Part 720

"Michigan became a State in January, 1837. Almost the first act of her State legislature was the passage of a general banking law under which any ten or more freeholders of any county might organize themselves into a corporation for the transaction of banking business. Of the nominal capital of a bank only ten per cent. in specie was required to be paid when subscriptions to the stock were made, and twenty per cent. additional in specie when the bank began business. For the further security of the notes which were to be issued as currency, the stockholders were to give first mortgages upon real estate, to be estimated at its cash value by at least three county officers, the mortgages to be filed with the auditor-general of the State. A bank commissioner was appointed to superintend the organization of the banks, and to attest the legality of their proceedings to the auditor-general, who, upon receiving such attestation, was to deliver to the banks circulating notes amounting to two and a half times the capital certified to as having been paid in. This law was passed in obedience to a popular cry that the banking business had become an 'odious monopoly' that ought to be broken up. Its design was to 'introduce free competition into what was considered a profitable branch of business heretofore monopolized by a few favored corporations.' Anybody was to be given fair opportunities for entering the business on equal terms with everybody else. The act was passed in March, 1837, and the legislature adjourned till November 9 following. Before the latter date arrived, in fact before any banks had been organized under the law, a financial panic seized the whole country. An era of wild speculation reached a climax, the banks in all the principal cities of the country suspended specie payments, and State legislatures were called together to devise remedies to meet the situation. That of Michigan was convened in special session in June, and its remedy for the case of Michigan was to leave the general banking law in force, and to add to it full authority for banks organized under it to begin the business of issuing bills in a state of suspension—that is, to flood the State with an irredeemable currency, based upon thirty per cent. of specie and seventy per cent. of land mortgage bonds."

_Cheap-Money Experiments (from the Century Magazine), pages 75-77._

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"Wild lands that had been recently bought of the government at one dollar and twenty-five cents an acre were now valued at ten or twenty times that amount, and lots in villages that still existed only on paper had a worth for banking purposes only limited by the conscience of the officer who was to take the securities. Any ten freeholders of a county must be poor indeed if they could not give sufficient security to answer the purpose of the general banking law. The requirement of the payment of thirty per cent. of the capital stock in specie was more difficult to be complied with. But as the payment was to be made to the bank itself, the difficulty was gotten over in various ingenious ways, which the author of the general banking law could hardly have anticipated. In some cases, stock notes in terms payable in specie, or the certificates of individuals which stated—untruly—that the maker held a specified sum of specie for the bank, were counted as specie itself; in others, a small sum of specie was paid in and taken out, and the process repeated over and over until the aggregate of payments equaled the sum required; in still others, the specie with which one bank was organized was passed from town to town and made to answer the purposes of several. By the first day of January, 1838, articles of association for twenty-one banks had been filed, making, with the banks before in existence, an average of one to less than five thousand people. Some of them were absolutely without capital, and some were organized by scheming men in New York and elsewhere, who took the bills away with them to circulate abroad, putting out none at home. For some, locations as inaccessible as possible were selected, that the bills might not come back to plague the managers. The bank commissioners say in their report for 1838, of their journey for inspection: 'The singular spectacle was presented of the officers of the State seeking for banks in situations the most inaccessible and remote from trade, and finding at every step an increase of labor by the discovery of new and unknown organizations. Before they could be arrested the mischief was done: large issues were in circulation and no adequate remedy for the evil.' One bank was found housed in a saw-mill, and it was said with pardonable exaggeration in one of the public papers. 'Every village plat with a house, or even without a house, if it had a hollow stump to serve as a vault, was the site of a bank.' … The governor, when he delivered his annual message in January, 1838, still had confidence in the general banking law, which he said 'offered to all persons the privilege of banking under certain guards and restrictions,' and he declared that 'the principles upon which this law is based are certainly correct, destroying as they do the odious feature of a banking monopoly, and giving equal rights to all classes of the community.' … The aggregate amount of private indebtedness had by this time become enormous, and the pressure for payment was serious and disquieting. … The people must have relief; and what relief could be so certain or so speedy as more banks and more money? More banks therefore continued to be organized, and the paper current flowed out among the people in increasing volume. … At the beginning of 1839 the bank commissioners estimated that there were a million dollars of bills of insolvent banks in the hands of individuals and unavailable. Yet the governor, in his annual message delivered in January, found it a 'source of unfeigned gratification to be able to congratulate [the legislature] on the prosperous condition to which our rising commonwealth has attained.' … Then came stay laws, and laws to compel creditors to take lands at a valuation. They were doubtful in point of utility, and more than doubtful in point of morality and constitutionality. The federal bankrupt act of 1841 first brought substantial relief: it brought almost no dividends to creditors, but it relieved debtors from their crushing burdens and permitted them, sobered and in their right minds, to enter once more the fields of industry and activity. The extraordinary history of the attempt to break up an 'odious monopoly' in banking by making everybody a banker, and to create prosperity by unlimited issues of paper currency, was brought at length to a fit conclusion."

_T. M. Cooley, Michigan, chapter 13._

See WILD CAT BANKS.

MONEY AND BANKING: A. D. 1838. Free Banking Law of New York.

"On April 18th, 1838, the monopoly of banking under special charters, was brought to a close in the State of New York, by the passage of the act 'to authorize the business of Banking.' Under this law Associations for Banking purposes and Individual Bankers, were authorized to carry on the business of Banking, by establishing offices of deposit, discount and circulation. Subsequently a separate Department was organized at Albany, called 'The Bank Department,' with a Superintendent, who was charged with the supervision of all the banks in the State. Under this law institutions could be organized simply as banks of 'discount and deposit,' and might also add the issuing of a paper currency to circulate as money. At first the law provided that State and United States stocks for one-half, and bonds and mortgages for the other half, might be deposited as security for the circulating notes to be issued by Banks and individual Bankers. Upon a fair trial, however, it was found that when a bank failed, and the Bank Department was called upon to redeem the circulating notes of such bank, the mortgages could not be made available in time to meet the demand. … By an amendment of the law the receiving of mortgages as security for circulating notes was discontinued."

_E. G. Spaulding, One Hundred Years of Progress in the Business of Banking, page 48._

MONEY AND BANKING: A. D. 1844. The English Bank Charter Act.

"By an act of parliament passed in 1838, conferring certain privileges on the Bank of England, it was provided that the charter granted to that body should expire in 1855, but the power was reserved to the legislature, on giving six months' notice, to revise the charter ten years earlier. Availing themselves of this option, the government proposed a measure for regulating the entire monetary system of the country."

_W. C. Taylor, Life and Times of Sir Robert Peel, volume 3, chapter 7._

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"The growth of commerce, and in particular the establishment of numerous joint-stock banks had given a dangerous impulse to issues of paper money, which were not then restricted by law. Even the Bank of England did not observe any fixed proportion between the amount of notes which it issued and the amount of bullion which it kept in reserve. When introducing this subject to the House of Commons, Peel remarked that within the last twenty years there had been four periods when a contraction of issues had been necessary in order to maintain the convertibility of paper, and that in none of these had the Bank of England acted with vigour equal to the emergency. In the latest of these periods, from June of 1838 to June of 1839, the amount of bullion in the Bank had fallen to little more than £4,000,000, whilst the total of paper in circulation had risen to little less than £30,000,000. … Peel was not the first to devise the methods which he adopted. Mr. Jones Loyd, afterwards Lord Overstone, who impressed the learned with his tracts and the vulgar with his riches, had advised the principal changes in the law relating to the issue of paper money which Peel effected by the Bank Charter Act. These changes were three in number. The first was to separate totally the two departments of the Bank of England, the banking department and the issue department. The banking department was left to be managed as best the wisdom of the directors could devise for the profit of the shareholders. The issue department was placed under regulations which deprived the Bank of any discretion in its management, and may almost be said to have made it a department of the State. The second innovation was to limit the issue of paper by the Bank of England to an amount proportioned to the value of its assets. The Bank was allowed to issue notes to the amount of £14,000,000 against Government securities in its possession. The Government owed the Bank a debt of £11,000,000, besides which the Bank held Exchequer Bills. But the amount over £14,000,000 which the Bank could issue was not, henceforwards, to be more than the equivalent of the bullion in its possession. By this means it was made certain that the Bank would be able to give coin for any of its notes which might be presented to it. The third innovation was to limit the issues of the country banks. The power of issuing notes was denied to any private or joint-stock banks founded after the date of the Act. It was recognized in those banks which already possessed it, but limited to a total sum of £8,500,000, the average quantity of such notes which had been in circulation during the years immediately preceding. It was provided that if any of the banks which retained this privilege should cease to exist or to issue notes, the Bank of England should be entitled to increase its note circulation by a sum equal to two-thirds of the amount of the former issues of the bank which ceased to issue paper. The Bank of England was required in this contingency to augment the reserve fund. By Acts passed in the succeeding year, the principles of the English Bank Charter Act were applied to Scotland and Ireland, with such modifications as the peculiar circumstances of those kingdoms required. The Bank Charter Act has ever since been the subject of voluminous and contradictory criticism, both by political economists and by men of business."

_F. C. Montague, Life of Sir Robert Peel, chapter 8._

ALSO IN: _Bonamy Price, The Bank Charter Act of 1844 (Fraser's Magazine, June, 1865)._

_W. C. Taylor, Life and Times of Sir Robert Peel, volume 3, chapter 7._

MONEY AND BANKING: A. D. 1848-1893. Production of the Precious Metals in the last half-century. The Silver Question in the United States.

"The total (estimated) stock of gold in the world in 1848, was £560,000,000. As for the annual production, it had varied considerably since the beginning of the century [from £3,000,000 to £8,000,000]. Such was the state of things immediately preceding 1848. In that year the Californian discoveries took place, and these were followed by the discoveries in Australia in 1851.

See CALIFORNIA: A. D. 1848-1849; and AUSTRALIA: A. D. 1839-1855.

For these three years the annual average production is set down by the Economist at £9,000,000, but from this date the production suddenly rose to, for 1852, £27,000.000, and continued to rise till 1856, when it attained its maximum of £32,250,000. At this stage a decline in the returns occurred, the lowest point reached being in 1860, when they fell to £18,683,000, but from this they rose again, and for the last ten years [before 1873] have maintained an average of about £20,500,000; the returns for the year 1871 being £20,811,000. The total amount of gold added to the world's stock by this twenty years' production has been about £500,000,000, an amount nearly equal to that existing in the world at the date of the discoveries: in other words, the stock of gold in the world has been nearly doubled since that time."

_J. E. Cairnes, Essays in Political Economy, pages 160-161._

"The yearly average of gold production in the twenty-five years from 1851-75 was $127,000,000. The yearly average product of silver for the same period was $51,000,000. The average annual product of gold for the fifteen years from 1876 to 1890 declined to $108,000,000; a minus of 15 per cent. The average annual product of silver for the same period increased to $116,000,000; a plus of 127 per cent. There is the whole silver question."

_L. R. Ehrich, The Question of Silver, page 21._

"From 1793—the date of the first issue of silver coin by the United States—to 1834 the silver and the gold dollar were alike authorized to be received as legal tender in payment of debt, but silver alone circulated. Subsequently, however, silver was not used, except in fractional payments, or, since 1853, as a subsidiary coin. The silver coin, as a coin of circulation, had become obsolete. The reason why, prior to 1834, payments were made exclusively in silver, and subsequently to that date in gold, is found in the fact that prior to the legislation of 1834 … the standard silver coins were relatively the cheaper, and consequently circulated to the exclusion of the gold; while during the later period the standard gold coins were the cheaper, circulating to the exclusion of the silver. The Coinage Act of 1873, by which the coinage of the silver dollar was discontinued, became a law on February 12th of that year. The act of February 28, 1878, which passed Congress by a two-thirds vote over the veto of President Hayes, again provided for the coinage of a silver dollar of 412.5 grains, the silver bullion to be purchased at the market price by the Government, and the amount so purchased and coined not to be less than two millions of dollars per month. During the debate on this bill the charge was repeatedly made, in and out of Congress, that the previous act of 1873, discontinuing the free coinage of the silver dollar, was passed surreptitiously. {2218} This statement has no foundation in fact. The report of the writer, who was then Deputy Comptroller of the Currency, transmitted to Congress in 1870 by the Secretary, three times distinctly stated that the bill accompanying it proposed to discontinue the issue of the silver dollar-piece. Various experts, to whom it had been submitted, approved this feature of the bill, and their opinions were printed by order of Congress."

_J. J. Knox, United States Notes, chapter 10._

"The bill of 1878, generally spoken of as the 'Bland' bill, directed the secretary of the treasury to purchase not less than two million nor more than four million dollars' worth of silver bullion per month, to coin it into silver dollars, said silver dollars to be full legal tender at 'their nominal value.' Also, that the holder of ten or more of these silver dollars could exchange them for silver certificates, said certificates being 'receivable for customs, taxes, and all public dues.' The bill was pushed and passed by the efforts, principally, of the greenback inflationists and the representatives of the silver States. … Since 1878 [to 1891], 405,000,000 silver dollars have been coined. Of these 348,000,000 are still lying in the treasury vaults. No comment is needed. The Bland-Allison act did not hold up silver. In 1870 it was worth $1.12 an ounce, in 1880 $1.14, '81 $1.13, '82 $1.13, '83 $1.11, '86 99 cents, until in '89 it reached 93½ cents an ounce. That is, in 1880 the commercial ratio was 22:1 and the coin value of the Bland-Allison silver dollar was 72 cents. In March, 1800, a bill was reported to the House by the committee of 'coinage, weights and measures,' based on a plan proposed by Secretary Windom. … The bill passed the House. The Senate passed it with an amendment making provision for free and unlimited coinage. It finally went to a conference committee which reported the bill that became a law, July 14, 1890. This bill directs the secretary of the treasury to purchase four and one-half million ounces of silver a month at the market price, to give legal tender treasury notes therefor, said notes being redeemable in gold or silver coin at the option of the government, 'it being the established policy of the United States to maintain the two metals on a parity with each other upon the present legal ratio.' It was believed that this bill would raise the price of silver. … To-day [December 8, 1891] the silver in our dollar is actually worth 73 cents."

_L. R. Ehrich, The Question of Silver, pages 21-25._

See, also, UNITED STATES OF AMERICA: A. D. 1873, 1878, and 1890-1893.

In the summer of 1893, a financial crisis, produced in the judgment of the best informed by the operation of the silver-purchase law of 1890 (known commonly as the Sherman Act) became so serious that President Cleveland called a special session of Congress to deal with it. In his Message to Congress, at the opening of its session, the President said: "With plenteous crops, with abundant promise of remunerative production and manufacture, with unusual invitation to safe investment, and with satisfactory assurance to business enterprise, suddenly financial fear and distrust have sprung up on every side. Numerous moneyed institutions have suspended because abundant assets were not immediately available to meet the demands of the frightened depositors. Surviving corporations and individuals are content to keep in hand the money they are usually anxious to loan, and those engaged in legitimate business are surprised to find that the securities they offer for loans, though heretofore satisfactory, are no longer accepted. Values supposed to be fixed are fast becoming conjectural, and loss and failure have involved every branch of business. I believe these things are principally chargeable to congressional legislation touching the purchase and coinage of silver by the General Government. This legislation is embodied in a statute passed on the 14th day of July, 1890, which was the culmination of much agitation on the subject involved, and which may be considered a truce, after a long struggle between the advocates of free silver coinage and those intending to be more conservative." A bill to repeal the act of July 14, 1890 (the Sherman law, so called), was passed by both houses and received the President's signature, Nov. 1, 1893.

MONEY AND BANKING: A. D. 1853-1874. The Latin Union and the Silver Question.