William Gouge,
A Short History

Of Banking from 1814-15 to 1815-16.

"At the time of the suspension of our city Banks, a public meeting of merchants and others was held, who publicly sanctioned the measure, under a pledge given by the Banks, that as soon as the war was terminated, specie payments would be resumed.  That this measure was intended, is evident, from the curtailment of loans immediately consequent upon the suspension.42

"But, unhappily, the redemption of the pledge was not demanded by the public at the stipulated time, and the Banks, urged on by cupidity, and losing sight of moral obligations in their lust for profit, launched out into an extent of issues unexampled in the annals of folly.  The fulfilling of a promise to pay money, by tendering another promise equally false, sanctioned by the public acquiescence, led to the organization of additional Banks, under the act of March, 1814, which had not till then been attempted to be formed, and a scene of indiscretion in the loaning of Bank credits was every where exhibited, which realized the anticipations of those who had foretold the ruinous effects of the paper system.  Money lost its value.  The notes of the city Banks depreciated twenty per cent., and those of the country Banks from twenty to fifty, and specie so entirely disappeared from circulation, that even the fractional parts of a dollar were substituted by small notes and tickets, issued by Banks, corporations and individuals.  The depreciation of money enhancing the prices of every species of property and commodity, appeared like a real rise in value, and led to all the consequences which are ever attendant upon a gradual advance of prices.  The false delusions of artificial wealth increased the demand of the farmer for foreign productions, and led him to consume in anticipation of his crops.  The country trader, seduced by a demand for more than his ordinary supply of merchandise, was tempted to the extension of his credit, and filled his stores, at the most extravagant prices, with goods vastly beyond what the actual resources of his customers could pay for, whilst the importing merchant, having no guide to ascertain the real wants of the community but the eagerness of retailers to purchase his commodities, sent orders abroad for a supply of manufactures wholly disproportioned to the effective demand of the country.  Individuals of every profession were tempted to embark in speculation, and the whole community was literally plunged in debt.  The plenty of money, as it was called, was so profuse, that the managers of the Banks were fearful they could not find a demand for all they could fabricate, and it was no unfrequent occurrence to hear solicitations urged to individuals to become borrowers, under promises as to indulgences the most tempting.  Such continued to be the state of things until towards the close of the year 1815."

The Secretary of the Treasury negotiated with the Banks as independent sovereignties.  His first effort was "to associate them with a view of furnishing a uniform national currency."43  It is almost needless to say that this effort did not succeed.

His next attempt was, "by their agency in circulating treasury notes, to overcome the inequalities of exchange." This, he says, was but "partially successful."

He then proposed a plan, "with the design to curtail the issues of Bank notes, to fix the public confidence, and to give each Bank a legitimate share in the circulation." What the particulars of this plan were, he has not stated, but it is evident from the context that it was through the free-will of the Banks he sought to carry it into execution.  He soon found that a plan which was not fitted to promote their particular interests, was "not likely to receive their general sanction.  The truth is," he adds, "the charter restrictions of some of the Banks, the mutual relation and dependence of the Banks of the same State, and even of the Banks of the different States, and the duty which the directors of each Bank conceive they owe to their immediate constituents upon points of security or emolument, interpose an insuperable obstacle to any voluntary arrangement, upon national considerations alone, for the establishment of a national medium, through the agency of the State Banks." The plain English of this is, that the directors of the Banks esteemed it a "duty" to make as much profit as they could, and Government did not see fit to interfere with them in the discharge of this sacred "duty."

In the effort "to overcome the inequalities of exchange, by the circulating of treasury notes, through the agency of the Banks," Government did indeed make some exertion of its power.  The Secretary issued an order, declaring that, after the first of August, nothing should be received in payment of duties but specie, treasury bills and the notes of such Banks as would receive treasury bills in deposit at par.  "The effect of this plan," says a contemporary writer,44 "was clearly foreseen by all who fairly understood the subject.  What was the result ?  In places where treasury bills were in the market, at or above par, the Banks agreed to receive them: whereas, where they were below par, the proposition was rejected."

But this measure had not simply a negative effect.  It increased the mass of Bank paper in circulation, and thereby still further vitiated the currency.  This is abundantly proved in a pamphlet entitled "An Appeal to the Public," published at New York, in December, 1815.  In this pamphlet, Mr. Isaac Bronson, the author, states the active capital of the Banks of the city of New York to be 13,515,000 dollars, and computes the amount on which they were drawing interest to be twenty-two or twenty three millions.

"Admitting it to be twenty-two millions, it follows that the Banks make dividends on a sum which exceeds their active capital about eight millions and a half, yielding the stockholders about half a million in dividends.  This profit is derived from their mere credit, without any cost or consideration whatever.  Of the eight and a half millions excess beyond their capitals, five millions have been issued in the purchase of, and in exchange for, Government securities of various sorts, bearing interest.

"We have been speaking hitherto of 'the Banks,' as if no distinctions were to be made between them.  It is now time to make the proper discrimination.  Among each other the directors have already, in their conversation, fallen into the familiar distinctions of the 'debtor Banks,' and the 'creditor' Banks.  By the former, are meant those whose paper has accumulated in the latter, to an amount which cannot be taken up.  The debtor Banks, the Banks who are indebted to the others, have become so indebted, because they hold large amounts of public securities, bearing interest, for which they have issued their Bank notes to Government, and which notes have found their way into the other Banks.  To keep the creditor Banks quiet, however, and as much as possible in good humor, it has been stipulated that they shall charge interest on these accumulations.  The practical effect therefore is, that the debtor Banks make their profit by trusting Government;  and the creditor Banks make theirs by trusting the debtor Banks.  The debtor Banks give out their notes in exchange for treasury notes bearing interest; and the creditor Banks charge interest on the notes they receive of the debtor Banks.  But if these notes accumulate in the hands of individuals, no interest is allowed them, unless they compel its payment by law.  And thus the Banks have established a rule of justice towards each other, in itself very correct, but which they refuse, however, to extend to the rest of the community.

"It is important to our subject that the reader should clearly understand the course of the Banks in relation to treasury notes.  We hope, therefore, to be pardoned for what to some may appear unnecessarily minute.

"Some months since, the Secretary of the Treasury proposed, to all the Banks in the United States, that they should receive treasury notes when offered them, and give their own notes in exchange for them: accompanying this proposition at the same time by a threat, that the treasury should not receive the paper of those Banks which did not receive treasury notes !  At a meeting of a select committee of our Banks, appointed to consider these propositions, it was resolved not to agree to them.  Three of the Banks, and of course they are the three who have been called, because they have become, the debtor Banks, did afterwards, however, by a private and separate arrangement, made by agents sent to Philadelphia on purpose, agree to these propositions, without the consent or knowledge of the five other Banks; so that these Banks now receive treasury notes from any one who presents them, and issue their bills in exchange for them when required.  And here, we submit to the reader, whether it does not necessarily and inevitably follow, that these Banks have parted with all power of control over their issues ?  That department of the Bank has been abandoned to the Secretary of the Treasury;  for it is very clear, that he may to-morrow, if he pleases, cause these Banks to add twenty millions to that excess of paper, which is the true cause of depreciation.  That this excess is continually increasing, is most notorious: to what extent, is one of those Bank secrets which all their caution has not prevented us from penetrating.

"Among others, this singular and ludicrous consequence has followed: The United States take only the bills of those Banks which cannot keep their accounts even with the other Banks; and refuse to receive the bills of those Banks which are immense creditors of the Banks whose bills are received.

"And the practical result will be, that so long as the notes of these Banks continue to be worth more than treasury notes, so long will treasury notes continue to be presented and Bank notes issued in exchange for them.  When the Bank notes, from the quantity afloat, become degraded below treasury notes, this practice will cease.  But the affairs of the Banks will be, by that time, utterly irretrievable, and they will follow the fate of all the Banks which have been mere machines of Government.

"It appears from the reply to the Connecticut Banks, that in July, the commercial loans had been reduced nearly three millions below what their amount was when payments were suspended.  But it is at the same time acknowledged, that the whole amount of loans had been increased three per cent. on the capitals of the Banks: and this before the system of receiving treasury notes was adopted.  The effect of that system, as we have been recently enabled to ascertain, has been to produce in the creditor Banks an accumulation of the notes of the debtor Banks of between two and three millions: although the balances, when payments were suspended, were less than three hundred thousand."

The plentifulness of "money," whether caused by the Banks trafficking with the Government, or by discounts to private persons, was very acceptable to the great mass of the people.  The Banks of Pennsylvania added ten millions to the amount of their loans in the course of the year, and the Banks of some of the other States were equally liberal, if not more so.  Never before had the country exhibited such an appearance of prosperity.  The unequal value of the Bank notes of different districts, was productive of some inconvenience, but this was not sufficient to counterbalance the advantage of a general rise of prices, and the briskness of nearly every kind of business.

"We cannot," says one writer, "see, with some honest calculators, how the continuance of the present state of things can affect the interests of the country.  If specie has been withdrawn from circulation, it is because it has been occupied abroad in a more profitable employment than it was engaged in at home.  Its exportation has added to the stock and wealth of the nation, by the purchase of merchandise abroad, worth more than the specie itself.  To be sure, we are subject to some inconveniences in our transactions at market, and in petty dealings;  but as we become accustomed to the use of paper money, the disadvantage will vanish.  All large mercantile negotiations are conducted as they have heretofore been, by Bank notes, or checks upon Banks.  As to the agios of exchange, where balances are due, they must of necessity continue: but before long they will be so completely understood, as to occasion no embarrassment.  The merchant who sells his goods for foreign notes, will add to the price of his goods the amount of the loss he sustains upon the notes, and the purchaser will eventually discover, that the difference which he must pay for his goods, at a place where his Bank notes are at a discount, and at a place where they are at par, is at least equal to the agio on his notes.  As to the solidity of the Banks, the suspension of specie payments has produced no alteration.  Although the Banks do not pay specie for any of their notes, yet the time never has been when they could pay specie for them all: for a Bank that keeps on hand a sufficiency of specie to meet all its debts, can never divide six per cent. interest.  The very principle upon which it is founded, requires that it should trade beyond its capital.  But the Banks have the same means of discharging all their notes as they ever had, viz: claims upon individuals who have borrowed their money, and who are now as able to pay as ever they were, if not in specie, in merchandise and property of equal value."

In March, 1816, Mr. Carey addressed a series of letters to the directors of the Philadelphia Bank, some extracts from which will elucidate the state of affairs, and the state of feeling.

"Blessed peace at length arrived. * * * * About the middle of May, 1815, the first vessel from Great Britain entered the port of Philadelphia.  She was quickly followed by others.  They were all full freighted with the most costly productions and manufactures of that country.  The news was rapidly conveyed into the interior.  The country storekeepers thronged to the city in crowds.  Never, probably, were there so many here before at one time.  The number has been calculated, and I believe correctly, at two thousand.

"They were all eager to purchase – apparently fearful of not being able to procure adequate supplies – and each providing himself as largely as if he were to have the monopoly of the trade of his neighborhood.

"Thus, although the importations were uncommonly great, they were sold off rapidly.  The advances on the invoices were universally high.  And some of the importers made independent fortunes on single cargoes.

"This was the golden age of Philadelphia.  The rapid circulation of property – the immensity of business done – and the profits made on that business, produced a degree of prosperity which she had, perhaps, never before witnessed.  Almost every man in every kind of business, was employed advantageously for himself and for the community.  And so high were the prices of imported articles generally, that domestic manufactures appeared likely to stand the shock of competition.

"Of the immense quantity of business done in this city during the last year, some idea may be conceived from the astonishing fact, that the real bona fide auction sales on which duties were paid, amounted in about eight months to near ten millions of dollars.  As this kind of business was principally carried on upon credit, it may readily be conceived that it must have created an inordinate quantity of promissory notes.  During the first epoch, (the months of May, June, July and August,) which I have styled, and I think justly, the golden age of Philadelphia, there were few of these notes offered at the Banks which were not discounted.  The Banks were in a most liberal mood.  Few men of fair character experienced refusals.  Instances occurred of notes being discounted at the different Banks for thirty, forty, fifty, sixty and seventy thousand dollars.  Cases of this kind were not, I believe, very numerous.  But enough of them did occur, to establish the fact of the extreme liberality that prevailed on the subject of dis counts.

"The Banks have been censured, and very severely, for the extension of their discounts at this period.  They have been charged with taking advantage of the suspension of specie payments, with over-trading and over-issuing of notes.

"Superficial reasoners have carried these allegations to a great extent – and have not scrupled to brand this conduct as fraudulent.  These charges are highly unjust, except, perhaps, so far as respects those immoderate notes above mentioned.  These I do not undertake to defend."

Mr. Carey then attempts to refute the opinion of those "superficial reasoners" who maintained that the Banks had over-traded.  "Never" in his opinion, "was a country in a more enviable state."  The only cause of complaint he had against the Banks, was, that in the month of September they began to curtail mercantile accommodations, whereby, in the months of October and November, there was a considerable fall in the price of British goods.  The necessity for this curtailment, Mr. Carey shows to have arisen from the extensive dealings of the Banks in Government securities, thereby confirming the statements of Mr. Bronson.  The published accounts show that seven of the Banks of Philadelphia, having nominal capitals of the amount of $7,700,000, had invested about $3,500,000 in Government stock.


42.   This meeting was composed principally, if not exclusively, of owners of Bank stock, and of debtors to the Banks; and the great body of the public, knowing little of the nature of Banking operations, acquiesced in the measure.  Peace was restored in less than six mouths after the Banks of the Middle States had suspended payment.  So confident were some of the public that these institutions would then redeem the solemn pledge they had given, that "the chests and secure places were unlocked, and hard money was again in the market, at three or four per cent. above par." Even in May the discount on Philadelphia notes was only 5 per cent.; but the Banks, under one pretext or another, refused to open their vaults, and the paper sunk, by, June, to 9, and by November, to 16 per cent. below par.

43.   Proposition relating to the National Circulating Medium, December 6th, 1815.

44.   Inquiry into the causes of the present state of the Circulating Medium. Philadelphia, August, 1815.