 York Report on the Currency, 
 
 43 1 - 
 Chaos of banking in the XIX 
 
 century, 322-332. 
 Chase, Salmon P., 107-134, 348. 
 Clay, Henry, 261, 283. 
 
 461
 
 462 
 
 INDEX 
 
 Clearing house, 216-228; loan 
 certificates, 224. 
 
 Cleveland, Grover, as President, 
 calls Congress in extra session, 
 1 80; Venezuela message of, 
 
 . 186. 
 
 Coinage, 16-29; coins of Massa- 
 chusetts, 26 ; first United States 
 coinage act, 32 ; second, 34 ; 
 third, 36; fourth, 37. 
 
 Collamer, Jacob, 112. 
 
 Colonial banking, 232-243. 
 
 Colorado, gold production of, 52, 
 
 54- 
 
 Commercial crises, 178. 
 Comstock lode, 50, 51. 
 Confederate Currency, 140-149. 
 Cortelyou, George 13., Secretary 
 
 of the Treasury, 411. 
 Counterfeit notes, 328. 
 "Crime of 1873," 168. 
 "Currency principle" of note 
 
 issues, 298. 
 
 Deficit in the Treasury, 161, 181, 
 
 187. 
 Deposits, 195; interest on, 213; 
 
 public, 269, 358, 407, 408. 
 Dewey, Davis R., 437. 
 Discount of commercial paper, 
 
 195, 206. 
 
 E 
 Elasticity of note issues, 316, 
 
 " Emergency circulation," 422. 
 England, adopts the gold standard, 
 
 63; Bank of, 369-377. 
 Examiners of national banks, 357. 
 Extension of public debt, 404. 
 
 F 
 
 Fessenden, William Pitt, 112, 119. 
 Foreign banking systems, 369-399. 
 Forgan, James B., 366, 367, 422, 
 
 Forman, Joshua, 305. 
 Fowler bill, 454. 
 Fractional currency, 116. 
 France, adopts the gold standard, 
 
 68 ; Bank of, 385-390. 
 Free bank system, 311321. 
 
 Gallatin, Albert, 259-265, 279. 
 Georgia, banking disorders in, 325. 
 Germany, adopts the gold stand- 
 ard, 65 ; Imperial Bank of, 390- 
 
 394- 
 
 Gilbert, Alexander, 416, 419. 
 
 Gold, not wholly free from varia- 
 tions of value, 12; bullion, 20; 
 private coins, 22 ; mint price of, 
 23 ; as a metal, 41-48 ; its affinity 
 for quicksilver, 42 ; placer, 42 ; 
 hydraulic mining of, 44 ; quartz 
 crushing, 45 ; chlorination, 46 ; 
 cyanide process, 46; production, 
 49-59; effect on prices, 55; 
 standard, 60-77 ; adopted by 
 England, 63 ; by the United 
 States, 64 ; by Germany, 65 ; by 
 Austria-Hungary,, 69 ; by India, 
 72; by Japan, 72; by Russia, 
 74; by France and the Latin 
 Union, 68 ; by Mexico, 75 ; anti- 
 gold law, 119; gold exchange 
 bank, 126; gambling, 127; con- 
 tracts enforceable notwithstand- 
 ing legal-tender act, 1 33 ; imports 
 in 1879 and 1880, 157; in 1908,
 
 INDEX 
 
 463 
 
 413; the Gold Standard Act of 
 1900, 161 ; certificates, 164. 
 
 Grant, U. S., as President, vetoes 
 the Inflation bill, 153. 
 
 Greenbacks, 106-139. 
 
 Gresham's Law, 25. 
 
 Hamilton, Alexander, report on 
 the mint, 31 ; views on banking, 
 196; on the Bank of New York, 
 248; on first Bank of the United 
 States, 254-257. 
 
 Hayes, R. B., elected President of 
 the United States, 156; vetoes 
 Bland silver bill, 170. 
 
 Hepburn, A. B., 364, 433. 
 
 Hepburn case in the Supreme 
 Court, 134. 
 
 I 
 
 Illinois, free banks of, 316. 
 India, adopts the gold standard, 
 
 72; stops coining silver, 178. 
 Indiana, free banks of, 319; State 
 
 Bank of, 333-338. 
 Inflation bill, 153; inflationists, 
 
 169. 
 
 J 
 
 Jackson, Andrew, President of 
 the United States, 276; makes 
 attack on Bank of the United 
 States, 278 ; vetoes charter, 286 ; 
 removes public deposits, 287. 
 
 Japan adopts the gold standard, 72. 
 
 Jefferson, Thomas, opposes char- 
 ter of the first Bank of the United 
 States, 256. 
 
 Julliard vs. Greenman in the Su- 
 preme Court, 135. 
 
 Kelley, W. D., 169. 
 Kemmerer, E. W., 56, 57. 
 Klondike, gold production of, 52. 
 Knickerbocker Trust Company, 
 
 411. 
 Knox, John J., 36, 37. 
 
 Land banking, 234. 
 
 Latin Monetary Union, 68. 
 
 Legal tender, 30-40 ; origin of, 
 30 ; significance of, 31 ; law of 
 United States in 1792, 31 ; in 
 l8 34. 34; in 1873, 36;. present 
 varieties of, 38; act of 1862, 
 no; $150,000,000 notes (green- 
 backs) authorized, no; $150,- 
 000,000 additional authorized, 
 113; $100,000,000 additional 
 authorized, 115; interest-bearing 
 notes, 115; compound-interest 
 notes, 1 1 6 ; effect of, on wages, 
 123; on prices of commodities, 
 124; legal-tender cases in the 
 Supreme Court, 134. 
 
 Letters of credit, 209. 
 
 Liability of shareholders, 335-352. 
 
 Loans and discounts, 206. 
 
 " Locofocos," 311. 
 
 Louisiana Bank Act of 1842, 343. 
 
 M 
 
 McCulloch, Hugh, 152, 335, 349. 
 
 McKinley, William, 160. 
 
 Macleod, H. D., 374. 
 
 Madison, James, 268. 
 
 Manning, Daniel, 173. 
 
 Massachusetts, Bank of, 247; gen- 
 eral banking law of, 300 ; Land 
 Bank Scheme in, 238.
 
 464 
 
 INDEX 
 
 Memminger, C. G., 140-145. 
 
 Michigan, " wild-cat banks " in, 
 326. 
 
 Mint price of gold, 23. 
 
 Monetary conference, interna- 
 tional, 76. 
 
 Money of account, 28. 
 
 Morris, Robert, 244. 
 
 Mortgage loans, 338, 351. 
 
 N 
 
 National bank system, 348-359 ; 
 condition on August 22, 1908, 
 
 359- 
 
 New England colonies, early cur- 
 rency of, 6-7 ; colonial banking, 
 experiments in, 232-243. 
 
 New London Society for Trade 
 and Commerce, 236. 
 
 New Netherland, first local cur- 
 rency of, 7. 
 
 New York, Bank of, 248.. 
 
 North America, Bank of, 244. 
 
 North Carolina, chaos of banking 
 in, 324. 
 
 Note holders' prior lien on bank 
 assets, 300, 306, 380, 382. 
 
 
 
 Ohio, State Bank of, 343. 
 Origin of money, 2. 
 
 Panic of 1893, 202; of i'9O7, 411. 
 
 Paper currency, denominations of, 
 165. 
 
 Paris Monetary Conference, 76. 
 
 Pennsylvania legislature repeals 
 charter of Bank of North Amer- 
 ica, 246; reenacts it, 247. 
 
 Pine-tree shilling, 26. 
 
 Post notes, 271. 
 Present problems, 416-423. 
 Premium on currency, 413. 
 Private banks, 362. 
 
 Quantity theory, 57. 
 
 R 
 
 Receivers of national banks, 357. 
 Reports of national banks, 357. 
 Reserves, banking, 197, 363, 366. 
 Rhode Island, Si, 237. 
 Ridgely, William B., Comptroller 
 
 of the Currency, 428. 
 Russia adopts the gold standard, 74. 
 
 Safety fund system, 303-310. 
 
 Scotch bank system, 378-381. 
 
 Seigniorage, 19. 
 
 Shaw, Leslie M., Secretary of the 
 Treasury, 407-410. 
 
 Sherman, John, Senator, 154 ; 
 Secretary of the Treasury, 156; 
 silver act, 159. 
 
 Silver dollar, 16; in panic of 1893, 
 167-192; Bland Act, 169; Alli- 
 son amendment, 170; vetoed by 
 President Hayes and repassed, 
 170; silver certificates, 171; 
 Sherman Act of 1890, 175 ; panic 
 of 1893, 180 ; coinage of bullion 
 purchased under the Sherman 
 Act, 187; total coinage under 
 all acts, 188. 
 
 Smith, George, 338. 
 
 South Africa, gold production of, 
 
 5 1 - 
 South Carolina, rice currency in, 
 
 7,8.
 
 INDEX 
 
 465 
 
 Spanish dollar, 25. 
 
 Spaulding, E. G., no. 
 
 Specie payments, suspensions of, 
 
 3 2 3- 
 
 Specie reserve, in Massachusetts, 
 299 ; in Louisiana, 343. 
 
 Specie resumption act, 154; un- 
 successful attempt to repeal, 155; 
 carried into effect, 1 56. 
 
 Specific Contract Law in Cali- 
 fornia, 132. 
 
 Speculation in bank charters, 322. 
 
 Standard of value, 18. 
 
 State Banks, 361-368. 
 
 Stevens, Thaddeus, 113. 
 
 Stock notes, 291. 
 
 Subsidiary coins, 16. 
 
 Suffolk Bank system, 291-302. 
 
 Supreme Court decisions, 133. 
 
 Surplus of banks, 214. 
 
 Taxes on circulating notes, 354, 
 
 392, 423- 
 Tennessee and Kentucky, skin 
 
 currency in, 8. 
 Tobacco currency, 3-5. 
 Token coins, 16. 
 Trade is barter even when money 
 
 is employed, 10; trade dollar, 
 
 37- 
 
 Treasury Department, divisions of 
 issue and redemption in, 162. 
 
 Treasury notes, in the War of 
 1812, 1 06; in the financial crisis 
 of 1837, 106; in the war with 
 Mexico, 107 ; of the Confederate 
 States, 140-147; of 1890, 159. 
 
 Trust companies, .363-368. 
 
 Value, standard of, 18. 
 Venezuela message of President 
 
 Cleveland, 186. 
 Virginia, tobacco money in, 3-5. 
 
 W 
 
 Wampum, 2, 3, 7. 
 
 Warburg, Paul M., plan for a cen- 
 tral bank of issue, 428. 
 
 War financiering, 122. 
 
 Washington, George, views on 
 bills of credit, 95, 96 ; action 
 on first Bank of the United 
 States, 256. 
 
 Webster, Daniel, 267, 270. 
 
 Webster, Pelatiah, 92, 97. 
 
 Wheat harvest of 1891, 176. 
 
 " Wild-cat banks," 327. 
 
 Wisconsin, free banks of, 319; 
 Marine and Fire Insurance Co., 
 
 339- 
 Witwatersrand, gold production 
 
 of, 51. 
 Woodbury, Levi, 300.
 
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