SOUND CURRENCY. PUBLISHED SEMI-MONTHLY BY THE SOUND CURRENCY COMMITTEE OF THE REFORM CLUB. ENTERED AS SECOND-CLASS MATTER AT THE NEW YORK, N. Y., POST-OFFICE, MAY 21, 1895. Publication Office, No. 52 William St., New York City. Vol. II., No. 13. NEW YORK, JUNE 1, 1895. (SUBSCRIPTION, $1.00. Each number contains a special discussion of some Sound Currency question. "Our banks have accomplished their great object, of furnishing a sound currency— sound, equal and uniform, in consequence of its redemption at par, in the great central market of the country (Boston). The bills furnish a most convenient instrument for exchanging the various commodities of commerce and agriculture, and go into wide circulation. The system is admirable, and is, perhaps, without a parallel in the world; it leaves us nothing to desire, so far as an instrument of commerce is needed, within the circle of the Eastern States.”—Report of Bank Commissioners of Maine, 1842. * * * "Two banks in this State do not arrange for the redemption of their notes in Boston. Their bills will not circulate beyond a limited sphere. At fifty miles' distance they cannot be used without loss, while the bills of the other banks of the State circulate, it is said, without loss, to the farthest bound of the Union."-Report of the Bank Commissioners of Maine, 1848. "The Suffolk System,' though not recognized in our banking law, has proved to be the great safe-guard to the public. Whatever objections may exist to this system' in theory, its practical operation is to keep the circulation of our banks within the bounds of safety. No sound bank can have any well founded reason for refusing to redeem its bills in Boston, and a bank that is not sound cannot long do business under that system, and ceases to be in good credit when it is thrown out at the Suffolk.'"-Report of Bank Commissioners of Maine, December 31, 1857. BANK NOTE ISSUES IN COLONIAL NEW ENGLAND. In 1686 it is recorded that there was felt in Massachusetts a "scarcity of coyne,' to remedy which a private bank, established by persons of estate and known integrity and reputation, was authorized. This institution, however, was not long-lived. If it existed, as it very probably did, until the Revolution of 1689, it did not survive any longer.* In 1701 a committee of the General Court proposed the establishment of another bank; but this recommendation was negatived by the Council. The agitation did not die out, however, and in 1714 was renewed by “a numerous and respectable" body of citizens whose demand was for a private bank based on real estate. Perceiving that their project was likely to succeed unless opposed by more than the refusal of legislative sanction, the Province proceeded to assume to itself the banking functions in question. This was done through the issue of £50,000 in bills expressly put upon a banking basis. These were put in the hands of five trustees and by them loaned out at 5 per cent. interest on mortgage security, one-fifth of the principal as well as the interest to be paid annually. At the same time the Legislature forbade the emission of bills by the private bank in contemplation. But in spite of this it seems to have issued notes, some of which were still in circulation in 1719. Their circulation was forbidden by Parliament in 1720. After a start had thus been made, the Province continued from time to time to issue bills for purposes of loaning, the first issue being followed by £100,000 in 1716, another £50,000 in 1721, and £60,000 in 1728. In 1733 a number of merchants and others in Boston, in order to supply the deficiency of a medium of trade, engaged in a project to issue paper to the value of £110,000. These bills were redeemable in ten years with silver at 198. an ounce, then the common rate for Province paper. In spite of opposition to them on the part of the Governor and their failure to obtain the sanction of the Assembly, these merchants' notes were circulated, and accounted better by 33 per cent. than Province bills. t "Specie " In 1740 two private banks were projected-a "Land" Bank and a or "Silver" Bank. The first contemplated an issue of £150,000 in notes to be loaned on landed security, payable in twenty years by various articles of merchandise; the other an issue of £120,000, redeemable in fifteen years in silver at 208. an ounce, or gold pro rata. The latter was very similar to the issue of merchants' notes in 1733. Both these institutions gained considerable currency for their notes – though in each case without legislative sanction. The "Land" Bank was especially opposed by the government of the Colony, and the measures adopted to put it down involved the dismissal of civil and military officers who were connected with it or who encouraged the circulation of its bills. This opposition was galling to the advocates of the bank, who even threatened to rise in rebellion. In 1742 the institution was compelled by act of Parliament to call in its notes and wind up its affairs, and a right of action was given each holder of its notes against any member of the association, as a result of which many of the stockholders suffered severely. June 30, 1742, a committee, reporting on the affairs of the "Silver" Bank, stated that it had actually emitted £120,000 in notes, of which £69,361 12s. 6d. had been recalled, leaving still in circulation £50,638 78. 6d. These notes also fell under the prohibition of Parliament in that year, and the remainder were retired. In New Hampshire, also, about 1735, a company was formed which issued notes upon the plan of the Merchants' Association of Boston of two years earlier. "They concluded," says Mr. Felt, "to follow the example set by the association of our metropolis-who had issued notes on their own responsibility-but not to imitate their judicious provisions to hinder loss to the public. Hence our Legislature passed a law against the circulation of their bills on a penalty of heavy fine." A part of the section of the statute here referred to recites that sundry persons of New Hampshire have adopted measures the past year to issue "promissory notes of a most uncertain and sinking value, as they are payable in New Hampshire, Massachusetts, Connecticut and Rhode Island bills, or in silver, gold, or hemp, at the unknown price they may be at Portsmouth, in New Hampshire, Anno 1747, whereby his Majes'y's good subjects will be great sufferers, should they part with their goods and substance for them or accept of them in payment." "This was a banking speculation," continues the historian, "which promised much advantage to its promoters, but very little to the public. The larger amount of its paper, like all such currency of that day, in New England, reach d Boston-the great mart for the northern colonies. But placed under the ban of the law, its market was spoiled for this Province." In Rhode Island the principle of loan issues by the Colony inaugurated by Massachusetts was carried to an extreme. In 1715, there was emitted what was called the First Bank of £40,000. The bills were issued by the Colony and loaned out to inhabitants at five per cent. interest, for a period of ten years, on real estate security. Felt, Massachusetts Currency, p. 47. + Ibid., pp. 89, 107. In May, 1721, a second bank of £40,000 was issued and loaned out like the first, except that the period of the loan was but five years, which was afterward extended to thirteen years. Other banks continued to be issued from time to time.* In 1749 there were still outstanding £210,000 of the third to eighth banks, inclusive; and two other banks were issued later. In addition to these there were occasional issues for the relief of the treasury which were not loaned out as were the "banks." Commencing with an issue of £8,000 in 1709, the Colony of Connecticut had issued bills of credit from time to time for the purpose of meeting expenses; and in 1726 and 1728 measures for issuing bills for loan were favorably discussed, and that of 1728 defeated only by the veto of the Council. In 1730 an association was formed, to which the General Court. in 1732, granted a charter under the name of the "New London Society United for Trade and Commerce," which shortly after commenced the issue of notes for circulation, in imitation of colonial bills. Thereupon at a special session of the General Court, its charter was repealed, and an act passed declaring that any one who should "strike or emit any bills of credit of the nature or tenor of bills of credit on this government," or on any fund or credit of any person or persons, or of any society, to be used in lieu of money, should be subject to the same penalties as are prescribed for forging or counterfeiting bills of credit. For the relief of those who had come into possession of the bills of the company, the Colony authorized an emission of £30,000, and later £20,000 additional, to be loaned out either to those bringing in the notes of the New London Society or to others. In 1740 a further issue of £22,000 was loaned out. No other issues of Connecticut paper money seem to have been made for loan purposes. MASSACHUSETTS STATE BANK CURRENCY. On March 8, 1782, within two months after the Bank of North America opened its doors in Philadelphia, the State of Massachussetts also granted it a charter and guaranteed it a monopoly during the continuance of the War with Great Britain. The success of this institution led two years later to the organization of the Massachusetts Bank, incorporated by the Legislature February 7, 1784. This was the first local bank established in the State. and the second in the United States. Its capital was limited to $300,000 of which $253,500 had been paid in when it commenced business on July 5 of that year. In its original charter nothing was said as to the issue of notes; but an act passed March 9, 1792, prohibited the issue of notes below $5, and from January 1, 1793, the total amount of notes together with "money loaned by them by a credit on their books or otherwise was limited to "twice the amount of their capital stock in gold and silver, actually deposited in the bank and held to answer the demands against the same." In case of excess, the directors under whose administration it occurred were to be held individually liable.+ In 1792 the Union Bank of Boston was chartered, with a capital of $1,200,000, of which the State subscribed $400,000. Its issue of notes of a less denomination than $5 was prohibited, and the total debts due from the bank_limited to an amount not exceeding twice its capital, in addition to its deposits. Provision was included for legislative examinations, and the bank was made the depository of the State funds. It was also required to loan to the State at any time a sum not to exceed $100,000, at five per cent. interest. It might establish branches. Most of the charters subsequently granted contained substantially the same provisions, including in nearly every case that for a State subscription. In this way the State became quite largely interested in banking, holding, in 1812, according to Martin's Boston Stock Market, $1,000,000 of bank stock, which was at that time sold to meet some extraordinary expenses. In 1795 Massachusetts incorporated her third bank-the Nantucket-with a capital of $40,000; and very shortly after the Merrimac, at Newburyport, was established. Each of these banks was permitted to issue notes as small as $2. In 1799 a general law was enacted prohibiting banking by unincorporated companies, or the further issue, except by the Nantucket Bank, of notes of a less denomination than $5. In the early years of the century, however, the currency of New England became greatly deranged, notes of banks in other States of denominations as low as twenty-five cents being in circulation, and specie having practically disappeared. One consequence was that the early prohibition against notes below $5 in Massacusehits gave way, in 1805, to a permission to issue bills of $1, $2 and $3 to the amount in the case of each bank of five per cent. of its paid-up capital. This failing to *The more the issues the greater the depreciation, and the greater the demand for more bills. "Those who were involved in debt," says Mr. Potter, "borrowed of the Colony, on mortgage, a sufficient sum to pay their debts, as the bills were in many cases made a legal tender. When the time came for repayment to the Colony, a suflicient amount of the same bills could be procured at a very great depreciation." In the eighty years of its existence as a State bank, from 1784 to 1864, the whole amount of circulating notes issued by it was $4,674,177, of which the amount lost or not presented for redemption was $22,111 or not quite one-half of one per cent. meet the demand, the proportion was increased, in 1809, to fifteen per cent., reduced in 1812 to ten per cent., and again increased, in 1818, to twenty-five per cent., a which it remained during the continuance of the State banking system. Though each of the banks was required by its charter to furnish to State officials a statement showing the amount of capital, deposits, circulation, etc., once in six months, or once in twelve months, few seem to have paid any attention to these provisions. But in 1803 an act was passed requiring banks to make regular semi-annual returns of their condition to State fficials. And from this time on the statistical data as to banking in Massachusetts is fairly complete. These returns for 1803 show seven banks in operation, with a capital of $2,225,000, and a circulation of $1,565,000. During the two years 1803 and 1804 the growth of the banking system was very rapid, and by 1805 there were in operation sixteen banks, with a capital of $5,460,000. From this time until 1811 but one other bank was chartered. During the period from 1805 to 1810 the bank-note currency of New England was in a very unstable condition. The banks of Massachusetts, however, were protected by legislative safeguards which, while not freeing them entirely from the disorders of the times, left them in a condition far better than that of the other New England States. Yet it is stated that when the vaults of the Berkshire and Northampton banks were examined about 1809, one was found to possess only about thirty or forty dollars in specie, and the other absolutely nothing.* One effect of the crisis through which the banks then passed is apparent in the sudden contraction of their circulation from $1,613,684, in 1806 to $1,038,042 in 1808. One of the fruits of this crisis, which remained as part of the permanent banking system of the State, was the Act of 1809, imposing a penalty of two per cent. a month upon any bank which should refuse or neglect to pay its notes in specie on demand. In 1809 also, an act was passed requiring that, for the purpose of securing uniformity and guarding against counterfeiting, all bills of $5 and under should be printed from certain stereotype steel plates executed by a Boston engraver. In 1811 the first effects of the stimulus to banking arising from the expiration of the charter of the United States Bank were evidenced in the incorporation of the Merchants' Bank, with a capital of $200,000, and on the following day-June 27, 1811-the State Bank, with a capital of $3,000,000. This institution was evidently designed to occupy the place in relation to the State that the United States Bank was just then resigning as to the United States; but the plan did not meet with very flattering success, and the $1,500,000 additional capital for a State subscription, for which provision was made, was never actually subscribed. In 1817 its capital was reduced to $1,800,000. The charters of these two banks were, in most respects, taken as the pattern from which the charters of the banks incorporated in the next few years were modeled. No business was to be done until one-fifth of the capital was paid in and actually existed in the vaults in gold and silver, as found by examination of commissioners to be appointed for the purpose by the Governor, whose duty it should be not only to count the money, but to ascertain by the oath of the directors that it had been bona fide paid in by the subscribers as payments upon their subscriptions and was intended to remain as a part of the capital of the bank. In case of any loss or deficiency arising from mismanagement, the stockholders were to be individually liable in their private capacities, to an amount not exceeding the stock held by them; and upon the expiration of the charter the stockholders were to be liable in their private and individual capacities for the payment of all bills outstanding, in proportion to the stock held. In the case of these two banks, as in the case of the most of those which had preceded them, the circulation was virtually limited to twice the capital stock by the provision that the total debts owing either to or from the bank, exclusive of deposits should not exceed twice the amount of the capital. But commencing almost immediately thereafter, the limit of circulation imposed either upon the incorporation of new banks or on the re-incorporation of old ones-the charters of the most of which expired in 1812-was 150 per cent. of the capital actually paid up. In the case of three or four banks the old limitation of twice the capital seems to have been adhered to ; while in the case of several the total debts due from the bank-including deposits as well as circulation-were limited to 150 per cent. of the capital stock. Between 1822 and 1829 there were forty-five bank charters given. Of these, two of the earliest followed the charter of the State Bank of 1811, which limited the total debts of the bank, exclusive of deposits, to twice the amount of the capital, but imposed no other restriction upon circulation. Thirteen more, granted exclusively in 1824 and 1825, limited the circulation to 150 per cent. of the paid-up capital; twenty five granted in 1825, 1826, 1827 and 1828, fixed the limit at 100 per cent. of the paid-up capital; while four imposed a limit of only 50 per cent., though in two of these cases the limit was shortly after raised to 100 per cent. *Information as to the currency of these banks and the loss to holders is not accessible, further than the fact that in 1809 the notes of the Northampton Bank were quoted in Boston at a discount of 15 per cent.. and those of the Berkshire Bank at from 20 to 50 per cent discount. The former Bank seems afterward to have recovered its standing in some measure, and in 1813 its charter was revived. The Massachusetts and other New England banks did not suspend specie payments in 1814, at the time the other banks of the country did; but on the contrary continued to maintain a currency of recognized soundness. The result was to attract to New England a large amount of specie which had previously been circulating in other States. The sound currency and consequent low prices of New England constantly tended to draw the available specie from other sections, where an inflated currency and high prices had resulted from undue bank expansion. The following table shows the amount of specie held by Massachusetts banks during the years in question : The years 1825, 1826 and 1828 were especially prolific in bank charters, and in the four years 1825 to 1828 no less than thirty-six banks were incorporated, while fourteen others were authorized to increase their capital stock. The total, new capital authorized was $9,075,000. The necessity for drawing so much capital from other uses for investing in banking caused a severe pressure for cash at several periods, and as a result neither of the banks chartered in 1827 and only six of the fourteen chartered in 1828, went into operation, and of these six two failed within two years. in August, 1829, the Farmers' Bank of Belchertown, incorporated in 1825 with a capital of $100,000, failed through gross mismanagement. The Sutton Bank, with a capital of $100,000, and the Brighton Bank, with a capital of $150,000, both incorporated in 1828 and put in operation by means of fraudulent practices and oaths on the part of the directors, were soon after found to be in an unsafe condition and to be conducted in violation of nearly every provision of their charters. There is reason to believe that a cor iderable number of other banks were guilty of like misdoing. The charters of these three banks were repealed early in 1830.* The first comprehensive law of the State on the subject of banking is that of February 28, 1829, the provisions of which were to govern every bank which should thereafter be incorporated, or whose capital should be increased or charter extended. It provided that no new bank should go into operation until fifty per cent. of the capital had been actually paid in, in gold and silver, which should have been duly examined, counted, certified and sworn to, in the same manner as required by the charters of all the later banks. Loans to stockholders were prohibited until their subscriptions were fully paid in; and in no case was a bank to be permitted to loan more than fifty per cent. of its capital upon the pledge of its own stock. The limit to the amount of bills which a bank might circulate was fixed at 125 per cent, of the capital; and the amount of bills below $5 which might be issued, left as before-25 per cent. of the capital stock. The total amount of debts which a bank might owe, exclusive of its deposits, as also the total amount of debts due to it, was limited to twice the capital. In case the debts due from the bank should exceed the limit fixed, the directors under whose administration the excess was allowed were liable in their private capacities for the amount of the excess. In case of any loss or deficiency in the capital stock which should arise from the official mismanagement of the directors, the persons who were stockholders at the time of such mismanagement were liable, in their private and individual capacities, to the amount of the stock then held by them respectively. And upon the expiration of the charter of banking corporation the stockholders were individually liable for the redemption of all its bills outstanding in the proportion to the amount of stock which they might hold. Both of these provisions, however, dated from some of the earlier charters, and were already in force as to most of the banks then in operation. One practice which commenced soon after the Act of 1829, which prohibited any bank from issuing any "note, bill, check, draft, facility or certificate, payable at a future day or bearing interest," was that of issuing "deposit books" in order to evade this provision. At first given only in the case of actual loans to the bank, for which it was allowed before 1829 to issue its notes on interest, they came to be extensively issued during the pressure of 1834, instead of money, in discounting paper. In that year, however, the prohibition was so extended as unmistakably to cover cases of this character. In 1836 the law against post notes was so modified as to allow a bank to issue them, bearing not less than 4 per cent. interest, to the amount of 25 per cent. of its paid up-capital. This permission was of two years' duration only. In October, 1831, the charters of all the banks except the one already incorporated under the new law in 1829 were to expire. Sixty-two of them, with an aggregate capital of $18.845,000, were rechartered, each for a period of twenty years. One was not rechartered, and two of the others decided to close their concerns instead of continuing under the new charters. Besides the old banks fifteen new banks were *Bailey, "Banker's Magazine," September, 1876, p. 210. |