Banks and Politics in America, written by Bray Hammond in the 1950s.

Since the FinancialCrisisInquiryReport blamed the Federal Reserve for not acting to prick the 2000s housing bubble, how politically at-risk has the Fed been? Given that the US had two central banks before the Fed, it seems likely -- prima facie at least -- that the Fed's concerns have merit.

Hammond details the rise and fall of the second central bank, where it was killed by an alliance of anti-bank conservatives and progressives with bankers who wanted de-regulation and increased profits which would accrue to the commercial banks which replaced the central bank.

Statements by the United States Treasury and by the Federal Reserve are always phrased in harmony with easy-money gospel no matter which way their action tends. This accords with the fact that current Treasury and Federal Reserve action in the field of money and credit is never condemned popularly except when it is restrictive. Now and then, however, when enough time has elapsed, it may be criticized for not having been restrictive in the past. It is easy to commend restraint after it has become too late to exercise it.

There is enough eerie similarity between the two episodes that the current Fed seems to have correctly played the political game. And since Congress has not yet updated the Fed's mandate to include pricking financial bubbles, Congress is thereby tacitly condoning the Fed's inaction while also implicitly admitting its guilt.

Benjamin Franklin conjectured after the Revolution that for one artisan or merchant in America there were at least a hundred farmers. The popular economic precepts were those of frugality and avoidance of debt.

At the same time that British authorities were still governed by the conservative spirit of the Bubble Act, Hamilton and the Federalists pushed the program of enterprise vigorously and creatively forward. The effect upon the economy was spectacular. "A people," observed Henry Adams, "which had in 1787 been indifferent or hostile to roads, banks, funded debt, and nationality, had become in 1815 habituated to ideas and machinery of the sort on a great scale."

In its absence, a domestic medium of exchange was required, and even more a legal tender, for the law unrealistically assumed the existence of silver and gold, which accordingly had to be produced for the settlement of taxes and contracts. ...
Trade was languishing because "there is not money to buy with." Moreover there were lawsuits and writs against "good honest housekeepers" who had property enough and the will to pay their debts but could not raise the money-the reason being that there was none. In several colonies land and commodities were made legal tender in the absence of specie, but that involved disputes about values and was generally unsatisfactory. The development of the economy tended to make the problem worse, for development re- quired imports, and the imports put specie more in demand than ever. It was this dearth of specie, the only legal tender, that in 1786 drove the Shays rebels in Massachusetts to demand a medium with which they could protect their farms from tax sales-though the dearth at that time coincided with no unusual surplus of imports. The difficulty was general and persisted into the 19th century.

This is the view, commonly elaborated by writers around 1900, which seems still to govern what many if not most people think on the subject. But it involves serious difficulties in fact and reasoning. It avoids the basic fact that the 18th century Americans, being with- out specie to serve as a medium of exchange and legal tender, had to provide something. ...
It ignores the fact that Andrew Jackson and the agrarians of his day were fanatically opposed to paper money, whether issued by banks or by government. ...
It conflicts with the fact that the dominant and influen- tial debtors have long been speculators and business men rather than farmers, and with the fact that the eventual multiplicity of banks and abundance of credit characteristic of the 19th and 20th century American economy are the result of an aggressive and per- sistent demand by these business men and speculators. The conven- tional theory of an agrarian "craze" for easy money is tenable in the United States, and also in Canada, for a relatively recent period only; and its attribution to the 18th century is a projection of ideas backward where they have no place.

Rhode Island was generally considered the most reprobate of the colonies. ...
These unfriendly words do not fit the paper money craze of poor farmers but the sophisticated monetary practice of an intelligent and energetic business community which not only fomented com- merce and developed markets but obtained the capital for its enter- prise, without interest, from its envious and conservative neighbors. Rhode Island's monetary practice was as characteristic of its success as were its ships. No other colony appears to have achieved so much or exemplified so much in monetary policy. But that is perhaps because no other was so largely commercial. The enterprising ma- jority in Rhode Island was an enterprising minority elsewhere -- inclined the same way but not so powerful.

A generation later, Adam Smith wrote that "£100 sterling was occasionally considered as equivalent in some of the colonies to £130 and in others to so great a sum as £1,100...." These things Parliament knew, for she was being constantly reminded of them by exasperated creditors and colonial administrators. But what could she do? It seemed impossible to solve the problem without abandoning basic commitments on commercial and colonial policy; nor on the other hand could any prohibition of paper money be effectual without interfering with the common law right to borrow. For paper money was essentially an evidence of debt. Such inter- ference, by a commercial people, was unlikely.

In 1740 John Colman, the Boston merchant whom I have quoted, organized one of those associations called "banks," whose bills of credit, lent to members of the association on the security of real estate, were not redeemable in specie.

Thirteen years later, 1764, Parliament passed the more general "act to prevent Paper Bills of Credit, hereafter to be issued in any of his Majesty's Colonies or Plantations in America, from being declared to be a legal Tender in Payments of Money." ...
In 1773 in "an Act to explain and amend" the 1764 measure, Parliament confirmed and enlarged the freedom of the American colonies to issue paper money. It did so in consideration of "the Want of Gold and Silver Currency" in the colonies, in consideration of "the publick Advantage," and "in Justice to those Persons who may have Demands upon the publick Treasuries in the said Colonies for Services performed." The money might be issued in the form of "Certificates, Notes, Bills, or Debentures" and made "a legal Tender to the publick Treasuries" in payment of taxes and other dues. But this concession came too late.

By 1790, accordingly, eight years after organization of the Bank of North America, four banks were in business, or in train to be, in four leading cities-Philadelphia, New York, Boston, and Balti- more. Three of the first four banks were long lived. The Bank of North America continued in business from 1782 to 1929, as I have said. The Bank of New York has continued in business uninter- ruptedly since 1784; it was the second bank established in North America and is now the oldest. The Massachusetts Bank took a national charter in 1865 and was absorbed in 1903 by the First National Bank of Boston. The Bank of Maryland continued in business forty-four years and failed in 1834.

American banking differed also from Old World banking in that it originated in a want of capital, not in a surplus of it. For European economies were already mature when their first banks arose, and they possessed age-old accumulations of wealth upon which those banks could rest. In England, stores of coin and plate had been lodged with goldsmiths, and the goldsmiths had turned bankers to find a use for the treasure. Nothing of the sort happened in America, where wealth was in hope more than in possession, and the need of homely necessities was so great that stocks of gold and silver could rarely be retained even when they could be assembled.

A hundred and twenty-five years later, in the panic of 1907, a rural bank in Iowa, of which I was assistant cashier, resorted to a similar strata- gem. The cashier and I, who constituted the entire office force, fetched all our bags of coin from the vault and piled them where the customers could not help seeing them. Subsidiary coin was legal tender for only very small amounts in those days, and the value of the lot was inconsiderable-ten of the bags contained only 1,000 pennies each-but the display was im- pressive, and we kept our doors open. We found it still more effectual, how- ever, to conceal our paper currency and offer payment to uneasy depositors in silver. Even the partisans of William Jennings Bryan balked at that; I remember a free-silver enthusiast, a Civil War veteran, who angrily refused ninety silver dollars, the amount of his quarterly pension, and stalked incon- sistently and angrily from the bank with his check uncashed-which, of course, suited us exactly. It will be observed that we pretended, unlike the Bank of North America, to be worse off than we were in fact-concealing our relatively large amount of paper currency and displaying our relatively small amount of coin.

"Discounts," said the rules of the Bank of New York in 1784, "will be done on Thursday in every week, and bills and notes brought for discount must be left at the bank on Wednesday morning, under a sealed cover, directed to William Seton, Cashier. The rate of discount is at present fixed at six per cent per annum; but no dis- count will be made for longer than thirty days, nor will any note or bill be discounted to pay a former one." This followed the practice in Philadelphia, where Thomas Willing said they discounted "only for thirty days"; though, according to Robert Morris, "sometimes through tenderness" a credit was prolonged. The rules of the Massachusetts Bank, which would "not be deviated from in the smallest instance nor on any pretence whatever," permitted discounts for thirty or sixty days only, depending on the security, with no privi- lege of renewal on any terms. The directors were convinced that the existence of the bank depended "on the Punctual payment of Discounts and all Monies at the Time they become due ... ," and the names of delinquent debtors to the bank were posted conspic- uously. That the strictness of these rules was a reality seems borne out by the circumstances. Lending was not left to bank officers, and it was not possible to walk into the bank, ask an officer for a loan, and get it. Lending was the responsibility of the directors, who were merchants advancing their own money, as they felt, to other mer- chants.

Almost by definition bank credit was mercantile. From the nature of their business, merchants had among themselves both the readiest means of supplying credit and the most attractive uses for it. No other economic group possessed so much cash to lend or could repay borrowings with such certainty in so short a time. This condition of itself put them on the threshold of banking and made them the first to engage in it. Agriculture had a potential demand for credit but no comparable means of supplying it or of making competitive offers for what was obtainable; and the country was as yet without the manufactures, the transportation systems, and the manifold services that were later to diversify its economic activity and mul- tiply the uses to which credit might be put. Hence banking germi- nated and rooted itself in the one place that at the time it could - in commerce.

What I have seen indicate that deposits sometimes exceeded circulation and that circulation sometimes exceeded deposits. The variations are due as much to place as to time, apparently, and depend considerably on the presence or absence of government de- posits. Some banks, especially in commercial centers and particu- larly in New York, seem to have preferred from a very early date to cultivate deposits while others preferred to cultivate note circula- tion. These tendencies developed by the 1830's and 1840's into marked specialization.

As soon as there was a plurality of banks in any community, it became evident at once how indissolubly banks are 'bound to one another with respect to lending and reserves. Every time it lent, a bank in effect put its competitors in possession of claims against it which enabled them to demand so much of its reserves. Banks raided one another rapaciously. This was stupid, and after some sixty years or so, when banks in Philadelphia tried to force the banks of New York to close, it was given up.

Alexander Hamilton himself fore- shadowed what would happen. In 1783 he said that authority to emit paper money was "a resource which though useful in the infancy of this country and indispensable in the commencement of the Revolution, ought not to continue a formal part of the Consti- tution, nor ever hereafter to be employed, being in its nature preg- nant with abuses." ...
it was sought in the 18th century to give substance and worth to the money to be issued by the new and untried government, it was stipulated that that money should comprise gold (and silver), so much were the precious metals esteemed above the word of political authority. But in the 20th century money is become a creature of government, political authority having supplanted, in the domestic sphere, the place the precious metals primitively held.

Thus the principles appealed to in one constitutional issue after another and at last in the Civil War got their first and clearest statement in the dispute of 1791 over the Bank recommended by Alexander Hamilton. The controversy demonstrated at the very outset that the Constitution had not displaced rival principles or reconciled them but had become their dialectical arena. Although it was not a popular document, it became equally accepted by both sides as soon as it was ratified; and the original differences about its wisdom gave way to differences as to how it should be interpreted and applied. Alexander Hamilton had been disgusted because it did not abolish the individual states outright and consolidate them at once into a single new sovereignty; but he had furthered it with all his might, nevertheless, and purposed now to make it, deficient as it was, the start for the national government he thought necessary. Thomas Jefferson, on the other hand, purposed to make it a bul- wark against encroachments by the central government upon the popular sovereignties of the states and the reserved liberties of the people. Mr Madison, its chief artificer, and the associate of Alex- ander Hamilton in the Federalist papers which had brilliantly ad- vocated it, shrank from Hamilton's radical course and joined Jeffer- son in promoting the doctrine that the Constitution was a pact between sovereignties which had established a central government logically inferior to themselves and possessed of only those powers specifically delegated to it. Hamilton made the Constitution a ple- nary charter for a national government to which the states would be ineluctably subordinated. Jefferson and Madison made it a barrier against that development. To Hamilton, the Constitution was an open door; to Jefferson and Madison, it was one that had been shut.

In 1791 American business had been concerned mainly with foreign commerce; by 1816 it was concerned mainly with a greatly diversified internal economy. The change had been impelled chiefly by the abundance of native resources to be developed, but it was hastened and intensified by the Napoleonic wars, which for two decades or so kept Britain and France at one another's throats and involved all Europe besides, driving Britain to strike at France's trade with the United States and France to strike at Britain's. American seaborne commerce was battered from both sides. War with either or both belligerents overhung the country for years and broke out at last, with Britain, in 1812. It ended in 1814. By then the dominant interests of American business had been turned de- cisively toward the domestic field; and the potential demand for bank credit had been enlarged both in volume and in variety.

Bribes were effected by arranging for legislators to acquire stock at a low price and then have it taken off their hands at a premium

In Congress during the debates of the next year or so on rechartering the Bank of the United States, Representative William A. Burwell of Virginia told how the Rhode Island bank (The Farmers Exchange Bank) had "issued notes to the amount of $800,000 upon a capital of $45." Representa- tive Joseph Desha of Kentucky put it less delicately: the bank, he said, "when it was ripped up, had but some odds of forty dollars in its vaults." The episode was typical of banking, people believed, and twenty-five years later William Gouge in his widely read de- nunciation of banks retold the story as awful evidence of what cunning men could do when they had a corporate charter.

In Windsor County, Vermont, in 1808 an indictment was sought against a man who held notes of the Vermont State Bank and demanded specie for them. It alleged that Jireh Durkee, of Boston, "being an evil-disposed person and not minding to get his living by truth and honest labor but contriving how he might injuriously obtain ... money to support his idle and profligate way of life and diminish and destroy the resources of the state of Vermont and rendering it difficult and impossible for the good citizens thereof to obtain money," had presented $9,000 of the bank's notes at the Woodstock office and obliged the bank to pay them. The effect of such action, which would enable Durkee "to realize a filthy gain," said the complaint, was to prevent the bank from making loans to "good citizens."

In 1814 the New England Bank, Boston, incorporated the year before, arranged to receive the notes of out-of-town banks and charge the depositors only the actual cost of collection. Something promptly occurred which shows that resistance to note redemption was not merely a provincial affair. The bank had sent its agent to New York with about $140,000 of notes of New York banks. Silver coin in that amount had been collected in payment by the agent, had been loaded in three wagons, and had started on its way to Boston. The wagons had not gone far when they were halted by order of the federal Collector of Customs for New York; and the money was carried back by force and placed in the vaults of the Bank of the Manhattan Company, of which the Collector was a director. The action was protested by the New England Bank's agent, but the Collector' declined to alter his purpose, alleging It suspicion that the coin was on its way to Canada, with which, since it was British, the States were then at war. In Boston, however, it was believed that his behavior "was chiefly actuated by dislike to the frequency with which the New England Bank dispatched large sums of the New York bills, which flooded 'Massachusetts, to be redeemed." The Massachusetts authorities laid the matter before the President of the United States, James Madison, "with the expression of their judgment that the collector had committed an outrage on one of their corporations, ought to relinquish the de- posit, and be dismissed from his office." Their effort "so far succeeded as to have the money restored."

The authorities in British North America (Canada now) regularly drew bills of exchange on London and sold them in New York for specie with which to meet administrative and military expenses. In the fall of 1810 Mr Astor (John Jacob Astor) purchased £50,000 sterling of such bills and drew $200,000 in specie from the New York office of the federal Bank (the Bank of the United States) to be sent north. Something he did or failed to do in obtaining the specie angered the Bank's directors, and they closed his account. This in turn angered him and he resolved to close the Bank.

In 1845 the defense of a counterfeiter in New York was that the statute authorizing the establishment of the bank whose notes he had counterfeited was unconstitutional, that the bank itself had therefore no legal existence, and that he therefore had committed no crime. The courts upheld him. DeBow v. The People.

The Philadelphia business was acquired and continued by Stephen Girard, who when the charter expired was the Bank's largest stock- holder, though not wholly as a matter of his free choice. Mr Girard had had upwards of $1,000,000 of his funds in Europe, which about 1810, in alarm at the way Bonaparte's empire was expanding, he began transferring from the continent to England and thence, concerned about Britain's ability to withstand Bonaparte, to the United States. So large a flight of capital had to be accomplished by such means as availed, and these were in bonds of the states, in stock of the Bank, and in merchandise. About half the total amount, more than $600,000, Mr Girard brought over in goods, and the remainder he exchanged through the Barings for bonds and stocks then held abroad. He acquired thus nearly $400,000 of Bank (the Bank of the United States) stock. While this was going forward it had become plain that the Bank's federal charter would not be renewed and that neither could a charter be obtained from Pennsylvania. Mr Girard was evidently uneasy about his growing investment in the Bank, but after some hesitancy and consultation with the Bank's directors and officers he continued his acquisitions. By December 1811 he seems to have decided to transform his investment into n local bnnk of his own, and in May 1812 he bought the Philadelphia office of the Bank of the United States virtually on the hoof, acquiring all at once the staff, including particularly the cashier, George Simpson, and the building, but only part of the assets. The new concern was the Bank of Stephen Girard, wholly owned by himself unincorporated. Yet visually it was the old Bank of the United States unchanged: customers found themselves in the same handsome room and dealing with the same staff.

Thus spoke men, in Savannah as in Baltimore and in Cleveland, "possessing spirits fraught with enterprise." One is uncertain which to admire the more, their effrontery or their enthusiasm. They be- lieved in America as a place to get rich, and they recognized the magic possibilities of inflating the supply of money by avoiding cash settlements. Let everyone honor everyone else's promises, nor threaten the beautiful structure of unlimited credit by deflationary demands that the promises be redeemed. Let the economy float off the ground in a trance of mutual confidence. It was a monetary burlesque of Pauline theology, faith taking the place of works.

Later generations that contemplate an America which is miracu- lously productive in a myriad of ways, from sea to sea, can under- stand only with an effort the terrible cost to their progenitors of settling and improving it. Amos Kendall, who arrived in Kentucky in 1814 from New England and who became fifteen years later one of Andrew Jackson's closest advisers, describes in his autobiography the situation in which in 1809 he had found his older brother and sister, who were pioneering in northern Vermont, where they had purchased tracts of wild land on credit, built small log cabins, and made clearings. Kendall was satisfied "that they could never meet the payments for their land and were making improvements upon it for the benefit of others." So it turned out. "In the winter of 1813, his brother Zebedee abandoned his place, giving up all his improve- ments, and returned to his father's with little else than a wife and five children. In August of the same year his sister, having also five children, arrived at her father's.... Her husband, finding himself in painful pecuniary straits, had enlisted in the army of the United States and left her."

There, like the majority of his countrymen, leaving aside only the Transcendeptalists and genuine agrarians, he could enjoy himself, as he (Nicholas Biddle) facetiously told his young lady,

"And renouncing illusions, find peace and content
In that simplest, sublimest of truths -- six per cent."

"In January 1823," Mr Biddle wrote, "we began without one dollar in our pockets, and we have been trying ever since to accumulate a fund in reserve." Dividends were stabilized at six per cent from 1826 to 1828, and then at seven per cent, where they remained. This by contemporary standards was low and the stockholders were not satisfied

"From about J800 to about 1860," in the opinion of Professor Jacob Viner, "the Bank of England almost continuously displayed an inexcusable degree of incompetence or unwillingness to fulfill the requirements which could reasonably be demanded of a central bank." Perhaps the Bank of England owed its survival somewhat to its shirking the responsibility and to its reticence, for the interests that wished to annihilate it differed little from their American counterparts; and certainly Mr Biddle's ex- plicit acceptance and efficient discharge of the regulatory function of the Bank of the United States provoked the forces of speculation and enterprise to seek its destruction

Socially, the Jacksonian revolution signified that a nation of democrats was tired of being governed, however well, by gentlemen from Virginia and Massachusetts. As Professor Sumner observed, what seems to have enchanted people with General Jackson when he became a candidate for President was not any principles or policies he advocated but his breaches of decorum, real or alleged.' Eco- nomically, the revolution signified that a nation of potential money- makers could not abide traditionary, conservative limitations on business enterprise, particularly by capitalists in Philadelphia. The Jacksonian revolution was a consequence of the Industrial Revolu- tion and of a farm-born people's realization that now anyone in America could get rich and through his own efforts, if he had a fair chance.

In 1813, while still at Dartmouth, Amos Kendall had submitted some poetry he had written to the Port Folio in Philadelphia, whose editors had offered a prize. He failed even of mention. He was naturally peevish about it; he thought the winning pieces were miserable. So do I, but they were not worse than his. If he later recognized in the president of the Bank of the United States the editor who had rejected his work, I can imagine it spurred the politician to avenge the poet; and in the end the smiling, insuf- ferable aristocrat in Philadelphia who lorded it over borrowers and lenders got punished also for lording it over poor versifiers.

Though it (Charles River Bridge vs. Warren Bridge) seemed at the moment a blow at corporate rights in the sense that it refused to preserve a monopoly of bridge traffic an- ciently conferred, its beneficiary was not an individual or several individuals but a new and rival corporation competing with the old. It therefore further familiarized people with corporate competition as well as corporate monopoly and definitely helped the corporation replace the individual as an agent of free enterprise in the economy. Mr Taney, I am sure, intended no such eventuality. Nor, I am sure, did Justice Story and Daniel Webster, by insisting on the preserva- tion of the rights long vested in the original bridge company, intend that future material progress be shackled to 17th century grants appropriate to 17th century life. But Taney just as surely was on the side of laisser faire and rampant business individualism as Story and Webster were on the side of economic and technical conserva- tism. He was not attacking vested rights per se, or corporate rights, or property rights, or wealth, or capitalism, but propounding a new democratic concept that within his own lifetime was to be more typical of capitalism than was the clumsy, antediluvian monopoly that he refused to sanction.

And so of his interposition in banking-to say that it was agrarian and anti-capitalistic is absurd. By siding with the state banks against the federal Bank, he simply contributed to a new and democratic concept then current, which in New York in 1838 achieved what at the time seemed one of the notable glories of the age of J ackson-the- authorization of "free banking."

Of his election to the Presidency Professor Richard Hofstadter writcs that it was not "a mandate for economic reform; no financial changes, no cru- sades against the national Bank, were promised.... Up to the time of his inauguration Jackson had contributed neither a thought nor a deed to the democratic movement, and he was elected without a platform.

The Jacksonians were anything but rash. Once decided that they should fight the Bank rather than wed with it, they developed their attack patiently, experimentally, shrewdly, probing the aristocratic victim and teasing public interest into action. The President himself took no unnecessary chances, but those he had to take he took with- out fear. He was a man of "sagacious temerity," in the words of one of his contemporaries. His attack on the Bank was like his careful slaying of Charles Dickinson in a duel thirty years before. His opponent had been formidable-much younger than he and an expert marksman, which he himself was not. Each was to have one shot. Jackson and his second had gone over the prospects carefully and decided it would be best to wait for Dickinson to fire first. For though Jackson would probably be hit, "he counted on the resource of his will to sustain him until he could aim deliberately and shoot to kill, if it were the last act of his life." So he awaited his adver- sary's fire and, as he had he was hit. But his coat, but- toned loosely over his breast, as was his wont, had presented a deceptive silhouette, and the ball had missed his heart. He concealed his hurt and concentrated on his helpless enemy, whose life he now could take. "He ·stood glowering at him for an instant, and then his long pistol arm came slowly to a horizontal position." He aimed carefully and pulled the trigger. But the hammer stopped at half- cock. The seconds consulted while the principals stood, and Jackson was allowed to try again. Once more he took deliberate aim, his victim waiting in evident horror, and fired. Dickinson fell, mortally hurt.

It is obvious that New York, besides gaining most from a success- ful attack on the Bank, risked the least; for it did not need, as the South and West did, the capital brought in by the Bank's branches. The West's aversion for the federal Bank was like the nationalistic resentment in.a 20th century under-developed economy which wants and needs imported capital but growls at the "imperialism" of the country that is expected to provide it. The western enemies of the Bank were moved by complex psychological and political considera- tions-including past distress and present dependence-while its New York enemies were moved, much more simply, by covetousness and rivalry. This was the decisive new ingredient provided in the Jacksonian attack. The agrarian prejudice had been alive since 1791 and most dangerous to the Bank a few years past during its critical days and the distress in the Ohio valley. The state bank opposition was almost as old as 'the agrarian. And the relative im- portance of the two varied with the decline of agrarianism and the growth of enterprise. New York, now the center of enterprise, added to the long-lived antagonism a hearty and acute self-interest. That Andrew Jackson proved to be the instrument of her interest was the happy result of Mr Van Buren's skill and devotion.

It goes without saying that Andrew Jackson himself did not understand what was happening. He had started with a vague, agrarian prejudice against banking which on occasion cropped up throughout his life but never led him to deny himself the service of banks or the friendship and support of bankers.

Popular propaganda has acquired more general and familiar use since the age of Jackson, but none more skillful. With the exception of a few persons who, with John Pendleton Kennedy, could ap- preciate the art of Amos Kendall and his associates, Americans were hypnotized by the Jacksonian propaganda, and Andrew Jackson himself-its main object-got guidance and inspiration from it. That many historians still follow the Jacksonian formula points to its effectiveness. In the words of one, for example, "The poor men of the East and of the West were asserting the power of their mass strength and, putting Andrew Jackson in the presidency, were smashing that symbol of financial autocracy, the great Bank of the United States."

In the August preceding, his younger brother, Major Thomas Biddle, a director of the St Louis office, had been killed in a duel incidental to attacks in Missouri on the Bank. Jacksonian politi- cians, it was alleged, had brought the duel about; this the J ack- sonians denied, but Nicholas Biddle could not have helped being embittered, especially because the duel had been provoked by slurs on his own integrity. (This duel was fought on an island in the Mississippi. The two men stood five feet apart, their pistols nearly touching, and each killed the other.)

And he (Secretary of the Treasury William Duane) said that it was "not prudent to confide, in the crude way proposed by your agent, in local banks when on an average of all the banks dependent in great degree upon each other, one dollar in silver can not be paid for six dollars of the paper in circulation."· This last was intelligent criticism of the contemporary banking situation. The condition it described was the one any real agrarian should have been concerned about. It had aroused Thomas Jefferson over forty years earlier when the ratio was merely one to one and a half. Mr Duane's criticism touched the mounting weakness that was to bring disaster in less than four years and that Mr Biddle, for all his intelligence, seems not to have seen, viz., the excessive expansion of bank credit, which from nothing forty years before had swollen to six-fold counting circulation alone, and to twelve-fold counting deposit liabilities also-the latter being almost, if not quite, the equal of the former. This is twice the ratio of liabilities to reserves long maintained by the American banking system at the middle of the twentieth century.

Though my own disposition is to deplore with Albert Gallatin, Ralph Waldo Emerson, and Henry David Thoreau the aggressive, intense, and rapacious growth of the American economy in the 19th century and its passion for money-making, yet I think there was never the ghost of a chance that the development could have been other than what it was. The Bank of the United States was an important restraint and corrective, but to suppose that it could maintain itself in the teeth of the overwhelming inflationary tide established in the Jacksonian age and dominant over the American economy ever since, is illusory. The democracy, rapt in dreams of avarice, would brook no restraints. The course which history took was the ineluctable product of the opportunity afforded by Amer- ican resources to European energy.

The federal Bank was obnoxious to many not merely because it was a "bank" but because it was a corporation. This enmity, which ran back farther than the South Sea Bubble, was nursed by agrar- ians and also by business men who had not yet learned what a useful device the corporate form of business organization could be. The merchant world of the past had comprised individuals only, trading on their personal responsibility, and though the merchant world was now giving way to the complex world of multifarious business specialties, the idea persisted in many quarters that busi- ness should remain individualistic. This was the doctrine most militantly held by the Loco Focos.

Importations, Mr Gallatin observed, had averaged $59,000,000 a year from 1822 to 1830; from 1831 to 1833 they averaged $83,- 000,000, from 1834 to 1837 they averaged $130,000,000, and in 1836 alone they amounted to $168,000,000. Moreover the excess of imports over exports had risen rapidly from an average of $4,000,- 000 a year in the first period to $61,000,000 in 1836. The official figures of exports and imports reported by the American customs service exhibited, said a British writer in 1837, "perhaps the most striking proof of overtrading ever given to the world." For the years 1830 to 1837 the excess of imports over exports, which meant an equivalent lent and invested in America by Europe, aggregated about $140,000,000. The eagerness of the New World to borrow was matched by the eagerness of the Old to lend. There was not only American speculation proper but also speculation in America by Europeans!

The sale of public lands, though another important source of federal income, was more significant as a medium of speculation. The lands concerned lay mainly in the Mississippi and Ohio river valleys. They were fertile and included promising sites for urban and indus- trial development. They now comprise some of the wealthiest areas on earth. The government was selling them for $1.25 an acrc. It kept the price low in order to avoid discrimination against settlers who were poor, but the low price was equally advantageous to pro- fessional speculators, who had already the advantage of being organ- ized, alert, practiced, and catered to by their own banks. The latter were practically free of restraint.

But in the existing state of business (Panic of 1837) on both sides of the Atlantic, all these participants were beset with paralysis. Because the British spinner would not or could not buy, no dealer would or could buy, no bank would or could lend. No cotton was going into use, no money was being made, no debts were being discharged.

Nicholas Biddle broke this impasse by having the bank assume the lead. Its doing so was, of course, irregular. ...

The first step was to buy cotton, and this the United States Bank would make possible. But since there were no borrowers daring and wealthy enough to initiate the undertaking and since the bank could not legally buy and sell commodities itself, the transactions were conducted in the name of Nicholas Biddle and other senior officers, who borrowed from the bank the necessary funds. Legally the cotton was theirs and the profit and loss was theirs; and since the laws at that time neither forbade nor restricted loans to bank officers, the arrangement was permissible. Moreover, save on the score of its purpose and scope, it was not unusual. It was a matter of course in American banking, and always had been, that the directors and managers of a bank had first claim on its facilities;

Furthermore brokers found the buying and selling of coun- try bank notes very profitable. They acquired an expert knowledge of them which the public did not possess; and though they provided a useful market for such notes and stabilized the dealings in them, they were not disposed to have all notes circulate at par lest their business disappear. So they fed their market by becoming agents of country banks, arranging loans to city borrowers in country bank paper, and at the same time providing themselves with more country bank paper to buy at a discount. They too resisted the efforts of the city banks to supplant a poor monetary medium with a better. In consequence of the impediments and the uproar raised by the various people who had a vested interest in depreciated money, metropolitan banks achieved only occasional and impermanent success in their efforts to expel country bank paper from their communities.

The Suffolk, on the basis of these alternatives, approached the country banks with an offer in one hand and a threat in the other. The offer was to let the country bank have the discount on its own notes if it would maintain a permant:nt balance of $5,000 with the Suffolk and enough besides to redeem such amount of its notes as the Suffolk received. The condition of a permanent balance of $5,000 was omitted for certain banks whose accounts the Suffolk already had, if they would maintain all their balances with it. What this scheme meant to the Suffolk was that it got increased deposits. What it meant to the Suffolk's country correspondents was less certain: if the notes stayed at a discount, the country bank redeemed them correspondingly and profitably at less than face value; if the notes went to par the country bank could take pride in the fact. The threat, on the other hand, was that if the country bank refused the offer, the Suffolk would pursue it into the woods and demand re- demption of its notes on the spot. This was annoying. Country bankers generally preferred the first alternative, though they liked neither. But even if they accepted the threat, they had to be pre- pared to meet it. In consequence, one way or the other, the prevail- ing discount on Massachusetts country bank notes was shortly brought down from one per cent to less than one-half per cent. ...

As the enthusiasm of the economic democracy rose, as the number of banks increased, as bank credit grew more distended, and as the regulatory powers of the Bank of the United States waned and disappeared, the Suffolk had more notes to handle, its correspond- ents grew tardy in remitting for the replenishment of their balances, and they leaned more on it for credit. It grew more and more ad- monitory. It sent a circular "to such of its correspondents as it allowed to overdraw, informing them that on account of the scarcity of money and in order to have some control over its own funds, overdrafts must be limited to $10,000."· In September 1833 it wrote to correspondents in the following strain: "Your account is over- drawn about $16,000; and we shall send home your bills for specie on Monday next, if it is not made good on or before Saturday. We cannot permit any overdrafts on this bank in future and shall here- after send your bills home for payment unless you have funds here to redeem them as fast as received. We can allow no overdrafts, because banks are so numerous and money so scarce, that it has b,ecome necessary for each bank to rely entirely on its own resources, and to limit its business accordingly.'"

During the winter of 1835-1836, as Andrew Jackson's second term neared its end and the charter of the federal Bank was expir- ing, thirty-two new banks were chartered in Massachusetts alone, where, however, the speculation was less than elsewhere. In April 1836 the Suffolk wrote as follows to forty-four country correspond- ents whose accounts were overdrawn: "In consequence of the great increase of banks in the New England states during the past winter, and the scarcity of specie, it has become impracticable to allow any further overdrafts on this bank, or to hold your bills beyond the amount of funds to your credit. Your account is now overdrawn ----- dollars, which we must rely upon your making good with as little delay as possible; and we shall be compelled to send your bills home for specie in future, unless you have funds here to redeem them. We regret the necessity of these measures, but the deranged state of money matters throughout our whole country renders them unavoidable. ...

The Suffolk was in effect the central bank of New England. It was doing what the Bank of the United States should and might have done for the country as a whole. It was regulating the exten- sion of bank credit, supporting the country banks, on occasion tightening the curb on them, and responsibly advising them what they should do and what not.

As an idea, free banking had its origin in England, but its native home as a practice was New York. It seems to have been proposed officially in that state first in 1825, when a legislative committee, disgusted by scandal after scandal in the enactment of special char- ters, recommended freedom to engage in banking on grounds of "the natural right which every citizen has to employ his time and money in banking operations either individually or in association." Besides ending the efforts to purchase privileges, the committee said, repeal of the existing restraints on banking would make it easier for credit to be obtained by "the merchant, the farmer, the manu- facturer, and the mechanic."

Free banking emerged as a political doctrine from an odd mixture of motives and convictions. The chief factor on one side was the Loco Foco demand that all banks be abolished; and on the other was the entrepreneurial demand for more and more of them. In between were the conservatives-the chartered banks already in business-who wanted neither the annihilation threatened by the Loco Focos nor the unlimited competition threatened by the J ack- sonian entrepreneurs. These chartered banks were hand-in-glove with the Democratic party organization in New York, headed by the Albany Regency. It had long been difficult to get new bank charters in N ew Y ork, because the Regency kept the number down con- servatively. And whenever a new one was decided on, it had been the practice to appoint commissioners who were to assure that fair opportunities were afforded the public to purchase stock-provided of course that most of the stock went into the possession of Demo- crats.

It was adopted in March 1837 when the tightness was already oppressive that was to become panic two months later and force specie payments to be suspended. Philadelphia and New York were concerting on measures to ease the tension. The United States Bank was about to initiate the sale of post-notes in London in order to relieve the demand on the States for specie and Nicholas Biddle was about to undertake his opera- tions in support of cotton. There was specie in the western banks- or had been-but passage of the free-banking act was coincident with distribution of the first installment of the federal "surplus." The distribution was hardest on the West, for under Jacksonian policy an unduly large proportion of the federal surplus had accumulated in western pet banks, which had now suddenly to sur- render it in specie. It was especially hard on Michigan, where the government deposits had been unusually high and where, because of the sparse population, the amount due was low. To organize over forty new banks in such conditions and equip them each with a stock of specie was a chimerical undertaking, even if normal conditions in the new state warranted so many banks. The frauds and perjuries which incensed the Supreme Court were not merely permitted by the law but instigated by it.

Hugh McCulloch of the Bank of Indiana wrote that he had been a banker fourteen years, from 1835 to 1849, before he "handled or saw a dollar in gold except the ten- thaler pieces which were brought into this country by German immigrants." J. S. Gibbons, a New York banker, wrote in 1858: "A very large amount of foreign gold is brought into the United States by immigrants and travellers from Europe. It is mostly taken to the west.... It is quite usual for our city banks to receive from some thriving town beyond the Mississippi river a well-ironed box of 50 lbs. weight, filled with an indiscriminate mixture of half the coinages of Europe, to the value of nearly ten thousand dollars."

Hugh McCulloch tells of a gentleman with $10,000 and two as- sociates with nothing who bought, "mostly on credit, $50,000 of the bonds of one of the southern states." These were deposited with the Treasurer of Indiana and paid for with circulating notes as soon as the notes were printed and delivered. "This transaction having been completed, more bonds were bought and paid for in the same manner; and the operation was continued until the financial crisis of 1857 occurred; at which time, this' bank, which had been started with a capital of $10,000, had a circulation of $600,000, secured by state bonds, on which the bank had for two or three years been receiving the interest." The interest at 5 per cent or more was at least $30,000 a year, or 300 percent of the bank's capital.

This rich and powerful community rose in ominous fashion above its neighbors on either side--the states to the south, the provinces to the north-who envied, feared, and resisted her. The South made a suicidal effort to free herself; Canada lived for generations in a fascinated dread. Both, by comparison, were backward, simple, con- servative, and agrarian. Both were shackled to their own institutions and their dislike of enterprise. The South, indeed, retrogressed, being worse off in the latter part of the century than in the first. Canada progressed, but slowly, biding her time so to speak.

The author of the Louisiana (Banking) act of 1842 was Edmond J. Forstall, a banker in New Orleans and agent of Baring Brothers. New Orleans was then fourth in rank among the world's shipping centers. It was there that the bulk of America's cotton exports were shipped, with other products of the Mississippi valley, and it was there that the bulk of her bullion imports were received; for after Mexico over- threw the Spanish viceroyalty in 1821, the silver and gold she produced became diverted to New Orleans. The immediate occasion of the 1842 banking act was a crisis in which all the banks of New Orleans had suspended. ...

The funds owing to depositors and note-holders should be invested to the extent of two-thirds in short-term assets maturing in ninety days or less, the other one-third being in specie. This was a require- ment of a 330 per cent specie reserve against deposit and note liabilities. ...