William Gouge,
A Short History

Of Banking in the Western States.

The first paper issuing institution west of the Alleghany mountains, was the Lexington Insurance Company, which was incorporated in 1802, with a capital of 150,000 dollars, and for which Humphrey Marshall, the historian of Kentucky, says, Banking privileges were surreptitiously obtained  The business being found to be lucrative to those who were engaged in it, the Kentucky Bank was instituted in 1807, with a nominal capital of one million of dollars.

The Miami Exporting Company was instituted at Cincinnati, Ohio, in 1803, with a capital of 200,000 dollars  As its title indicates that it was established ostensibly for commercial purposes of another nature, perhaps Banking privileges were obtained for it surreptitiously, as in the case, in the previous year, of the Lexington Insurance Company  Be this as it may, the Miami Exporting Company did Banking business;  and in the nine years subsequent to its institution, five other Banks were established in different parts of the State, making in all six Banks in Ohio in 1812, with a nominal capital of 1,200,000 dollars.

These Banks maintained specie payments till within a month or two of the close of the war  This is a fact not generally known, but it is placed beyond doubt by a statement made by Mr. Hawkins in Congress, on the 17th of January, 1815, that "even the Banks of Kentucky and Ohio, where specie abounded, had at length been compelled in self-defence to stop payment of specie."

It must be evident from this, that if the United States' Government had immediately compelled the Banks of the great Atlantic cities to redeem the pledge they had given in the preceding August, the western country might have suffered but little from the suspension of specie payments  But, when the United States' Government connived at the suspension of specie payments, sanctioned the use of in convertible paper, and by its fiscal manoeuvering encouraged the issue of additional amounts of such paper, it was impossible that the mania which had reached Pennsylvania, from New England, through New York and New Jersey, should not extend into Ohio and Kentucky.

Kentucky was, however, at first comparatively moderate  All she did at the close of the war, was to authorize the Bank of Kentucky to increase its capital to three millions, and to establish thirteen branches  Seven of these branches were in operation in 1816  Ohio, apparently, went further into the system;  for, we have seen a list of twenty-one chartered institutions which were in operation in that State in 1816, and allusion is made to others which were carrying on the Banking business without charters.

Still, the issues of paper in the Western States were moderate when compared with those in the Middle States  Mr. William Jones, the first President of the United States' Bank, stated, in the documents laid before Congress in 1819, that, "at the time of the subscription to the stock of the Bank, specie was at six per cent. at the westward, and at fourteen per cent. in Philadelphia, New York, and Baltimore."  In the table appended to Mr. McDuffie's report, the rate of exchange at Lexington on Boston, in July 1816, is stated to have been two per cent. – a sure proof that the currency of Kentucky was not at that time much, if it was any, depreciated.

The issues of the western Banks were probably increased considerably in the last six months of 1816: and in this or the following year, the system was extended into Indiana, Illinois and Missouri.

It was about this time, that branches of the United States' Bank were established in the West, and they sought, to make a profit, less by circulating their own paper, than by giving drafts on the eastern cities, receiving in exchange notes of the local Banks, and requiring interest to be paid on the same  This was rather a round-about way of inducing the local Banks to extend their issues, but it was the most effective that could be adopted  Western Bank paper being exchangeable for United States' branch drafts, and United States' branch drafts being exchangeable for European products in the Atlantic cities, the effect was similar to that which would have been produced by making western Bank notes current in New York and Philadelphia.

The full effects of this system were felt in the year 1818, or in the second year of active operations of the United States' Bank  Mr. Niles, then, speaking of "new Banks establishing or about to be established," says, "Behold forty-three new Banks authorized in Kentucky – half a score in Tennessee – eight in Ohio," &c  Of those authorized in Kentucky, at least thirty-five, since known as the Independent Banks of Kentucky, went into operation  Their nominal capital was between seven and eight millions of dollars, but their real capital must have been small: for, the American Quarterly Review says, the same specie was used for different Banks, and only remained long enough in each for the law to be complied with.

If the months of May, June, July, and August, 1815, were "the golden age of Philadelphia," the first months of the year 1818, were the golden age of the western country  Silver could hardly have been more plentiful at Jerusalem in the days of Solomon, than paper money was in Ohio, Kentucky, and the adjoining regions  But, when the United States' Bank found it necessary to curtail, money became as scarce in the West as silver is in Jerusalem under the Turkish despotism.

The Bank of the United States was very sudden in its demands, for its necessities were such as to admit of no delay  An Ohio paper says that the branch at Cincinnati called on the local Banks of that town for a balance of 700,000 dollars, in requisitions of twenty per cent. every thirty days  This compelled the Bank of Cincinnati to stop payment about the middle of November, 1818, and in two days afterwards the Bank of Kentucky unexpectedly followed its example  A strong expression of public opinion compelled the Bank of Kentucky to resume specie payments in less than a week, and it continued to pay specie till the early part of 1820.

It is stated that in the twelve months preceding June 26th, 1819, 800,000 dollars in specie were drawn from Ohio  If this be true, the wonder is not that only six or seven Banks in that State paid specie in August, 1819, but that they were not all bankrupt  This was the fate of the Independent Banks of Kentucky  Some of them maintained a show of specie payments till August, and afterwards paid out notes which were lent them by the Bank of Kentucky, redeemable in 365 days after date: but, towards the close of the year few of them paid any thing.

The Bank of Vincennes (Indiana) had recourse to a very ingenious expedient  It issued notes payable at its branch at Vevay, nine months after date, printing the words "nine months after date" in very small letters  All this, however, availed nothing  It went with the others.65

The effect which the sudden withdrawal of specie and discrediting of Bank paper, had on prices in the western country was very distressing  "It is said" remarked Mr. Niles on the 2d of September, 1820, "but we know not how to believe it, that corn is selling at 10, and wheat at 20 cents per bushel, specie, in some parts of Kentucky  At this rate how are debts to be paid ?"  Mr. Niles appears afterwards to have had other evidence sufficient to overcome his incredulity, for he remarked on the 15th of September, 1821: "A gentleman in Western Virginia directs the Register to be stopped, because he used to pay for it annually with one barrel of flour, but that three will not do it now  Another, a miller in Ohio, on paying his advance to my agent, observed, that he had sold four barrels of flour to obtain the note of five dollars which was remitted."

In other publications we have evidence of the lowness of prices  For example: In the United States Gazette of May 23d, 1821, corn is said to have been sold at Cincinnati at 10 cents a bushel: and the same periodical of 1st of June, has a notice of a letter from a practical farmer in Harrison County, Ohio, stating that wheat had fallen to 25 cents a bushel, and in some instances to 12'c2'bd cents  A letter from Greenfield, Ohio, dated May 3d, 1821, and quoted in the Gazette June 23d, states that wheat was sold at 12'c2'bd cents a bushel, and that whiskey was dull at 15 cents a gallon.66  The Weekly Register of May 19th, gives the following quotation from "a late Pittsburg Mercury."  "Flour, a barrel, $1: Whiskey 15 cents a gallon: good merchantable pine boards, 20 cents a hundred feet: sheep and calves $1 a head  Foreign goods at the old prices  One bushel and a half of wheat will buy a pound of coffee: a barrel of flour will buy a pound of tea;  twelve and a half barrels will buy one yard of superfine broadcloth."

While the staples of the western country were at this low price, the people were deeply in debt to the United States Government, to the merchants of the Atlantic cities, to the United States' Bank, to the local Banks, and to one another  The plentiful issues of paper had led to great speculations in the public lands  The wild lands of the West had been sold, in some instances, as high as forty or fifty dollars an acre  The sum due to Government on account of these purchases, exceeded twenty-two million dollars in the latter part of 1820  The sum due to one of the branches of the United States' Bank, that at Cincinnati, exceeded two million dollars  The sums which were due by the western people to one another, to the local Banks, and to the merchants of the Atlantic cities could not easily be calculated.

To relieve the public distress, the Legislature of Ohio passed a law to prevent property from being sold unless it would bring a certain amount, to be fixed by appraisers  This law operated very unequally  Another law of the same State, to prohibit buying and selling the notes of chartered Banks, would have increased the mischief, if it had not, happily, been such a law as, from the nature of things, could not be enforced.

Kentucky adopted what has been called the "relief system," in all its extent  Stop laws, stays of executions, and replevin acts, followed one another in quick succession  And Commonwealth's Banks, or State Loan Offices, were established in Kentucky, Indiana, Illinois, and Missouri, with power to issue millions of paper money  The creditor had no alternative but to receive this paper or wait for payment till better times should arrive.

Governor Adair, in his message to the Legislature, in October, 1821, said, that "the paramount law of necessity" had compelled Kentucky to resort to a policy against which strong objections might be brought: but, he added, "let it never be forgotten, that the measures adopted have completely realized the proposed end: that an agitated and endangered population of half a million of souls, has been tranquillized and secured, without the infliction of legal justice, or the example of violated morality."

All the people of Kentucky did not think so highly of the system, and the Judges of the Court of Appeals were among the dissidents  They resolutely refused to acknowledge the constitu-tionality of the "relief laws:" and the Legislature established a new Court of Appeals, the judges composing which were friendly to the relief system.

The people divided into two parties, and the contest was conducted with great violence  The party friendly to the new Court of Appeals had the ascendancy for several years  In 1824, they numbered sixty members of the Legislature, while their opponents numbered but forty  In the session of 1825-26, they appear to have been less powerful, for we find that preparations were made to defend the records of the new Court of Appeals with powder and ball.67  In the fall of 1826, the friends of the Old Court elected a majority of members of the Legislature  A change of only ninety-one votes at the polls, would have given their opponents the majority of members  The Old Court party has, however, ever since retained its ascendancy; and the relief system is at an end.

All parties now are willing to admit that this "relief system" did great evil  It did not effect an equitable adjustment of the affairs of debtor and creditor  That could have been effected only by a legislative or judicial recognition of the changes which had been made in the standard of value, and a separate adjudication in each case  It was only by accident if a man received payment in paper of the same value as that which was current when the debt was contracted.

The Bank of Kentucky commenced discounting on the 27th of April, 1821  Its notes were sold almost immediately at 70 cents in the dollar;  and continued to depreciate till April or May in the ensuing year, when the exchange was 210 paper dollars for 100 silver dollars  On the 28th of July, 1821, which was ten days after it commenced its issues, the notes of the State Bank of Illinois were 50 per cent. below par  In addition to the loss which each creditor sustained by being paid in money of this description, he was liable to further loss from the paper depreciating while it remained in his hands  The other branches of the relief system, the stop laws, the appraisement laws, the stays of execution, and the replevin acts, tended to destroy the confidence of men in one another and in the Government  The relief system is at an end; but its evil effects will be felt in the West for twenty years  What, then, ought we to think of the Banking system, in which the relief system originated ?


64.   See Niles, vol. 18, p. 387  The letter appeared in the London Courier, on the 11th of May, 1820.

65.   The Banks in the extreme West did not all stop payment till a year or two after the failure of the Banks in Kentucky  The Shawneetown and Edwardsville Banks, in Illinois, paid specie in August, 1821  One, at least, of the Banks in Missouri, continued to pay specie until the latter part of 1821; and several of the Ohio Banks appear to have paid specie in the midst of all the confusion.

66.   Towards the close of the year 1821, flour rose at Cincinnati to $3.50 a barrel.

67.   See Philadelphia Gazette of January 1st, 1826.