61ST CONGRESS SENATE \ DOCUMENT 2d Session \ No. 581 NATIONAL MONETARY COMMISSION State Banking Before the Civil War BY DAVIS R: DEWEY, PH. D. Massachusetts Institute of Technology AND The Safety Fund Banking System in New York 1829-1866 BY ROBERT E. CHADDOCK, PH. D. University of Pennsylvania Washington : Government Printing Office : 1910 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis NATIONAL MONETARY COMMISSION. NELSON W. ALDRICH, Rhode Island, Chairman-. EDWARD B. VREELAND, New York, Vice-Chairman. JULIUS C. BURROWS, Michigan. JOHN W. WEEKS, Massachusetts. EUGENE HALE, Maine. ROBERT W. BONYNGE, Colorado. PHILANDER C. KNOX, Pennsylvania. SYLVESTER C. SMITH, California. THEODORE E. BURTON, Ohio. LEMUEL P. PADGETT, Tennessee. HENRY M. TELLER, Colorado. GEORGE F. BURGESS, Texas. HERNANDO D. MONEY, Mississippi. ARSENE P. PUJO, Louisiana. JOSEPH W. BAILEY, Texas. ARTHUR B. SHELTON, Secretary. A. PIATT ANDREW, Special Assistant to Commission. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis State Banking Before the Civil War BY DAVIS R. DEWEY, PH. D. Massachusetts Institute of Technology Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATE BANKING BEFORE THE CIVIL WAR. CONTENTS. Page. I. Paying in of capital 5 II. Distribution of stock 22 III. State ownership of stock 33 IV. Subscriptions by religious and educational societies 40 V. Length of charter 41 VI. Scope of business 43 VII. Volume of notes 53 VIII. Denominations of notes 63 IX. Redemption of bills; legal penalties 73 X. Redemption by voluntary systems 79 XI. Suffolk system 82 XII. Redemption in New York 96 XIII. Methods of evading redemption 100 XIV. Post notes 104 XV. Note brokerage 107 XVI. System of voting 112 XVII. Liability of directors 115 XVIII. Liability of stockholders 117 XIX. Qualifications of directors 120 XX. Reports from banks; supervision 126 XXI. Branches 136 XXII. Right to carry on a banking business 143 XXIII. Loans and discounts 151 a. Procedure in applications 151 b. Character of security 153 (1) Loans on pledge of bank stock 153 (2) Accommodation paper 155 (3) Loans on real estate 159 (4) Loans on merchandise 162 (5) Loans on stocks 165 (6) Exchange 167 c. Length of loans 182 d. Renewal of loans 185 e. Amount of loan to any one person 187 /. Loans to directors 192 g. Partiality in making loans 198 h. Restrictions on loans to residents and nonresi­ dents 200 XXIV. Loans to States 207 XXV. Loans to special interests 212 XXVI. Deposits 214 XXVII. Specie reserve 217 XXVIII. Surplus... - 225 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATE BANKING BEFORE THE CIVIL WAR. I. PAYING IN OF CAPITAL. Beginning with the period of national independence the earliest banking experiments were founded on specie. The Bank of North America, 1781, was based on specie ob­ tained by the Government from France; and the Bank of Massachusetts had collected in specie $253,500, out of its total capital of $300,000, before it began operation. There was, however, no great supply of precious metals in the country, and when banks began to increase in number it was found impossible to adhere to this conservative rule. Hamilton recognized that it would be impossible to found a great national bank on specie, and so, following the ex­ ample of the Bank of Kngland, in 1790 recommended the use of government securities. The charter of the First Bank of the United States accordingly provided that only $2,000,000, or one-fourth of the capital subscribed by individuals, should be paid in gold and silver, and the remainder in government stock. Even for this compara­ tively small amount payment by installments was per­ mitted, and the bank was authorized to begin operations when $400,000 was paid in. This method was repeated in the capitalization of the Second United States Bank in 1816. In nearly all local charters provision was made that the State should subscribe for a portion of the capital, but 5 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis National Monetary Commission this subscription did not necessarily mean that money was actually to be paid in, but rather stock or bonds. The United States Government, which subscribed for $2,000,000 of the stock of the First Bank, borrowed its subscription from the bank. But the bank, having no money to lend, passed a credit of $2,000,000 on its books to the Government, on which it paid 6 per cent.0 In the case of the Bank of Pennsylvania, 1793, the State sub­ scribed for its third, or $1,000,000, of the capital in United States stock, and again, in 1803, took advantage of this privilege when such securities were selling at a discount. The charter of the Bank of America in New York, 1811, with a capital of $6,000,000, allowed $5,000,000 to be subscribed in stock of the Bank of the United States and called for only $1,000,000 in cash. The instability of bank capital was rendered even more insecure by abuses of a flagrant character. As a rule, subscriptions were made in installments extending from one to four years, and it became a common practice for subscribers, after the first installment was paid, to pledge their stock, then only partially purchased, back to the bank for a loan with which to settle for subsequent obli­ gations. " Speculators in shares were not slow to perceive that if they could put their own stock notes into the bank instead of cash, they might get something for nothing. If the bank survived the dividends would probably exceed the interest on the stock notes, the difference being a clear gain to the shareholders, without any investment of their a Gouge: Inquiry into the Principles of the American Banking System, p. 72. 6 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis State Banking Before Civil War own money."0 Many banks, therefore, were established on an inadequate specie basis, represented by a first in­ stallment of from 5 to 15 per cent of the capital. In 1820 Secretary Crawford reported that although the banking capital was nominally over $125,000,000, including that of the Second United States Bank, the actual capital paid in was only $94,000,000. The active capital, however, in his opinion, did not even reach this, as stockholders were allowed permanent accommodations at the bank or were permitted to pay portions of their stock subscriptions with their own notes. In this way most of the banks estab­ lished after 1812 had been organized: " Not because there was capital seeking investment, not because the places where they were established had commerce and manufac­ tures which required their fostering aid, but because men without active capital wanted the means of obtaining loans which their standing in the community would not command from banks or individuals having real capital and established credit. "& The active capital was conse­ quently estimated as not over $75,000,000. Gouge vividly describes the method: "The first in­ stallment, which we shall suppose to be $5 on a share, en­ ables the banks to purchase desks and the counter and to pay for engraving and printing its notes. It has, then, the necessary apparatus for commencing its operations, and it has, perhaps, a specie fund in reserve, of three or four dollars for each share of stock, to meet contingencies. It then begins to discount notes and circulate paper. As a White: Money and Banking, p. 291. b Report of the Secretary of the Treasury, February 24, 1820. 7 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis National Monetary Commission the bank notes will serve the purposes of trade in the neighborhood, the specie is sent to distant places to pro­ cure commodities. Then comes the time for paying the second, third, or fourth installment. The bank makes a call on the stockholders. Some of them hypothecate their stock; that is, pledge it to the bank and with the means obtained from the bank itself pay in their proportion. Others have obtained the means by discounts of accom­ modation notes without any hypothecation of stock. Some few pay in real money, but they generally pay in the notes of the bank itself, or of similar institutions. Thus, bank capitals are formed by exchanging one kind of promises to pay for another kind of promises to pay. This mode of forming bank capitals with the stock notes of the subscribers is not peculiar to banks of the second and third order. The banks of the most approved stand­ ing have formed their capitals in the same way."a Under the conditions of the charter of the First United States Bank it is not probable that more than $500,000 of a total of $10,000,000 was ever paid in specie. This method was repeated in the establishment of the Second Bank, for the third installment was not paid in specie, but in bank notes or stock notes. Lowndes, of South Carolina, in a congressional debate in 1818, declared that everyone anticipated the payment of the capital of this bank by notes discounted for that purpose; as the bank was in full operation it could not be expected to exclude its own stockholders from discounts; and it*was probable that a a Gouge: Inquiry into the Principles of the American Banking System, pp.