State bank

currency.

CHAPTER V

1812 TO 1836

THE Currency history of the country for the quartercentury following the expiration of the charter of the first Bank of the United States is divisible into three almost equal periods, the disorganized condition of the currency during and following the War of 1812, and the struggle for its reformation, which extended to 1820; a period of sound currency under regulation by the second Bank of the United States followed and continued until 1829; then began the war upon the bank resulting in the failure to renew its charter and the downfall and breaking up of the system of which the bank had been the controlling influence.

Statistics relating to banking and currency from 1812 to 1834 are exceedingly meagre. Subsequent to 1834, pursuant to a resolution of Congress directing the collection and reporting of information, the Treasury reports contain fairly satisfactory data. Secretary Crawford,1 and afterward ex-Secretary Gallatin,2 undertook to give some comparative figures for certain years. For the period from 1821 to 1828, inclusive, the only available statistics are found in the reports of the Massachusetts banks (required by state law from 1803) and those of the second Bank of the United States, also required by law.

1 Report of 1820, in full in International Monetary Conference, 1878, p. 502.

2 Currency and Banking System, 1831.

The second war with Great Britain began in 1812. The government found it necessary to borrow money, and as predicted by Hamilton, Gallatin, and Crawford, the state banks proved unequal to the emergency. Instead of the anticipated contraction of banking facilities after the liquidation of the first bank, a rapid ex- State banks. pansion had taken place, but much of the alleged bank capital was fictitious, a large number of banks having been organized upon capital represented by notes of hand of the subscribers.

suspension.

Crawford estimated that in the four years, 1811-1815, the number of banks increased from 88 to 208, the capital from less than $43,000,000 to over $88,000,000, and the circulation from $23,000,000 to $110,000,000. In 1816 there were 246 banks with $89,400,000 capital. Inflation and For 1817 the number of banks is not given, but the capital is estimated at $125,700,000. In 1820 there were 307 banks, but the capital was only $102,100,000. Adequate legal restrictions were wanting in most of the states, and notes were issued with ease and without regard to capital or specie holdings. In order to increase the volume as much as possible, since note-issues were their principal means of making loans and discounts, a mass of small denominations, some as low as six cents, were issued. Adding to this the stress of war and the consequent hoarding of specie, suspension of coin payments naturally followed. Most of the banks outside of New England suspended in August, 1814. The depreciation of Southern and Western bank-notes was most severe. At Baltimore, where notes from Southern banks were found in greatest abundance, the discount on some issues reached 23 per cent. In New York and Philadelphia 16 per cent was the maximum discount. Boston and New England notes alone were quoted on a par with specie. The range of the dis

Treasury notes and loans.

counts by years was: 1814, 10 @ 20 per cent; 1851, 2 @ 21 per cent; 1816, 13 @ 23 per cent; and 1817, the year of resumption, 2 @ 4 per cent. Lack of specific information prevented the public from exercising a wise discrimination, as between banks, and hence they discriminated against localities. As late as 1823 discounts reaching a maximum of 75 per cent upon notes of certain Kentucky banks are recorded.1

The funds of the government were deposited in many of these banks throughout the country, and when suspension took place amounted to $9,000,000. Congress, in 1812, had been compelled to resort to an issue of "Treasury Notes" (the first since 1781) to cover short term loans. Five separate issues were authorized during the war. At first all were interest-bearing, payable in one year and in denominations of $100 only. Later notes of $50, $20, and $5 were authorized; the $5 notes, however, did not bear interest. They were not made legal tenders, the proposition to do so having been promptly defeated; but being receivable for all public dues, and payable to public creditors, they circulated freely. In all $60,500,000 were authorized, but less than $37,000,000 were actually issued.2 These notes were all funded into bonds or paid, except a very few which were probably destroyed or lost.

The government did not succeed in disposing of its obligations at par. An official report shows that of the $80,000,000 of bonds and notes placed during the War of 1812, owing to the discounts thereon and the depreciated currency received in payment therefor, the Treasury actually obtained only $34,000,000. In other words, had the Treasury been able to dispose of its

1 Gouge, History of Paper Money.

2 Bailey, National Loans.

3 McDuffie's Report on Bank of United States, 21st Congress, Ist Sess.

through

notes and bonds at par in coin, and had its balances Loss in the various state banks been available, a loan of depreciated $34,000,000 properly financed would probably have cov- currency. ered the expenses of the war, for which, ultimately, the people paid $80,000,000 and interest. Gallatin, in reviewing the period, expressed the opinion unequivocally that, had the Bank of the United States been rechartered, suspension of specie payments would have been avoided and so this loss, enormous for that period, would not have been incurred.1

Many of those in Congress who had aided in defeating the renewal of the federal bank charter began to see the error of that policy. It will be recalled that a change of one vote in each House of Congress would have carried one of the measures proposed. Even Madison, now President, who in 1791 was the leader of the opposition to the first bank charter, modified his opinions. The "object lesson" had been an instructive

one.

Jefferson advised Madison to propose the issue of government currency, $20,000,000 annually so long as needed, and appeal to the states to relinquish the right to establish banks of issue.2 This appears to be the first important suggestion for a government note-issue.

bank pro

posed.

Early in 1814 New York members in Congress pre- National sented a petition for the establishment of a national bank with a capital of $30,000,000.3 The House Committee reported adversely, upon constitutional grounds. Calhoun, then a representative from South Carolina, endeavored to have such a bank established in the District of Columbia, which, being under exclusive federal

1 Gallatin, Currency and Banking System.

2 Bolles, Financial History of United States.

3 Clarke and Hall, Documentary History of Bank of United States.

Dallas's plan.

jurisdiction, made the measure constitutional.

A bill for this purpose was reported in February, but was soon dropped. In October the Secretary of the Treasury, A. J. Dallas, upon request from the House Committee on Ways and Means to furnish suggestions for the maintenance of the public credit, submitted a report1 strongly favoring a national bank. Jeffersonian though he was, and in the cabinet of Madison, Dallas said that if after twenty years of tacit sanction of the old bank charter the Constitution had not been amended upon this question, he considered himself justified in regarding it settled in favor of the constitutionality of the charter. He regarded such an institution "the only efficient remedy for the disordered condition of our circulating medium." He recommended a $50,000,000 bank, two-fifths of the capital to be taken by the United States, $6,000,000 to be paid in specie by outside subscribers, $24,000,000 in the recent issues of public debt, and the $20,000,000 taken by the United States to be also paid for in such obligations; the bank to loan the government $30,000,000, and the government to have five of the fifteen directors and the right of inspection.

Calhoun proposed a substitute bill providing that all the shares were to be open to public subscription, and omitting the required loan to the government. Another bill, containing a clause permitting the bank to suspend coin payments during the war, was introduced. The suspension clause was rejected by the casting vote of Speaker Langdon Cheves (afterwards president of the second bank). Daniel Webster, with his accustomed vigor and eloquence, also opposed the suspension clause. Amended in various particulars the bill finally passed, but since the capital was reduced to $30,000,000 and no loan to the government was provided for, Dallas pro

1 Finance Reports, Vol. II.; also Clarke and Hall's History.