William Gouge,
A Short History

Of Banking from 1810-11 to 1814-15.

After the unsuccessful attempt to obtain from Congress a renewal of the charter of the United States Bank, overtures were made to the Legislature of Pennsylvania.  The petitioners offered a bonus of five hundred thousand dollars, and a loan of five hundred thousand dollars more, for an act of incorporation under the title of the "American Bank," with a capital of five million dollars.36  The offer was, in a fiscal point of view, very advantegous, but it was not accepted, less perhaps from any remains of the old democratic enmity to the system, than from a desire of individuals to get charters for the particular benefit of themselves and their friends.

"The anxiety displayed by the stockholders of the United States Bank to continue their business," say a committee of the Senate of Pennsylvania,37 "and the successful appearance of their dividends, added to the locating of branches of the Pennsylvania Bank in the country, very naturally excited the attention of the public, and particularly of the inhabitants of some of the interior counties of the State, who fancied that much of the prosperity of cities was to be traced to the establishment of Banks, and that if that were the case, there was no reason why the country should not participate in their advantages.38  Such considerations as these, urged on by the desire of accumulating wealth without the dull exercise of labor, engendered a spirit of speculation.  It was supposed that the mere establishment of Banks would of itself create capital, that a bare promise to pay money, was money itself, and that a nominal rise of the price of land and commodities, ever attend ant upon a plenty of money, was a real increase of substantial wealth.  The theory was plausible, and too well succeeded.  The Farmers' Bank, with a capital of three hundred thousand dollars, was established in the county of Lancaster, in the beginning of the year 1810, and was accompanied by several others in the city, as well as in other parts of the State.

"These early symptoms of a mania for Banking, induced the Legislature, on the 19th of March, 1810, to enact a law prohibiting unincorporated institutions from issuing notes, or pursuing any of the operations of Banks; but in defiance of its provisions, the system was persevered in, and even companies incorporated for the purpose of constructing bridges, departed from the spirit of their charters, converted themselves into Banks, and emitted notes for circulation.

"The war, as might naturally be expected, put a temporary stop to the exportation of specie, and thereby removed the only check against inordinate issues of paper, which can possibly exist.  This cessation of the returning of notes for payment, had the effect of inviting the Banks to enlarge their issues.  Loans were made to Government to an immense amount, and to individuals vastly beyond what the absence of foreign commerce justified, and a gradual depreciation of the currency was the result.  The increase of dividends and the facility with which they appeared to be made, extended throughout the whole Commonwealth the spirit of speculation, already introduced into some counties.  The apparent success of the Farmers' Bank of Lancaster, which from the enormous extent of its issues was enabled to divide upwards of twelve per cent. per annum, and to accommodate its stockholders with loans to double the amount of their stock, had a powerful influence on the public mind.  A Bank by many was no longer regarded as an instrument by which the surplus wealth of capitalists could be conveniently loaned to their industrious fellow-citizens, but as a mint in which money could be coined at pleasure, for those who did not possess it before.  Under these delusive impressions, associations of individuals sprang up in every quarter, holding out inducements to the farmer, the merchant, the manufacturer, and mechanic, to abandon the dull pursuits of a laborious life, for the golden dreams of an artificial fortune.

"The liability, however, to individual ruin, attendant upon unchartered co-partnerships, restrained in a degree the Banking mania, and impelled the projectors to apply for a legislative sanction.  During the session of 1812-13, a bill to incorporate twenty-five institutions, the capitals of which amounted to nine million five hundred and twenty five thousand dollars, was passed by both houses of the Legislature, by a bare majority of one vote in each.  The bill was returned by the Governor with his objections, which were sensible and cogent, and on a reconsideration the votes were 38 to 40.  At the following session the subject was renewed with increased ardor, and a bill authorizing the incorporation of forty-one Banking institutions with capitals amounting to seventeen million dollars, was passed by a large majority.  This bill was also returned by the Governor with additional objections, but two-thirds of each House, (many members of which were pledged to their constituents to that effect,) agreeing on its passage, it became a law on the 21st of March, 1814, and thus was inflicted upon the Commonwealth an evil of a more disastrous nature than has ever been experienced by its citizens.  Under this law thirty-seven Banks, four of which were established in Philadelphia, actually went into operation.

"The immediate commencement of a number of these Banks, with scarcely a bona fide capital equal to the first instalment, for the convenient mode of discounting stock notes to meet the subsequent payments, was soon discovered, increased the mass of paper credits already too redundant, and depreciated the whole circulating medium so far below specie value, as to excite a want of confidence in its convertibility.  In the absence of a foreign demand for specie a domestic one arose.  The laws of the New England States had been so rigorous upon the subject of Banks, which were liable to a penalty of 12 per cent. per annum for the non-payment of their notes, that no depreciation of their currency took place.  The consequence thereof was, that the difference between the New England prices of commodities, stocks and foreign bills of exchange, and those of Pennsylvania, was equal to the extent of the depreciation of the currency of the latter, and as our Bank notes were redeemable on demand, the most profitable remittance which could be made to New England, in exchange for her commodities, was specie, and this demand created a run upon the Banks which they were not able to withstand.  The situation of the southern and western Banks was precisely similar to that of our own.  All had over issued, and a general depreciation had ensued.  The same causes produced the same effects, and a general stoppage of all the Banks in the United States except those of New England, took place in August and September 1814.39  The New England demand, it is true, was increased by two causes, viz: first, by facilities in foreign trade through neutral vessels, which were afforded them by an exemption from the blockade of the enemy, and secondly, by a well grounded apprehension that the southern Banks, from their extensive emissions, would necessarily become embarrassed.  Certain it is, however, that all these causes combined could not have produced a general suspension of payment, had our Banks observed the same caution in their issues as that which characterized the Banks of the Eastern States."

From this account it appears, that, one year before the expiration of the charter of the United States Bank, and two years before the commencement of the war with Great Britain, the Bank mania raged in Pennsylvania with so much violence as to require legislative interposition.  In a year or two after, the mania infected the Legislature.  It had received a check in New England, and was now, according to the natural course of things, spreading south and west.

The infatuation of the high authorities of the United States Government, was as strong as that of the people and of the local Legislatures.  War was declared against Great Britain in June 1812, and Bank notes and Bank credits were seized on to defray the expenses of fleets and armies.  "The Bank capital has been stated at seventy-five millions," said the Committee of Ways and Means of 1813-14, of which Mr. Eppes was chairman.  "On this capital we may calculate with safety on a circulation in notes and discounts of one hundred millions.  From this sum deduct 47,569,120, the maximum of what is deemed necessary for circulation, and the sum remaining, viz. 52,430,880, constitutes the ability of the monied capitalists to loan.  Of this sum we propose to borrow thirty millions."

In conformity with these principles, about six millions were borrowed in 1812, from the Banks, and about four millions more from individuals, who had obtained from the Banks the means of lending.  These loans were obtained at par.  In the next year the Government borrowed about twenty millions, for every hundred dollars of which it issued a certificate of stock for 113 dollars.  In the following year it borrowed about fifteen millions, for twelve millions of which stock was issued at the rate of 125 dollars for 100 dollars paid in.  Then, as Mr. Ingham said in Congress, "it seemed impossible to borrow on any terms."

The policy of carrying on the war by means of loans, cannot be said to have been an unwise one; but what ought to have been an essential point in this policy, namely, drawing on the real resources of the country to an extent sufficient to support the credit of Government, was neglected.  It was known before-hand, that the operations of the enemy would, by cutting up our commerce, diminish the revenue from the customs: yet, the first steps towards raising a revenue by internal taxation, were not taken till July and August, 1813: and the acts which were then passed, did not take effect until the 1st of January 1814.

The consequence was, that the revenue for the three years, 1812, 1813, and 1814, amounted to only thirty-six millions, or about twelve millions a year.  The charges on Government in time of peace, amounted to eight millions a year, and with the remaining four millions we were endeavoring to carry on a war with the most powerful nation on the globe !

As an auxiliary means of supplying financial wants, emissions were made of treasury notes, bearing an interest of five and two-fifths per cent. per annum, reimbursable one year after they were issued, and receivable in payment for duties, taxes, and public lands.  Of these notes, nearly three millions were issued in 1812, about six millions in 1813, and upwards of eight millions in 1814.  As great part of the revenue of twelve millions a year was received in treasury notes, the reader can judge of the condition, of Government.

The mania which raged among the people, and which infected the Legislatures of the different States, would have produced great evils if we had remained at peace.  But this financiering of the United States Government hastened the crisis and exacerbated all the symptoms of the disease.  The country was flooded with paper, which might, without impropriety, be regarded as a new emission of continental money, differing from the old only in having the Banks for indorsers.  Gladly did these institutions avail themselves of the excuse for stopping payments, which was afforded by the inroad of the enemy into Maryland.

For some time after the suspension of specie payments by the Bank of England, its notes remained on a with specie, and after they depreciated the paper of all the other Banks, inasmuch as they were convertible into Bank of England notes, experienced an equal degree of depreciation.  The currency was at times depreciated as much as twenty per cent., but the scale of depreciation was the same throughout England and Wales.

The suspension of specie payments in the United States, differed from that of England in two important particulars.  It did not take place throughout the country, and, as each Bank was independent, there was a different scale of depreciation for each county and each town.  The paper, however, still served as a medium of commerce.  The merchant of Pittsburg put an additional price on his goods, equivalent to the depreciation of the currency in that quarter: and as he had obtained ten or twenty per cent. more on his sales, he was enabled to pay ten or twenty per cent. more on his purchases.  A loss was sustained by individuals when the paper underwent an additional depreciation while remaining in their hands, but their indignation, instead of falling on the Banks, was vented on the innocent and useful exchange merchants.

On the 19th of November, or eighty days after the suspension of specie payments, the paper of the best Banks of Philadelphia was at fourteen per cent. discount: yet but little murmuring was heard, except at the refusal of the Banks to receive southern and western paper on deposit.  Prices were rising, business was brisk, and if any man experienced difficulties, he attributed them to the war.

Such was the state of things, when, on the 14th of October, 1814, or forty-four days after the suspension of specie payments, Mr. A.J. Dallas, Secretary of the Treasury, recommended the establishment of a National Bank, with a capital of fifty millions, of which twenty millions should be subscribed by Government, and paid in six per cent. stock.  The residue of the capital was to be subscribed by individuals, and was to be paid, six millions in gold and silver coin, in three different instalments, six millions in treasury notes, and eighteen millions in six per cent. stock.  The Bank was to be bound to lend thirty millions to Government, and was to be authorized to suspend specie payments, if the President of the United States should deem such a suspension advisable.

So desperate was the state of credit, that this desperate expedient was regarded with favor by many members of Congress.  Mr. Ingham, who was one of its advocates, said, "should any unexpected difficulties menace the Bank, there will be a resort to the power of suspending specie payments. * * * I do not apprehend any serious consequences will result from the temporary suspension of specie payments.  The experiment was tried many years ago in England, and has been continued up to this time, without injury to the commercial interests, and with essential benefit to the nation at large.  It has also been tried here, and, though Bank paper is somewhat depreciated thereby, it is solely because it will not answer the purpose of paying balances between people of different States, for which specie had usually been employed.  For example, the Bank paper of the District will not enable you to trade east of Baltimore: yet every article to be purchased with it here, is as cheap as it was twelve months ago.  It may, therefore, be fairly inferred, that a paper which was receivable all over the United States in taxes, and might be exchanged for notes of smaller or greater denomination, or treasury notes in each of the States, would, from its general convenience continue to circulate without depreciation, even though a temporary suspension of specie payments should take place."40

Mr. Gaston, of North Carolina, compared this proposition to relieve the evil arising from too much paper by throwing more into circulation, to the remedy which Burke had described the French Convention as prescribing for every evil, viz: issuing more assignats.

The clauses in the bill to authorize the Bank to suspend specie payments, and to compel it to lend thirty millions to Government were struck out: and the bill was further modified, by a provision that the whole of the stock should be subscribed by individuals, and paid, with the exception of the six millions in specie, in treasury notes to be hereafter issued.  In this form it received the approbation of a large majority of the House: but a select committee to whom it was referred, in one of its stages, received a letter from the Secretary of the Treasury, stating that the bill as amended would not answer the purposes of Government.  It would, he said, give to the holders of the public stock cause for complaint; and it would be very difficult, if not impracticable, to get into circulation, either with or without depreciation, the forty-four millions of treasury notes, which were afterwards to be subscribed as the capital of the Bank.  After being made acquainted with the views of the Cabinet, the House rejected the bill, by a vote of 49 to 101.

A bill drawn up in accordance with the views of the Treasury Department, was then brought before the Senate.  It proposed the establishment of a Bank, with a capital of fifty millions, whereof five millions were to be paid in gold and silver, twenty-seven millions in six per cent. stock, eight millions in treasury notes, and ten millions to be subscribed by Government.  The Bank was to be bound to lend thirty millions to Government, and was to be authorized to suspend specie payments.  In this form, the bill passed the Senate on the 9th of December, by a vote of 17 to 14.

In the House it was opposed with great ability by Mr. Webster and others, and rejected on the 2d of January, 1815, by the casting vote of Mr. Cheves, the Speaker.

The next day this vote was reconsidered, and the bill was recommitted to a select committee, who, on the 6th of January, reported it with sundry amendments, reducing the capital of the Bank to thirty millions, of which fifteen were to consist of treasury notes, and ten of public stocks; and striking out the clauses to compel the Bank to lend thirty millions to Government, and to authorize it to suspend specie payments  The bill thus amended, was passed by the House on the 7th of January, by a vote of 120 to 37.41

When the bill was in this form returned to the Senate; that body increased the capital of the Bank to thirty-five millions, and restored the clause authorizing the Bank to suspend specie payments.  In this the House refused to concur, and the Senate finally receded from its amendments.  The bill having thus passed both Houses, was sent to President Madison, but he put his veto on it.  His objections were: "The amount of stock to be subscribed will not, it is believed, be sufficient to produce in favor of the public credit, any considerable or lasting elevation of the market price.  Nor will any adequate advantage arise to the public credit from the subscription of treasury notes.  The actual issues of these notes nearly equal, and will soon exceed, the amount to be subscribed to the Bank.  The Bank will be free from all obligations to co-operate with public measures."  [The meaning of this is, the Bank will not be compelled to lend thirty millions to Government.]  Lastly: "The proposed Bank will commence and conduct its operations under an obligation to pay its notes in specie, or be subject to the loss of its charter.  Without such an obligation, the notes of the Bank, though not exchangeable for specie, yet resting on good pledges, and performing the uses of specie in the payment of taxes and other public transactions, would, as experience has ascertained, qualify the Bank to supply at once a circulating medium, and pecuniary aid to Government.  Under the fetters imposed by the bill, it is manifest that during the actual state of things, and probably during the war, the period particularly requiring such a medium and such a source for loans and advances to Government, notes for which the Bank would be compellable to give specie in exchange, could not be kept in circulation."

Another bill was then got up in the Senate to establish a Bank with a capital of fifty millions, of which five were to be paid in gold and silver coin, fifteen in six per cent. stock, twenty in treasury notes, and ten to be subscribed by Government.  In one paragraph, it was declared "the said corporation shall be bound to lend to the Government of the United States, reimburseable at their pleasure, thirty millions of dollars, in such sums and at such periods as may be convenient to the Government of the United States." And in another paragraph, it was expressly provided, that "until the first Monday in April, 1816, it shall not be obligatory on said corporation to pay its notes in specie." Authority was also given to Congress to authorize, in certain contingencies, "the suspension of specie payments, for such time or times as they may deem proper."

This bill, which was framed in accordance with the views of Mr. Madison and of his Cabinet, was passed by the Senate on the 13th of February, by a vote of 18 to 16.  It was then sent to the House, where, after some debate, it was, on the 17th of February, indefinitely postponed, by a vote of 74 to 73.

The news of peace was received on the 13th of February, and to the timely arrival of this intelligence, we must attribute the delivery of the country from the curse of a national paper currency.  If Mr. Madison and the gentlemen of his Cabinet had been allowed to take their own way, we should have had a National Bank with a paper capital of fifty millions, issuing notes redeemable in paper.


36.   "Concise Observations on the Propriety of Incorporating New Banks," Philadelphia, 1812.

37.   Report on the Causes and Extent of the Present General Distress Read January 29th, 1820. Condy Raguet, Chairman.

38.   If they had supposed that the prosperity of some of the inhabitants of cities was owing to the establishment of Banks, they would not have been far wrong.  Nor were they in error in supposing that Bank notes are money to those who issue them, if others are so simple as to receive them; nor that a universal rise in the price of land and commodities brings an increase of wealth to those who are fortunate enough to make sales while prices are high.  Their error was in supposing that a system which is profitable to any, only because but few participate in it, might be extended so far as to be profitable to all who might wish to share in its advantages.

39   It appears from other documents, that, when the British made an inroad into the State of Maine, some of the Banks in that quarter of the country suspended payment; that the Banks of Ohio and Kentucky maintained specie payments till the latter part of December, or the beginning of January; and that the Bank of Nashville, (one of the two Banks then in operation in Tennessee,) did not stop payment till August, 1815.  The Banks of Louisiana suspended payment in April, 1814, four months sooner than the Banks of Pennsylvania.

40   Legislative History of the United States Bank.

41 note in 2010:– The same old same-old, again and again; why set up a bank using Treasury Notes as stock, based upon which to issue circulating medium ?!? – Treasury Notes are already circulating media, no need for middle men, no need to give the Government's credit to individuals who then lend it back to the Government (at interest) and lend it to the general public.  Also indicating that in 1815 the U.S. already had the best Representatives money could buy.  They never relent, never give up; it took them another hundred years, but they got what they wanted.