William Gouge,
A Short History

General View of Banking Operations from 1814-15 to 1820-21.

In his speech of Jan. 2d, 1815, Mr. Webster said, "the depreciation of the notes of all the Banks in any place is, as far as I car learn, general, uniform and equal."  In looking through Grotjau's Price Current, we have found the quotations of Pennsylvania and Ohio notes to be, for months together, from five to six, and afterwards ten, per cent. discount, and those of Virginia and North Carolina two to three per cent.  So general seemed to be the rate of depreciation for each part of the country, that the names of particular Banks were not given in the Price Current, for more than a year after the suspension of specie payments.  While Philadelphia paper, the standard in which they were estimated, was always varying in value, as compared with silver, the notes of most of the country Banks had, as compared with one another, a singular equality of depreciation.

This equality lasted for some time after it became the custom to give regular quotations of the price of Bank paper.  It will be seen, by inspecting the table, that in May, 1816, the notes of twenty-seven out of thirty-five country Banks of Pennsylvania, were at a discount of ten per cent.  It will also be seen that the discount was diminished with a regularity approximating to uniformity, up to May, 1818.  In the succeeding July, the United States' Bank commenced its curtailment: and then the great confusion in exchanges begun.

Mr. Niles says the prices of Bank notes varied several per cent. in the course of a week.  The notes which were at par in one part of the country, were in other parts at a heavy discount.  At the same time that exchange at New Orleans on New York was at from seven to ten per cent. discount, exchange at New York on New Orleans was at six per cent. discount.  A Bank's paying specie did not prevent its notes depreciating: for nobody knew how long any distant Bank would continue to pay specie.  All the Banks whose notes were at a discount at New York of less than 5 per cent., and some of the others, were understood to pay specie on demand.

Of the increase and decrease of the local currency of Pennsylvania, the reader may form an idea from the following table.76

notes in circulation.
City Banks.   Country.   Total.
Nov. 1814, - 3,363,802   1,942,479   5,306,281
1815, - 4,810,507   5,349,247   10,159,754
1816, - 3,416,248   4,787,722   8,203,970
1817, - 2,355,694   3,853,866   6,209,560
1818, - 1,987,945   3,093,966   5,081,911
1819, - 1,645,000   1,384,325   3,029,325

76   The returns of the Farmers and Mechanics' Bank, in 1814, were for August 2d: those of the Pennsylvania Bank for August 30, and those of the Philadelphia Bank for September 1st.  The returns of the other Banks were for November.  No return was made in any of these years of the circulation of the Bank of North America.

It will be seen that the great increase in circulation took place in the year after the war.  Great as it was we ought not to wonder at it.  The Government's receiving in convertible paper in payment of duties, was quite as efficient a sanction of the continued suspension of specie payments as could have been afforded by an act of Congress passed with that express intent.  What Government is willing to receive, individuals having payments to make to Government will not refuse.  Institutions which are founded for private profit, must always be expected to take advantage of so many opportunities of acquiring gain as the policy of Government will allow, or its necessities compel it to afford.

In the year 1815, ten months and a half of which were months of peace, the Government issued twenty millions in treasury notes.  As such of these as were of a less denomination than one hundred dollars bore no interest, they directly increased the amount of paper medium.  The others, as has been shown in another chapter, indirectly increased the circulation of the Banks, as those institutions gave their own inconvertible notes in exchange for treasury notes.

In 1816 there was a reduction of about twenty-five per cent. in the circulation of the Banks of Pennsylvania, and a very great reduction in the circulation of the Banks of the adjoining States.  Of the manner in which this was effected, we will let the Secretary of the Treasury speak.

"At a moment when excessive importations of foreign merchandise had involved the mercantile and manufacturing interests in the greatest distress, and menaced them with impending bankruptcy, reason, humanity, and sound policy, all united against the curtailment of Bank discounts.  Yet, so far as the knowledge of the Secretary of the Treasury extends, the reduction of the circulating paper has in no instance been attempted by the sale of the public debt held by the Banks.  Curtailment of discounts has been the only process resorted to by them, where any efforts have been made to prepare for the resumption of specie payments.  The disregard to individual suffering manifested by this procedure in the State Banks has been the result of a conviction, that when the national currency shall be restored by the efforts of the Government and the Bank of the United States, the public debt will be increased in value."77

77   Letter of Mr. Dallas, November 1816.

This is true.  But when we establish institutions to which it is impossible to impart moral responsibility, we ought not to expect them to pay much regard to "reason and humanity."  The Banks acted with sound "policy" in regard to their own interest, in pressing on the community and in holding on to the public stocks.

In 1817, there was a further reduction in the circulation of the Pennsylvania Banks, but the deficiency was supplied by the issues made by the United States' Bank.  The returns of the Pennsylvania Banks, for 1818, were made some months after the Bank of the United States had begun its grand curtailment.

The local Bank mania may be said to have raged with more violence in Pennsylvania in the year 1815, than at any other period: but, if we take the Union throughout, the mania did not reach its height till the spring of 1818, or three years after the close of the war.  It was in this year that Vermont, which had been without Banks since the grand New England explosion of 1808-9, began to revive the system: and the passion for multiplying paper issuing institutions became so great, that Mr. Niles was forced to exclaim–

"We see every where new Banks establishing or attempting to be established.  Behold forty-three new Banks authorized in Kentucky – half a score in Tennessee – eight in Ohio – a mob in little Rhode Island – some in Virginia, Massachusetts, &c. – sixteen petitioned for in New York – and some wanted in Pennsylvania – half a dozen new ones in Maryland – and from fifty to a hundred more proposed in various parts of the United States."78

Only three months after Mr. Niles had indited this paragraph, the United States' Bank was compelled to commence that course of measures, the effects of which have been narrated in our previous chapters.

The author of the pamphlet signed A Friendly Monitor, says,

"Every inquiry I have made has entirely convinced me, that every formidable difficulty with which the Bank has had to contend, has been produced by its agency for the Government, and particularly by the too rapid reduction of more than eighteen millions of the public debt, between the months of June 1817, and November 1818, and the utter impracticability of converting in due time any reasonable portion of the specific public deposits into such funds as the public creditors were entitled to demand, without hazarding the prostration of many respectable institutions."

As Banks are the creatures of Government, all the evils they produce must be ascribed to the Government.  It is to afford opportunities for speculation to themselves, their personal friends and their political partisans, that our law-givers establish Banks.  It was through the attempt to carry on the war by means of Bank notes and Bank credits, that the suspension of specie payments was produced.  It was through the connivance of the Government, that the suspension of specie payments was so long continued.  It was through the issue of treasury notes, that the amount of Bank notes in circulation was immediately increased.  It was that a large amount of public stock might be absorbed, that a Bank was instituted with a capital of thirty-five millions, when there was not room for a credit Bank with a capital of thirty-five thousands.  No doubt, also, the disinclination of the Government to suffer the Bank to retain the eighteen millions of public moneys, mentioned by "A Friendly Monitor," had its effect.  If the Government had been content to continue to pay the interest on a corresponding amount of public debt, and to let the Bank keep eighteen millions of the public money for its own uses, the crisis might have been – we will not say averted, but it might have been delayed.  If it had been delayed, the evil would have been increased.  The notion of the early administrators of the Bank of the United States, appears to have been, that the Bank should do a business bearing the same proportion to its great capital, that the business of the local Banks bore to their small capitals.  If the payment of any portion of the national debt had been deferred to suit their convenience, they would have made a corresponding increase in their business.  Even as it was, we have found them complaining, in the spring of 1818, that they could not sign notes fast enough: and the report of the committee of Congress shows, that all the energies of the directors were exerted to increase the circulation, extend the general dealings of the Bank, and raise the price of the stock in the market.

Other men in their situation would probably have acted as they did.  It is of very little moment whether it is Mr. Wiggins or Mr. Spriggins that is president of a Bank, or whether the Jones' or the Giles' are directors.  The fault is in the system.  Give the management of it to the wisest and best men in the country, and still it will produce evil.  No new principles of action were introduced by the early administration of the United States' Bank.  If the members of Congress who granted the charter did not know that the usual way of paying all instalments after the first is by discounting stock notes, they had not much acquaintance with either the theory or the history of Banking.  As little credit must be given them for intelligence in respect to money corporations, if they did not know that the practice of those who wish to get the control of such institutions is, to divide their shares, as was done by certain gentlemen in Baltimore and others in Philadelphia.  It was not, surely, to be expected, that men who associated with the professed design of making profit for themselves, and who admitted the Government as a partner, should trammel themselves with restrictions which the Legislature had, either through design or oversight, failed to impose.79  If the courts of law have not absolutely decided that whatever is not expressly forbidden is granted in a charter, the Banks find it very convenient to act on such an assumption.

The history of the country from 1814 to 1818, exhibits nothing more than the natural results of Banking by corporations, and with paper money, while the Government, embarrassed in its fiscal concerns, wanted the inclination or perhaps the ability to apply an adequate remedy.  The reaction of 1818-19 was only the natural result of the different operations of the preceding years.  The irregular Banking in the South and West in subsequent years, is only a link a little lower down in the same chain of consequences.

It would appear as if the suspension and resumption of specie payments might have been productive of little embarrassment, comparatively speaking, if the Government had, immediately on the close of the war, refused to receive inconvertible notes in payment of duties.  The few Banks which then existed in Ohio and Kentucky had suspended payment only a month or two.  The Bank of Nashville actually maintained specie payments.  The dealings of the Banks in the Southern States were of moderate extent.  The new Banks of Pennsylvania were not yet in full operation.  The principal part of the over-issue was by the Banks of the great cities of the Middle States, and these Banks might, by a sale of the public stocks they held, have obtained the means of redeeming their excess of paper.

If this had been done we should have escaped the particular evils recorded in the foregoing chapters, but we should probably have experienced evils proceeding from the same source in another form.  It was four or five years before the war, that Banking in New England produced consequences similar to those felt in the other States four or five years after the war.  As the mania spread through New York, into Pennsylvania, and thence South and West, Banks were established without those restrictions which experience in New England had proved to be necessary.

To impose such restrictions would, in fact, have been hardly in accordance with the philosophy of the day.  A ruling principle in this was, as may be seen by the quotations we have given from the writings of various eminent men, that inconvertible Bank notes, if they were not quite as good as gold and silver, were very little inferior to them as a circulating medium.  Many of our readers may smile at such notions now;  but perhaps if they had lived in those days, they would have thought as their neighbors thought.  Perhaps the present popular notions on the subject of Banks, will, some twenty years hence, be regarded in the same light as those notions of the anti-bullionists are at the present period.

That "love of money which is the root of all evil," and which, operating through the medium of incorporations and paper bills, is productive of so much evil, would have brought on the nation great calamities, if we had remained at peace.  The war, and the measures consequent thereon, gave that evil its particular form and feature.  It is that same "love of money" which now gives plausibility to the sophistry by which the present Banking system is support ed, as well in the minds of those who suffer as in the minds of those who are benefitted by the system.  Hence it is that the former are so easily persuaded that what is gained by the use of paper money is so much gained by the nation, and not so much gained by one part of the nation from another part.  It is so hard for any man, be he merchant, or be he drayman, to be content with his earnings – we are all so anxious to become rich in a hurry, that we readily become the dupes of one another, and sometimes in our haste we dupe ourselves.


78   Weekly Register, April 11th, 1818.

79   "To talk about regularization of banks means either to betray complete ignorance, or to fool the simple folk with high sounding words... to control the delivery of bread, or in general, the production and distribution of goods, without controlling banking practices, is an absurdity" (V.I. Lenin Collected Works [1964], vol. 25, p. 329)