it was thought, was due rather to his belief that the Bank was his
enemy than to any dislike of a national bank. The growing hostility
between him and Henry Clay induced the latter to make the renewal of
the Bank’s charter a political issue. When the bill rechartering the
Bank was passed in July, 1832, Jackson vetoed it, charging, in the
main, that the Bank was a monopoly. This brought the question of the
further existence of the Bank fully into the arena of politics, in the
presidential election of 1832, with the “Hero of New Orleans” on one
side, and on the other “monster monopoly,” “Old Nick’s money,” and
“Clay’s rags.” Jackson won, and speedily decided to remove the public
deposits from the Bank. This decision precipitated a bitter war between
Jackson and Congress. But Jackson did not swerve from his purpose. By
1835 it became apparent that the Bank could not secure a renewal of its
charter from Congress. As a confession of its defeat, and just thirteen
days before the expiration of its federal charter, the Bank obtained
from the State of Pennsylvania, February 18, 1836, a charter for the
United States Bank of Pennsylvania, for a period of thirty years. Shorn
of its importance, in a restricted field, yet with enormous capital,
it fell into large bond and stock investments of questionable value.
Its troubles were aggravated by bad management. It suspended during the
panic of 1837 and the next year, and again for the last time in 1841.
Biddle resigned the presidency in 1840, and four years later died poor
and broken-hearted. Thus perished what is sometimes called the third
Bank of the United States, its predecessor, the second Bank of the
United States, having fallen a victim to political intrigue and loss of
prestige. The shareholders lost their entire investment of $28,000,000,
but the circulating notes were all paid, and also the deposits. The
government got back its investment of $7,000,000, and made $6,093,167
besides, from its connection with the Bank.
[Illustration: SECOND UNITED STATES BANK, PHILADELPHIA. NOW CUSTOM
HOUSE.]
STATE BANKS AND INDEPENDENT TREASURY.—After the removal of deposits
from the Bank of the United States, September 26, 1833, the public
revenues were deposited in selected State banks, sometimes called “pet
banks.” In 1836 eighty-eight State banks in twenty-four States held
public deposits to the amount of $49,377,986. As the State banks had
thrown their influence against the national bank, they were rewarded
by allowing them to use the public money intrusted to them as a basis
of extending their loans and for enormous issues of their own notes.
Banks were started for the sole purpose of issuing notes which they
could use in buying public lands. As a consequence the government lost
heavily through the depreciation of these notes and the failure of
the banks. On July 11, 1836, the Secretary of the Treasury issued a
circular forbidding the receipt of anything but specie in payment for
public lands. This caused a run on the banks and aided in hastening
the financial crisis of 1837. An act of Congress of June 23, 1836,
authorizing the calling in of $37,468,859 of the public funds deposited
in the State banks, for purposes of distribution, forced the suspension
of specie payments by all such banks, with very few exceptions.
The unsatisfactory trial of both federal and State banks as custodians
of the public funds led to the establishment of what became known as
the independent Treasury system, by which the government collects its
money and keeps it in the hands of the United States Treasurer or
sub-treasurers, making disbursements when required. An act putting this
system into effect became law July 4, 1840, but was repealed the next
year. It was repassed August 6, 1846, and remained in operation until
the passage of the National Currency Act in February, 1863, which gave
the Secretary of the Treasury the right to designate certain national
banks as depositories of public funds. There were in such banks, on
February 4, 1899, United States deposits amounting to $81,120,873,
secured by United States bonds belonging to the banks and deposited
in the Treasury, amounting to $89,100,240. Prior to the adoption of
the national banking system the country had a somewhat disastrous
experience with what has been known as “wild-cat” banks. Many of
them were organized for the sole purpose of issuing notes they never
intended to pay. While they were numerous and dangerous, it must be
remembered that in a number of States the leading banks carried on only
a legitimate business, and State banks as they exist to-day compare
favorably in their management with the national banks.
IV. HISTORY OF THE LEGAL-TENDER NOTE.
The first act authorizing the issue of legal-tender notes, known
popularly as greenbacks, was approved by President Lincoln, February
25, 1862. It provided for the issue of $150,000,000 in notes, in
denominations of not less than $5.00. Holders of these notes could
deposit them with the United States Treasurer or assistant treasurers
in any sum not less than $50.00, or any multiple thereof, and receive
United States bonds bearing six per cent interest. The first notes
were issued March 10, 1862. An act authorizing a second issue of
$150,000,000 was signed by the President, July 11, 1862. Of these
$35,000,000 were to be in denominations of less than $5.00. A third
issue of $150,000,000 was authorized March 3, 1863, but this act
deprived the legal-tender note of its convertibility into six per cent
bonds at the option of the holder.
The withdrawal of this privilege worked no particular hardship at the
time, for bond issues and various interest-bearing certificates were
plenty during the period of war. But after the war had closed and the
issues of new securities had ceased, the absence of this provision
began to prevent the absorption of the legal-tender notes.
The highest amount of legal-tender notes outstanding at any date was on
January 3, 1864, $449,338,902. Their depreciation was hastened by the
issue of the short-time interest-bearing securities in large amounts.
During 1862 the average gold premium was 113.3; during 1863, 145.2;
during 1864, 203.3. In July, 1864, this premium reached its highest
point, an average of 258.1.
In 1865 the country began to feel the necessity of a contraction of
the currency, with a view to as early a resumption of specie payments
as the business interests would permit, and the Congress expressed
the public sentiment by an almost unanimous resolution. On March 12,
1866, an act was approved calling for the retirement and cancellation
of not more than $10,000,000 of legal tenders within six months, and
thereafter not more than $4,000,000 during any one month. The effect
was to reduce the legal tenders outstanding on December 31, 1867, to
$356,000,000.
This reduction, together with the rapid payment of notes of other
classes, used as currency, led to so sudden a contraction of the
circulating medium, and such stringency in the money market, that
Congress, by act of February 4, 1868, prohibited the further reduction
of the legal-tender notes. The amount outstanding, October 1, 1872, was
$356,000,000, and on January 1, 1874, $382,979,815, the increase being
due to a construction on the part of secretaries of the Treasury to the
effect that they had power to reissue retired notes which were held as
a reserve. On June 20, 1874, Congress enacted that the United States
notes outstanding and to be used as part of the circulating medium
should not exceed $382,000,000, and that no part thereof should be held
or used as a reserve.
Another attempt was made in 1875 to reduce the aggregate of
legal-tender notes, preparatory to the resumption of specie payments.
The Resumption Act of January 14, 1875, authorized, among other things,
the retirement and cancellation of legal tenders till the amount
outstanding should be reduced to $300,000,000; $35,318,984 were retired
under this law, but further reduction was prohibited by act of May 31,
1878. The amount outstanding at that date was $346,681,016, and this
has continued to the present time, no new issues having been authorized.
On January 1, 1879, the resumption of specie payments took place as
provided in the act of January 14, 1875. At this latter date, the
only legal-tender coin recognized by law was the gold coin. But, in
February, 1878, the coinage of standard silver dollars was authorized,
and they were to be a legal tender for all debts, unless otherwise
expressly stipulated in the contract. This led to the claim on the part
of those who favored silver that the redemption of legal-tender notes,
provided for in coin in the act of 1875, could be effected by the use
of silver dollars. But the general, and doubtless sound, construction
of the law of 1875 has been that it was an express contract to redeem
the legal-tender notes in the coin then recognized as legal tender, and
in no other; and so the Treasury has redeemed legal tenders since 1879,
in gold, when the same is demanded.
In 1869 the United States Supreme Court, the bench not being
full, declared the acts authorizing legal-tender notes to be
unconstitutional. But subsequently, the bench having its full quota
of nine, the Court sustained the constitutionality of the acts, on
the ground, mainly, that they were a proper exercise of the war power
vested in the Congress. In 1883 the Court decided that the reissues of
these notes, made in time of peace, were constitutional.
At the time of the resumption of specie payments there were
$135,000,000 in gold and bullion on hand to provide for the redemption
of such notes as might be presented. By Act of July 12, 1882, it was
provided that when the redemption reserve of gold coin and bullion in
the Treasury fell below $100,000,000, the issue of gold certificates
should cease. This is held to indicate that Congress regarded
$100,000,000 as the limit below which the redemption reserve should not
be permitted to fall.
If this reserve had not been called upon to bear other burdens, there
would probably never have been any doubts as to its sufficiency. In
1878, however, began the coinage of silver dollars and the issue of
silver certificates. These notes were kept at par in gold by their
interchangeability in the operations of commerce for legal-tender
notes. They were thus an indirect charge on the gold reserve. From 1878
to 1890 they were increased at the rate of over $2,500,000 a month. In
that year (July 14, 1890) an act was passed providing for the issue of
Treasury notes in the purchase of silver bullion, which provided also
for the coinage of some of the bullion purchased into silver dollars.
These Treasury notes were redeemable both in gold and silver, and as
the government never availed itself of its option to redeem in silver
when gold was demanded for them, these notes as they were issued became
a further burden on the gold reserve provided for the legal-tender
notes.
By the beginning of the year 1893 the legal-tender notes, silver
certificates, and Treasury notes had reached an aggregate of nearly
$800,000,000, all depending on the Treasury reserve for gold redemption.
This reduction of the percentage of gold held to the amount of the
demand liabilities raised doubts as to the ability of the government
to maintain gold payments, and the legal tenders and Treasury notes
were presented for redemption. The depletion of gold was so great that
on one or two occasions there was danger that the reserve would be
exhausted, and resort was had to the sale of bonds to procure gold to
replenish the reserve.
The issue of further Treasury notes was stopped by the repeal of the
act of 1890 in November, 1893, and since this repeal confidence in the
ability of the Treasury to maintain gold redemptions has been gradually
restored.
Under the provisions of the Act of May, 1878, the legal-tender notes
when redeemed cannot be canceled. They must be paid out again, and
therefore when reissued, they may again be presented for redemption.
This constitutes the so-called endless chain by which the gold in the
Treasury is always liable to be drawn out.
V. THE NATIONAL BANKING SYSTEM.
The desirability of perfecting the banking and currency system of the
country was readily perceived on the breaking out of the Civil War in
1861. Secretary Chase in two annual reports, those of 1861 and 1862,
recommended a system of national banks, whose supervision should be
by national authority, and whose issues of notes should be based
on deposits of bonds of the government. After several unsuccessful
attempts, a bill, introduced by Mr. Sherman, passed both Senate and
House, and became a law February 25, 1863. This act embodied the
essential features of Mr. Chase’s reports. Under it the first charter
was issued to the First National Bank of Philadelphia.
The formation of national banks proceeded very slowly at first. In
order to hold out greater inducements for the State banks to enter the
national system, the act was amended on June 3, 1864. The first report
of the Comptroller of the Currency, November 28, 1863, showed that
only 134 national banks had been organized up to that date; but when
the act of June 3, 1864, went into operation, new banks were formed
more frequently. A more rapid increase took place after the passage
of the act of March 3, 1865, imposing a tax of 10 per cent on the
circulating notes of State banks. This increase was from 638 banks in
January, 1865, to 1513 in October of the same year; with an increase
in capital of from $135,618,874 to $393,187,206; and in circulation of
from $66,769,375 to $171,321,903. Prior to 1869 national banks were
required to make their reports on fixed dates, but after March 3, 1869,
they were required by law to make their reports to the Comptroller five
times a year on some past date fixed upon by the Comptroller.
NATIONAL BANK LAWS AND REGULATIONS.—The national banks are under the
supervision of the Comptroller of the Currency, who is appointed by the
President on the recommendation of the Secretary of the Treasury. His
salary is $5000 a year.
A national bank may be organized by any number of persons not less
than five, on permission of the Comptroller. The capital required is
not less than $50,000 in any case, and this minimum applies only to
towns the population of which does not exceed 6000; in cities having
a population exceeding 50,000, the minimum capital is $200,000. For
places having a population over 6000 and not exceeding 50,000, the
capital required is $100,000. One half of the capital must be paid in
before the bank is authorized to begin business, and the remainder in
installments of not less than 10 per cent on the entire amount of the
capital, as frequently as one installment at the end of each succeeding
month from the time it is authorized to begin business. Capital stock
is divided into shares of $100 each.
The banks are managed by a board of not less than five directors,
chosen by the stockholders. Executive officers of the bank—president,
vice-president, cashier, and assistant cashier—are chosen by the
directors.
Shareholders are individually liable for the debts, contracts, and
engagements of the bank to the extent of the amount of their stock
therein, at the par value, in addition to the amount invested in such
shares. This is what is known as the double liability of shareholders,
and is one of the features adding to the strength of the system.
National banks are designated by the Secretary of the Treasury to
act as depositaries or custodians of public money. Such deposits are
secured specially by a deposit of United States bonds with the Treasury.
All national banks before commencing business are required to transfer
and deliver to the Treasurer of the United States, as security for
their circulating notes, United States registered bonds to an amount
not less than one fourth the capital where the capital is $150,000 or
less, and to the amount of $50,000 where the capital is in excess of
$150,000. These bonds must be taken by the banks whether they issue
circulation or not.
Circulating notes are issued to national banks on a deposit of United
States bonds with the Treasurer. Notes are limited to 90 per cent of
the par value of the bonds, also to 90 per cent of the capital of the
bank. They are over-secured, and no holder of them has ever lost a
dollar by reason of the failure of a bank.
The notes are secured by the government bonds, there being a difference
of the 10 per cent between the par of the bonds and the notes issued,
and the bonds nearly always command a premium. They are further secured
by the first lien on the assets of the bank, including the double
liability of shareholders, by a 5 per cent redemption fund in the
Treasury, and also by the margin between the capital and the amount of
notes permitted.
National bank notes are redeemable at the counters of the issuing banks
and at the Treasury in “lawful money” of the United States. This term,
as commonly used, means legal-tender money, and in practice, perhaps,
gold coin or legal-tender notes.
Reserves of national banks are the amounts of money kept on hand to
pay their deposits and current checks and drafts. This reserve is to
be kept in lawful money,—gold and silver coin or certificates, and
United States currency certificates or legal-tender notes. There are
three central reserve cities, namely, New York, Chicago, and St. Louis.
National banks in these three cities must keep a reserve of 25 per
cent against their deposits, and this amount must be kept in their
own vaults. There are twenty-four other reserve cities which are also
required to keep a reserve of 25 per cent, but one half of that amount
may be due from other banks in New York and other central reserve
cities, approved as reserve agents by the Comptroller of the Currency.
Banks outside of these reserve cities must keep a reserve of 15 per
cent, three fifths of which may be due from approved reserve agents in
the reserve cities or central reserve cities.
In times of panic when there is a run on banks they may use this
reserve to pay their depositors, and it often happens that the reserve
falls below the amount required by law. Under such circumstances the
Comptroller may notify the banks to make good the deficiency; failing
to comply with this request within thirty days, they may be closed.
National banks are not permitted to make loans on real estate.
The regulations prescribed by the law for the management of these
institutions are very stringent, supplemented by a system of
examination and reports.
In 1896 the Comptroller of the Currency estimated that the government
had made a net profit of $157,439,248.98 out of the revenues derived
from the national banks. It was estimated in the same report that the
average percentage of dividends paid to creditors of insolvent national
banks was 75 per cent. There have been no losses on circulation. In
1878 the Comptroller estimated that the annual losses upon all the
currency issued by State and private banks amounted to 5 per cent
annually.
The national banks are not monopolistic. Any body of five reputable
citizens can form one by getting together $50,000 capital. The total
shares of the national banks are approximately 300,000.
Profits on national bank stock are not exorbitant. For a period of
twenty-nine years the net earnings on capital and surplus have been
only a little over 7 per cent.
[Illustration: THE BOURSE, PARIS.]
Since the establishment of the national banking system 5171 banks
have been organized, of which 1224 have gone into liquidation, 368
have become insolvent, and 3579 are in operation (February 4, 1899).
There is a marked falling off in the number of new national banks
organized in recent years. In 1890 there were 307 organized, but in
1898 there were only 50 organizations reported, and that was the
highest number reported since 1893. The capital of the national banks
is also decreasing, but the deposits show a large increase.
At present the State banks are gaining in numbers more rapidly than the
national banks.
[Illustration: BANK OF ENGLAND, LONDON.]
PROFIT ON NATIONAL BANK CIRCULATION.—Many suppose that national banks
make an undue profit on the privilege they have of issuing notes to
circulate as money, based on a deposit of bonds with the United States
treasurer. Official figures disprove this. The total national bank
notes outstanding, February 4, 1899, was $203,636,184.50. The law
permits these banks to issue notes to the extent of 90 per cent of
their capital. This capital, on February 4, 1899, was $608,301,245.
Therefore they might have had notes at issue on that date to the amount
of $545,871,120.50, instead of only $203,636,184.50. This is conclusive
evidence that there is no substantial profit in the issuing of such
notes.
In the figures furnished by the Comptroller of the Currency for 1898,
he shows that the profit which a national bank could make by taking out
circulation on a deposit of $100,000 of United States bonds, on October
31, 1898, was less than 1 per cent. On that date eight leading banks
had no circulating notes at all out. The meagre profits of national
banks explain why they do not supply an adequate paper currency. The
restrictions on them make it impossible to render any substantial
assistance to business in this respect. This is especially true in
times of panic. Possessing gigantic strength, they are compelled to see
the industries of the country attacked by doubt and distrust, and are
unable to go to their aid because of the restraints which forbid them
to exercise their legitimate functions.
VI. FOREIGN BANKING AND FINANCE.
Most foreign countries issue metallic money only, except those that are
on a paper basis. In general the paper currency is issued by banks,
many of which are more or less remotely associated with the government.
Some of these banks issue notes on the security of the government or
other stocks and bonds, while many emit notes based on no special form
of security, but upon the general assets of the bank.
As compared with the United States there are but few banks in the
principal foreign countries. England has less than one hundred;
Scotland less than a dozen; Canada but thirty-eight chartered banks. As
in other foreign countries, the Canadian banks have numerous branches
affiliated with the head office. National banks in the United States
are prohibited from having branches. The Bank of France, the Bank of
England, the Imperial Bank of Germany, the Austro-Hungarian Bank, the
Imperial Bank of Russia, are all more or less intimately associated
with their respective governments.
[Illustration: GERMAN BANK, BREMEN.]
The Bank of England was incorporated by royal charter, July 27, 1694,
its incorporators lending £1,200,000 to the government, in return
for which the Bank was permitted to issue notes to a like amount. It
had a practical monopoly up to 1826, and even now, it is believed,
no bank within a radius of 65 miles of London may issue notes. It
has suspended specie payments more than once. In 1844, the banking
and issue departments of the Bank were separated. One fifth of the
reserve may be silver, though in practice the reserve is kept in gold
coin and bullion. Its notes are based on gold, except £16,800,000,
which are secured by the government debt and other securities. It is
compelled to buy all gold offered at a fixed price, paying for it in
notes. So it must redeem all notes on demand in gold. When so redeemed
they are canceled and, after five years, burned. No notes of a less
denomination than five pounds are issued. The Bank checks gold exports
by raising the rate of discount. The building covers about four acres of
ground, and employs over eleven hundred persons. It is the keystone of
the entire system of British credit, and commands the assistance of the
Government when needed.
The Scotch banks issue notes on their own credit to the amount
outstanding at the time of the passage of the Bank Act in 1844. Their
rate of interest is said to be the same at all of their thousand
offices. A unique feature of the Scotch banking system is that of cash
credits, by means of which a person of good credit may get his checks
cashed without a deposit of actual money, the banks simply entering the
credits on their books.
The Bank of France has a monopoly of note issues, charges a premium on
gold for export, and may redeem its notes in either gold or silver. The
Imperial Bank of Germany and a few other German banks issue notes on
gold and other securities, and further amounts on their general credit.
Beyond a fixed sum, called the emergency circulation, a tax of five per
cent is levied. Other European banks are generally modeled on the same
leading principle—a central bank of issue, with numerous branches, and
associated with the Government directly or indirectly. The Imperial
Bank of Russia issues notes practically covered by gold and redeemable
in that coin. Japan tried a system of national banks combined with
Government paper money, but is now substituting a system of bank notes
issued by the Bank of Japan.
VII. UNITED STATES GOVERNMENT DEBT SINCE 1857.
In 1857 the Government owed only $10,000,000 over and above the cash
held in the treasury. At the breaking out of the Civil War the debt had
increased to about $80,000,000. By August 31, 1865, it had increased
to $2,756,000,000, with an interest charge of $150,000,000. In
twenty-eight years, down to June 30, 1893, the Government extinguished
$1,917,500,000 of its debt, paid $2,364,000,000 for interest on its
debt, and $118,000,000 for premium on bonds redeemed, making a grand
total of $4,400,000,000, or an annual average payment of $157,000,000
for the entire period.