William Gouge,
A Short History

Of Banking from 1826-27 to 1828-29.

Mr. John F. Watson, the Cashier of the Bank of Germantown, in his "Annals of Philadelphia," gives the following testimony of an ancient lady, respecting the manner in which commercial affairs were conducted previous to the Revolutionary War.  "If a citizen failed in business, it was a cause of general and deep regret.  Every man who met his neighbor, spoke of his chagrin.  It was a rare occurrence, because honesty and temperance in trade were then universal."

In another part of his book, Mr. Watson speaks of the changes which have in this respect taken place, within his own short period of observation.

"When I was a boy, as none got suddenly rich by monopolies, they went through whole lives gradually but surely augmenting their estates, without the least fear of misfortune or bankruptcy.  When it did rarely occur, such was the surprise and general sympathy of the public, that citizens saluted each other with sad faces, and made their regrets and condolence a matter of common concern.  An aged person has told me, that, when the proprietor of that large house, formerly the Post Office (now the National Hotel) at the corner of Chesnut street and Carpenter's Court, suddenly failed in business, the whole house was closely shut up for one week, as an emblem of the deepest family mourning, and all who passed the house instinctively stopped, and mingled the expressions of their liveliest regret.  Now how are changed matters in those particulars."

They are so changed, that a certain number of bankruptcies and insolvencies in the course of a year, are regarded as being as much within the order of nature as a certain number of deaths.  Periodical redundancies and scarcities of money are looked for as naturally as cold in winter or heat in summer.  If a great storm occurs, or a pestilence sweeps over the land, the journalists record it: and so they record great pressures for money, but they think no more of noting the effects of ordinary "expansions" and "contractions" than of noting the ordinary variations of the weather.

A gentleman who resided for twenty-five years in the town of Barcelona, a town which does most of the import and export business of the fertile and industrious province of Catalonia, has told us that during the whole period of his residence there, but one bankruptcy occurred.  It may be difficult for many Americans of the present day to conceive such a state of things to be possible.  But it is possible; and a faithful relation of the pecuniary vicissitudes of one of our ordinary years, might be received as incredulously by many plain Swiss and Hollanders, as some Americans receive accounts of countries and cities where bankruptcies and insolvencies are events of rare occurrence.

But, to return to our narrative.  By September, 1826, the violence of the reaction which followed the expansion of 1824-25, had subsided: and through the year 1827, things went on smoothly.  The two first months of 1828 also passed over without any convulsion: but in the beginning of March, a sudden and unexpected scarcity of money was felt in Philadelphia.

If we were engaged in frequent wars, or if the state of the world at large was such as it was in the twenty years which followed the French Revolution, ingenuity might be able to give a plausible view of the causes of the frequent scarcities of money, independent of the operations of Banking institutions.  But we have enjoyed peace for seventeen years in succession.  Most other commercial countries have been in the enjoyment of peace.  It has, therefore, become impossible to conceal from observers, the effects which paper money Banking institutions have on commercial affairs.  That the scarcity of money in 1828 was owing to their operations, was so evident, that no body doubted, nobody disputed it.  No other cause could be as signed for it.  And Mr. Biddle, the President of the United States' Bank, published an essay in the National Gazette, on the 10th of April, in which he gave the following elegant and lucid exposition of one of the causes of the evils the community was then suffering.

"The question is, what is the cause and the nature of the present scarcity of money ?

"The answer is easy.

"The currency of the United States consists of coin, and of Bank notes promising to pay coin.  As long as the Banks can always pay the coin they promise they are useful, because, in a country where the moneyed capital is disproportioned to the means of employing capital, the substitution of credits for coins enables the nation to make its exchanges with less coin, and of course, saves the expense of that coin.  But this advantage has by its side a great danger.  Banks are often directed by needy persons, who borrow too much, or by sanguine persons, anxious only to increase the profits, without much pecuniary interest or personal responsibility in the administration.  The constant tendency of Banks is, therefore, to lend too much, and to put too many notes in circulation.  Now, the addition of many notes, even while they are as good as coin by being always exchangeable for coin, may be injurious, because the increase of the mixed mass of money generally occasions a rise in the price of all commodities.  The consequence is, that the high price of foreign productions tempts foreigners to send a large amount of their commodities, while the high price of domestic productions prevents these foreigners from taking in exchange a large amount of our commodities.  When, therefore, you buy from foreigners more than they buy from you, as they cannot take the paper part of your currency, they must take the coin part.  If this is done to a considerable extent, the danger is that the Banks will be obliged to pay so much of their coin for their notes as not to leave them a sufficient quantity to answer the demand for it, in which case the Banks fail, and the community is defrauded.  To prevent this, a prudent Bank, the moment it perceives an unusual demand for its notes, and has reason to fear a drain on its vaults, should immediately diminish the amount of its notes, and call in part of its debts.  So, on a large scale, when the Banks of a country perceive such a demand for coin for exportation as diminishes too much the stock of coin necessary for their Banking purposes, they should stop the exportation.  This they can always do if their affairs have been well managed: and here lies the test of Bank management.

"The law of a mixed currency of coin and paper is, that when, from superabundance of the mixed mass, too much of the coin part leaves the country, the remainder must be preserved by diminishing the paper part, so as to make the mixed mass more valuable in proportion.  It is this capacity of diminishing the paper which protects it.  Its value consists in its elasticity – its power of alternate expansion and contraction, to suit the state of the community;  and when it loses its flexibility, it no longer contains within itself the means of its own defence, and is full of hazard.  In truth, the merit of a Bank is nearly in proportion to the degree of this flexibility of its means.  If a Bank lends its money on mortgages, on stocks – for long terms, and to persons careless of protests, it incurs this great risk, that, on the one hand, its notes are payable on demand, while, on the other, its debts cannot be called in without great delay – a delay fatal to its credit and character.  This is the general error of Banks, who do not always discriminate between two things essentially distinct in Banking, a debt ultimately secure, and a debt certainly payable.  But a well-managed Bank has its funds mainly in short loans to persons in business – the result of business transactions – payable on a day named, which the parties are able to pay and will pay at any sacrifice, in order to escape mercantile dishonor.  Such a Bank has its funds, therefore, constantly repaid into it, and is able to say whether it will or will not, lend them out again.

"A Bank so managed, if it finds too much demand for its coin to go abroad, begins by not lending more than it receives every day, and then goes farther, by not lending as much as its income, declining to renew the notes of its debtors, and obliging them to pay a part or the whole: making it a rule to keep its discounts within its income.  The operation proceeds thus: by issuing no new notes, but requiring something from your debtors, you oblige them to return to you the Bank notes you lent them, or their equivalents.  This makes the Bank notes scarcer – this makes them more valuable – this makes the goods for which they are generally exchanged less valuable – the debtor, in his anxiety to get your notes, being willing to sell his goods at a sacrifice – this brings down the prices of goods, and makes every thing cheaper.  Then the remedy begins.  The foreigner, finding that his goods must he sold so low, sends no more.  The American importer, finding that he cannot make money by importing them, imports no more.  The remainder of the coin, of course, is not sent out after new importations, but stays at home, where it finds better employment in purchasing these cheap articles;  and when the foreigner hears of this state of things, he sends back the coin he took away.  He took it away merely because your own domestic productions were so high that lie could not make any profit in his country by taking them.  But when the news reaches him that his productions are very cheap in our country, he will also learn that our productions are cheap too, and he sends back the coin to buy these cheap productions of ours.  We, therefore, get back our coin by diminishing our paper, and it will stay until drawn away by another superabundance of paper.  Such is the circle which a mixed currency is always describing.  Like the power of steam, it is eminently useful in prudent hands, but of tremendous hazard when not controlled;  and the practical wisdom in managing it lies in seizing the proper moment to expand and contract it – taking care, in working with such explosive materials, whenever there is doubt, to incline to the side of safety.

"These simple elements explain the present situation of the country.  Its disorder is over-trading, brought on by over-banking.  The remedy is to bank less, and to trade less.

"During the last year, money was very abundant – that is, the demand for coin being small in proportion, the Banks distributed freely their discounts and notes.  This plenty concurred with other causes, especially the expectation of a new tariff, to induce an increased importation of foreign goods, and, at the same time, furnish great facility for procuring them on credit.  For instance, in the difficulty of procuring profitable investments, there were found capitalists who exported the coin of the country, and sold their bills for it on credit – thus obtaining a small profit on the shipment, and a greater on the discount of the notes taken for their bills.  This fraction of a percentage on the shipment of coin, seems to be a trifling gain for the great inconvenience to which it often subjects the community;  but the profit, though small, is lawful, and no odium should attach to the agents, for the operation is often a wholesome corrective of excessive issues of paper.  The effect was, that by the month of February, the exportations of specie to France and England had become unusually large, amounting, probably, in the preceding twelve months, to between four and five million dollars;  and great importations were constantly arriving, and which, when sold, would require remittances to Europe.  Hitherto, at this season;  the demand for exchange had been supplied by the bills drawn on the produce of the South, when shipped to Europe;  but this year the crop, and with it the bills produced by it, has come tardily into the market, so that the demands of exchange for the proceeds of the arriving shipments were directed immediately to the exhausted vaults of the Banks.  Such an effect was to be averted without loss of time.  The directors of the Bank of the United States, as was their natural duty, were the first to perceive the danger, and the Bank was immediately placed in a situation of great strength and repose.  The State Banks followed its example.  They began by restraining their loans within their income, and gradually and quietly decreasing the amount of them, and more especially directing their retrenchments on those whose operations were particularly connected with the exportations they desired to prevent.  The course of business has been this: A merchant borrows from the Banks and sends abroad $100,000 in coin, or he buys bills from one who has shipped the coin.  With these he imports a cargo of goods – obtaining a long credit for the duties – sends them to auction, where they are sold, and the auctioneer's notes given for them.  These notes are discounted by the Banks, and the merchant is then put in possession of an other $100,000, which he again ships, and thus he proceeds in an endless circle, as long as the Banks, by discounting his notes, enable him to send the coin, and tempt him to do so, by keeping up prices here by their excessive issues.  The Banks, therefore, begin by diminishing or withdrawing these artificial facilities, leaving the persons directly concerned in this trade to act as they please with their own funds, but not with the funds of the Banks.  The immediate consequence is, that the auctioneers can no longer advance the money for entire cargoes – that they no longer sell for credit, but for cash – that the price of goods falls – that instead of being sold in large masses, they are sold slowly and in small parcels, so that the importer is not able to remit the proceeds in large amounts.  This diminishes the demand for bills and for specie to send abroad.  In the meantime, the importer, finding the prices of his goods fall, imports no more;  and the shipper of coin, finding less demand for exchange, and that he can make more of his money by using it at home than by exporting it, abstains from sending it abroad.  Time is thus gained till the arrival of the Southern exchange, which will supply the demand without the aid of the coin, and then every thing resumes its accustomed course.

"This is the point to which the present measures of the Banks are tending.  The purpose must be accomplished, in a longer or shorter time, with a greater or less degree of pressure, but the effect must and will be produced."

This account, mutatis mutandis, will serve for a history of Banking in almost any year.  "Such is the circle a mixed currency is always describing."  The only difference is, that the circle is sometimes wider and sometimes narrower.

"The constant tendency of Banks is to lend too much, and to put too many notes in circulation."  Sometimes it is a demand for specie to establish a new institution at New Orleans, that compels them to diminish their issues;  sometimes it is a demand for specie for the use of the British army in Canada, sometimes the crop of cotton comes in tardily – sometimes it is something else: but a year seldom passes without some cause of this kind occurring, and it is impossible in the nature of things that such causes should not occur.

It would seem from Mr. Biddle's statements in another part of this essay, that, though every thing appeared very smooth on the surface in 1827, great danger lurked beneath.  Speaking of the State Banks, he says, "what interest has the community in propping up many of these institutions ?  Let any sedate man look at the returns made this winter of the state of the Banks in various parts of the United States, and then answer whether they need further exemptions from the necessity of accommodating their business to their means.  In the present and immediate example, no man can fail to perceive that, but for the warning restriction imposed by the Bank of the United States and the leading State Banks, the events of the last six weeks would have brought many of them to the verge of insolvency, whence they could only escape by some sudden shock to the community."

In 1825, the immediate danger was to the Banks, and through them to the community.  In 1826, the United States' Bank and the leading State Banks placed themselves "in a situation of great strength and repose," but the sufferings of the community were not the less severe on that account.  It was, in fact, by producing sufferings in the community, that the Banks placed themselves in that situation from which they regarded what was going on around them with so much complacency.  The people implored them for relief, but the President of the United States' Bank replied,

"It is in the order of nature, that if men or nations live extravagantly, they must suffer till they repair their losses by prudence, and that neither men nor Banks should impose on the community by promises to pay what they cannot pay.  The laws of trade have their own remedy for such disorders, as infallible as the law of animal life, which enables the human system to relieve itself from its own excesses.  Both must have their course.  But the Bank of the United States is invoked to assume that which, whoever attempts, deserves the ruin he will suffer.  It is requested to erect itself into a special providence to modify the laws of nature, and to declare that the ordinary fate of the heedless and improvident shall not be applied to the United States.  Our countrymen are to be indulged without restraint in the utmost extravagance of the luxuries of Europe, on credit from the Banks; and when the day of payment arrives, the debtor shall not be called upon for payment – the Banks shall not be incommoded to pay their own notes, for the moment any inconvenience is felt, the Bank of the United States will certainly interpose and pay the debt.  But if the Bank of the United States blends any sense with its tenderness, it will- do nothing of all this."

This reply, though not very consoling, would have been unanswerable, if it had not been that "the disorder of the country was over-trading, brought on by over-banking."

The Banks continued to diminish mercantile facilities, in the month of May.  In September there was another pressure on the community;  and in December a great scarcity of money was felt in Boston.

The President of the United States' Bank, in a letter to the Secretary of the Treasury, dated July 18th, 1829, says the office at Portsmouth, "last year was nearly prostrated in the general ruin which spread over that country.  Out of 460,000 dollars of loans, 148,000 dollars was thrown under protest: still further protests were expected, and the actual loss sustained there will not be less than 112,000."

In March 1829, there was a pressure in Philadelphia: and in the following months great apprehensions were entertained in New York for the safety of the country Banks in that and the neighboring States.  A writer in the United States Telegraph endeavored to show that the Banks of that city were also in a perilous condition.  The difficulties appear to have been greatest in that city about the beginning of June.  In the middle of the month, it was announced that the money market was becoming easy.  Many New York merchants were, however, compelled to make compromises with their creditors; and many mechanics were deprived of employment.

The greatest distress in this year, appears to have been in Rhode Island.  The Providence Literary Subaltern, as quoted by the Philadelphia Gazette, on the 26th of June, says–

"The embarrassments which have been realized in this immediate neighborhood for the last ten days, have had no parallel in the history of the Republic.  Men of reputed capital, who have withstood the shock of former changes and times; men who for the last forty years have stood firm, erect and undismayed before the tempest of the times that have assailed them, are now tottering on the verge of bankruptcy and ruin.  Their fall bears excessively heavy on the poor and laboring classes, who, by the way, are in reality the principal sufferers.  Deprived of employment, destitute and friendless, they are thrown upon the world, and know not how to obtain a livelihood.  Within the last ten days, within the circle of the ten adjacent miles, upwards of twenty-five hundred people have been suddenly and unexpectedly thrown out of employment, and the distress that such an event has produced, can be far better imagined than described."

Additional Particulars of the History of Banking from 1824 to 1829.

The professors of natural science are able to give satisfactory accounts of the general causes of heat and cold in different latitudes, and of snow and rain in different seasons, but it is in most instances beyond their power to state in what degree each of the general causes known to be in operation, has contributed to the state of the weather at a particular time and particular place.  Banking is like the weather.  It is affected by a variety of causes, which present themselves in different combinations.  Many of these causes are of such a nature that their operation, if separately considered, would be inappreciable, though when united they produce a very sensible effect.  Others are so strongly marked in their consequences, that their operation can at times be calculated with all the accuracy which is necessary for illustrating general principles.

Among these latter causes must be ranked the conflicts of the Banks with one another, and their dealings with Government.  These are sufficient to produce great commercial embarrassments, even when there is no very great demand for specie for exportation.  We have seen that the war between the allied Banks of Boston and the country Banks, produced a great scarcity of money in New England, in May 1825, or at the very time when speculation was most active in the Middle and Southern States.  The President of the United States' Bank speaks of the "reaction, as it is called," taking place in Philadelphia, "in October."  But the newspapers make mention of the pressure in July, and it is well known that it is not till some time after great pressures begin, that mention is made of them in the public journals.  Taking into consideration the facts that the pressure was felt here some four or five months before the crisis in England, that exchanges were in favor of this country, and that during this time the English country Banks were, according to Lord Liverpool, increasing their issues, we are inclined to think that some other cause besides the foreign demand for specie must have contributed to the reaction of 1825 – at least so far as it affected the United States' Bank, and through it the other Banks and the community.  We have a cause adequate to the effect, in the loans of ten million dollars made by the Bank to the Government in 1824 and 1825.  The amount may not be large, abstractedly considered, but a paper money Bank which has been doing business for several years, can seldom, unless it has a surplus stock of specie, make loans for a long period, without being afterwards forced to resort to such measures as operate with great hardship on its regular customers.  "The constant tendency of Banks," as Mr. Biddle has correctly observed, "is to lend too much – to put too many notes in circulation."  And the Bank of the United States, after having lent as much as it could to private traders, strained its credit and resources to lend to Government, and thereby put more notes in circulation than the state of trade required.

The peculiar force with which the pressure of 1825 operated on the United States' Bank, strengthens this reasoning.  It receives additional corroboration in the fact that the reaction was over in the United States much sooner than in England: and also in the fact that the exports of gold and silver in the year 1825, exceeded the imports in only the small sum of 2,600,000 dollars, the imports for the year being $6,150,785, and the exports $8,787,055.

It must, indeed, be admitted that a very small export of specie sometimes produces very great confusion.  Mr. Carey, in a work published in 1810, says–

"The merchants engaged in the trade to the East Indies, made application last spring to the Bank of the United States for dollars to remit there, and offered a premium of one per cent.  The directors took the matter under consideration, and with liberality resolved to furnish the necessary sums without premium What was the exact amount I cannot state, but I have reason to believe it exceeded half a million of dollars.  They were applauded for their liberality.  But, however extraordinary it may appear, the effect of the operation was absolutely to impel some of the other Banks to curtail their discounts considerably."

If our currency was metallic, the exportation of ten or twenty millions of gold and silver, would have no more effect on the general train of commercial operations than the exportation of so many dollars' worth of iron and copper, for the exportation of specie would never commence till the domestic demand was fully satisfied.  But, now, the fitting out of a single East India ship, may derange the trade of a city: and diminishing the ordinary stock of specie in the amount of only two or three millions, may derange the trade of the country.

This may appear strange at first view, but Mr. Biddle, in his Address to the Stockholders of the United States' Bank, in September 1831, gives us very satisfactory reasons why a cause, apparently so very trifling, should produce so very great an effect.

"It is the peculiarity of our moneyed system, that in many parts of the country the precious metals are excluded from the minor channels of circulation by a small paper currency, in consequence of which the greater portion of these metals is accumulated in great masses in the Atlantic cities, liable to be immediately demanded on notes previously issued in the confidence of the continuance of the same state of things which caused the abundant issue of them;  at the first turn in the tide of foreign exchange – when the supply of foreign exchange is unequal to the daily demand, the vaults of the Banks may be exhausted before any precaution can prevent it.  These very precautions too, consisting as they do almost exclusively of curtailment of their loans, made suddenly – mostly without concert, and always under the influence of anxiety if not of alarm, may fall with oppressive weight on the community, by the pressure in which alone can be produced the necessary reaction.  This reaction, moreover, is necessarily slow, since our distance from Europe makes it less easy to restore the equilibrium than between adjoining countries in the same hemisphere."

It certainly was not by any increase of its loans to merchants that the Bank of the United States was brought into difficulty in 1825, for these loans, including in the calculation common discounts and bills of exchange, actually sustained a reduction of upwards of 300,000 dollars, between the 1st of January, 1824, and the 31st of July, 1825.  By its loans of ten millions to Government, the Bank appears to have added to its circulation, between the dates just mentioned, only 3,277,885.  But this, it seems, was two millions six hundred thousand more paper than the country could bear, for in this amount the exports of specie exceeded the imports in 1825.

It is well worthy of observation, that the total import of foreign merchandise in 1825, was, according to the custom house returns, $96,340,075, and the total export of domestic and foreign produce, was $99,535,388.  If allowance be made for freight of the exports, and profits on them in foreign markets, it will be seen that the "balance of trade" was decidedly in favor of the country.  So that, altogether, we have in the events of the year, an example that, in time of profound peace, and when the balance of trade is in favor of the country, and when the exports of specie exceed the imports in the sum of only two or three millions, a whole community may, by the operations of paper money Banking, be brought to the very verge of insolvency.

The evils produced by Banks' making loans to Government are occasional.  These produced by Banks' trading on Government deposits, are perpetual.  These deposits vary in the amount of millions in the course of a few months.  A Bank may know that the Government will, in the course of a short period, require its funds to pay off a portion of the public debt, or for some other purpose, but as the constant tendency of Banks is to lend too much and put too many notes in circulation, a Bank having possession of such funds seldom fails to make discounts on them as freely as on its own capital, trusting that when the Government shall demand its own, means may be found of meeting the demand through a credit in Europe, or some other financial operation.  The most common mode is that of reducing commercial discounts.  In the voluminous documents appended to the report made by a Committee of Congress in April 1832, continual reference is made to changes in the operations of the United States' Bank, rendered necessary by Government's reclaiming its deposits for the purpose of paying off the public debt.

If the State Banks should be made the depositories of the public funds, the evil would be increased instead of being diminished.  Paper money Banks cannot be employed in any way as fiscal machines, without embarrassing the operations either of Government or of the community, and sometimes of both.  If we had a metallic currency, and if our fiscal concerns were managed without the agency of Banks, the paying off of ten or twenty millions of public debt in the course of a year, would have the same effect as the paying off of ten or twenty millions of private debt – would produce benefit instead of injury.  But as matters have been managed through the agency of the Banks, the paying off of the public debt has indirectly contributed to the irregularities of the money market since the year 1825.

The pressure of 1828 operated with more force on the local Banks than on the Bank of the United States.  It was, as we have reason to believe, with great difficulty that some of the principal Banks of Philadelphia placed themselves in a situation of repose.  As the imports of specie had in the previous year exceeded the exports, the imports having been $8,151,130, and the exports $7,971,307, while the total value of exports was $82,324,827, and of imports only $79,484,068, we cannot resist the conclusion that the difficulties of 1828 were, as well as those of 1825, owing, in a great measure, to domestic causes.  The pressure in that year appears to have been independent of any movements in Europe.  Money was very plenty in England.  The interest on commercial securities in London in August, was only two per cent: The Bank of France had it in contemplation in November, to reduce the rate of discount to three per cent.  In December, there was, indeed, a pressure in both France and England, but our difficulties commenced in the early part of the year.  The foreign demand for specie could not have been great, as the exports of gold and silver in the whole year amounted to $7,550,339, and were nearly balanced by the imports, which amounted to $7,489,741.

To account for the difficulties in the year 1828, it is necessary to take into consideration a fact which was mentioned by Mr. Biddle in the verbal expos'c3'a9 he gave to the stockholders of the United States' Bank, at their meeting in August.  He then stated that the circulation of the Bank had been increased between August 1822 and August 1828, from 5,400,000 dollars, to upwards of 13,000,000, and that this had been effected, without adding any thing to the aggregate amount of currency, but simply by displacing an equal amount of the notes of the local Banks.  Admitting this to be the fact, we have a satisfactory reason for the pressure felt by the other Banks of Philadelphia, while the United States' Bank was in a situation of great strength and repose.  It was in the previous year, or 1827, that the United States' Bank commenced the issue of branch drafts for the sums of five and ten dollars, by which it obtained a decided advantage over the State Banks.  It was thereby able, in December 1827, to put a stop to the circulation of the notes of the Cape Fear Bank of North Carolina; and to this operation of displacing the notes of the local Banks by the small branch drafts of the United States' Bank, may be attributed great part of the difficulties of the year 1828.  It must be evident to every person, that new and unexpected demands on the local Banks by the United States' Bank, must have the same effect on them as new and unexpected demands on them for specie to send abroad.  The United States' Bank may expand in the same proportion as the local Banks contract;  but it has a different class of customers, and thus while money is made plenty with one portion of the community, it may be made scarce with another.  The pressure of 1828 did not seem to affect the dealers in public stocks.  Its weight fell principally on the merchants, and other productive members of society.

The difficulties of the year 1829, appear to have been owing in part to the operation of displacing local Bank notes by the branch drafts of the United States' Bank, in part to local causes of different kinds in different parts of the country, and in part to the state of commercial affairs in Europe.  The operations of the United States' Bank are so limited in New England, that the people of that quarter of the country must attribute the principal evils they suffer to the doings of their local Banks.  The people of the other States must attribute their sufferings to the combined operations of the local Banks and the Bank of the United States, bearing in mind the fact, that the United States' Bank has a share in producing these evils, only in proportion to the amount of its capital, the number of its branches, the control it has of the funds of Government, and the changes it makes from time to time, in its mode of operation.

Of Banking from 1829-30 to 1832-33.

Towards the close of the year 1829, money became plenty.  For this various causes may be assigned.  One of the chief was the extensive dealings of the United States' Bank.

This institution had, early in 1823, devised a plan for extending its operations, and in that year discontinued the practice of paying out the notes of the local Banks, and renewed the practice of receiving the notes of all its branches.  But the condition of things was such, that, towards the close of the year, its circulation was diminished, instead of being increased.  It stood, in November and December, at $4,081,842, which was less than it was at any previous period, except the three months which immediately followed the first opening of the doors of the Bank at Philadelphia.

In 1824 and 1825, the Bank increased its active capital, by the sale of three or four millions of forfeited Bank stock.  It was by this operation, by adding upwards of three millions to its circulation, and by straining its credit, that it was enabled in these years to lend ten millions to Government.  A part of the plan of the Bank was to extend its dealings in domestic exchanges.  This it naturally preferred to increasing its business in other commercial securities, as on these it received only discount, whereas on bills of exchange it received both discount and premium.  Being the depository of the public funds in various parts of the Union, it possessed great advantages for dealings in exchange, especially as the greater part of the public revenues was received in those cities which had naturally the rate of exchange in their favor.  The operations of the Bank in its exchange dealings are thus described by its President.

"The crop of Tennessee is purchased by merchants who ship it to New Orleans, giving their bills founded on it to the branch of Nashville, which furnishes them with notes.  These notes are in time brought to New York for purchasing supplies for Tennessee.  They are paid in New York, and the Nashville Bank becomes the debtor of the branch at New York.  The Nashville branch repays them by drafts given to the branch at New York on the branch at New Orleans, where its bills have been sent, and the branch in New York brings home the amount by selling its drafts on the branch at New Orleans: or the New Orleans branch remits.  This very plan of circulation, is the basis of the whole interior trade of the United States."

The true basis of the interior trade of the United States, is the fertility of the soil and the industry of the people.  The sun would shine, the streams would flow, and the earth would yield her increase, if the Bank of the United States was not in existence.  What is now performed by it in the way of exchange dealings, would, if there were no corporations, be as well performed by private exchange merchants.  Perhaps they could not perform it at quite as low a rate, for they would have to provide a capital of their own, whereas the United States' Bank performs it by the control it has of the public deposits, and by means of the credit its charter gives it in different States.  Employing no capital of its own in the business – the whole affair being a mere paper transaction between the Bank and its branches, it may well afford to do it cheap.  It may, however, be questioned, if the reduction of the price of exchange below its natural rate, is an equivalent for the evils which must necessarily ensue from the substitution of the discretion of the officers of the United States' Bank and of its twenty-five branches, for the laws of nature.  Whenever and wherever the Bank of the United States reduces exchange below its natural rate, it removes the only effective check on over-trading.  This in a short time makes necessary a reduction of discounts, and thus we have in the exchange dealings of the United States' Bank a new element of commercial vicissitude.  If there were no paper money institutions, the rate of domestic exchange would be regulated by the cost of transporting specie from one part of the country to another.  This, even between the most remote parts of the Union, would not exceed two or three per cent., and it would be better to pay this percentage than to be exposed to all the evils of an interminable series of expansions and contractions.

There was, however, a serious obstacle to extending the operations of the Bank as far as was desirable.  It was physically impossible for the President and Cashier of the Parent Bank to sign all the notes wanted for the branches: and Congress, though repeatedly solicited, had refused to give authority to any other persons to sign notes for circulation.  Counsel was then taken of some distinguished legal characters, and they declared that the issue of small drafts signed by the officers of the branches, either upon one another, or upon the Parent Bank, was not prohibited by the charter.  The issue of these drafts was accordingly commenced in 1827, and a great increase of paper medium has followed.  The President of the institution has said, "If branch drafts had not been issued, no notes at all could have been issued, from the mere physical impossibility of preparing them.  But branch drafts do not increase the circulation more than branch notes would."  This is true, but the physical impossibility was made known to Congress, when application was made for authority to be given to other persons besides the President and Cashier to sign notes for circulation.

In answer to a question propounded by Mr. Camberbreleng, "In what manner can a National Bank diminish the circulation of country Banks, with which it has no transactions except by reducing its own circulation ?" the President of the Bank replied, "Very easily and very naturally.  The very increase of the circulation of a National Bank, may be the most efficient cause of the reduction of a State Bank, and in this way, a branch is near a local Bank – the branch notes are more valuable than the local notes – the local notes are exchanged for the branch notes at the branch Bank, which thus becomes the creditor of the local Bank, and makes it pay its debts, and thus reduce its circulation.  Now almost all State Banks stand in this relation to the Bank and its branches."

This is sufficient to show that the embarrasments of 1828 were produced in part by the conflicts between the United States' Bank and the local Banks for the circulation.  Encouraged by the success of its experiment, the United States' Bank took measures for extending the operations of its old branches and for establishing new ones.  It felt pretty secure in the emission of branch drafts, for they were made payable at a distance of five hundred or a thousand miles from the places in which they were issued, and though receiveable every where in payment of debts to Government, could at any time be refused to be received in payment of debts due to the Bank.  The Bank did, in deed, and still does, receive these branch drafts on deposit, at all its offices.  This was necessary to give the drafts a general circulation.  But if it should at any time become the interest of the Bank not to receive them, it has only to say so, and the merchants will, as they were in 1818-19, be denied the privilege of paying debts due to the Bank in the paper of the Bank.  A portion of the paper of each of the twenty-five offices, being distributed through each of the twenty-four States, each office may, in case of a "panic" be delivered from the effects of a "run," by a refusal to receive or to discharge any but its own drafts.

Under these circumstances the Bank increased its issues, and it is evident that after these issues were swelled to a certain amount, they afforded a basis for new issues by the State Banks.  It is well known that the country Banks of Pennsylvania discount as freely on deposits of Philadelphia notes as on deposits of specie; for, Philadelphia notes are, they say, "as good to them as specie," or even better, inasmuch as exchange is usually in favor of Philadelphia.  The Banks throughout the Union regard United States' Bank notes and drafts in much the same light as the country Banks of Pennsylvania regard Philadelphia paper; because balances are constantly accumulating against them, in the United States' Bank, through that institution's being made the depository of the public funds, and through its many extensive transactions.  The operation was briefly this:– local Bank notes which circulated freely only in the neighborhood of the Banks which issued them, were exchanged at the offices of the United States' Bank for branch drafts which were made to circulate every where.  This diminished the circulation of the State Banks, and increased that of the United States' Bank.  The circulation of the Bank of the United States being increased, a number of its notes were received by the State Banks, either on deposit or in payment of debts due to them by individuals.  The local Banks finding they had on hand a considerable amount of United States' paper, which was "as good to them as specie, or even better," began to issue their own notes more freely.  A portion of these were received by the United States' Bank, and the State Banks, on payment being required, satisfied the demand with branch drafts.  Each extension of the business of the United States' Bank in exchanges, increased its circulation of branch drafts, and each increase of branch drafts, after the new mode of operation war fairly established, enabled the State Banks to increase their issues, by providing them with means to meet such demands against them as might be made by the United States' Bank.

From the reports made to the Legislature of Pennsylvania in November, 1828, by the various Banks of the State, and by the Bank of Pennsylvania in February 1829, it appears that their circulation then amounted to 7,238,991 dollars, and their deposits to 6,221,037 dollars – total 13,460,028 dollars.  From similar reports made in November 1831, it appears that their circulation was 8,753,092, and their deposits 7,736,747 – total 16,489,839 dollars.  This shows an increase in the local Bank medium of Pennsylvania, of three millions of dollars, or about twenty-two per cent. between these dates.

Mr. Cambreleng states, that, between the 1st of January 1830 and, the 1st of January 1832, the country Banks in the State of New York had increased their circulation from 3,974,345, to 8,622,277 dollars.  The increase in 1831, in the circulation of the Banks of New York, Massachusetts, Rhode Island and Pennsylvania, not including the Banks of Philadelphia, is estimated by him at eight millions.

The gross circulation of the Bank of the United States in January 1829, was 13,391,110 dollars, and in January 1832 it was 24,630,747 dollars.  The net circulation was at the first of these periods, 11,901,656 – at the second it was 21,250,545 dollars.  The increase in the net circulation was about seventy-eight per cent.

Other causes besides the new mode of operation adopted by the United States' Bank have contributed to this increase of currency.  Multitudes of those who were ruined by the events which followed the war, had found relief in death.  Others had sought an asylum in the poor-house.  The children of others had become old enough to till, as hirelings, the farms their fathers once owned.  A new generation of business men had come on the stage of action, and the incidents of 1818-19 were fast fading from the minds of those who were then old enough to be observant of the course of affairs.  In such a country as the United States, the silent operations of society work great changes in a period of ten or twenty years.  Pernicious as the Banking system is, it cannot exhaust the natural sources of wealth, or destroy that desire in men to better their condition, which is the main spring of action.  The country was more populous and more wealthy than it was at any previous period.  It could bear more Banking, and more Banking it was made to bear.

The combined operations of these causes began to be very visible in their effects in the latter part of 1829, after the embarrassments caused by a pressure in Europe were over.  The rise of property on Market street, Philadelphia, was a subject of newspaper boast in November.

An increase of the trade with Mexico, and a decline of the trade with China, contributed to swell the amount of specie in the country.  In 1830, the exports of gold and silver were only 2,178,773 dollars, while the imports were 8,155,964.  A method adopted by the Bank of the United States, and imitated by private capitalists, of drawing bills on England to be negotiated beyond the Cape of Good Hope, was one of the causes which, in this year, diminished the export of gold and silver.  The committee of Congress say,

"this new method of dealing in bills of exchange does not economize the specie of the country at all.  It is a universal law of drawing, that funds must either go before or follow after the draft to honor it at maturity;  and whether it goes directly or circuitously, the funds to discharge it must sooner or later arrive at the place of payment.  These bills are to be paid in England, but they go round the Cape of Good Hope before they reach their place of destination.  Instead, therefore, of sending the specie directly to India and China, as formerly, who does not perceive that it must now be sent to England, the country upon which these bills are drawn, there to meet them upon the arrival at the place where they are to be paid ?  The Bank consequently becomes the shipper of the specie, to pay its bills, in place of the merchant, to purchase his merchandise in the East Indies.  It is simply and purely nothing but a change of the destination of the specie, with only the advantage of its going to London.

"The supplying of bills encourages an operation which commences and ends without the employment of any capital whatever, and is similar in character to respondentia securities.  The buyer is enabled, within the term of credit, to make the voyage, dispose of his goods, and obtain from the proceeds the funds to meet his obligation, and the Bank to transmit the same to the place upon which the bills are drawn, (which are at six months' sight,) long before they become due.  It would seem to produce a greater export of specie, eventually, than would otherwise take place, if the operations were commenced with specie, and not with bills purchased in the manner described: for the merchant, relying upon his immediate resources, would not engage to such an extent in the business, and would combine in the operation much of the produce of the country, whereas, relying upon an extensive credit, he hazards every thing on the success of the enterprize.  It is a species of speculation in trade, leading to great risks, and certainly terminating in over-trading – the evils of which the country is now sorely experiencing.  By loans of a similar character by insurance companies, providing funds for traders to China, Government has sustained more loss than in any other branches of trade."

All this is true enough, but this method of drawing bills to be negotiated beyond the Cape of Good Hope, enables the Banks to increase their issues, inasmuch as it defers the demand for specie for six months, a year, or longer.  It contributed, with other causes, to swell the amount of silver in the vaults of the Banks, in the latter part of 1829, and in 1830, and 1831.

In March 1830, the Bank of the United States had in its vaults 8,038,246 dollars, which was more than it ever had before.  In December, the Banks of the city of New York complained that they had so much specie that they did not know what to do with it.  The amount in their vaults was said to be seven millions.

Throughout 1830 and the greater part of 1831, the Banks generally extended their operations.  Money was unusually plenty, and little embarrassment was suffered, except what was produced by the action of the Banks on one another, in their struggle to determine which should circulate most paper.  The effect in Philadelphia was to raise property, in many parts of the town, as high, or nearly as high, as it was during the suspension of specie payments.  Great part of Market street was rebuilt with elegant stores.  Rents rose enormously in business places.  The trade with the Western country was increased greatly; and speculation showed its activity in a variety of forms.  In almost every part of the country, the same effects were observable, in either a greater or a less degree.

This continued till October, 1831, when "an active demand for money" began, the consequences of which have since been felt in various parts of the country in various forms.

The President of the United States' Bank, in a letter dated April 16th, 1832, addressed to Mr. Clayton, the chairman of the committee of Congress, gives the following account of the state of affairs:

"In addition to the business of domestic exchange, the amount of local loans has increased, owing to the greater demand for the use of money during the last year, and the conversion into the more active form of business of the stocks repaid by Government to the Bank.  The first grew naturally out of the state of trade.  For eighteen months, the want of employment for capital, and the derangement of industry arising from political and other causes, rendered money very abundant in France and England, the two countries whose situation so much influences our own, and produced a corresponding ease and plenty in the United States, while at the same time, the disturbed state of Europe, and the Cholera which interposed new obstacles to trade, with certain parts of it, naturally directed the manufacturers of England and France to this country, which is by far the best and safest markets for their productions.  These circumstances occasioned, during the past twelve months, an unusual importation of foreign merchandise.  While the treatment of this temporary commercial disease was in progress, the sufferers naturally looked for the cause of it every where but in themselves, and the Bank was reproached with having contributed to occasion the importations.  Without going into detail, one single fact is quite decisive on this subject.  It will be seen from the following official statement, marked B, that the large importations last year began with the month of April, and of course they must have been founded, so far back as the Bank was concerned, on the state of things in this country a month or two previous, say the month of March last.  Now, it will be seen from the state of the Bank before the committee, that, for nearly two years before the month of March last, (1831,) the local discounts of the Bank had undergone no perceptible increase – those for July 1829 being $34,196,000, and those for March 1831 being $34,220,000, an increase within that period of only 24,000 dollars."

This does not appear to be a correct mode of viewing the subject.  The exchange dealings of the Bank ought to be taken into consideration as well as the local discounts.  They contribute quite as much to credit traffic.  It is through them the Bank is able to circulate its branch drafts.  The arrival of these branch drafts in the great Atlantic cities, is, as the President of the Bank has stated elsewhere, "the signal of relief to the southern and western traders."  The receipt of them at the office at New York, was nearly twelve millions in the year 1828, and upwards of eleven millions in 1829.  The receipt of them at Philadelphia, and at the three offices of New York, Baltimore, and Boston, amounted to upwards of thirty-seven million dollars, in the two years of 1828 and 1829.  It is with these branch drafts that the southern and western merchants pay for foreign merchandise.  It is with these the importer pays the duties to the Government.  Nothing, therefore, can con tribute more efficiently to an increase of imports.

"The large importations must have been founded, so far as the Bank was concerned, on the state of things in this country a month or two previous."  This is unquestionable, and the state of things in this country was then affect ed by the new system of operations begun by the Bank in 1827.  Between the two dates mentioned in the extract, the net circulation of the United Sates' Bank was increased from 13,780,847 to 16,933,122, or about twenty-two per cent., and though the increase in the circulation of the local Banks may not have been in the same proportion, there is reason to believe it was considerable.  It may be admitted that the state of trade in Europe, and, perhaps, the Cholera, tended to swell the importations, but any disposition to over-trading thereby induced, would, if we had been without moneyed corporations and without paper money, soon have been checked by the necessity of paying cash, or at least making engagements to pay in specie. –The President of the Bank proceeds as follows:

"Without having contributed to produce them, the Bank found, about nine months ago, large importations, requiring for their diffusion through the country, increased facilities connected with Banking: having the means of giving them – being in fact created for the purpose of giving them – it gave them;  it had the means of giving, because, in the early part of the year, it had been strengthened for business, purposely, by the addition of two millions of its funds in Europe transferred home, by the repayment of about ten millions of the funded debt paid back by Government since October, 1830, making an increase of active means amounting to twelve millions.  When, in the progress of a few months, the continuance of these importations, and the revenue which had accrued on them, produced an effect in the actual state of the market, the Bank applied itself immediately to correct any disadvantages from it to the community.  The actual position of things was simply this: There were large importations requiring means of remittance to Europe to pay for them: there were large amounts of revenue to Government, amounting in New York alone, from March 1831, to March 1832, to nearly seventeen million dollars, requiring great forbearance towards the debtors.  In the mean time, the southern produce, which furnishes the greater part of the means to pay for these importations, was, owing to a great variety of causes, the state of the crops and the weather, unusually late in appearing.  This, therefore, was the condition of the country: an unusual importation, an unusual amount of debts payable to Government, and an unusual delay in receiving the ordinary means of meeting these demands.  Undoubtedly, if the Bank had chosen to adopt such a course, it would have been easy, by an immediate diminution of its loans, to place itself out of the reach of all inconvenience, but it would, at the same time, have inflicted very deep wounds on the community, and seriously endangered the revenue of Government.  These exertions of mere power have no attraction, and it was deemed a far wiser policy to deal with the utmost gentleness to the commercial community, to avoid all shocks, to abstain from countenancing all exaggerations and alarms, but to stand quietly by, and assist, if necessary, the operations of nature and the laws of trade, which can always correct their own transient excesses.  Accordingly, the whole policy of the Bank for the last six months.  [preceding April 16th, 1832,] has been exclusively protective and conservative, calculated to mitigate suffering, and yet avert danger.  The point where these importations occurred, and where the revenue was payable, was New York.  The whole force of the institution was, therefore, directed to strengthen that place, and the distant branches were directed to avoid incommoding it, and the Atlantic branches near to it, by drafts upon them, but to pay their balances to them with as little delay as the convenience of their respective localities would permit.  This is the whole policy of the Bank for the last six months.  It will be seen, therefore, that, without a diminution, there has been an actual increase of business in New York, and a large increase of the domestic bills of the branches: the increase in New York being for the purpose of protecting the interest there, and the increase of the bills being the remittances from the West and South to sustain New York and the southern Atlantic branches.  In the mean time the Bank, out of its own accumulations, and its own credits in Europe, supplied, since the first of September last, the means of remittances in its own bills to the amount of $5,295,746 52, and parted with its surplus specie to the amount of 5,000,000, making an aggregate contribution to the commerce of the country of $10,295,746.52."

The letters from the Cashier of the Bank at Philadelphia to the cashiers of the branches, in the months of October, November, December, January, and February, 1831-32, exhibit a remarkable example of the manner in which the operations of the Bank "assist the operations of nature, and the laws of trade, which can always correct their own transient excesses."  The general directions to the cashiers were to shape their business, not according to the natural demands of trade in their immediate vicinity, but according to the special demands of the Bank in New York, and other Atlantic cities.  They were to withhold local accommodations, and to purchase bills of exchange on particular places, thus increasing facilities to one class of dealers, and denying them to others, when it was as likely as not that regard to the interests of the community in the neighborhood of the offices would have required an increase of local discounts and a diminution of exchange dealings, or exchange dealings of a different character from those which were ordered.  It may be doubted if any Board of men sitting in Philadelphia, is able to direct money operations, in many and remote parts of the Union, without inflicting injury on the community, especially when that same Board has on its shoulders the additional burden of regulating the foreign exchanges of the country.  It may be doubted if the discretion of any Board, however scientific and however experienced, is an adequate substitute for "those operations of nature and laws of trade," which, if left to themselves, "can always correct their own transient excesses."

The reduction of accommodations at the Bank in Philadelphia, between the 5th of January and the 29th of March, 1832, was $1,810,408.37, including both promissory notes and bills of exchange;  at the offices at Boston, between the 5th day of January and the 29th of March, it was $167, 860 85, on a discount line of less than two and a half mil lion dollars; and at the office at Baltimore, between the 16th of January and the 2d of April, it was $123,741.63, on a discount line of little more than two million dollars.  At the office at New York, the local discounts were, as Mr. Biddle states, increased, but the dealings in exchange were diminished, so that the actual reduction of commercial accommodations at that office, was $259,305.43, be tween the 4th day of January and the 28th day of March.  At the Bank in Philadelphia, the reduction between the 5th of January and the 5th of April, fell a little short of twenty per cent. of the whole amount of accommodations.

It appears, from a letter of the Cashier of the Bank in Philadelphia, dated November 24th, 1831, that the orders issued in October were, at some of the Western offices, "unfortunately misunderstood.  At some of them, our Cashiers ceased checking altogether upon Philadelphia and New York, and at Nashville the Board refused very large amounts of prime bills upon your city, (New Orleans,) and have thus dried up a few of the rills by which the stream of exchange would have been swelled in its course towards you and thence to us."  Thus, it seems, that, in addition to the evils to which the country is exposed from the attempts of the Board at Philadelphia to control the whole course of foreign and domestic exchanges, and through them the whole train of commercial operations – attempts which, from the imperfection of human nature, must necessarily be productive of evil – we are exposed to other evils from the officers of distant branches misunderstanding directions.

Explanations of the orders of the Bank were then given to such of the branches as had misapprehended them, and it must be stated, in justice to the Cashiers of the Southern and Western offices, that they obeyed orders so well, that, though there was a reduction of dealings to the extent of two millions and a half at Philadelphia, New York, Boston, and Baltimore, there was an increase between October 1831, and March 1832, of more than a million in the net circulation of the Bank, of more than six millions in the bills of exchange, and of more than eight millions in the total of discounts and bills.

The Bank perceived in February that it was necessary to change its policy, for branch drafts came from the South and West in such quantities into the great Atlantic cities, as to threaten difficulties of another nature.  Orders were then issued to the branches to keep down their business, as well in bills of exchange as in local discounts.  Notwithstanding this direction, the bills of exchange were, by May, increased to twenty-three millions, and the aggregate of discounts and bills to seventy millions.

The immediate causes assigned for the movement in October, were directions from Government to pay off six or seven millions of the public debt.  Orders to pay off a small additional amount, only one million and three quarters, in April, are specially mentioned, in the instructions given to the southern and western branches, why they should shape their business so as to assist the principal of fices in the Atlantic cities.  If the Government had been willing to leave the national debt unpaid, and to suffer the Bank to have the public funds to trade upon, it would, perhaps, have kept on expanding.  But the Government was, very properly, desirous of discharging the national debt while it had the means: and expressed a wish in March, to pay off in July one half of the three per cents.  This rendered necessary a new movement on the part of the Bank, which is thus related by its chief officer.

"I received a letter from the acting Secretary of the Treasury, dated the 24th of March, 1832, informing me that the Government was about to issue a notice on the 1st of April, of their intention to pay on the 1st of July next, one-half of the three per cent. stock, and to do it by paying to each stockholder one-half the amount of his certificate.  He added, 'If any objection occurs to you, either as to the amount, or as to the mode of payment, I will thank you to suggest it.'

"Thus invited by the Government, in a communication marked 'confidential,' to give my opinion on a measure contemplated by the Government, I felt it my duty to express my views of its probable operation.  In my reply, therefore, dated the 29th of March, I stated, 'that so far as the Bank is concerned no objection occurs to me, it being sufficient that the Government has the necessary amount of funds in the Bank to make the contemplated payment.'  I then proceeded to observe, that in the present situation of the mercantile community, and with a very large amount of revenue, [amounting to nine millions,] to be paid before the 1st of July, the debtors of the Government would require all the forbearance and all the aid which could be given to them;  and that the payment proposed, by creating a demand for the remittance of several million dollars to the European stockholders, would tend to diminish the usual facilities to the debtors of the Government, and might endanger the punctual payment.  For this reason, I thought it for the interest of the Government to postpone the payment till the next quarter.

"After weighing the circumstances, the Government was desirous of adopting the measure;  but the difficulty I understood to be this, that the sinking fund would lose the quarter's interest, from July to October, of the sum intended to be paid in July, and that the Government did not feel itself justified in making the postponement, unless that interest could be saved; but that it would be made, provided the Bank would make the sinking fund whole on the 1st of October.  To this I said, that, as the Bank would have the use of the fund during the three months, it would consent to save the sinking fund harmless, by paying the three months' interest itself.  And so the matter stands."

It was not long, however, before the Bank discovered that it would be as inconvenient to pay the European stock holders in October, as to pay them in July.  One of the directors then made a voyage to Europe, and an arrangement was made through the medium of private Banker in London, by which the reimbursement of a portion of the three per cents. was deferred for a further period.

It is thus by means of its credit with Government, and its credit in Europe, that the Bank has sustained itself during the last six months.  And it is well for the community that the Bank enjoys this credit.  From the accounts recently published, it appears that its circulation was reduced, from March to November, more than twenty per cent.  A further diminution would, by is operation on the local Banks, have added greatly to the sufferings which the commercial community endured during the last year.  If we except the real estate held by the Bank and the specie in its vaults, all its capital and all its credit may be regarded as invested in promissory notes and bills of exchange, and it cannot pay to the public creditors the funds entrusted to it for that purpose, without making a reduction of commercial accommodations in a corresponding amount.  The reduction during the past year was quite as great as the community could bear;  and though the Government has just cause of complaint, inasmuch as the sinking fund was not made whole on the 1st of October, according to agreement, it ought, perhaps, not to be very severe in its judgment, as an attempt to fulfil the contract literally, would have occasioned a great pressure on the people.

The President of the Bank said, in his letter to Mr. Clayton in April 1832, speaking of the plan of operation adopted in October 1831, "This has given time for the operations of the laws of trade: the country is recovering from the temporary inconvenience; the over-stocked market, by checking prices, has checked farther importations; the southern crop so long delayed, is coming forward; the exportation of specie has ceased; the importations of specie, postponed by the troubles of Mexico, are resumed; and in a short time, the whole operation will rectify itself."

The inconvenience has, however, continued to the present day, and if a man of Mr. Biddle's great powers of mind, still thinks the embarrassments of the people are such as spring only from "vibrations of trade," having their origin in natural causes, and that they are in no way increased by Banking operations, it must be that his situation at the head of the Banking system, has an influence on his judgment.  He speaks of its being natural for men to look for the cause of their sufferings every where but in themselves.  With equal truth it may be affirmed that statesmen, and men whose situation gives them the power of statesmen, are apt to attribute the sufferings of the community to any cause but their own measures.

If it should still be denied that the operations of the United States' Bank in particular, and of the local Banks in general, contributed to that state of things which led to the excessive importations in the spring of 1831, it must be admitted that the subsequent measures of the Banks have contributed to produce the heavier importations of 1832.  It would be very illogical to argue that the "Cholera," when it visits the north of Europe, forces trade from it, and that when it visits the United States, it brings an increase of trade along with it.  There must be some other cause than the "Cholera" for the excessive importations of the last year.  Mr. Biddle, in the essay he published in 1828, pointed out very clearly the manner in which over-banking leads to over-trading.

In October 1829, the statements of the United States' Bank showed a total of discounts and bills of exchange of $39,960,052, and in May 1832, a total of $70,428,070.  In the short period of two years and seven months, there was an increase of $30,668,018 in the accommodations the Bank afforded to dealers.  At the same time the local Banks expanded; and if such causes will not affect trade, it is hard to say what will.

The present amount of currency would be redundant, if over-banking had not induced over-trading.  But in the present condition of things, men cannot, notwithstanding the abundance of paper money, meet their engagements with ease; and their embarrassments are, at particular times and particular places, increased by the action of the Banks on one another, and by a system of exchange dealings in which the interests of the community in one town or in one State, are made subordinate to the interest of a Banking office, perhaps five hundred or a thousand miles distant.

Such consequences are inseparable from the present system, and must not be ascribed to faults in the men who manage it.  Under another President and another Board of Directors, the Bank of the United States might not have committed precisely the same faults, but perhaps it would have committed faults which would have inflicted still greater evils on the community.  A President and Board of Directors who would refuse to take the measures necessary to raise the rate of dividends and the price of shares as high as possible, would be very unpopular with the stockholders, and would, probably, soon be dismissed from their official stations.

If the State Banks were made the depositories of the public funds, and if their notes were made receivable in payment of duties, the evils of the system would be increased.

If the Government should, after the expiration of the present charter of the United States' Bank, resolutely refuse to receive any thing but gold and silver in payment of debts, and also refuse to employ any Bank as an agent in its fiscal operations, the evils of the system would be greatly diminished.

Extent of Banking Operations at Different Periods.

For many years a veil of mystery was thrown over the operations of the Banks.  Mr. Bland, a member of Congress from Maryland, in a speech made previous to the dissolution of the old Bank of the United States, said, "The nature of the loans, the deposits, and all the bargains, dealings, and contrivances, between the Government and the Bank, are wholly invisible to the public."

Dr. Bollman, who undertook the defence of the Bank, after mentioning that the nature of Banking operations was but little understood, spoke of "an idea prevailing with those whom curiosity and a turn for research has led to investigate the subject more deeply, that the interest of of these institutions, as well as their usefulness, required the preservation of what they deem salutary prejudices concerning them."  The Doctor justified such revelations as he made by the necessity of the case.

"I have labored," says Mr. Carey, who was embarked in the same cause, "under a most discouraging destitution of materials.  Those whose province it was to furnish them, have most cautiously forborne from the communication, in the most extraordinary manner."

In another sentence he says, "The obligation of secrecy in Banking transactions, precludes a writer who undertakes the defence of such an institution, from many of the most important data, on which his reasoning may depend. * * * Were I possessed of a statement of the specie in the different Banks of Philadelphia – and were it proper to disclose it."

For many years this veil of mystery was not removed; if, indeed, it can now be said to be removed.  "I have found" said 'A Friendly Monitor,' writing in 1819, "considerable embarrassment in obtaining the most simple information in relation to the Bank (i.e. the present Bank of the United States.)  If I ask a director, the seal of his finger is significantly impressed on his lips.  There is a species of masonry in Banking which to a certain extent is highly proper and necessary.  It implies a mutual pledge among the directors, that nothing shall be divulged which may be prejudicial to the interests of the Bank."

Before the suspension of specie payments, no regular returns were received by the Legislature of Pennsylvania from the Banks in this Commonwealth.  Since that time, accounts have been published annually: but as the Bank of Pennsylvania and the Bank of North America have in many years made no returns, it is impossible to give a general table from which indisputable conclusions might be drawn.

In some of the other States, the difficulty of obtaining satisfactory accounts of the extent of Bank operations, is more difficult than in Pennsylvania.  During the great excitement of 1818-19, Mr. Niles made an effort to collect information respecting all the Banks then in existence;  but, though his correspondence was very extensive, he does not appear to have succeeded in his object;  for the tables which he gave notice of his intention of publishing, do not appear in his Register.

In 1820, Mr. Crawford, who was then Secretary of the Treasury, made a report on the state of currency, in connexion with which he gave a table intended to show the amount of capital paid in, the notes in circulation, the public and private deposits, and the specie in the Banks in 1819.  Mr. Niles, on publishing the table said, "it will be seen the preceding returns are very imperfect – as, for instance, the capital paid in, in Maryland is given at 86,290, whereas it is nearly eight millions of dollars.  Several of the other items I know, from various documents in my possession, are pretty nearly correct; yet some are also much deficient."

Mr. Gallatin, who was for many years Secretary of the Treasury, published in 1831, "Considerations on the Currency and Banking System of the United States."  A comparison of his estimates with those of Mr. Crawford, will show the difficulty there is in arriving at a satisfactory conclusion.

Mr. Crawford's estimate of the amount of notes in circulation, is as follows:

1813, .............. $62,000,000

Mr. Gallatin's estimate is as follows:


Mr. Gallatin appears to have had more data than Mr. Crawford, but still his tables are so imperfect that variations of from 5 to 25 per cent. may take place in the amount of currency, which they afford no means of ascertaining.

To collect and arrange the accounts of five or six hundred Banks which are, or which have been, scattered through twenty-four States and two or three Territories, would be no easy task.

If we had all these accounts collected and arranged to our hand, a question might arise as to the sense in which they should be understood.  There is an ambiguity in many Bank statements which renders them useless.  The word "cash" under the pens of some Bank officers, contracts and expands its meaning with as much facility as Bank medium contracts and expands its amount.  Some times it includes "mint certificates," because cash can be got for them in the market.  Sometimes, in the case of a country Bank, it includes city Bank notes, because they are to the country Bank "as good as cash."  Sometimes cash and "bills of exchange" are given together.

If all ambiguity were removed from Bank statements, another question might arise, and that is, how far they are to be depended upon.  We have seen a committee of the Legislature of North Carolina accusing one of the Banks of that State of rendering a false account of the amount of specie in its vaults: and a committee of the Legislature of Connecticut accusing one of the Banks of that State of rendering a false account of the amount of notes in circulation.

No doubt, the accounts of many Banks are fairly rendered, but it is impossible, in a general view of the subject, to say how many Bank returns are faithful and how many are not.  There may be a literal exactness in the returns, and yet some fact may be suppressed, which, if generally known, might entirely change the impression the public receives from a Bank statement.  "I could," says a writer in a Portsmouth, New Hampshire, paper, "name more than one Bank in this State, where a considerable portion of the debts mentioned in the return, were worth nothing; and much of the specie was borrowed from individuals or Banks, laid in the vaults those two days, and then returned to the owners with the seals unbroken."  The author of a pamphlet published at New York, in 1828, entitled a "Peep into the Banks," objected to a new law of that State, requiring the Banks to make semi-annual returns of the amount of specie in their vaults, for the following reasons.  "It is well known, that institutions which, heretofore, have been required to make these exhibitions, have prepared, previous to the period of making them, to present as favorable statements as possible.  If all the Banks in the State are to do so, it will produce a semi-annual pressure for money.  Paper, payable a short time previous to these periods, will be discounted freely, when a general curtailment will be made.  The notes and bills payable out of the State, will obtain a preference, that thereby funds of specie, in Philadelphia, Boston, &c., may be made for a few days the property of Banks in this State.  In this and other contrivances, the officers will be employed to make a a display of that which has no permanent existence."

There is another question.  Do even the directors know, in all cases, what is the exact state of a Bank ? –There are not in the city and county of Philadelphia, any men more astute in what regards their own interests, than some of the Directors of the Bank of the Northern Liberties;  yet a sum equivalent to the whole capital of the Bank, was taken from it by some of its clerks and their coadjutors out of doors, without any of the Directors, the President, or Cashier, being aware of the fact.  The case of the City Bank of Baltimore, was still more remarkable.  It had what was called a "solid" capital of 800,000 or 900,000 dollars, and its credit was good.  But, about the time Mr. M'Culloh was removed from the cashiership of the United States' branch, the Cashier of the City Bank found it necessary to resign.  An investigation was then made by a committee of the stockholders, and it was found that all the persons employed in the Bank, with the exception of one clerk and the porter, had made free with its funds.  The over-drafts of the Cashier amounted to $166,548.85: those of his particular friend to 185,382 dollars; those of one clerk to about 30,000 dollars; those of a second clerk to $15,082.70; and those of a third clerk to $6,324.99.83

83   Niles' Register, October 30th, 1819.

It is to be hoped that most Bank officers are every way worthy of the trust reposed in them; but even then we cannot be sure of the accuracy of their accounts.  As is remarked by Governor Wolcott, "The stations of President, Cashier, Teller and Book-keeper, are incompatible, and yet some two or more of them are united in the same persons, contrary to established maxims of accountability, prudence, and even justice to the individuals who are so entrusted.  If, at the close of the hours of business in every day, full accounts of all the funds issued and of securities obtained and discharged, are not immediately stated, their accuracy ascertained, and their results extended into records, which are regularly continued, by persons whose peculiar duty it is to note all these facts, according to established forms; then the transactions of different days will be blended, and soon all individual responsibility will be irrecoverably lost."

While so much obscurity and so much uncertainty hangs over Bank accounts, the reader will be content with a mere abstract of the tables and statements of Mr. Gallatin.  We have been for seven years collecting the accounts of the Banks, but so little success has crowned the labors of Mr. Crawford, Mr. Gallatin, and Mr. Niles, that we do not think it worth while to arrange our own materials.

Number of Banks in operation at different periods, and number of Banks that failed or discontinued business, from 1st January 1811, to 1st January 1830: 1394, out of which 165 broke.

We have another list, which contains the names of twenty-eight broken Banks not mentioned in Mr. Gallatin's table, viz. one in Massachusetts, one in Maine, three in New York, three in Pennsylvania, one in Delaware, one in the District of Columbia, two in Virginia, one in Georgia, four in Kentucky, eight in Ohio, one in Indiana, one in Illinois, and one in Michigan.  Even this, however, does not appear to be complete.  No list has yet been published of the number of Banks in operation in the first six months of 1818, which was the time the mania reached its height; and Mr. Gallatin, with all his industry, has not been able to give a complete list of all the Banks which were in operation in the years mentioned in the above.  There were, for example, two if not three Banks in Missouri in the year 1820.

Mr. Gallatin's estimate of the capital of the Banks, the notes in circulation, and specie in their vaults, at different periods, is as follows:

Capital.   Circulation.   Specie.
1st. Jan. 1811, - 52,610,601   28,100,000   15,400,000
1815, - 82,259,590   45,500,000   17,000,000
1816, - 89,822,422   68,000,000   19,000,000
1820, - 137,110,611   44,863,344   19,820,240
1830, - 145,192,268   61,323,898   22,114,917

In making these estimates, Mr. Gallatin was forced to guess at the amount of specie possessed by, and the amount of notes circulated by, thirty-eight Banks in 1811, eighty eight Banks in 1815, one hundred and twelve Banks in 1816, ninety-five Banks in 1820, and forty-nine Banks in 1830.  Where he had returns they were not all of the same dates, and in some years the returns were from but little more than half the whole number of Banks.  After all, his guesses may be as near the truth as some Bank statements.

Nothing is more certain than political economy.  Nothing is more uncertain than political arithmetic.

Bank statements, taken by themselves, are too vague to be made the basis of an argument.  We have, however, throughout this book, received them without dispute, because we believed them to approximate sufficiently near the truth to serve the purposes of illustration.  Abstract signs would, if generally understood, answer the same end.  Bank statements may be used with this view, though, taking them in the aggregate, they may not be worthy of implicit confidence.  That the Banks should make such reports as will place their operations in the most favorable light, is natural.

If any think differently, and are disposed to reason a priori with Bank statements for their basis, we hope they will avoid the error of some modern writers, who have represented an increase of some eight or ten millions in the circulation of a single Bank in a year or two as quite gradual and moderate.  If Mr. Gallatin is correct in his conjecture, that the whole amount of medium, Bank notes, Bank credits, and specie in circulation, is but one hundred and ten or one hundred and twenty millions, an in crease of ten or twelve, or fifteen per cent., in one of these components of the currency, must have a very considerable effect on prices.  This able writer is confident that the amount of notes in circulation did not exceed thirty millions in 1811, forty-seven millions in 1815, and seventy millions in 1816: yet this he thinks, and he probably thinks justly, is quite sufficient to account for the depreciation of the currency.  He agrees with Mr. Crawford in the opinion that the notes in circulation were not reduced to a less amount than forty-five millions in 1820: yet his judgment is, that the numerous failures which preceeded the year 1819, or which have since taken place, have been principally owing to the operations of the Banks.

Full and correct accounts of the amount of notes in circulation, and of the amount of deposits, would gratify curiosity: but, for practical purposes, they are not necessary.  The effects of Banking are inscribed on every page of our country's history, from the year 1783 up to the present day.  Those who have been in business can speak of these effects from their own experience.  Those who have never been in business, have only to open their eyes, and they will behold the effects of the system in the condition of different classes of society.

Many of the operations of the system are such that they cannot be embraced in the annual reports made by the Banks to the Legislature.  Fluctuation of prices is but one of the evils of paper money Banking, and that not the greatest.  If it were possible for a metallic currency to vary in amount as Bank medium varies, such variations would be limited in their effects, for they would not operate on a false and super-extended system of credit, nor would the evil be aggravated by the machinations of irresponsible Boards of Directors.  Paper money must be regarded as the foundation of the American Banking System, since the founders of Banks would not, if they were prevented from issuing paper money, accept of charters: but this paper money does less evil as an uncertain medium of commerce, than is produced by its being made the instrument by which the foundation is laid for a false and super-extended system of credit, and by its giving to corporations a power which enables them to exercise an influence on society nearly as great as that which was exercised by feudal lords in the middle ages.