C. Conditions of Banking in 18601

During the decade 1850-1860 the banks of the country multiplied in number and enjoyed increased prosperity. Trade and commerce, both domestic and foreign, flourished, and the general prosperity of the time was reflected by the sound condition of banking. A partial report of conditions in 1860 is as follows:

Among the evidences of prosperity and general accumulation of wealth in the United States, the multiplication of banks with increased aggregate capital is one of the most significant. When, as in this country has been generally the case, individual promises representing produce and merchandize, and made available through the instrumentality of banks, are almost the sole means by which commodities pass from the producers to the consumers, the increased action of the banks becomes the index of larger production and more active trade. Where crops and the products of manufacturing industry are more abundant, the aggregate amount of paper created by their interchange is larger, and the negotiations of this paper require greater banking facilities. This want usually manifests itself in a more lucrative banking business, which draws more capital into that employment. Such a state of affairs presented itself during the decade which closed with 1860. The bank movement in the United States during that period underwent great expansion without becoming less sound. In that respect it presented a strong contrast to the expansion that occurred in the decade which ended with 1840. In that period a season of speculation in bank stocks and wild lands manifested itself, and the paper created for bank negotiation represented imaginary or speculative values rather than commodities produced. Those values were never realized, and the whole paper system based on them collapsed. If we compare the aggregate features of the banks at each decade with . . . the sum of the imports and exports for corresponding dates, the results are as follows:

1830

330 $145,192,268 $200,451,214 $22,114,917 $ 61,323,898 $144,726,428 1840 901 358,442,692 462,896,523 33,105,155 106,968,572 1843 691 228,861,948 254,544,937 33,505,806

239,227,465

149,090,279

58,563,608 412,607,653 48,677,138 155,012,911 330,037,038 691,945,580 83,594,537 207,102,477 762,288,550

1 Preliminary Report on the Eighth Census, 1860 (Washington, 1862), 75-8.

The year 1843 was that of the lowest depression after the extensive liquidation that following the expansions of 1837-'39. In that year the bank credits were, however, large, as measured by the foreign trade or the sum of the imports and exports, but an internal trade had been developed through the settlements of the western country which required more credits. The operation of the general bankrupt law aided in clearing away the wreck of over two hundred banks that had failed, and which failures involved that of several sovereign States that had loaned their credits for bank capital.

The elements of prosperity were now again active, and banking facilities were required to a greater extent. The severe losses the public had suffered made some more comprehensive guarantee necessary to a full restoration of confidence in bank paper. In New York, in 1838, a new principle had been adopted — that of requiring the banks to deposit security for their circulating notes and holding stockholders liable to an amount equal to the value of their shares. On this basis the banking of New York was thenceforth to operate; and the principle, as its value became recognized, was gradually adopted in other States.

The failure of the Irish harvests of 1846-'47, followed by those of England in 1848-49 by creating a great demand for American breadstuffs, stimulated business and gave a new impulse to banking. The year 1850 showed an amount of foreign trade more than double that of 1843. With the increase of business the banks were very prosperous, as is manifest in the fact, that although the capital of the banks was no more in that year than in 1843, their discounts were one hundred and fifty millions, or 60 per cent. greater. Thus the decade opened with a very lucrative banking business, and amid the greatest excitement in relation to the gold discoveries of California. The spirit of enterprise abroad was very strong, and the impression that prices were to rise by reason of the depreciation of gold was prevalent; hence the general desire to operate, in order to avail of the anticipated profits. Industry of all descriptions was very active and productive, and there never was a period when the national capital accumulated so fast, a remarkable evidence of which was afforded in the vast amount expended in the construction of railroads; while, of the large capital accumulated, a considerable portion was employed in banking. The incorporated bank capital increased nearly two hundred millions, and the private bank capital half as much. The report of the Treasury Department gave the latter amount at $118,036,080....

The increase of bank capital was large in the Atlantic cities, par

ticularly in Boston and New York, of which the number and capital were respectively as follows:

This increase of banks, following the general expansion of business, brought with it the necessity of some improved means of adjusting the daily mutual balances. The fifty-five banks in New York city, for example, were each compelled to settle as many accounts daily. To obviate that great labor the clearing system was devised. Each bank sends every morning to the clearing-house all the checks and demands it may have received the day previous, in the course of business, upon all others. These in a short time are interchanged, and a balance struck and paid. This system was established in 1853, and the amount of the exchanges and balances annually were as follows:

With the development of business the transactions grew immensely up to 1858, when they fell off nearly one-half under the panic of that year. They recovered gradually up to the breaking out of the rebellion. The banks of Boston and Philadelphia adopted the same sys

tem with similar results. The figures indicate to what an extent the credits of individuals, created in the operations of business, are cancelled through the intervention of the banks of the cities where the commerce of the whole country centralizes.

In the States of Illinois, Mississippi, Arkansas and Florida, after the collapse of 1837, no banks were again created up to 1850, and the three last named are still without them, with the exception of two small ones in Florida. Texas has a small bank at Galveston, and Utah, Oregon, and New Mexico have none. In the District of Columbia four old banks expired by limitation of charter in the hands of trustees, and Congress refused to recharter them; but they continue to transact business.

It is probable that a large portion of the increase in banking, particularly at the west, has been due to the introduction of the security system of New York, the idea of which seemed to popularize that which had previously been in bad odor. The following table shows the States which have adopted the free banking principle in whole or in part:

V. CURRENCY AND COINAGE

A. Currencies and their Movements, 18521

The movement of coin and bank notes during the period 1836-1849 indicates several important monetary laws as follows: (1) seasonal demands for money; (2) tendency of a cheaper money to drive a dearer money out of circulation; and (3) settlement of balances of trade.

Our foreign commerce has not only affected the specie in our country, but it has had a general influence also upon the circulation of our banks. Prior to the acquisition of California in 1848, the production of gold and silver annually by our mines, was but little over half a million of dollars. About $2,000,000 more than the products of our mines were needed annually to satisfy the pride of the people, and supply them with utensils and ornaments; and to keep pace with the increase of our population, requires an increase of coin of $2,500,000 annually; so that we needed about $5,000,000 annually to supply the wants of the country, and have a sufficient specie basis to sustain our banks, and maintain the credit of our paper currency. The amount of specie in the United States is so exceedingly small, in proportion to the population and commercial wants of the country, that large importations of foreign goods, and an exportation of specie to the amount of $4,000,000 or $5,000,000 a year, for two or three years in succession, will inevitably weaken the banks very much, produce a panic, and a run upon many of them, and cause many failures, if not a general suspension of specie payments. This is verified by the commercial revulsion from 1837 to 1842. In May, 1837, nearly all the banks in the United States suspended specie payments; during the year ending September 30th, 1838, our imports amounted to but $108,486,616, including $17,747,116 specie, and but little over $90,000,000 in merchandise and foreign products; our exports the same year amounted to $113,717,404, including but $3,508,046 in specie — that is we exported exclusive of specie, over $110,000,000 in amount, and imported but little over $90,000,000; paid off several millions of debts, and got a balance of over $14,000,000 specie to sustain our banks. This enabled nearly all the banks in the old States, and many in the new ones, to resume specie payments during the spring and summer of the year 1838, and to go on for some time prosperously; but the free-trade compromise act again invited large importations of foreign goods, amounting, during the year ending September 30th,

1 Essays on the Progress of Nations. By Ezra C. Seaman (New York, 1852),