William Berkey
The Money Question

PAPER
MONETARY SYSTEM


CHAPTER V.
PAPER MONEY AND BANKS OF THE UNITED STATES.



THE trials and tribulations to which the American people have been subjected from the earliest settlement of the country, on account of the want of a proper and well settled system of money, would form a sad but instructive chapter, in American history.  The limits of this volume, however, preclude more than a cursory view of the subject, but that will be sufficient to establish the fact that when paper money fails to perform the functions of money, it is because it is not based on sound principles, and also that bank notes, nominally redeemable in specie, constitute the worst form of paper money ever devised.

For many generations after the first settlement of the colonies the work of production was slow and laborious, and the surplus products, at least such as could find their way to foreign markets, were hardly sufficient to procure in return the common necessaries of life.  The small sums of money brought to the country by the settlers were soon exhausted—sent abroad for merchandise, and trade for the most part had to be carried on by the inconvenient method of barter.  The Indians found along the shores of Long Island Sound were more advanced in civilization than those further north, and used a circulating medium of exchange consisting of beads of two kinds, one white, made out of the end of a periwinkle shell, and the other black, made out of the dark part of a clam shell.  They were rubbed down and polished, and, when artistically arranged in strings or belts, formed objects of real beauty.1  These beads circulated among the Indians as money, one black bead being regarded as worth two white ones, and were known as wampum or wampumpeag.  The colonists came to use them, first in their trade with the Indians and then amongst themselves.  In Massachusetts they became by custom the common currency of the colony, and were made a legal tender for 12 pence.

Barter currency was established at an early day in the colonies, and products of all kinds were made a tender in payment of debts.

“In Connecticut there were four prices :  ‘Pay,’ ‘pay as money,’ ‘money,’ and ‘trusting.’  The merchant asked his customer how he would pay before fixing his price.  ‘Pay’ was barter at the government rates.  ‘Money’ was Spanish or New England coin, also wampum for change.  ‘Pay as money’ was barter currency at prices one-third less than the government rates.  ‘Trusting’ was an enhanced price according to time.  A six-penny knife cost 12d. in pay, 8d. in pay as money, and 6d. in coin.”2

About the middle of the 17th century the trade with the West Indies began to bring in coin, and a mint was established in Boston, though an infraction of the prerogative of the crown.  Laws forbidding the exportation of coin were passed, but it could not be kept in the country.  The first issue of paper money made in the colonies was made by Massachusetts in 1690, six years before the establishment of the Bank of England.  An expedition had been sent out against Canada, and, returning without spoils and in a state of misery, the soldiers were clamorous for their pay.  £7,000 were issued in notes from 5 shillings to £5.  The form of these notes or bills was as follows :

“ This indented bill of ten shillings, due from the Massachusetts colony to the possessor, shall be in value equal to money, and shall be accordingly accepted by the treasurer and receivers subordinate to him, in all public payments, and for any stock (cattle) at any time in the treasury.”

Then followed the date and the signatures of the committee appointed to issue them.  They were not a legal tender, but were receivable merely for taxes and property in the treasury.  In 1692 it was ordered that these bills be received at 5 per cent. premium over coin in the treasury, and the result was that they circulated at par with coin for twenty years, until redeemed, and barter currency ceased for a time, or at least became less common.  In 1703 another issue of bills in the same form, for £15,000, was authorized by act of Parliament, but they were not made a tender.  A subsequent act passed in 1712, however, made them a tender for private debts.  In 1716 another issue of bills to the amount of £150,000 was authorized by an act of Parliament ;  to be distributed among the different counties of the province ;  and to be put into the hands of five trustees in each county, to be appointed by the legislature, to be let out by the trustees on real estate security in the county, in certain specified sums, for the space of ten years, at five per cent. per annum.  These bills were not made a tender.  Another act for £50,000 in bills was passed in 1720, containing similar provisions.  In 1773 Massachusetts was out of debt.  In 1720 bills were issued by the colony of Rhode Island and were made a tender for all debts, except special ones ;  and similar bills were authorized at different times subsequently, some a tender and others not.  The colony of Connecticut issued similar bills at various times between 1709 and 1731.  New York began to issue bills in 1709 ;  Pennsylvania, in 1723 ;  Maryland, in 1733 ;  Delaware, in 1739 ;  Virginia, in 1755 ;  and South Carolina, in 1703.  The first emission of bills by Virginia bore interest at 5 per cent., and, according to Jefferson, in a very short time not one of them was to be found in circulation.  They were locked up in the chests of executors, guardians, widows, farmers, etc.

“ We then,” says Jefferson, “issued bills bottomed on a redeeming tax, but bearing no interest.  These were received, and never depreciated a farthing.”

In 1764 Dr. Franklin bore testimony before the British Board of Trade, as we have already mentioned, to the value and usefulness of the bills issued by Pennsylvania.  Just after the Revolution North Carolina issued a large amount of paper money, which was made receivable in dues to her ;  it was also made a legal tender.  Several hundred thousand dollars of this paper money remained in circulation more than twenty years, at par with gold and silver, with no other advantage than being received in the revenues of the State.

In 1751 Parliament passed an act forbidding the issue of any more paper money, save in the form of exchequer bills redeemable in a year, except in case of war, when they could be made redeemable in four years ;  and in 1763 all colonial acts for issuing paper money were declared by act of Parliament to be void.  Dr. Franklin protested against the act, but without avail.  The English had reached the conclusion that nothing was money but gold and silver, and, animated by that peculiar spirit which has characterized their immediate descendants in this country, were determined that, right or wrong, everybody else should subscribe to the same opinion.  In 1773, however, Parliament allowed any bills issued by the colonies to be a tender to their treasury.


CONTINENTAL MONEY.


During the Revolutionary war Congress issued nearly $350,000,000 in bills of credit.  The first issue was in 1775, and the confederated colonies were pledged for its redemption.  In form these bills were as follows :

“ This bill entitles the bearer to receive....Spanish milled dollars, or the value thereof, in gold or silver, according to the resolutions of Congress.”

The last emission was in 1780 under the guarantee of Congress, and was in the following form :

“ The possessor of this bill shall be paid....Spanish milled dollars by the 31st of December, 1786, with interest, in like money, at the rate of 5 per cent. per annum, by the State of....according to an act of the legislature of the State of...., the....day of...., 1780.”

The endorsement by Congress was :

“ The United States insure the payment of the within bill, and will draw bills of exchange, annually, if demanded, according to a resolution of Congress of the 18th of March, 1780.”

The bills were required by Congress to issue upon the responsibility of the several States, and the confederated colonies pledged their faith for their payment.  They were not made a legal tender, doubtless because Congress did not possess the authority to make them such.  They circulated at par with silver for over a year, but after that they began to depreciate rapidly in value, owing to the character of the bills and the excessive amount put in circulation.  In March, 1778, they were depreciated to $1.75 for $1, and before the end of the year to $4 for $1;  March, 1779, $10 for $1;  September, 1779, $18 for $1;  March, 1780, $40 for $1.  Congress then passed a resolution to fund the whole mass at that rate, but the depreciation continued until it reached $500 for $1, in 1781, and after that they ceased to circulate.  In 1791 they were still permitted to be funded at the rate of $100 for $1.  Continental money, according to Jefferson,

“expired without a single groan.  Not a murmur was heard among the people.  On the contrary universal congratulations took place on their seeing the gigantic mass, whose dissolution had threatened convulsions which should shake their infant confederacy to its center, quietly interred in its grave.  Foreigners, indeed, who do not like the natives feel indulgence for its memory, as of a being which has vindicated their liberties and fallen in the moment of victory, have been loud, and still are loud in their complaints.  A few of them have reason ;  but the most noisy are not the best of them.  They are persons who have become bankrupt by unskillful attempts at commerce with America.  That they may have some pretext to offer to their creditors, they have bought up great masses of this dead money of America, where it is to be had at five thousand for one, and they show the certificates of their paper possessions, as if they had died in their hands, and had been the cause of their bankruptcy.”

As Continental money is the “ghost conjured up by all who wish to give the banks an exclusive monopoly of government credit,” it may be well to pause a moment to consider its nature.  The paper money issued by the several colonies prior to the Revolution had answered the purposes of money admirably, though not issued according to any well settled policy.  Whenever it had a fair trial, however, it never failed to succeed.  But Continental money was issued under very different circumstances.  The colonies had been brought together not out of choice but by necessity.  Congress assumed the powers which it exercised through necessity, and its acts were acquiesced in by the people only out of a spirit of patriotism.  Congress had no power to lay and collect taxes, and the confederation was without revenue.  Whatever was done, had to be done through the States.  Even after the adoption of the Articles of Confederation, in 1781, Congress possessed only the semblance of authority.  Judge Story describes the situation at the time in the following language :

“ In the first place there was an utter want of all coercive authority to carry into effect its own constitutional measures.  This of itself was sufficient to destroy its whole efficiency, as a superintending government, if that may be called a government which possesses no one solid attribute of power. * * In truth, Congress possessed only the power of recommendation.  It depended altogether upon the good will of the States whether a measure should be carried into effect or not. * * Even during the Revolution, while all hearts and hands were engaged in the common cause, many of the measures of Congress were defeated by the inactivity of the States ;  and in some instances the exercise of its powers was resisted.  But after the peace of 1783 such opposition became common, and gradually extended its sphere of activity, until, in the expressive language already quoted, ‘the confederation became a shadow without the substance.’ * * But a still more striking defect was the total want of power to lay and levy taxes, or to raise revenue to defray the ordinary expenses of government.  The whole power confided to Congress upon this head was the power to ascertain the sums necessary to be raised for the service of the United States, and to apportion the quota or proportion on each State.  But the power was expressly reserved to the States to lay and levy the taxes, and of course the time, as well as the mode of payment, was extremely uncertain.  The evils resulting from this source, even during the Revolutionary war were of incalculable extent ;  and but for the good fortune of Congress in obtaining foreign loans, it is far from being certain that they would not have been fatal. * * Requisitions were to be made upon thirteen independent States, and it depended upon the good will of the legislature of each State, whether it would comply at all ;  or if it did comply, at what time and in what manner.  The very tardiness of such an operation, in the ordinary course of things, was sufficient to involve the government in perpetual embarrassment, and to defeat many of its best measures, even when there was the utmost good faith and promptitude on the part of the States, in complying with the requisitions.  But many reasons concurred to produce a total want of promptitude on the part of the States, and, in numerous instances, a total disregard of the requisitions.  Indeed from the moment that the peace of 1783 secured the country from the distressing calamities of war, a general relaxation took place ;  and many of the States successively found apologies for their gross neglect in evils common to all, or complaints listened to by all.  Many solemn and affecting appeals were from time to time made by Congress to the States, but they were attended with no salutary effect.  Many measures were devised to obviate the difficulties, nay the dangers which threatened the Union ;  but they failed to produce any amendments in the confederation.  An attempt was made by Congress, during the war, to procure from the States all authority to levy an impost of five per cent. upon imported and prize goods, but the assent of all the States could not be procured.”3

The population of the thirteen colonies was estimated in 1775 at 2,448,000,4 and the entire property of the country at less than $600,000,000.  That a paper currency, issued to an excessive amount, by thirteen sparsely settled colonies, in a state of rebellion, under a revolutionary government possessing only a shadow of authority, against the most powerful nation on the earth, should have circulated at all, is one of the most remarkable facts connected with the Revolution, and is to be accounted for only by the patriotism of those engaged in that memorable struggle.  But, as we have seen, it circulated for over a year at par with silver, and in 1778, three years after the first emission, it depreciated only to $1.75 for $1.  Congress resorted to various measures to sustain the credit of Continental bills, but, as ought to have been expected, without success.  Money, as has been fully explained, derives it power to represent value from law, but there must be value in property or products, for which it can be exchanged, for it to represent, and the law must emanate from responsible source—from a government possessing the right and power to command such property for its uses, otherwise it is only money in name.  It is worthy of note, too, that Continental bills were not issued in the form of paper money, such as was first introduced by Massachusetts, and subsequently adopted by many of the other colonies, but in the form of promises to pay specie, at certain specified times, which, under the circumstances, was a manifest impossibility.  The gradual depreciation of Continental money, as it passed from hand, inflicted a loss upon each successive holder, which came to be regarded in the nature of a tax or contribution towards the cause of independence.  The large sums held by individuals after it ceased to circulate were taken at its greatest depreciation, and no great loss was sustained.  When, after it had seen the liberties of the people vindicated, it sank, in the moment of victory, quietly into its grave, no commercial crash or money panic attended its fall.  Its ghost has troubled no one since, except the advocates of the British system of bank currency, which, perhaps, is only in accordance with the eternal fitness of things.


Banks of the United States.


We come now to a new era in the history of American currency.  When the colonies entered the Federal Union, under the Constitution framed in 1787, they surrendered all power or control over the question of money to the Federal Government.  The object of this was to secure to the people a uniform and stable medium of exchange, and hence it was that a clause was inserted in the Constitution expressly prohibiting States from coining money, emitting bills of credit, etc.  But this wise provision of the Constitution was soon totally subverted by the money power, through the instrumentality of banks of issue, modeled on the British system of bank currency ;  and practically the currency of the country has been subject to the control of that power ever since.  About the close of the Revolution four banks of issue were established in the United States ;  one in each of the States of Pennsylvania, New York, Massachusetts and Maryland.  At the time the Federal Constitution was framed, there was a large and formidable party, with aristocratic notions and tendencies, under the leadership of Alexander Hamilton, a statesman of undoubted patriotism and great ability, which was strongly in favor of the formation of what was termed “a strong government.”  This policy grew out of a want of faith in the people, and the belief that they were incapable of self-government.  In a speech on this subject, June 18, 1787, Mr. Hamilton said :  “ I believe the British government forms the best model the world ever produced, and such has been its progress in the minds of many, that this truth gradually gains ground.  This government has for its object public strength and individual security.  It is said with us to be unattainable.  If it was once formed it would maintain itself.  All communities divide themselves into the few and the many.  The first are the rich and well born, the other the mass of the people. * * Can a democratic assembly, who annually revolve in the mass of the people, be supposed steadily to pursue the public good ?  Nothing but a permanent body can check the independence of democracy.  Their turbulent and uncontrolling disposition requires checks. * * Let one body of the legislature be constituted during good behavior or life.  Let one executive be appointed (for life) who dares execute his powers. * * All State laws to be absolutely void which contravene the general laws.  An officer to be appointed in each State to have a negative on all State laws.  All the militia and the appointment of officers to be under the national government. * * The people are gradually ripening in their opinions of government ;  they begin to tire of an excess of democracy.”5  This policy of a strong government, based on an aristocracy of wealth, was rejected by the convention ;  but it has never been abandoned by the money power of the country.  In 1863, in a speech, in the House of Representatives, in support of the National Bank Currency Bill, Hon. E.G. Spaulding, a banker of New York, boldly asserted that, “It is now most apparent that the policy advocated by Alexander Hamilton of a strong central government was the true policy;”  and at the present time we have the policy of a third term openly and fearlessly advocated by the money power and its tools.

Hamilton, who was the first Secretary of the Treasury, urged the establishment of a National Bank modeled upon the British system, and upon his recommendation the first Bank of the United States, with a capital of $10,000,000, was chartered by Congress, February 25, 1791, for a period of twenty years.  Jefferson, who was then Secretary of State, gave a written opinion denying the power of Congress to incorporate a bank of issue, and Madison, who was in Congress, opposed it, in a powerful speech, as a violation of the Constitution.  In 1811 the bank applied to Congress for a renewal of its charter, but it was not granted.  Clay and other leading statesmen opposed its re-charter on the ground that it was “unconstitutional, anti-American, and strictly a British institution.”

In the meantime a mania to start banks had sprung up in New England, which subsequently extended to the Middle States, and finally all over the country.  In 1815 Jefferson gave the following statement of the number of banks which had been established up to that time :

“ In 1781 we had 1 bank, capital,............ $1,000,000
1791, 6 banks, .............13,500,000
1794, 17 ............ 18,642,000
1796, 24 ............ 20,472,000
1803, 34............ 29,112,000
1804, 66..... amount of capital not known.

And at this time (1815) we have probably one hundred banks.”

Notwithstanding the constitutional prohibition against emitting bills of credit, charters, incorporating private institutions, authorized to emit bills of credit (bank notes), were granted by the legislatures of the several States in large numbers, in utter disregard of the Constitution, as well as of the public good.  In Pennsylvania, for example, twenty-five charters, incorporating specie basis banks of issue, were granted during the session of 1813, but were vetoed by the Governor.  At the next session of the legislature, in 1814, a bill was passed over the veto of the Governor chartering forty-one banks, with a capital of $17,000,000.  Thirty-seven of them went into operation at once, and six months afterwards suspended specie payment.  The manner of obtaining a charter was very simple.  A petition setting forth “the wants of the people” in the locality where the bank was to be established was all that was required ;  political influence and intrigue accomplished the rest.

Specie basis banks are always required by law to redeem their notes in specie, but as they are, also, always authorized to issue notes to three times the amount of their capital stock, their redemption in specie becomes an impossibility.  This feature in banking, as has been explained, was originally nothing more than a bold plan on the part of certain ingenious financiers and schemers to acquire favor with the public for the Bank of England and increase its business.  As the system in time was found to have a tendency to concentrate wealth in the hands of the few, it commended itself to the aristocratic, or governing class, of that kingdom, and soon became an integral part of the structure of British society.  Transplanted to the free atmosphere of America the system was afforded an opportunity to develop its latent evils, greatly to the disadvantage of American society.  If banks were authorized to issue only a dollar of paper for a dollar of specie held for its redemption, there would be no advantage in issuing notes ;  they might as well lend the specie.  Individuals obtain charters to carry on the business of banking on the theory that they have capital to employ in that business, but under the specie basis system they are not required to use their capital at all.  Bank notes are issued and exchanged for the notes of individuals.  These bank notes are based on the credit of the institution which issues them, and represent nothing more ;  if redeemed, they are good ;  if not, they are as worthless as the note of an insolvent individual.  A bank of issue in effect simply substitutes its notes, of various denominations and otherwise convenient for use in payments, for the notes of its customers.  As a large portion of the community are constantly having payments to make in bank, the notes of the bank are as good to them as money, and they thus come to perform not only the functions of the individual notes, for which they were substituted, but also the functions of a circulating medium.  Whilst in reality they are nothing more than promises to pay, representing credit, (evidences of the indebtedness of the bank,) they at the same time become substitutes for money.  In this way a bank of issue enables its corporators and stockholders to force their credit, or evidences of indebtedness, upon the public, at a high rate of interest, and compel its use as a circulating medium, whether the public desires to use it or not.  The medium of exchange thus forced upon the public, encumbered with interest, becomes a tax upon the community at large, because its cost enters into the price of commodities.  As bank notes rest entirely upon private credit, they are subject to depreciation in value, which imposes an additional burden upon trade and production.  It is, as we have seen, a part of the specie basis system to treat discounted paper as deposits, and this furnishes the basis for additional loans of credit.  By encouraging discounts and lending credit, through the instrumentality of bank notes, to be used as real capital, business becomes active, prices advance and speculation becomes rife.  Inflation of bank credit and notes goes on and a huge structure of credit is erected upon an insignificant basis of specie, supposed to be resting in the vaults of the bank, which is toppled over by the first financial breeze that springs up, and the public is buried in its ruins.  When the banks are called upon to redeem their promises to pay they are of course unable to do so, for the wit of man has not yet devised a way to redeem several paper dollars with one gold dollar.  Like individuals, banks can be thrown into bankruptcy and compelled to go into liquidation, but such a step only aggravates the distress of the public, and is rarely adopted ;  and the banks are permitted to escape, only to repeat the operation as soon as confidence has been restored through the aid of the Sheriff.  The extent to which banks are enabled to lend their credit by means of the specie basis system of banking will appear from an examination of the following table, which is an abstract of the Commissioners’ Report of the banks of Connecticut for a period of twelve years, from 1837 to 1847 inclusive and the year 1849.  The banks of Connecticut, it should be mentioned, were conducted during this period with as much safety to the public as those of any other State in the Union :

Kellogg, who gives this table,6 in commenting upon it, says :

By the foregoing table it will be seen that the average amount of the specie held by the banks in the State of Connecticut, for the twelve years, was $478,719, while the average amount of their loans to the public, during the same period, was $11,669,457—more than twenty-four and one-third times as much money as the banks had specie.  The annual interest on $11,669,457 was $700,167.  If they could have loaned only their specie, the interest would have amounted to but $28,723.  The banks gained from the public annually $671,444 above the interest on their specie ;  and, in the twelve years, $8,057,328.  They collected this interest in advance, and made their dividends half yearly to their stockholders ;  therefore, it is proper to compound this interest half yearly, which would swell their gains to nearly $12,000,000, that is to say, $1,000,000 interest annually.  These were actual gains, as much realized by these banks as if they had produced and sold annually $700,167 worth of agricultural products.”

  (The statements of the banks of any of the large cities, published from time to time in the newspapers, will disclose a similar inflation of credit at the present time.  The fact that the National Banks do not redeem their notes in specie makes no difference.  They are banks of issue and belong to the specie basis system all the same.)

The banks of the United States have been compelled to suspend specie payments at various times as follows, to wit :  in 1809, 1814, 1819, 1825, 1834, 1837, 1839, 1841, 1857, 1861, and in 1873 currency payment.  These suspensions have invariably occasioned great public distress, and in several instances have involved the entire country in bankruptcy and ruin, from which it took years to recover.  In March, 1809, a legislative committee of the State of Rhode Island made an examination into the affairs of the Farmers’ Exchange Bank of Gloucester, and it was found that the bank had $580,000 of its notes in circulation, and only $86.16 in its vaults for their redemption.  Before the end of the year a general suspension of the banks of New England took place, and it was discovered that they were nearly all in the same condition—no specie and nothing to show but the worthless notes of speculators.


CRASH OF 1814.


In 1814 all the banks outside of New England, including the forty-one banks chartered by the Pennsylvania legislature in the early part of the year, were obliged to suspend specie payment, occasioning great distress.  The people were helpless, and could do no better than to use their depreciated notes.  This condition of affairs lasted for years.  The following table shows the depreciation of the notes of the banks of the cities of Baltimore, New York and Philadelphia during the suspension :

On the first of January, 1817, the second Bank of the United States began business, and on the 20th of February following specie payments were nominally resumed.  The extent and character of the resumption that took place may be gathered from the following case cited by Sumner, in his History of American Currency :  “ In 1817 a case at Richmond, after specie payments were resumed, gave an insight into the state of things.  A man having presented ten one hundred dollar notes for redemption was refused.  He could not get a lawyer to take a case against the bank for a long time.  Finally having obtained judgment, the Sheriff was sent to collect.  The president of the bank was taken before the court, but refused to pay.  The bank was closed by the Sheriff, but soon after opened and went on.”

The specie basis system had now been in operation long enough to produce its legitimate fruits, and accordingly we find that here and there the people were becoming alarmed at its encroachments upon their rights, as well as at the evils which it inflicted upon the public.  The following is an extract from a report of a legislative committee of the State of New York in 1818 :

Of all aristocracies, none more completely enslave a people than that of money ;  and, in the opinion of your committee, no system was ever better devised so perfectly to enslave a community as that of the present mode of conducting banking establishments.  Like the siren of the fable, they entice to destroy.  They hold the purse-strings of society, and, by monopolizing the whole of the circulating medium of the country, they form a precarious standard, by which all property in the country—homes, lands, debts and credits, personal and real estate of all descriptions—are valued, thus rendering the whole community dependent upon them ;  proscribing every man who dares to expose their unlawful practices.  If he happens to be out of their reach, so as to require no favors from them, his friends are made the victims ;  so no one dares complain.  The committee, on taking a general view of our State, and comparing those parts where banks have been, for some time, established with those that have none, are astonished at the alarming disparity.  They see, in the one case, the desolation they have made in societies that were before prosperous and happy ;  the ruin they have brought on an immense number of the more wealthy farmers, and they and their families suddenly hurled from wealth and independence into the abyss of ruin and despair.  If the facts stated in the foregoing be true, (and your committee have no doubt they are,) together with others equally reprehensible and to be dreaded, such as that their influence too frequently, nay, often already, begins to assume a species of dictation altogether alarming, and, unless some judicious remedy is provided by legislative wisdom, we shall soon witness attempts to control all selections to offices in our counties, nay, the elections to the very legislature.  Senators and members of assembly will be indebted to the banks for their seat in this capitol ;  and thus the wise end of our civil institutions will be prostrated in the dust of corporations of their own raising.”

THE CRASH OF 1819.


In 1818 the bank of the United States had discounted to the amount of $43,000,000, and had $2,000,000 in specie.  It had established eighteen branches, and its notes could not be signed fast enough for the public.  To increase its reserve of specie it had bought $7,000,000 of bullion abroad, at a cost of $800,000 for expenses, but it was exported as fast as it was imported.  The Bank of England, which had been in suspension since 1797, was preparing to resume specie payments, and was drawing specie from every source that was available.  In April, 1818, less than fifteen months after the Bank of the United States started, it was believed to be insolvent.  A committee, appointed by Congress to investigate its affairs, reported a resolution requiring the bank to show cause why its charter should not be forfeited, but the resolution was lost, forty members of Congress being stockholders in the bank.  The bank now resorted to vigorous measures to save itself from bankruptcy, and in a little over two months was once more solvent.  It had, however, ruined the country.  The amount of bank note circulation in 1813-14 was about $45,000,000 ;  in 1817-18, $100,000,000 ;  and in 1819 about $45,000,000.  Contraction had done its work, and the ruin which it had accomplished was deep and widespread.  In August, 1819, 20,000 persons were seeking employment in Philadelphia, and a similar condition of affairs prevailed in New York, Baltimore and other cities.  The distress was least severe in New England.  In the Western States it was intense.  In the South the banks still pretended to pay specie, but the following account of the manner in which they did business in some localities would hardly justify the pretension :  One who presented a bill had to make oath in the bank that the bill was his own and that he was not an agent for any one.  He was required to make this oath before the cashier and five directors, and had to pay $1.37½ expenses on each bill.

Stagnation and distress lasted throughout the year 1820.  Wheat was 20 cents per bushel in Kentucky.  At Pittsburgh flour was $1 per barrel, boards, $2 per thousand, etc., etc., while imported goods remained at their old prices.  One and a half bushels of wheat would buy a pound of coffee ;  a barrel of flour would buy a pound of tea, and twelve and a half barrels of flour would buy a yard of broadcloth.  But a better idea of the condition of affairs may be formed, perhaps, from a report of a committee of the Senate of Pennsylvania, of which the distinguished Condy Raguet was chairman, made on the 20th of February, 1820.  It is as follows :

“ In ascertaining the extent of the public distress, your committee has had no difficulties to encounter.  Members of the legislature from various quarters of the State, have been consulted in relation to this subject, and their written testimony in answer to interrogatories submitted to them by the committee, has agreed, with scarcely a single exception, on all material points.  With such respectable weight of evidence, added to that which has been derived from the prothonotaries, recorders and sheriffs of the different counties, from intercourse with numerous private citizens residing in different parts of the state, as well as from the various petitions presented to the legislature, your committee can safely assert that a distress unexampled in our country since the period of its independence, prevails throughout the commonwealth.  This distress exhibits itself under the various forms of—

“ 1.  Ruinous sacrifices of landed property at sheriff’s sales, whereby, in many cases, lands and houses have been sold at less than a half, a third, or a fourth of their former value, thereby depriving of their homes, and of the fruits of laborious years, a vast number of our industrious farmers, some of whom have been driven to seek, in the uncultivated forests of the west, that shelter of which they have been deprived in their native State.

“ 2.  Forced sales of merchandise, household goods, farming stock and utensils, at prices far below the cost of production, by which many families have been deprived of the common necessaries of life, and of the implements of their trade.

“ 3.  Numerous bankruptcies and pecuniary embarrassments of every description, as well among the agricultural and manufacturing as the mercantile classes.

“ 4.  A general scarcity of money throughout the country, which renders it almost impossible for the husbandman or other owners of real estate to borrow at a usurious interest, and where landed security of the most indubitable character is offered as a pledge.  A similar difficulty of procuring on loan had existed in the metropolis previous to October last, but has since then been partially removed.

“ 5.  A general suspension of labor, the only legitimate source of wealth, in our cities and towns, by which thousands of our most useful citizens are rendered destitute of the means of support, and are reduced to the extremity of poverty and despair.

“ 6.  An almost entire cessation of the usual circulation of commodities, and a consequent stagnation of business, which is limited to the mere purchase and sale of the necessaries of life, and of such articles of consumption as are absolutely required by the season.

“ 7.  A universal suspension of all manufacturing operations, by which, in addition to the dismissal of the numerous productive laborers heretofore engaged therein, who can find no other employment, the public loses the revenue of the capital invested in machinery and buildings.

“ 8.  Usurious extortions, whereby corporations instituted for banking, insurance and other purposes, in violation of law, possess themselves of the products of industry without granting an equivalent.

“ 9.  The overflowing of our prisons with insolvent debtors, most of whom are confined for trifling sums, whereby the community loses a portion of its effective labor, and is compelled to support families by charity who have thus been deprived of their protectors.

“10.  Numerous law-suits upon the dockets of our courts and of our justices of the peace, which lead to extravagant costs and loss of a great portion of valuable time.

“ 11.  Vexatious losses arising from the depreciation and fluctuation in the value of bank notes, the imposition of brokers and the frauds of counterfeiters.

“ 12.  A general inability in a community to meet with punctuality the payment of debts even for family expenses, which is experienced as well by those who are wealthy in property as by those who have hitherto relied upon their current engagements.  With such a mass of evils to oppress them, it cannot be wondered at that the people should be dispirited, and that they should look to their representatives for relief.  Their patient endurance of suffering, which can only be imagined by those who have habitually intermingled with them at their homes and by their firesides, merits the commendation of the legislature and prefers a powerful claim to their interference.”

The people of the United States had not been without warning as to the evils and dangers of the specie basis system, but they had supinely allowed the money power to gain control of the monetary affairs of the country, precisely as they are doing now.  January 16, 1814, previous to the crisis of that year, Jefferson wrote as follows :

Everything predicted by the enemies of the banks in the beginning is now coming to pass.  We are to be ruined by the deluge of bank paper, as we were formerly by the old Continental paper.  It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burthen all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs. * * I am an enemy to all banks discounting bills or notes for anything but coin.

And again, January 6, 1816 he wrote as follows :

The American mind is now in that state of fever which the world has so often seen in the history of other nations.  We are under the bank bubble, as England was under the South Sea bubble, France under the Mississippi bubble, and as every nation is liable to be, under whatever bubble, design or delusion may puff up in moments when off guard.  We are now taught to believe that legerdemain tricks upon paper can produce as solid wealth as hard labor in the earth.  It is vain for common sense to urge that nothing can produce but nothing ; * * Not Quixot enough, however, to attempt to reason Bedlam to rights, my anxieties are turned to the most practicable means of withdrawing us from the ruin into which we have run.  Two hundred millions of paper in the hands of the people, (and less cannot be from the employment of a banking capital known to exceed one hundred millions,) is a fearful tax to fall at hap-hazard on their heads. * * And what have we purchased with this tax of two hundred millions, which we are to pay by wholesale, but usury, swindling and new forms of demoralization.”  As we have seen, the bubble burst, as predicted by Jefferson, in 1819.  The stagnation and distress continued during 1821 and 1822.  In 1823 there was a large creation of banks in New York, and the Bank of the United States began to expand.  In 1824 all the banks began to expand.  Pennsylvania rechartered the banks of 1814.  In the spring of 1825 petitions were presented in New York for fifty-two charters for banks and insurance companies.  “In Kentucky there was anarchy.  Alabama and Tennessee notes were at a discount.  Indiana, Illinois and Missouri were still suffering from the ‘relief’ system (stay laws against the collection of debts, etc.)  The New York and Boston banks were fighting the country issues. * * The bank of the United States increased its issues over $3,000,000.”7

CRASH OF 1825


In the latter part of 1824 and beginning of 1825 the Bank of England found it necessary to curtail its discounts, in order to check the outflow of bullion.  This occasioned another terrible crisis in that country.  Seventy banks failed and nearly two thirds of the merchants and manufacturers stopped payment, causing great distress among the working classes.  Gold began to flow from the United States, and the banks were obliged to suspend specie payments.  Fifty failures occurred in New York before December, and banks went under all over the country.  The crisis, however, was not felt so severely in the United States as it was in England, because the banks had not yet had sufficient time to inflate their credit and circulation to the greatest extent.  Here and there throughout the country industrial activity was stimulated somewhat during the next few years by the high tariff of 1824 and 1828, and by the building of railroads, which began in 1830 ;  but business generally continued to suffer from the rotten monetary system which had been fastened upon the country, and distress was more or less common.


The war with the United States Bank.


The fight between President Jackson and the United States Bank, which occupied the attention of the people for years, now began.  The specie basis system had been in operation for over a quarter of a century, and during the whole time the country had never once enjoyed the advantages of a sound currency.  Pecuniary distress, periodical returns of expansion and contraction, deranged currency, ruined exchanges, and panics and convulsions had characterized the entire period.  The banks, although based on “hard money,” and professing to pay coin, were in a state of chronic suspension.  The press of the country was completely subsidized ;  Congress, as well as State legislatures, bowed in abject submission to the mandates of the money power ;  and even the Supreme Court of the United States did not escape its contaminating influence.  The people were perfectly helpless, and the outlook of American freedom and independence was dark indeed.  It is worthy of mention that Pitt, in 1791, when Hamilton brought forward his funding and banking scheme, said :  “ Let the Americans adopt their funding system and go into their banking institutions, and their boasted independence will be a mere phantom.”  But fortunately for the country the election of 1828 resulted in the choice of Andrew Jackson as President of the United States, and the people found in him a leader, as fearless as he was patriotic.  In his first message to Congress, December 8, 1829, in language of extreme moderation, he called public attention to the United States Bank, and expressed himself as unfavorable to its continued existence.  He said :

The bank immediately began preparations for war.  Through its branches and its control over State banks, its power extended into every part of the country.  Millions of dollars (belonging, as it subsequently appeared, to depositors and stockholders) were squandered for the purpose of corrupting the people.  Statesmen, Congressmen, brawling politicians, editors, all succumbed to its influence, very much in the same way as they are seen bowing to the power of the National Banks at the present day.  After a careful survey of the field and a thorough canvass of Congress, it was determined by the bank that a renewal of its charter should be applied for during the session of Congress immediately preceding the next general election in 1832.  The bill passed Congress by a majority of eight in the Senate and twenty-two in the House.  As was expected, it was returned with the President’s veto, on the 10th of July, 1832.  The contest was then transferred to wider field and carried on with excessive virulence.  The money power everywhere went to work to defeat Jackson.  In Philadelphia, for example, “the bank would order the business men to hold public meetings in its behalf in order that it might ascertain who were its friends, and who were courageous enough to stand by the government in its efforts to redeem the people, and then, in turn, would appoint places for the assembling of the different trades, in order that the employers might see who of their workmen had opinions which they dared maintain.”8  The masses, however, rallied to the support of the President, and the capacity of the American people for self-government was triumphantly vindicated.  President Jackson was re-elected, defeating Mr. Clay by a vote of 228 to 49 in the electoral college.  Upon examination it will be found that the principles involved in the contest between General Jackson and the United States Bank are precisely identical with those which underlie the impending contest between the people and the National Banks.  The subject is, therefore, worthy of more than a passing notice.  Benton, in his “Thirty Years in the United States Senate,” in commenting upon some errors of Mons. de Tocqueville “in relation to the Bank of the United States, the President and the people,” gives clear and comprehensive analysis of the principles and purposes involved in the contest, from which we quote as follows :

“ This passage was the grand feature of the message, rising above precedent and judicial decisions, going back to the Constitution and the foundation of party on principle ;  and risking a contest at the commencement of his administration, which a mere politician would have put off to the last.  The Supreme Court had decided in favor of the constitutionality of the institution ;  democratic Congress, in chartering a second bank, had yielded the question, both of constitutionality and expediency.  Mr. Madison, in signing the bank charter in 1816, yielded to the authorities without surrendering his convictions.  But the effect was the same in behalf of the institution, and against the Constitution, and against the integrity of party founded on principle.  It threw down the great landmark of party, and yielded a power of construction which nullified the limitations of the Constitution, and left Congress at liberty to pass any law which it deemed necessary to carry into effect any granted power.  The whole argument for the bank turned upon the word ‘necessary’ at the end of the enumerated powers granted to Congress ;  and gave rise to the first division of parties in Washington’s time—the federal party being for the construction which would authorize a national bank ;  the democratic party (republican, as then called,) being against it.

“ It was not merely the bank which the democracy opposed, but the latitudinarian construction which would authorize it, and which would enable Congress to substitute its own will in other cases for the words of the Constitution, and do what it pleased under the plea of ‘necessary’—a plea under which they would be left as much to their own will as under the ‘general welfare’ clause.  It was the turning point between a strong and splendid government on one side, doing what it pleased, and a plain economical government on the other, limited by a written Constitution.  The construction was the main point, because it made a gap in the Constitution through which Congress could pass any other measures which it deemed to be ‘necessary;’  still there were great objections to the bank itself.  Experience had shown such an institution to be a political machine, adverse to free government, mingling in the elections and legislation of the country, corrupting the press, and exerting its influence in the only way known to the moneyed power—by corruption.  General Jackson’s objections reached both heads of the case—the unconstitutionality of the bank and its inexpediency.  It was a return to the Jeffersonian and Hamiltonian times of the early administration of General Washington, and went to the words of the Constitution, and not to the interpretations of the administrators for its meaning.

“ Such a message, from such a man—a man not apt to look back when he had set his face forward—electrified the democratic spirit of the country.  The old democracy felt as if they were to see the Constitution restored before they died—the young, as if they were summoned to the reconstruction of the work of their fathers.  It was evident that a great contest was coming on, and the odds entirely against the President.  On the one side, the undivided phalanx of the federal party (for they had not then taken the name of whig);  a large part of the democratic party, yielding to precedent and judicial decision ;  the bank itself, with its colossal money power—its arms in every State by means of branches—its power over the State banks—its power over the business community—over public men who should become its debtors or retainers—its organization under a single head, issuing its orders in secret, to be obeyed in all places and by all subordinates at the same moment.  Such was the formidable array on one side :  on the other side a divided democratic party, disheartened by division, with nothing to rely upon but the goodness of their cause, the prestige of Jackson’s name, and the presidential power ;—good against anything less than two-thirds of Congress on the final question of the re-charter ;  but the risk to run of his non-election before the final question came on.

“ Under such circumstances it required a strong sense of duty in the new President to commence his career by risking such a contest ;  but he believed the institution to be unconstitutional and dangerous, and that it ought to cease to exist ;  and there was a clause in the Constitution—that Constitution which he had sworn to support—which commanded him to recommend to Congress, for its consideration, such measures as he should deem expedient and proper.  Under this sense of duty, and under the obligation of this oath, President Jackson had recommended to Congress the non-renewal of the bank charter, and the substitution of a different fiscal agent for the operations of the government—if any such agent was required.  And with his accustomed frankness, and the fairness of a man who has nothing but the public good in view, and with a disregard of self which permits no personal consideration to stand in the way of a discharge of a public duty, he made the recommendation six years before the expiration of the charter, and in the first message of his first term ;  thereby taking upon his hands such an enemy as the Bank of the United States, at the very commencement of his administration.  That such a recommendation against such an institution should bring upon the President and his supporters, violent attacks, both personal and political, with arraignment of motives as well as of reasons, was naturally to be expected ;  and that expectation was by no means disappointed.  Both he and they, during the seven years that the bank contest (in different forms) prevailed, received from it—from the newspapers and periodical press in its interest, and from the public speakers in its favor of every grade—an accumulation of obloquy, and even of accusation, only lavished upon the oppressors and plunderers of nations—a Verres, or a Hastings.” * *

“ He impugned neither the integrity nor the skill of the institution, but repeated the objections of the political school to which he belonged, and which were as old as Mr. Jefferson’s cabinet opinion to President Washington, in the year 1791, and Mr. Madison’s great speech in the House of Representatives in the same year.  He, therefore, made no attack upon the bank, either upon its existence, its character, or any one of its rights.  On the other hand, the bank did attack President Jackson, under the lead of politicians, and for the purpose of breaking him down.  The facts were these :  President Jackson had communicated his opinion to Congress in December, 1829, against the renewal of the charter ;  near three years afterwards, on the 9th of January, 1832, while the charter had yet above three years to run, and a new Congress to be elected before its expiration, and the presidential election impending—(General Jackson and Mr. Clay the candidates)—the memorial of the president and directors of the bank was suddenly presented in the Senate of the United States, for renewal of its charter.

“ Now, how came that memorial to be presented at a time so inopportune ?  so premature, so inevitably mixing itself with the presidential election, and so encroaching upon the rights of the people, in snatching the question out of their hands, and having it decided by a Congress not elected for the purpose—and to the usurpation of the rights of the Congress elected for the purpose ?  How came all these anomalies ?  all these violations of right, decency and propriety ?  They came thus :  the bank and its leading anti-Jackson friends believed that the institution was stronger than the President—that it could beat him in the election—that it could beat him in Congress (as it then stood), and carry the charter—driving him upon the veto power, and rendering him odious if he used it, and disgracing him if (after what he had said) he did not.  This was the opinion of the leading politicians friendly to the bank, and inimical to the President.  But the bank had a class of friends in Congress also friendly to Gen. Jackson ;  and between these two classes there was vehement opposition of opinion on the point of moving for the new charter.  It was found impossible, in communications between Washington and Philadelphia, then slow and uncertain, in stage coach conveyances, over miry roads and frozen waters, to come to conclusions on the difficult point.  Mr. Biddle and the directors were in doubt, for it would not do to move in the matter, unless all the friends of the bank in Congress acted together.  In this state of uncertainty, General Cadwallader, of Philadelphia, friend and confidant of Mr. Biddle, and his usual envoy in all the delicate bank negotiations or troubles, was sent to Washington to obtain a result ;  and the union of both wings of the bank party in favor of the desired movement.  He came, and the mode of operation was through the machinery of caucus—that contrivance by which a few govern many.  The two wings being of different politics, sat separately, one headed by Mr. Clay, the other by Gen. Samuel Smith of Maryland.  The two caucuses disagreed, but the democratic being the smaller, and Mr. Clay’s strong will dominating the other, the resolution was taken to proceed, and all bound to go together.” * *

“ The prudential counsels of such men as Mr. Dallas did not prevail ;  political counsels governed ;  the bank charter was pushed—was carried through both Houses of Congress—dared the veto of Jackson—received it—roused the people—and the bank and all of its friends were crushed.  Then it affected to have been attacked by Jackson ;  and Mons. de Tocqueville has carried that fiction into history, with all the imaginary reasons for a groundless accusation, which the bank had invented.

“ The remainder of this quotation from Mons. de Tocqueville is profoundly erroneous, and deserves to be exposed, to prevent the mischiefs which his book might do in Europe, and even in America, among that class of our people who look to European writers for information upon their own country.  He speaks of the well informed classes who rallied round the bank ;  and the common people who had formed no rational opinion upon the subject, and who had joined General Jackson.  Certainly the great business community, with few exceptions, comprising wealth, ability and education, went for the bank, and the masses for General Jackson ;  but which had formed the rational opinion is seen by the event.  The ‘well informed’ classes have bowed not merely to the decision, but to the intelligence of the masses.  They have adopted their opinion of the institution—condemned it—repudiated it as an ‘obsolete idea;’  and of all of its former advocates, not one now exists.  All have yielded to that instinctive sagacity of the people, which is an overmatch for book-learning ;  and which being the result of common sense, is usually right ;  and being disinterested, is always honest.  I adduce this instance—a grand national one—of the succumbing of the well informed classes to the instinctive sagacity of the people, not merely to correct Mons. de Tocqueville, but for the higher purpose of showing the capacity of the people for self-government.  The rest of the quotation, ‘the independent existence—the people accustomed to make and unmake—startled at this obstacle—irritated at a permanent institution—attack in order to shake and control;’  all this is fancy, or as the old English wrote it, fantasy—enlivened by French vivacity into witty theory, as fallacious as witty.” * *

“ Now, while Mons. de Tocqueville was arranging all this fine encomium upon the bank, and all this censure upon its adversaries, the whole of which is nothing but a French translation of the bank publications of the day, for itself and against President Jackson—during all this time there was a process going on in the Congress of the United States, by which it was proved that the bank was then insolvent, and living from day to day upon expedients ;  and getting hold of property and money by contrivances which the law would qualify as swindling—plundering its own stockholders—and bribing individuals, institutions, and members of legislative bodies, wherever it could be done.  Those fine notes, of which he speaks, were then without solid value.  The salutary restraint attributed to its control over local banks was soon exemplified in its forcing many of them into complicity in its crimes, and all into two general suspensions of specie payments, headed by itself.  Its solidity and its honor were soon shown in open bankruptcy—in the dishonor of its notes—the violation of sacred deposits—the disappearance of its capital—the destruction of institutions connected with it—the extinction of fifty-six millions of capital (its own, and that of others drawn into its vortex);—and the ruin or damage of families, both foreign and American, who had been induced by its name, and by its delusive exhibitions of credit, to invest their money in its stock.  Placing the opposition of President Jackson to such an institution to the account of base and personal motives—to feelings of revenge because he had been unable to seduce it into his support—is an error of fact manifested by all the history of the case ;  to say nothing of his own personal character.  He was a senator in Congress during the existence of the first national hank, and was against it ;  and on the same grounds of unconstitutionality and of inexpediency.  He delivered his opinion against this second one before it had manifested any hostility to him.  His fist opposition was abstract—against the institution—without reference to its conduct ;  he knew nothing against it then, and neither said, or insinuated anything against it.  Subsequently, when misconduct was discovered, he charged it ;  and openly and responsibly.  Equally unfounded is the insinuation in another place, of subserviency to local banks.  He, the instrument of local banks ! he who could not be made the friend, even, of the great bank itself ;  who was all his life a hard money man an opposer of all banks—the denouncer of delinquent banks in his own State ;  who, with one stroke of his pen, in the recess of Congress, and against its will, in the summer of 1836, struck all their notes from the list of land office payments !  and whose last message to Congress, and in his farewell address to the people, admonished them earnestly and affectionately against the whole system of paper money (bank currency)—the evils of which he feelingly described as falling heaviest upon the most meritorious part of the community, and the part least able to bear them—the productive classes.”

The United States Bank continued its war upon the administration until the last moment of its existence.  Its charter expired by limitation in 1836, but it was entitled to two years in which to wind up its affairs.  Instead of preparing to close up its business it resorted to new and desperate measures to prolong its powers.  In January, 1836, a bill was “snaked” through the legislature of Pennsylvania, by means of bribery and corruption, entitled “An Act to repeal the State tax, and to continue the improvement of the State by railroads and canals, and for other purposes;”  and under the vague generality of “other purposes,” was found a charter for the United States Bank, adopting it as a State Bank.

---[That bill was introduced in the Pennsylvania House of Representatives, on January 19, 1836, by none other than the future grand old commoner, Thaddeus Stevens, who in his younger days was an attorney of the Bank of the United States......]

The people of Pennsylvania were astounded, and met in masses to denounce the act and demand its repeal ;  and at the next session of the legislature an investigation was ordered, but, as is usual in such cases, it came to nothing.  Rotten and corrupt as the institution subsequently proved to be, it went on for several years, and exerted great influence in the commercial and political affairs of the country.  The two general suspensions of specie payments, headed by the United States Bank, referred to in the foregoing extracts from Benton, were the suspensions of 1837 and 1839, in the latter of which the bank closed its doors upon its creditors October 9th, 1839, never really to open them again.  A report of its affairs was made by a committee of stockholders, and disclosed, to quote again from Benton,

such an exhibition of waste and destruction, and of downright plundering, and criminal misconduct, as was never seen before in the annals of banking.  Fifty-six millions and three quarters of capital out of sixty-two millions and one quarter (including its own of thirty-five) were sunk in the limits of Philadelphia alone :  for the great monster, in going down, had carried many others along with her ;  and, like the strong man in Scripture, slew more in her death than in her life.  Vast was her field of destruction—extending all over the United States—and reaching to Europe, where four millions sterling of her stock was held, and large loans had been contracted.  Universally on classes the ruin fell—foreigners as well as citizens—peers and peeresses, as well as the ploughman and the wash-woman—merchants, tradesmen, lawyers, divines :  widows and orphans, wards and guardians :  confiding friends who came to the rescue :  deceived stockholders who held on to their stock, or purchased more :  the credulous masses who believed in the safety of their deposits, and in the security of the notes they held—all—all saw themselves the victims of indiscriminate ruin.  An hundred millions of dollars was the lowest at which the destruction was estimated ;  and how such ruin could be worked, and such blind confidence kept up for so long a time, is the instructive lesson for history :  and that lesson the report of the stockholders’ committee enables history to give.  From this authentic report it appears that from the year 1830 to 1836—the period of its struggles for a re-charter—the loans and discounts of the bank were about doubled—its expenses trebled.  Near thirty millions of these loans were not of a mercantile character—neither made to persons in trade or business, nor governed by the rules of safe endorsement and punctual payment which the by-laws of the institution, and the very safety of the bank, required ;  nor even made by the board of directors, as the charter required ;  but illegally and clandestinely, by the exchange committee—a small derivation of three from the body of the committee, of which the President of the bank was ex officio a member, and the others as good as nominated by him.  It follows then that these, near thirty millions of loans, were virtually made by Mr. Biddle himself ;  and in violation of the charter, the by-laws and the principles of banking.  To whom were they made ?  To members of Congress, to editors of newspapers, to brawling politicians, to brokers and jobbers, to favorites and connections :  and all with a view to purchase a re-charter, or to enrich connections, and exalt himself (Nicholas Biddle, President of the Bank.)

The importance of the destruction of the United States Bank cannot be overestimated.  In no other way could the government have been rescued from the domination of the money power, which was sparing no pains to subvert the liberties of the people.  John Randolph warningly said :

“ Charter a bank with thirty-five millions of capital ;  let it establish and learn its power ;  and then find, if you can, means to ‘bell the cat.’  It will be beyond your power ;  it will overawe your Congress, and laugh at your laws.”

His words were fully verified.  Even Clay, who had said, in 1811, “I conceive the establishment of this bank (National Bank) as dangerous to the safety and welfare of this republic,” and Webster, who had declared his hostility to bank currency repeatedly, as “one of the greatest of political evils,” and “a contrivance for cheating the laboring classes of mankind,” were both dragooned into the support of the United States Bank, in its application for a renewal of its charter ;  and all this power over the monetary and political affairs of the country was developed by the bank while it was yet in its infancy and rotten, financially, to the core.

We have dwelt at some length upon the subject of the United States Bank, because the country is now undergoing a similar ordeal.  The money power is seeking to again secure control of the monetary and political affairs of the country through the instrumentality of the National Banks.  The monster is now hydra-headed.  Its political tools of both parties, in and out of Congress, pretend to be in favor of specie circulation—of “hard money,” “honest money,” etc.  It is a mere pretense.  If they were honestly for “hard money,” and opposed to “paper money,” their first step would be to suppress the paper money of the banks, because, of all forms of paper money, that is the worst and most dangerous.  Benton, the great champion of hard money, could tolerate United States Treasury notes, and even voted for a bill authorizing their issue ;  but, unlike these hypocritical champions of hard money of the present day, he left no one in doubt in regard to his views upon the question of banks of issue.  In his speech, on the Divorce of Bank and State, in 1837, he said :

“ Banks of circulation are banks of hazard and of failure.  It is an incident of their nature.  Those without circulation rarely fail.  That of Venice has stood seven hundred years ;  those of Hamburg, Amsterdam, and others, have stood for centuries.  The Bank of England, the great mother of banks of circulation, besides an actual stoppage of a quarter of a century, has had her crisis and convulsion in average periods of seven or eight years, for the last half century—in 1783, ’93, ’97, 1814, ’19, ’25, ’36—and has only been saved from repeated failure by the powerful support of the British government, and profuse supplies of exchequer bills.  Her numerous progeny of private and joint stock banks of circulation have had the same convulsions ;  and not being supported by the government, have sunk by hundreds at a time.  All the banks of the United States are banks of circulation ;  they are all subject to the inherent dangers of that class of banks, and are, besides, subject to new dangers peculiar to themselves.  From the quantity of their stock held by foreigners, the quantity of other stocks in their hands, and the current foreign balance against the United States, our paper system (bank currency) has become an appendage of that of England. * * The power of a few banks over the whole presents a new feature of danger in our system.  It consolidates the banks of the whole Union into one mass, and subjects them to one fate, and that fate to be decided by a few, without even knowledge of the rest.  (This was strikingly illustrated by the almost general suspension of the National Banks in 1873.)  An unknown divan of bankers sends forth an edict which sweeps over the empire, crosses the lines of States with the facility of firman, prostrating all State institutions, breaking up all engagements, and leveling all laws before it.  This is a kind of consolidation which the genius of Patrick Henry had not even conceived.  But while this firman is thus potent and irresistible for prostration, it is impotent and powerless for resurrection.  It goes out in vain, bidding the prostrate banks to rise.  A veto power intervenes.  One voice is sufficient to keep all down ;  and thus we have seen one word from Philadelphia annihilate the New York proposition for resumption and condemn the many solvent banks to the continuation of a condition as mortifying to their feelings as it is injurious to their future interests.  Again from the mode of doing business among our banks—using each other’s notes to bank upon, instead of holding each other to weekly settlements, and liquidation of balances in specie, * * our banks have all become links of one chain, the strength of the whole being dependent on the strength of each.  A few govern all.  Whether it is to fail, or to resume, the few govern ;  and not only the few but the weak.  A few weak banks fail ;  a panic ensues, and the rest shut up ;  many strong ones are ready to resume ;  the weak are not ready, and the strong must wait.  Thus the principles of safety, and the rules of government, are reversed.  The weak govern the strong ;  the bad govern the good ;  and the insolvent govern the solvent.  This is our system, if system it can be called, which has no feature of consistency, no principle of safety, and which is nothing but the floating appendage of a foreign and overpowering system.”

Who can doubt as to where Jackson and Benton would stand to-day, if they were alive, in regard to the issue now pending, whether the government and people of the United States shall use United States Treasury notes, or National Bank notes, nominally redeemable in gold, for their circulating medium ?  It was impossible in Jackson’s time for the administration to suppress State banks of issue, so deeply had they become rooted in the structure of American society, but everything possible was done to curtail their power for mischief.  The first step taken in this direction was the publication, July 11, 1836, of the famous “specie circular,” ordering agents for the sale of public lands to take nothing in payment but specie.  This circular was based on a law passed in 1816, requiring the Secretary of the Treasury to take nothing, but specie, Treasury notes, or the notes of specie paying banks.  The notes of eastern banks at this time were sent West for a “good circulation,” and “coon-box banks” were set up in the Western States, which issued notes in easy loans to land speculators.9  The title to land was passing rapidly to speculators, and the treasury was being filled with worthless paper.  Ten millions of bank currency of this sort was arrested by the circular on its way to the land office at Washington.  The money power was highly indignant, and Congress, then as now its suppliant tool, at its next session passed a bill rescinding the circular, but it was not signed by the President and failed to become a law.  This led to the establishment of the Independent Treasury system, of which more will be said hereafter.  The number of specie basis banks in existence during this period were as follows :

Years, Number.
1820....308
1830....330
1834....506
1835....558
1836....567
1837....634
1839... 840
1840....901

The country was flooded with depreciated currency, based on “hard money,” and commercial crashes and money panics occurred with almost as much regularity as the ebb and flow of the tides.


THE CRASH OF 1837.


In the latter part of 1836 several large failures occurred in Great Britain.  This was the beginning of a crisis which convulsed both Europe and America.  Early in May one bank in New York City and three in Buffalo failed.  On the 10th of May all the banks in New York suspended specie payments, under a law passed by the legislature allowing them to suspend for one year.  The banks throughout the country soon followed their example.  The distresses of the year were aggravated by a failure of the wheat crop.  The New York banks being required by law to resume May 10, 1838, contracted their circulation as rapidly as possible.  It was reduced over $12,000,000, or one-half, during the year 1837.  The banks of New England were in a bad condition, the best of them having only $1 in specie to redeem $11 in notes.  A meeting of bank delegates in New York was called for November 27, 1837, to confer in regard to resumption, but the United States Bank refusing, the convention did not meet.  The New York Banks resumed on the 10th of May, 1838, and nearly all the banks throughout the country soon followed, at least nominally, except those of Philadelphia.  Towards the end of the year the Bank of England again became involved in trouble, producing the usual effect in America.


CRASH OF 1839.


On the 10th of October, 1839, the Bank of the United States closed its doors, and was followed by nearly all the banks in the South and West.  The banks in New York and New England made a show of holding out, but to no purpose.  According to Sumner, 343 out of 850 banks closed entirely, and 62 partially, and the government lost over $2,000,000 in deposits.


CRASH OF 1841.


An attempt was made to resume specie payments in 1841.  But a run was made on the United States Bank, which had again opened, and it was compelled to finally close February 4, 1841.  This led to another general suspension, followed by great distress.  Specie payments were not again resumed until March, 1842.

During all these years of banking on the specie basis system, banking operations had been carried on in the most reckless manner, without regard to personal integrity, or the laws of banking.  Every possible device was resorted to by banks to put their notes in circulation, in such a way as would prevent their speedy return for redemption.  Judge Kelley, in an able speech on the subject of banking, delivered at Indianapolis, in August, 1875, thus felicitously describes the manner in which this was frequently done :

“ Do you know where the phrase ‘carpet-bagger’ came from ?  The younger men of our day think it was invented to describe a man from the North who went South and got an office.  Oh, no ;  not at all.  The older members of my audience will attest the truth of what I say when I state that the phrase ‘carpet-bagger’ arose from the fact that nearly every specie basis bank had its carpet-bagger—a fellow it sent with notes by the carpet-bag full into some distant State to get them into circulation there.  If he could not buy cattle, corn, hogs or something else in which there might be a profit, he was to enter into a treaty with the carpet-bagger or other officer of some bank out there for an exchange of notes.  For instance :  The Frogtown bank—for I am told there were banks located occasionally in almost impenetrable swamps, and in those days, you must remember, there were no telegraphs and but few railroads—the fellow from Frogtown would get way out into Skunktown, another almost inaccessible place, and he would effect an exchange of ten, twenty, or thirty thousand dollars of Frogtown bank notes for a like amount of Skunktown bank notes, and the Skunktown bankers would put off the Frogtown notes on their customers, and the Frogtown bankers would put off the Skunktown bank notes on theirs, and thus they would go on with this legitimate business to their common advantage.  I am giving you a historic fact when I tell you that I first became acquainted with that term in designating those fellows who were traveling from one out-of-the-way place to another with a carpet-bag, full of notes to exchange, so that the notes put in circulation in Skunktown couldn’t find their way back to Frogtown, because the people in Skunktown didn’t know where Frogtown was, and the people in Frogtown didn’t know where Skunktown was—and if they did they couldn’t get there ;  the people in one place couldn’t get to the other to get the specie on which the notes were based.  Then after the bank at Frogtown had paid out the Skunktown notes, the bank at Frogtown would refuse to receive the Skunktown notes, but it would send the holder, who was its debtor, around the cornier to a broker, who would buy them at seven or nine per cent. discount, and then the broker and the bank would divide the proceeds of this gold basis transaction.  That is a specimen of what was going on all over the country.”

In referring to this period, in the same speech, Judge Kelley forcibly says :  “ It is usual to speak of the great crisis of 1837, but from 1832 to 1843 was one unbroken period of individual suffering, resulting from the alternating expansions and contractions of a banking system based on what it could not get, and could not have retained if it had got—gold coupled with permission to issue notes and lend money deposited for safe keeping.”

In 1840 the Independent Treasury act was passed, which took from the banks the custody of the funds of the government.  This act excited great indignation amongst the banks and their tools, and the next year, a new administration coming into power, Harrison having been elected President, the first step taken by Congress was to repeal it.  It was re-enacted, however, in 1846, and remained in force until 1861, when it was suspended to enable the Secretary of the Treasury to deposit the funds of the government with “ specie paying banks.”  (The Secretary of the Treasury was about to negotiate a loan of $150,000,000 from the banks of New York, Boston and Philadelphia, and the Independent Treasury act was suspended at their instance, so as to enable them to retain their gold and pay the government in bank currency ;  but the Secretary of the Treasury unexpectedly required the loan to be paid in specie, and, after that, there were no “specie paying banks” left in which to deposit government funds.)

The stimulus of the tariff of 1842, a great demand for breadstuffs from abroad, the introduction of foreign capital, the discovery of gold in California, and other causes combined to carry the country through from 1841 to 1857 without a commercial crash or money panic.


PANIC OF 1857.


In 1857, however, the people of Great Britain were overtaken by another of their periodical crises, which, as usual, involved the banks of the United States.  The Ohio Life and Trust Company failed August 24, 1857, with liabilities to the amount of $7,000,000.  Sumner says, “at this period no rule seems to have governed issues save to keep one-third of the circulation in specie, and in some States even this dwindled down to one-tenth or one-twelfth.  Such a rule, however, is entirely fallacious, as any other arbitrary rule of reserve must be, and it proved in the time of trial that there was no strength to endure any shock.”  The New York banks, as an example of the contraction which followed, curtailed their loans from $116,000,000, August 29, 1857, to $94,500,000, November 28, 1857.  The banks of Philadelphia, Washington, Baltimore, and interior towns, suspended in September, and those of New York, Boston and of the country generally, in October.  Stocks fell 40 or 50 per cent., and 20,000 persons were thrown out of employment in New York City within a fortnight.10  But it is unnecessary to go into details.  It was the same old story over again.  The people were accused of “extravagance,” “over production,” etc., and after “confidence” had been restored by the Sheriff, the banks started afresh.


SUSPENSION OF 1861.


In the beginning of 1861, when the great Rebellion broke out, the number of banks in the United States was about 1,600, with a circulation of over $200,000,000.  Of this circulation, about three-fourths belonged to the Northern States.  The specie reserve of the banks of the Northern States, kept on hand for the purposes of redemption, amounted to probably some $60,000,000.  The necessities of the government becoming urgent, two loan acts were passed by Congress, during the extra session of 1861, one approved July 17th and the other August 5th.  By the act of July 17th Congress authorized loans to the amount of two hundred and fifty millions of dollars, in bonds running twenty years, at not over 7 per cent. interest ;  in 7-30 notes running three years ;  or fifty millions of the amount could, at the discretion of the Secretary, be issued in the form of Treasury notes, payable on demand, without interest.11  The act of Congress of August 5th authorized the Secretary of the Treasury to issue 6 per cent. bonds, running twenty years, for the purpose of funding the Treasury notes, etc., and also suspended the provision of the sub-Treasury act of 1846, “so far as to allow the Secretary of the Treasury to deposit any of the moneys obtained on any of the loans now authorized by law, to the credit of the United States, in such solvent specie paying banks as he may select.”  Then, to quote from Spaulding’s Financial History of the War, “the banks in New York, Boston and Philadelphia most patriotically came forward and made arrangements in several negotiations with Secretary Chase to loan the government $150,000,000 under the provisions of the two loan acts passed at the extra session.  Of this sum $105,000,000 was apportioned to the associated banks of New York, payable in installments.  The banks were in good condition, * * and the loan to the government was made with the expectation that the money would be checked out under the direction of the Secretary, in pursuance of the sixth section (suspending the sub-Treasury act) above referred to.  The Secretary of the Treasury refused to use the discretionary power conferred upon him, by that section, and would not check on the banks for the expenses of the war, so that current bank notes could be paid or balances settled through the clearing house, but insisted that the banks should pay the money loaned into the sub-Treasury in gold or gold Treasury notes. * * The banks having been committed to making the loans, and having made partial advances on account of the same, were obliged to complete the loan, notwithstanding the Secretary of the Treasury deemed it incompatible with his views of duty, and the traditions of the sub-Treasury law to use such banks as disbursing agents of the government, even under the extraordinary exigency under which the loans were made.” From this it appears that when the banks “most patriotically came forward” to lend the government the sum of $150,000,000, they confidently expected that they would be permitted to exchange bank currency for the bonds of the government, and in effect to become factors between the government and the people, in exchanging the bonds of the government for the products of industry.  Had this arrangement been carried out, it is not difficult, in the light of sixty years experience with the specie basis banking system, to conjecture what would have been the result.  The banks would have taken the loans of the government as fast as they were offered, and inflated their circulation to a corresponding degree.  Sooner or later the inflation would have ended in a commercial crash and money panic ;  the banks would have suspended specie payments as usual, and the people would have found themselves with some hundreds of millions of dollars of worthless or depreciated paper on their hands—in a state of bankruptcy.  Secretary Chase undoubtedly became entangled in the toils of the money power, but his action in this particular, in refusing to take anything but specie from the banks on account of their loan of $150,000,000, was a fortunate circumstance, which led to important results.  When urged to check upon the banks, instead of requiring them to pay specie, he said, “however harmless or beneficial it might be, if confined to the New York banks, it would inevitably result in a general payment and receipt for public dues of bank notes, which in turn would lead to expansion, which in turn would terminate in suspension and vast injuries to the sound banks.”12

The banks accused the Secretary of the Treasury of acting in bad faith with them, not only in the matter of requiring them to pay specie, but in continuing to issue Treasury notes (demand notes under the act of July 17, 1861) after he had given assurances to the contrary, and a general suspension of specie payments took place on the 28th of December, 1861.  A prominent banker13 in speaking of this period says :  “ Even with all these unfavorable circumstances surrounding them (the banks), it was an encouraging fact observed by those who were anxiously watching the practical operation of this great and novel experiment, that while the circulating notes in the country were restricted, the disbursements of the government for the war were so rapid, and the consequent internal trade movement was so intense, that the coin paid out upon each installment of the loan came back to the banks, through the community, in about one week.  The natural effect of this general commercial activity upon the circulating medium being to quicken its flow.  After taking the third amount of fifty millions by the associated banks, those in New York who had at that time paid in of their proportion over eighty millions in all found themselves in this position :

Their aggregate coin, which on the 17th of August, before the first payment into the Treasury, was..... $49,733,990
Was on December 7th...................... 42,318,610
A reduction of only......................... $7,415,380
and the other two cities in like proportion.”

In the latter part of 1861 gold began to flow towards Europe.  This, together with the issue of demand notes, caused the specie reserve of the banks to diminish rapidly.  The drain upon the New York banks in December went on at the following rate :

December 7, 1861, the banks had in specie... $42,300,000
December 14, 1861,.........39,000,000
December 21, 1861,.........36,800,000
December 28, 1861,.........29,300,000

After a final conference with Secretary Chase, in which he refused to abandon the course he had thus far pursued, the banks decided that it was expedient to suspend specie payments, and accordingly, as already mentioned, a general suspension took place on December 28, 1861.  From this time on the specie in the New York banks began to increase again, and March 8, 1862, was $30,000,000.  The State banks continued to circulate their notes until after the National Banks were put in operation, when they were driven out of circulation by taxation.  The National Banking bill became a law on the 25th of February, 1863, and on the 3d of March following an act of Congress was passed imposing a tax of one per cent. each half year, on a graduated scale, of State bank circulation, according to the capital stock of each bank.  This was done for the purpose of getting the State banks of issue out of the way of the National Banks, and proved successful.  Thus, after an eventful career of over half a century, during which they had inflicted incalculable injury and suffering upon the American people, the specie basis banks of issue, organized under State authority, passed away, not in a merited storm of public indignation, but quietly and stealthily at the command of the money power, to enable it to erect in their stead a more powerful and dangerous development of the same system of banking.


NATIONAL BANKS.


The National Banking system was planned shortly after Secretary Chase entered upon the duties of his office, and was recommended by him in his first annual report to Congress, December 10, 1861.  It was found impossible to put the system into operation soon enough to meet the necessities of the government, and it became necessary to issue Treasury notes (greenbacks.)  There is abundant reason to believe that the instigators of the National Banking system were in no particular hurry to have it put into operation.  As the circulation of the National Banks was to be based on government bonds, it became an object to these conspirators, chief among whom was the Hon. John Sherman, United States Senator from Ohio, to so shape legislation as to depreciate the paper of the government and enable them to secure the bonds necessary to establish the National Banking system at the lowest possible figure.  The National Banking bill, therefore, was not pressed until 1863.  It was then foisted upon the country at a time when National Banks could render no possible service to either government or people—in fact, were a disadvantage, for their circulation differs in no material respect from the circulation of specie basis banks of issue, and is a breeder of inflation.  The National Banking system was conceived in fraud, and its promoters, who found it to their advantage to first depreciate by legislation and then decry, as they are still doing, the paper of the government, were more dangerous, because more subtle enemies of the government, than Jefferson Davis and all his hosts.  The last step in the scheme, planned by Secretary Chase and certain capitalists and politicians, is now in process of consummation.  We refer to the retirement of the greenback and the resumption of specie payments, January 1, 1879.  When this is accomplished the National Banks will hold the purse strings of society, and, by monopolizing the whole of the circulating medium of the country, by which all property in the country—homes, lands, debts and credits, personal and real estate of all descriptions—are valued, will render the whole community dependent upon them.  John Randolph predicted, and his prediction was verified, that if a National Bank was established with a capital of $35,000,000, it would “overawe Congress and laugh at its laws.”  Now we have 2,000 National Banks with a capital of nearly $400,000,000.  Benton characterized the unity of interest of the old State banks of issue as “a consolidation of a kind which the genius of Patrick Henry had not even conceived.”  The National Banking system constitutes “a consolidation” besides which the one denounced by Benton is a mere pigmy.  Hamilton when he sought to found a strong government, based on an aristocracy of wealth, and to that end urged the establishment of a United States Bank modeled on the British system never dreamed of such a consolidated power as that now constituted by 2,000 National Banks, modeled on that (the British) system.

But, apart from the dangerous power over the property and political affairs of the country, which such a system confers upon a comparatively small class of people, why should all other classes be compelled to pay the banking class interest on $400,000,000, more or less, of paper money based on bonds of the government, for which the people are responsible, when they can have a better circulating medium, without interest, based on precisely the same security ?

The history of the National Banking system can be more clearly set forth in connection with the history of the legal tender acts, passed during the war, and with that will form the subject of the next chapter.  The details of the system will be duly explained in a subsequent chapter (Chapter VII.)




1 Professor Sumner’s History of American Currency.

2 Professor Sumner’s History of American Currency.

3 Story on the Constitution, Vol. 1, page 171.

4 Jefferson’s Works, Vol. 9, page 272.

5 Yates’ Debates of the Constitutional Convention (1787.)

6 Kellogg’s New Monetary System, page 204.

7 Sumner’s History of American Currency.

8 From Speech of Hon. W.D. Kelley, at Indianapolis, Aug., 1875.

9 History of American Currency.

10 Sumner, page 183.

11 These notes (known afterwards as old demand notes) were subsequently made a full legal tender and circulated at par with gold.  See Chapter VI.

12 Letter of J.E. Williams to Hon. S.P. Chase.

13 Letter of Geo. S. Coe to E.G. Spaulding, Financial History of the War.