note-issues.1 In fact, however, when the bank reports were published later, it appeared that the banks had absorbed fully one-half of this coin and increased their circulation by $23,000,000. Indeed, the financial transactions of the government for a number of years after 1846 were relatively so insignificant in volume that the question whether upon the whole the "constitutional treasury" was detrimental or not was subjected to no real test. President Taylor in his first message (1849) gave the subject only three lines, leaving it to the wisdom of Congress to retain or repeal the law, and Congress took no action.

It is worthy of note that Congress had devised no method of ridding the people of depreciated paper; not even the small bills (under $5), against which so much had been said, were done away with.

Reference has been made in previous chapters to the dissatisfaction of the Southern and Western states due to the disadvantage under which they labored owing to inadequate banking facilities. The following table gives for the several sections the banking power, composed of capital, circulation, and deposits of reporting institutions, and the relative amount per capita (excluding slaves in the Southern states).

NOTE.

For 1830 the figures include the Bank of the United States distributed according to branches, but omitting $14,000,000 of capital invested in United States bonds.

1 Finance Report, 1847.

The table illustrates not only the disparity referred to, particularly in the Western states, but also the location of the enormous expansion in 1840.

CHAPTER X

PAPER CURRENCY

1850-1860

THE element of federal politics incident to the competition for public deposits having now been definitely eliminated from the banking business, commercial banking developed in a greater degree than ever before. Issuing currency, instead of being the primary object of banking, began to be regarded as of less importance in most of the older sections of the country.

The distressing experiences already described produced a revulsion of sentiment in some of the states which led to the severest restrictions upon all banks by legislation and in a few by constitutional amendment. Nine states had no banks in 1852.1 After a few years this rigidity relaxed and local bank-note issues were again reported from nearly all of the states. The scarcity of silver coin, discussed in another chapter, had caused a large increase in small note-issues.

Many states adopted the New York free banking and bond deposit plan, but not without modifications that operated more or less to neutralize its beneficial features. Bonds of states that afterwards depreciated, railway bonds some of which proved of little value, and miscellaneous securities, were permitted to be used as a basis for circulation, entailing losses upon the note holders. Many banks reported no deposits and no specie, the bonds deposited to secure circulation being all the protection note holders could expect.

The publication of reports of condition, now required by law in many states, no doubt assisted in correcting many evils and removed much of the mystery which had surrounded the busi

ness.

In New England compulsory specie reserve laws were enacted, and other wise legislation, supplemented by the Suffolk system, served to maintain prompt redemption and a safe bank currency, acceptable almost everywhere in the Union. In 1858 the Suffolk Bank made over that special business to the Bank of Mutual Redemption, organized for the purpose by country banks. In 1856 the Boston Clearing-house was established, following the lead of New York City, where a similar institution was organized three years earlier.

The New York State Banking Department was established in 1851. The Metropolitan Bank of New York City was established to act as a central redemption bank (like the Suffolk) in the same year. These circumstances and the establishment of the clearing-house in New York City in 1853 brought about a much more stable and secure system of paper currency.

In New York weekly reports were required to be made to the clearing-house by the associated banks, and in 1858 a fixed ratio of cash reserve to be held against deposit liabilities was agreed upon. The clearing of checks obviated the use of currency to a considerable extent, and in other particulars the association of the banks of the city, voluntarily imposing restrictions upon their business, contributed greatly to make them strong and influential.

There is one fundamental principle underlying the clearinghouse system. Each bank settles its daily business with all the other banks of the city precisely as it would if there were but one other bank in the city. For instance, the First National Bank delivers to the clearing-house at ten o'clock A.M. every day all the debit items it holds against all the other banks and receives credit for the amount by the clearing-house. The clearing-house in turn, having received the same from the other banks, delivers