These early American banks received deposits and made loans in the same way that commercial banks do today. Depositors could draw checks on their accounts, a practice followed by wealthy customers even in the earliest days. But more often both individuals and business firms made payments in cash. Thus, when a bank officer made a loan, he either credited the borrower's checking account with the amount or, more frequently, handed over the proceeds of the loan in bank notes, which the borrower would then use to pay his workers or remove his other obligations.

Bank notes were ordered by individual banks from private engravers, whose numerous designs could be modified according to the whims of a particular board of directors. Notes were ordinarily signed by the president and cashier of the bank and stored in the safe or vault until they were issued by a bank officer in the routine course of business. Not until the middle 1850s did the dollar volume of bank deposits exceed the dollar volume of bank notes outstanding. Some banks in large cities had by then withdrawn their “circulation," preferring to make all their loans by crediting the deposit accounts of borrowers.

During the first three decades of our national history commercial banks were scrupulously run, their managements so conservative that many a creditworthy borrower was doubtless turned away empty-handed. Some banks limited their discounts to 30 days, with no renewals, and most of the rest put a 60-day limit on their note maturities. Although some banks would make concessions to the requirements of farmers, sometimes extending them credit for as much as nine months, long-term paper was frowned upon. There were exceptions to any rule, of course, because the most inventive bankers were forever experimenting with new types of credit, finding new ways to earn profits for their stockholders while protecting the solvency of their institutions. Nevertheless, mortgage loans, whether on farm or city property, were for decades made only to favored customers; typically, they were unamortized and had maturities of from three to five years. Unlike their European colleagues, most early American bankers resisted the temptation to long-term involvements in the businesses they financed, though more aggressive big-city bankers gradually committed their institutions to the bonds of railroads and manufacturing companies as well as to those of states and municipalities. And gradually the sophisticated banks of the East began to engage in what was later called “investment banking," underwriting securities issues as well as buying the bonds of industry and government.

Banking practice tended to be less cautious, less conservative, as banks were formed at the cutting edge of the frontier. We should guard against the hasty inference that all Western and Southern banks were inferior to those of the East. Banking at its best was to be found in such states as

Ohio, Indiana, Iowa, and Louisiana before the Civil War. But it was in the new areas of the country that the demand for a circulating medium was insatiable, and it was in these areas that the malpractices so shocking to historians of another generation were most apparent.

Difficulties centered around the note issues of banks. Even in well-settled parts of the country, notes issued by different banks were accepted at widely varying rates. Notes of institutions long-established and known to redeem in specie were accepted at par over wide areas. Bills of other banks were received at discounts varying from one-half of 1 percent to 50 percent or more. As much as anything else, distance from the location of the issuing bank affected the acceptability of notes. For example, bills of Baltimore banks circulated at 1 to 2 percent discount in Washington, 40 miles away, while Washington paper was at 1 to 2 percent discount in Baltimore. Notes of Western banks located in states known for lax laws might circulate in the East at big discounts, even though they were issued by specie-paying banks with solid local reputations.

As the number of state banks increased to more than 500 in 1834 (see Table 2-1), heterogeneity of the currency implied other problems. The process of determining the value of genuine notes became more tedious and complex. To this difficulty was added the problem of how to detect the growing number of counterfeit bills. Finally, there was the requirement that notes of broken or liquidated banks, which remained in circulation for long periods, be detected.

Thus, the simplest transaction might require haggling over the amount of payment in the notes of a particular bank, and it is easy to perceive how burdensome it would be to make payments from one part of the United States to another. Indeed, many banks specialized in the pur

SOURCE: Historical Statistics of the United States, Colonial Times to 1957, pp. 623-624.

East side of the first Treasury Building: the building was occupied in 1800 and burned by the British in 1814.

chase and sale of domestic exchange in much the same way that modern money-market banks specialize in the purchase and sale of foreign exchange. Actually, in 1850 it was probably more difficult for a St. Louis merchant to remit to a New York supplier than it is for a modern Chicago businessman to remit to a manufacturer in Tokyo. Clearly, a growing industrial economy would have to find a better way.

The Start of Bank Regulation

Almost from the beginning of our national history, it was apparent that the money supply would not manage itself in a way satisfactory to the substantial citizens of the country. As the decades went on, a variety of regulatory devices were suggested and put into effect. A glimpse at our pre-Civil War financial history suggests the course that regulation was to take.

Federal Intervention

Throughout the years before 1863, Americans maintained a strange ambivalence toward federal controls over banks and the banking system. From the first it was recognized that only federal regulation could provide a homogeneous, universally accepted currency. Moreover, there was a growing realization that only a bank with special privileges could affect the total money supply, keeping the note issues and deposits of the state banks within certain bounds. Yet there was great reluctance, most pronounced in the newly settled areas of the country, to allow so much authority to the federal government. To this reluctance was added the hostility of a large number of state-chartered banks, whose officers and stockholders were persuaded, rightfully, that banking was more profitable in the absence

of federally chartered institutions. Nevertheless, two experiments with federal regulation left marks on 19th-century banking.

Soon after he became Secretary of the Treasury, Alexander Hamilton proposed the establishment of a Bank of the United States. In his famed Report on a National Bank, he argued that the young country required a major institution to provide a first-rate convertible paper currency, and to serve as lender to the Treasury and fiscal agent for the government. Over

This portrait of financier Alexander Hamilton, less flattering than the Trumbull rendering, hangs in the Treasury. It is this likeness that appears on every $10 bill currently

issued.

the opposition of such major figures as Thomas Jefferson and Edmund Randolph, Congress in 1791 created the first Bank of the United States. With a capital of $10 million, one-fifth of it subscribed by the United States as a major stockholder, the Bank of the United States quickly became the most influential financial institution in the country. Following the clear intent of its charter, the Bank earned most of its income by carrying on a regular commercial banking business, though loans to the government were not unusual. As Hamilton had predicted, the Bank provided valuable services to the government, acting in many respects like a modern central bank. The Bank and its branches followed a conservative lending policy and on balance remained the creditor of the state banks, continually receiving a greater dollar volume of state-bank notes than the state banks received of the Bank's obligations.2 Notes of the Bank of the United States and its branches ordinarily circulated throughout the country at par. The Bank gradually came to hold a substantial portion of the monetary gold and silver of the country, its vaults during the last three years of its existence containing about as much specie as the total holdings of the state banks. Moreover, the Bank gradually took on the responsibility of making specie loans to state banks, many of which came to rely on the federal institution for accommodation in times of stress.

By almost any criterion, the first Bank of the United States must be judged a success. In no comparable period of American history was there such a well-ordered expansion of credit, and after 20 years the monetary system had advanced remarkably from its inauspicious start. Yet a combination of fear and cupidity led to congressional opposition to the Bank's recharter in 1811. Ironically, Albert Gallatin's support of the bill to recharter did more harm than good with other members of Jefferson's party, and the bill failed by the narrowest of margins.

Grave problems of financing the War of 1812, and deterioration of the paper currency as state banks filled the void left by the first Bank, led to renewed support for a federal institution. After congressional wrangling over several bills, the second Bank of the United States was chartered in 1816. With a capital of $35 million, one-fifth of it again subscribed by the government, the second Bank was a major force in the economy. Despite a shaky start, the Bank prospered after 1823 under the leadership of Nicholas Biddle. By 1830 it had become a central bank, controlling the quantity of money in the economy and rendering services to the federal government as well as to commercial banks. At times it acted as a lender of last resort to commercial banks, and it undertook countercyclical action to offset swings in economic activity. Its notes and those of its branches

2 Thus, the Bank was on balance in a position to present state-bank notes for redemption in specie, forcing the state banks to limit their circulation. Although not founded for this ostensible reason, the first Bank of the United States soon exercised a regulatory function.