National Currency and State Bank Currency.--In Competition.--Legal-
tender Bill tended to expand State Bank Circulation.--Secretary
Chase's Recommendation.--Favorably received.--State Bank Circulation,
$150,000,000.--Preliminary Bill to establish National Banks.--
Fessenden.--Sherman.--Hooper.--National Bank System in 1862.--
Discussed among the People.--Recommended by the President.--Mr.
Chase urges it.--Bill introduced and discussed in Senate.--Discussion
in the House.--Bill passed.--Hugh McCulloch of Indiana appointed
Comptroller of the Currency.--Amended Bank Act.--To remedy Defects,
Circulation limited to $500,000,000.--National Power.--State Rights.
--Taxation.--Renewed Debate in Senate and House.--Bill passed.--
Merits of the System.--Former Systems.--First Bank of the United
States.--Charters of United-States banks, 1791-1816.--National
Banks compared with United-States Banks.--One Defective Element.--
Founded on National Debt.
The Secretary of the Treasury had not failed to see that a constant
conflict and damaging competition must ensue between the currency
of the Nation and the currency of the State banks. It was the
course of the banks more than any other agency that had discredited
the "demand notes" and demonstrated to the Treasury Department and
to Congress the absolute necessity of imparting the legal-tender
quality to the paper issued by the government. As this paper took
the place of gold and silver in the payment of every obligation,
both corporate and individual,--except duties on imports and interest
on the National debt,--it was made easy for the State banks to
extend their circulation. It was quite practicable for them to
keep a sufficient amount of legal-tender paper in their vaults to
meet all the probable requirements of redemption, and they were
thus tempted to expand their loans and issue their own bills to a
dangerous extent. It was indeed hardly necessary to provide legal-
tender notes to redeem their own bills. One kind of paper money,
to a large proportion of the public, was practically as good as
another. Coin redemption being abandoned, the banks in a certain
sense lost all moral and legal restraint. The enactment of the
Legal-tender Bill had not therefore given the control of the currency
to the government. It had only increased the dangers of inflation
by the stimulus it imparted and the protection it afforded to the
circulation of State bank notes.
SECRETARY CHASE'S RECOMMENDATION.
Secretary Chase had grasped the situation earlier than the experienced
financiers who assumed to be his special advisers, and while he
was, in the opinion of unjust critics, completely in the hands of
the State banks, he surprised the country by recommending in his
report of December, 1861, the establishment of a National system
that should give the General Government complete control of the
currency. The State bank circulation in the loyal States he
estimated at $150,000,000. "The whole of it," he regarded as "a
loan without interest from the people to the banks." The secretary
thought "it deserves consideration whether sound policy does not
require that the advantages of this loan be transferred from the
banks, representing the interest of stockholders, to the government
representing the aggregate interest of the whole people." Attention
was called to the fact that "the existing circulation depends on
the laws of thirty-four States and the character of some sixteen
hundred private corporations." It was somewhat startling to learn
that "the circulation is usually furnished in greatest proportion
by institutions of least actual capital and is commonly in the
inverse ratio of solvency."
The bold and comprehensive recommendation of Mr. Chase was favorably
received by many of the leading men in Congress and by many of the
ablest financiers of the country. The committees of both Senate
and House were well disposed, but preferred time for consultation
and deliberation. The Secretary of the Treasury, with the aid of
Mr. E. G. Spaulding, Mr. Sherman, and Mr. Samuel Hooper, engaged
in the preparation of a bank bill which in due time was submitted
to the Committee of Ways and Means. The committee was at that
moment engaged on the Internal-revenue Bill, the important character
of which absorbed the attention of Congress. The adjustment of
the tariff duties to the excise taxes was also a serious labor
which left no adequate time to mature a bank bill in season for
its consideration at that session. Indeed the committee was not
able to report the bill to the House until the 12th of July, 1862,
when five thousand extra copies were printed for distribution among
the financial institutions of the country. It was deemed wise to
give the people time to consider so important a measure, and with
that end in view all further action was postponed to the next
session.
Meanwhile the bill was published in the leading papers of the loyal
States and elicited the most diverse opinion. It was however
received with favor by the public. Those interested in the State
banks were at first exceedingly hostile to it. The proposition to
tax their circulation two per cent. in addition to the three per
cent. imposed upon incomes by the new law was considered harsh and
unjust. The object was to compel the retirement of the State bank
circulation. In no other way could a national system be at once
generally instituted. The courts had repeatedly held the authority
of the States to charter banks with power to issue and circulate
notes as money, to be constitutional. Congress could not abridge
this right in any way by direct legislation. Its power to tax was
however undoubted. The friends of the State bank system claimed
that the indirect method of destroying the institution by taxing
its notes out of existence was an arbitrary exercise of questionable
power.
The advocates of a uniform and stable system of banking to cure
the manifold evils then prevailing, admitted that the prerogative
of the States could not be questioned, but urged that the exercise
of it had invariably increased and often produced the financial
troubles which had afflicted the country in the past. If the States
would not surrender their prerogative, the National Government
would be compelled to exercise its larger prerogative embodied in
the power to tax. The right of the nation to do this had been
asserted by the head of the Treasury under a Democratic administration
some years before. Recognizing as he did the necessity of a reform
in the system of banking, Secretary Guthrie in his report to Congress
in 1855 declared that "if the States shall continue the charter
and multiplication of banks with authority to issue and circulate
notes as money, and fail to apply any adequate remedy to the
increasing evil, and also fail to invest Congress with the necessary
power to prohibit the same, Congress may be justified in the exercise
of the power to levy an excise upon them, and thus render the
authority to issue and circulate them valueless."
THE SYSTEM OF NATIONAL BANKS.
During the autumn of 1862 the bank question was subjected to a
thorough discussion among the people. The legal-tender notes had
already become popular, and were evidently preferred by the public
to the notes of local banks. The depression naturally incident to
continued reverses in the field led to the defeat of the Administration
in many of the State elections, but despite the operation of all
adverse causes the general trade of the country was good. The
crops had been abundant and prices were remunerative. All that
had been claimed for the legal-tender bill by its most sanguine
advocates had been realized in the business of the country. The
one disappointment was their failure to keep at par with gold; but
even this, in the general prosperity among the people, did not
create discouragement. The Internal-revenue system had but just
gone into operation, and the only feature embarrassing to the people
was the requirement that the taxes should be paid in the legal-
tender paper of the government. No provision of law could have
operated so powerfully for a system of National banks. The people
were subjected to annoyance and often to expense in exchanging the
notes of their local banks for the government medium. The internal
fiscal machinery of the government evidently required places of
deposit. The tax-collectors could not intrust the funds in their
hands to State banks except at their own risk. The money of the
government was thus liable to loss from the absence of responsible
agencies under the control of National power. The fact that the
bills of State banks were not receivable for taxes tended constantly
to bring them into disrepute. The refusal of the government to
trust its funds in the keeping of the State banks was nothing less
than the requirement of the Sub-treasury Act, but to the popular
apprehension it was a manifestation of distrust which did the banks
great harm. The total revenue of the National Government had before
the war been collected at a few custom-houses on the coast, and
the public had not been generally familiar with the mode of its
safe-keeping. The system of internal taxes now reached the interior,
and the people were made daily witnesses of the fact that the
government would not trust a dollar of its money in the vaults of
a State bank.
Under the influences thus at work, the friends of the State banks
plainly saw that the National system was growing in favor, and they
began to admit that its creation might facilitate the financial
operations of the country. Many of them were willing to give it
a fair trial. The advocates of the National system constantly
pressed their cause among the people. The five-twenty six per
cent. bonds, into which the legal tenders were convertible, offered,
as they explained, an excellent basis for banking. Their absorption
for that purpose would create not only a market for that class of
securities but inevitably cause them to appreciate in value. The
government would thus be largely benefitted, and its cause would
be strengthened by the silent influence of self-interest which
would certainly be developed by the general distribution of its
bonds as the basis of a national currency. It was also urged that
the existing banks could with great facility and without sacrifice
re-organize under the proposed national law.
The popular mind having been thus favorably turned towards the
system of national banks, the President specifically approved it
in his message to Congress in December, 1862. Expressing his doubts
"whether a circulation of United-States notes, payable in coin,
and sufficiently large for the wants of the people, can be permanently,
usefully, and safely maintained," Mr. Lincoln asked if there was
"any other mode by which necessary provision for the public wants
can be made, and the great advantage of a safe and uniform currency
secured?" He declared that he knew of none "which promises so
certain results, and is at the same time so unobjectionable, as
the organization of banking associations under a general law of
Congress well guarded in its provisions." Mr. Chase elaborated
his recommendation of the preceding year to the same effect. He
asked that "a tax might be imposed on the notes of existing banks
such as would practically exclude them from circulation." In their
stead the legal-tender notes would be used, but he preferred "a
circulation furnished by the government but issued by banking
associations organized under a general Act of Congress."
Mr. Chase said "the central idea of the proposed measure is the
establishment of one uniform circulation, of equal value throughout
the country, upon the foundation of national credit combined with
private capital." He suggested that "these associations be entirely
voluntary. Any persons desirous of employing real capital in
sufficient amounts, can, if the plan be adopted, unite together
under proper articles, and having contributed the requisite capital
can invest such part of it, not less than a fixed minimum, in United-
States bonds, and having deposited these bonds with the proper
officer of the United States can receive United-States notes in
such denominations as may be desired, and employ them as money in
discounts and exchanges." As a further inducement, the secretary
said "the stockholders of any existing banks can in like manner
organize under the Act, and transfer, by such degrees as may be
found convenient, the capital of the old to the use of the new
associations. The notes thus put into circulation will be payable
until resumption in United-States notes, and after resumption in
specie, by the association which issues them, on demand, and if
not so paid will be redeemable at the Treasury of the United States
from the proceeds of the bonds pledged in security." The secretary
thought it would be "difficult to conceive of a note circulation
which will combine higher local and general credit than this.
After a few years no other circulation would be used, nor could
the issues of the national circulation be easily increased beyond
the legitimate demands of business. Every dollar of circulation
would represent real capital actually invested in national stocks,
and the total amount issued could at all times be easily and quickly
ascertained from the books of the Treasury."
SENATE DISCUSSES THE BANKING SYSTEM.
The bill to carry out these suggestions was introduced in the Senate
on the 26th of January, 1863, by Mr. Sherman, and was reported from
the Finance Committee on the 2d of February. On the 9th the Senate
took it up for consideration. Mr. Sherman advocated the proposed
system in an elaborate argument on several distinct grounds: "The
banks would furnish a market for United-States bonds; they would
absorb the circulation of the State banks gradually and without
harsh measures; they would create a community of interest between
the stockholders of the banks, the people, and the government,
where now there existed a great contrariety of opinion and a great
diversity of interests; adequate safeguards would be established
against counterfeiting; the currency proposed would be uniform and
would take the place of the notes of sixteen hundred banks, differing
in style, and so easily imitated and altered that while notes of
one-sixth of the existing banks had been counterfeited, 1,861 kinds
of imitations were afloat, and 3,039 alterations, in addition to
1,685 spurious notes, in which hardly any care had been taken to
show any resemblance to the genuine." The national banks would be
depositories of public moneys and their notes would be receivable
for taxes. He concluded by declaring that "we cannot maintain our
nationality unless we establish a sound and stable financial system,
and as the basis of it we must have a uniform national currency."
Accordingly he deemed the passage of the pending bill "more important
than any other measure now pending either in Senate or House."
--Mr. Henderson of Missouri sought to limit the system to banks
with a capital not less then $300,000, and thought "it would be
infinitely better that all the banks should be established in New
York, Philadelphia, Boston, Cincinnati, St. Louis, and such cities
as those." He said "they had had some experience in the West with
banking laws which permitted the organization of banks in out-of-
the-way places, obscure villages, and unknown cross-roads."
--Mr. Powell of Kentucky, who was most persistent in his advocacy
of a currency based on gold and silver coin, moved to "strike from
the bill the words which prevented the acceptance of the National
bank notes for duties on imports." These duties were payable in
coin in order to secure gold with which to pay the interest on the
public debt. In supporting his amendment, Senator Powell said that
if the bill became a law the fact that they could not be received
for customs would tend to depreciate the notes, and he wanted the
credit of the paper money kept up if the country was to have no
other. His motion was defeated.
--Mr. Ira Harris of New York secured the adoption of three sections,
to be added at the end of the bill, which would enable State banks
to accept its provisions and become National institutions more
readily and more easily. He said that he was not opposed to a fair
trial of the new system, but he doubted very much whether the banks
of New York could be induced to abandon their State charters. "The
banking system of New York was the best in the world. The banks
enjoyed privileges which they could not be induced to surrender
and the people would be reluctant to trust any others."
--Mr. John Carlile of West Virginia voted against all amendment
because he wanted the bill to kill itself, which would happen if
it were not improved. He voted against Senator Henderson's amendment
to limit charters to banks with $300,000 capital. If the bill
passed as it came from the Finance Committee there "will be banks
established at every cross-road in the country. The State banks
will be destroyed, and widows and orphans whose all is invested in
the stock of these institutions will be impoverished."
--Mr. Clark of New Hampshire thought the proposed system might be
improved by providing "that there shall be a visitation on the part
of the States." He thought it would give confidence to the banks
if the States "had the right to know how they stood."
--Mr. Pomeroy of Kansas thought the right to organize with a capital
as low as $50,000 was a good provision and would "tend to popularize
and extend the National banks throughout the country."
SENATE DISCUSSES THE BANKING SYSTEM.
--Mr. Howard of Michigan opposed the bill because he thought its
effect would be to "wage a very unnecessary and dangerous war upon
the State institutions," and also because he deplored "the contest
which will probably arise out of it in our local politics."
--Mr. Garrett Davis, avowing himself an advocate of the old United-
States Bank which President Jackson destroyed, was opposed to the
pending bill because "it does not provide for the convertibility
of its paper into coin." The "system is based on government bonds,
and they sold in New York yesterday at a discount of fifty-three
percent."
--Mr. Chandler of Michigan corrected Mr. Davis. "Gold sold at
fifty-three per cent. premium, but that did not mean a discount of
fifty-three per cent. on the bonds."
--Mr. Wilson of Massachusetts pertinently asked Mr. Davis "if the
credit of the government is not good enough, where is there left
in the country any thing good enough to bank on? If the government
goes down, there is not a considerable bank in America that does
not go down with it."
--Mr. Doolittle of Wisconsin regarded it as "a necessity that the
government should take control of the paper currency of the country.
In some way we must restrain the issues of State banks. If we
permit these banks to flood the channels of circulation, we destroy
ourselves."
--Mr. Collamer of Vermont denied the right to tax the State banks
out of existence, and to establish corporations in the State and
Territories. Independently of the power of visitation by those
States and Territories, he objected to making the government
responsible for the ultimate redemption of the bills by the securities
deposited. He inquired in what respect the promises of the National
banks would be better than the notes of the government, and why
should they be substituted for them?
--Mr. Chandler of Michigan claimed that when the whole system was
in operation the government would borrow $300,000,000 at four per
cent. per annum, because, while the bonds deposited with the banks
would draw six per cent., the tax would bring back two per cent.
He did not know how far the bill would go, but "all that is in it
is good."
The bill came to a vote in the Senate on the 12th of February, and
narrowly escaped defeat. The yeas were twenty-three, the nays
twenty-one. The senators from Oregon, Nesmith and Harding, were
the only Democrats who voted in the affirmative. Nine Republican
senators voted against it.
The House of Representatives received the bill on the 19th. Mr.
Spaulding of New York advocated it very earnestly. He stated that
its principle was based on the free banking law of New York, which
had been in successful operation since 1838. He dwelt upon the
national character of the proposed notes, on their use in payment
of taxes, and on the advantage to accrue from the exemption of the
banking associations from State and United-States taxation.
--Mr. Fenton of New York expressed the belief that the measure
would aid in extricating the government from the financial difficulties
in which it was involved, and pronounced it "one of the most potent
means by which the representatives could strengthen the government
and the people in the struggle to put down the enemies of the
country, and give hope and courage to the hearts of those brave
men who have gone forth to battle." Considerable opposition was
offered, chiefly on details and by amendments. But the House
sustained the measure as it came from the Senate, and passed it on
the 20th of February, by the close vote of 78 to 64, on the call
of the ayes and noes. It was approved by the President on the 25th.
The Currency Bureau of the Treasury Department provided for in the
National Banking Act was organized by the appointment of Hugh
McCulloch, who was then at the head of one of the largest State
banking institutions in Indiana. He was recognized as possessing
executive capacity and large experience in financial affairs. He
had originally been opposed, as were many others interested in
State banks, to the National Banking Act, but, as he says, the more
he examined "the system" the more it "grew into favor with him day
by day." This appears to have been the result with all who gave
the question a fair and candid consideration, even when biased by
personal interests or political prejudice. The law was defective
in many particulars and some of its provisions made it difficult
for existing State banks to accept charters under it. The first
annual report of the comptroller of the currency shows that by Nov.
28, 1863, 134 banks had been organized under the Act. Fourteen of
these were in the New-England States, sixteen in New York, twenty
in Pennsylvania, twenty in Indiana, thirty-eight in Ohio; New
Jersey, the District of Columbia, and Kentucky each had one; Illinois
seven, Iowa six, Michigan and Wisconsin four each, and Missouri
two. Their total capital was $7,184,715. The bonds deposited with
the Treasurer of the United States were $3,925,275, their deposits
$7,467,059, and their loans and discounts $5,413,963.
THE AMENDED BANK BILL OF 1864.
In his report Mr. McCulloch pointed out defects of the law which
had become apparent by the test of experience, and made many
suggestions for its improvement. The whole subject was taken into
consideration by the Ways and Means Committee of the House at the
first session of the Thirty-eighth Congress. An amended bill,
which repealed the Act of February 25, 1863, and supplied its place,
was reported from the committee March 14, 1864. It was carefully
considered in the committee of the whole, section by section, and
against the protest of its advocates an amendment was ingrafted
upon it giving to the States the right to impose taxes on the bank
shares for State and municipal purposes to the same degree that
taxes were imposed upon the property of other moneyed corporations.
This bill was reported to the House from the committee of the whole
on the 16th of April, when Mr. Stevens moved a substitute in which
the tax amendment was left out. The substitute was defeated, and
thereupon the immediate friends of the bill united with the opposition
and laid the whole subject on the table. Mr. Stevens was totally
opposed to the exercise of any power whatever by the States over
banks established by National authority.
In the height of the war excitement, when men's minds were inflamed
by a just resentment toward the Southern theory of States' rights,
there was a tendency to go to extremes in the other direction.
Some of the Republican leaders, notably Mr. Stevens, were very
radical in their views in this respect, and would scarcely have
hesitated at the abolition of all the checks upon Federal power
which the Constitution wisely gives to the States. But apart from
considerations of this character it was believed by many of the
friends of the national banking system that the imposition of State
taxes, in addition to those to be imposed by the General Government,
would defeat the object of the bill. Others in their anxiety to
strengthen the National Government were anxious to reserve to it
exclusively the largest possible scope of taxation. It soon became
apparent however that some concession must be made to those of both
political parties who believed that the States could not constitutionally
be deprived of the right to levy uniform taxes on property within
their jurisdiction. To meet the views of these gentlemen the Ways
and Means Committee reported a bill with a provision intended to
reconcile all differences of opinion. This gave to the State the
power to tax the capital stock, circulation, dividends, or business
of national banks at no higher rate than was imposed upon the same
amount of moneyed capital in the hands of individual citizens of
the State, provided no tax was imposed upon that part of the capital
invested in United-States bonds. This was adopted by a vote of 70
to 60 on the 18th of April, 1864.
The opposition to the bill in all other respects save this question
of taxation was confined mainly to the Democratic members of the
House. The measure was by this time regarded favorably by all
Republicans. It was considered to be a part of the Administration
policy, and one that would contribute largely to strengthen the
government in its struggle. Its success thus far had demonstrated
that under a perfected law it would soon become the general and
popular banking system of the country. It was daily growing in
favor with business men, and there was no longer doubt that a large
proportion of the surplus capital of the nation would be invested
in United-States bonds and in the stock of National banks. In the
debate in the House which was prolonged, two speeches of particular
interest were elicited. Mr. James Brooks of New York, as the leader
of the Democratic minority on the question, ably summarized the
objections of his party. He was a man of education and great
intelligence. He had traveled extensively and was a close observer.
He had been a writer for the metropolitan press for many years,
and was familiar with the political and financial history of the
country from an early period. He was an effective speaker. On
the occasion he was in large part supplied with facts by Mr. James
Gallatin, who as president of one of the principal banks of New-
York City had unsuccessfully attempted to dictate the financial
policy of the government in 1861. Mr. Gallatin had conceived an
intense hostility to Mr. Chase, and inspired Mr. Brooks to make in
the course of the debate on the bank bill some unfounded charges
against the Secretary. The speech of Mr. Brooks was a general
attack upon the financial policy of the administration directed
principally against the Legal-tender Act, and at the same time a
qualified defense of the State bank system. He asserted that the
government could have successfully carried on the war upon a specie
basis, but his authority for this claim was Mr. Gallatin. Mr.
Samuel Hooper at the close of the debate defended the financial
policy of the Administration and disposed of the argument of Mr.
Brooks. He asserted that Mr. Gallatin had induced the banks of
New-York City on December 30, 1861, to suspend specie payments,
and briefly related his presumptuous attempt to dictate to the
Secretary of the Treasury the financial policy of the Nation. He
declared that the issue of legal-tender notes was the only resource
left to the government, and "was wise as well as necessary." In
his review of the financial history of the country he dealt
unsparingly with the old State-bank system, and exposed in a masterly
manner its inherent defects even in those States where the greatest
care had been exercised by the Legislative power to hedge it about
with limitations.
THE AMENDED BANK BILL OF 1864.
In the Senate the debate on the House bill was chiefly confined to
amendments proposed by the Finance Committee. The provision
incorporated by the House in regard to taxation was amplified so
as to make it more specific and definite. Considerable opposition
was shown to this action, but Mr. Fessenden, chairman of Finance,
defended the recommendation of his committee and successfully
replied to the arguments against it. An efforts was made by Senators
Doolittle, Henderson, and Trumbull on the Republican side to prevent
the establishment of any more banks under this law than were in
existence in May, 1864, unless they redeemed their notes in coin.
The banks then organized, possessed an aggregate capital of about
$36,000,000, with bonds deposited to secure circulation to the
extent of a little more than $33,000,000. The argument was that
this addition to the legal-tender notes already in circulation
supplied an ample currency for the business of the country. The
issue of the whole $300,000,000 of National bank notes authorized
by the bill, these senators claimed, would be such an expansion of
the currency as would sink its value to almost nothing. They
proposed also to compel the State banks to retire their circulation,
but permitted them to organize on the specie basis as National
banks. Mr. John P. Hale of New Hampshire thought that "it would
be much simpler to incorporate in the bill a provision abolishing
all such instruments as had previously been known as State
constitutions." Senator Collamer proposed to require the banks to
retain in their vaults one-fourth of all the gold they received as
interest on their bonds deposited to secure circulation until the
resumption of specie payments.
These amendments were voted down, and the bill finally passed the
Senate on the 10th of May by a vote of 30 to 9, ten senators being
absent or not voting. A conference committee of the two Houses
agreed upon the points of difference. The report was adopted and
the bill was approved by the President on the 3d of June, 1864.
By the end of November 584 National banks had been organized, with
an aggregate capital of $108,964,597.28, holding $81,961,450 of
the bonds of the United States to secure a circulation of $65,864,650.
These banks at once became agencies for the sale of the government's
securities, and their officers being usually the men of most
experience in financial affairs in their respective communities,
gave encouragement and confidence to their neighbors who had money
to invest. The sale of government bonds was in this way largely
increased. The National banks thus became at once an effective
aid to the government. By the close of the fiscal year 1864
$367,602,529 of bonds were disposed of by the banks. During the
fiscal year 1865 bonds to the amount of $335,266,617 were sold over
their counters. On the 1st of October, 1865, there were in existence
1,513 National banks, with an aggregate capital of $395,729,597.83,
with $276,219,950 of bonds deposited with the Treasurer of the
United States to secure circulation.
Experience has justified the authors and promoters of the national
banking system. Originally the circulation was limited to a total
volume of $300,000,000, apportioned, one-half according to
representative population, and the remainder by the Secretary of
the Treasury among associations with "due regard to the existing
banking capital, resources, and business of the respective States,
Districts, and Territories." Complaint arose that by such limitation
and apportionment injustice was done and monopolies created. After
the war this restriction was removed and banking under the national
system became entirely free. The advantages of uniform circulation
on a basis of undoubted strength and availability have won almost
universal favor among business men and prudent thinkers. The
restoration of the multiform State system, with notes of varying
value and banks of doubtful solvency, would receive no support
among the people.
The National bank system with all its merits has not escaped serious
opposition. The Bank of the United States, as twice established,
incurred the hostility of the Democratic party,--their two greatest
leaders, Jefferson and Jackson, regarding the creation of such an
institution as not warranted by the Constitution. A persistent
attempt has been made by certain partisans to persuade the people
that the national banks of to-day are as objectionable as those
which encountered serious hostility at earlier periods in our
history. An examination into the constitution of the banks formerly
organized by direct authority of the General Government will show
how wide is the difference between them and the present system of
national banks. It will show that the feature of the earlier banks
which evoked such serious opposition and ultimately destroyed them
is not to be found in the present system and could not be incorporated
in it. It was from the first inapplicable and practically
impossible.
THE BANK OF NORTH AMERICA.
The most important financial institution established in the United
States before the adoption of the Constitution was the Bank of
North America, still doing business in Philadelphia, with unbroken
career through all the mutations of the eventful century which has
passed since it was called into existence. It had its origin in
1780, when certain patriotic citizens of Philadelphia resolved to
"open a security subscription of three hundred thousand pounds _in
real money_," the object being to procure supplies for the army,
"then on the point of mutiny for lack of the common necessaries of
life." The enterprising men who had the matter in hand addressed
themselves to the task of providing three million rations and three
hundred hogsheads of rum for the famished troops. The Continental
Congress recognized their patriotic conduct and pledged "the faith
of the government for the effectual reimbursement of the amount
advanced." It fell to Robert Morris, Superintendent of Finance
for the government, to organize the bank which owed its origin to
these circumstances. While engaged in this arduous task he received
two letters of advice from an anonymous source, ably written, and
displaying considerable knowledge of the science of banking, then
almost unknown in America. Indeed the methods of banking--it might
be proper to say its secrets--were jealously guarded by the
capitalists who monopolized it in the financial centres of Europe.
Mr. Morris was struck by the ability and originality of his unknown
correspondent, and was amazed to find that Alexander Hamilton, then
but twenty-three years of age, was the author of the letters. It
was the first exhibition of that mastery of finance which gave Mr.
Hamilton his enduring fame.
When Mr. Hamilton assumed control of the Treasury Department under
the Presidency of Washington he found that the Bank of North America
had accepted a State charter from Pennsylvania and was not therefore
in a position to fulfil the functions of a National bank which he
desired to establish as an aid to the financial operations of the
government. After his funding of the Revolutionary debt he applied
to Congress for the charter of a National bank, with a capital of
$10,000,000, twenty-five per cent. of which must be paid in coin
and the remainder in the bonds of the United States. The government
was to own $2,000,000 of the stock of the bank and was obviously
to become its largest borrower. The measure encountered the
determined opposition of the Secretary of State, Jefferson, and
the Attorney-General, Edmund Randolph, and it finally became an
almost distinctly sectional issue--the Northern members of Congress
with few exceptions sustaining it; the Southern members under the
lead of Mr. Madison almost wholly opposing it. It became a law on
the 25th of February, 1791.
When the charter of the bank--which was granted for twenty years--
expired in 1811 the administration of Mr. Madison favored its
renewal. The eminent financier, Albert Gallatin, then Secretary
of the Treasury, informed Congress that the bank had been "wisely
and skillfully managed." The hostility to it originated in political
considerations. It was regarded as an aristocratic institution,
was violently opposed by the State banks which by this time had
become numerous, and notwithstanding the change of Mr. Madison in
its favor, the bill to re-charter was defeated. The contest however
was severe. In the House the opponents of the bill had but one
majority, and there being a tie in the Senate the re-charter was
defeated by the casting vote of George Clinton the Vice-President.
By this course Congress gave to the State banks a monopoly of the
circulating medium. The war of 1812 followed, and in the sweep of
its disastrous influence a large majority of these banks were
destroyed, their notes never redeemed, and great distress consequently
inflicted upon the people.
It was this result which disposed Congress, as soon as the war was
over, to establish for the second time a Bank of the United States.
The charter was drawn by Alexander J. Dallas who had succeeded Mr.
Gallatin at the Treasury. In the main it followed the provisions
of the first bank, but owing to the growth of the country the
capital stock was enlarged to twenty-five millions, of which the
government subscribed for one-fifth, payable wholly in its own
bonds. Individual subscribers were required to pay one-fourth in
coin and three-fourths in government bonds. The charter was again
limited to twenty years. It was this bank which encountered the
bitter opposition of President Jackson, and which was seriously
injured by his order to the Secretary of the Treasury, Roger B.
Taney, in 1834, to withhold the deposit of government funds from
its vaults. The act of President Jackson is usually referred to
as "a removal of the deposits." This is incorrect. The government
deposits were not removed from the United-States Bank, except in
the ordinary course of business for the needs of the Treasury.
But the order of the President prevented further deposits of
government money being made, and thus destroyed one of the principal
resources upon which the bank had been organized. A short time
before the charter of the United-States Bank expired, a State
charter was obtained from the Legislature of Pennsylvania, under
which the bank continued business until 1841, when its affairs were
wound up with heavy loss to the stockholders.
THE UNITED-STATES BANKS,--1791-1816.
These brief outlines of the charters of the United-States banks of
1791 and 1816 show how entirely dissimilar they were in many
essentials from the system of national banks established under the
Acts of 1863 and 1864. In the first the government was a large
stockholder and the officers of the Treasury practically directed
all the operations and all the details of the bank. In the system
now prevailing the government cannot be a stockholder, and takes
no part in the management of banks except to see that the laws are
complied with and that the safeguards for the public are rigidly
maintained. An especially odious feature in the United-States Bank
was the favoritism shown in its loans, by which it constantly tended
to debauch the public service. Political friends of the institution
were too often accommodated on easy terms, and legitimate banking
was thus rendered impossible. No such abuse is practicable under
the present system. Indeed there is such an entire absence of it
that the opponents of the National banks have not even brought the
accusation.
There was special care taken to place the Currency Bureau entirely
beyond partisan influence. The misfortunes which had come upon
the United-States Bank from its connection with party interests
were fully appreciated by the wise legislators who drafted the
National Bank Act. They determined to guard against the recurrence
of the calamities which destroyed the former system. The original
Act of 1863, organizing the National system, provided that the
Comptroller of the Currency should be appointed by the President
upon the nomination of the Secretary of the Treasury, and, unlike
any other Federal officer at that time, his term was fixed at five
years. This period of service was established in order that it
should not come to an end with the Presidential term. It was also
specifically provided, long in advance of the tenure-of-office Act,
that the President could not remove the Comptroller unless with
the advice and consent of the Senate. The Comptroller was thus
excepted by statute from that long list of officers who were for
many years subjected to change upon the incoming of each Administration.
From the organization of the National Banking system to this time
(1884) there have been four Comptrollers,--three of whom voluntarily
resigned. The present incumbent of the office, Mr. John Jay Knox,
has discharged his important duties with great satisfaction for
twelve years, and with his predecessors has conclusively established
in practice the non-partisan character which is indispensable to
the successful administration of the Bureau.
The division and distribution of bank capital under the National
system do not merely carry its advantages to every community, but
they afford the most complete guaranty against every abuse which
may spring from a large aggregation of capital. The Bank of the
United States in 1816 had a capital of thirty-five millions of
dollars. If a similar institution were established to-day, bearing
a like proportion to the wealth of the country, it would require
a capital of at least six hundred millions of dollars--many fold
larger than the combined wealth of the Bank of England and the Bank
of France. It is hardly conceivable that such a power as this
could ever be intrusted to the management of a Secretary of the
Treasury or to a single board of directors, with the temptations
which would beset them. It is the contemplation of such an enormous
power placed in the hands of any body of men that gives a more
correct appreciation of the conduct and motives of General Jackson
in his determined contest with the United-States Bank. His instincts
were correct. He saw that such an institution increasing with the
growth of the country would surely lead to corruption, and by its
unlimited power would interfere with the independence of Congress
and with the just liberty of the people.
MERITS OF NATIONAL BANK SYSTEM.
The single feature of resemblance between the Bank of the United
States and the system of National banks is found in the fact that
Government bonds constitute the foundation of each. But the use
to which the bonds are devoted in the new system in entirely
different from that of the old. The United-States Bank retained
its bonds in its own vaults, liable to all the defalcation and
mismanagement which might affect the other assets. In the present
system the National Bank deposits its bonds with the Treasury
Department, where they are held as special security for the redemption
of the bills which the bank puts in circulation. The United-States
Bank circulated its bills according to its own discretion, and
there was no assurance to the holder against an over-issue and no
certainty of ultimate redemption. The National Bank can issue no
bills except those furnished by the Treasury Department in exchange
for the bonds deposited to secure prompt redemption. In the former
case there was no protection to the people who trusted the bank by
taking its bills. In the case of the National Bank, the government
holds the security in its own hands and protects the public from
the possibility of loss.
The one defective element in the National bank system is that it
requires the permanence of National debt as the basis of its
existence. In a Republican government the people naturally oppose
a perpetual debt, and could with difficulty be persuaded to consent
to it for any incidental purpose however desirable. But so long
as a National debt exists no use has been found for it more conducive
to the general prosperity than making it the basis of a banking
system in which flexibility and safety are combined to a degree
never before enjoyed in this country and never excelled in any
other. In no other system of banking have the bills had such wide
circulation and such absolute credit. They are not limited to the
United States. They are current in almost every part of the American
continent, and are readily exchangeable for coin in all the marts
of Europe.