This ended all efforts to force the people to take the money at par in ordinary business transactions. The General Assembly, in January, 1787, formally repealed the forcing acts, and then took the first step toward the repudiation of the State debt by ordering the treasurer to pay off one-fourth of it in the bills received for taxes, that is, in the depreciated paper money, which, at that time, was circulating on the basis of six to one. By successive steps of this and similar kinds the entire State debt was extinguished, public creditors being forced to take it on terms prescribed by the State or to forfeit their claims. The last instalment of the debt was got rid of in 1789, in a forced settlement, when the paper money which the helpless creditors received was worth only one-twelfth as much as coin. "Had a general act of insolvency," says Arnold, "relieving all debtors from their liabilities and the State from its legal obligations been passed in the first instance, the same end would have been more speedily accomplished, and the means would not have differed very widely from those that were actually employed. . . . . It fell but little short of repudiation."

During 1787, when the value of the paper money ranged from onesixth to one-tenth that of coin, bills in equity for the redemption of mortgaged estates were filed in large numbers in the courts. The Superior Court of Newport declined to try any case in which a large sum was involved. Suitors came to court with paper money in handkerchiefs, bags, and pillowcases, asking to have the holders of their mortgages forced to take this at par in redemption of their lands. One bag, containing fourteen thousand dollars, was brought for the redemption of a single farm. But the court refused to try all cases of the kind. The value of the paper money dropped steadily till fifteen paper dollars were worth only one coin dollar. In August, 1789, the General Assembly showed its first sign of returning reason by suspending the operation of the tender law. It followed this by repealing the statute of limitations, because of the depreciation in the value of paper money, and by extending the time allowed for the redemption of mortgages from five to twelve years. Finally, in October it repealed as much of the Paper Bank act as made the bills a tender at par, and debtors were authorized to substitute property at an appraised value for money in discharge of debts. The act which effected the repeal fixed the value of the paper bills at fifteen to one. This was the end.

120. EARLY STATE BANK NOTE ISSUES

BY DAVIS R. DEWEY

I. VOLUME

The restrictions laid down in the charters of state banks in the period before the Civil War were exceedingly vague and lax, and little protection was given to the currency. Many of the acts of incorportation did not make specific requirements with reference to the volume of notes that might be issued, but covered the point indirectly through limitations in the amount of indebtedness, including deposits.

The states were generous in their grants of indebtedness. At the outset this limitation was generally set at two or three times the capital. This amounted to practically no limitation at all, at least upon banks with a large capital, and admitted an issue of notes out of all proportion to the specie fund. Naturally it afforded an opportunity for a wide range and violent fluctuations in the amount of outstanding currency, depending upon applications for discounts.

In many cases, however, particularly in the northern states, the banks did not issue the legal maximum. There was a marked variation, also, in the amounts issued by banks in the country and those in the city, the latter doing more of a discount and deposit business.

In the earliest charters there was no express provision made for the redemption of notes, nor was there any penalty for non-redemption. The issuing of notes was generally regarded as the principal object of a bank's existence instead of an incidental function. The limitation of note issues to a certain proportion of the capital which was often represented by stock notes of shareholders rather than solid funds was of little consequence. Practically the only security for convertibility lay in the liability imposed upon stockholders, and particularly upon directors, in case of failure or mismanagement. Indeed, many in the earlier part of the nineteenth century considered that it was improper and injurious to call upon a bank for specie in payment of its bills. "Brokers who sent home the bills of country banks were denounced as speculators and bloodsuckers, whose extirpation would be a public benefit." Respectable men defended the

1 Adapted from State Banking before the Civil War, pp. 53-224. (National Monetary Commission, 1910.)

conduct of banks in interposing obstacles to the payment of their notes to brokers who had bought them up to discount. A Boston broker was brought before the grand jury of Vermont for demanding payment in specie for the bills of one of its banks, on the complaint of the attorney general that he was guilty of an indictable offense.

As a result of disastrous experience various methods were tried to enforce redemption. On the one hand the public, through its legislatures, gradually imposed penalties upon banks for failure to honor their note obligations, and on the other hand prudent and well-managed banks found it necessary, in self-defense and for their mutual benefit, to establish voluntary arrangements whereby notes could be promptly redeemed. Until about 1830, however, the situation was on the whole deplorable, particularly so in the South and West; and with few exceptions the situation continued bad practically down to 1860. During the first half of the century various devices were employed by speculative banks to increase their circulation and avoid redemption. In 1818 a legislative committee of New York enumerated some of the schemes which were thus adopted, such as placing a fund in a distant bank to redeem notes, and, after it became generally known that the notes were at par in that quarter, issuing a new emission signed in ink of a different shade, at the same time giving secret orders to the correspondent bank not to pay the notes thus signed. Others issued a species of paper called "facility" notes, not payable in money, but receivable by banks issuing them in payment of debts due. Again, large accommodations were given to individuals on agreement that the borrowers should keep in circulation a certain sum for a specified time, the notes being designated by a private mark, and in case the notes were returned before the date set the borrowers were to be charged with the discount on such sum for the remainder of the period. To others loans were made on condition that the borrowers pay their notes when due in what was called current money; that is, notes of banks which were current throughout the State, but not including the bank's own notes. The borrower, therefore, was often obliged to pay, as the time drew near, a premium in order to secure acceptable notes.

Most of these schemes bordered so closely upon fraud that they had to be abandoned. Other methods, however, were employed, some of which may be enumerated, as follows:

1. About 1835 it became common for banks in the North to employ agents to exchange bills of one bank for notes of other banks.

This practice was continued in Massachusetts and complained of by the commissioners in a report of 1840. The bank inspector of Vermont, 1837, criticized the practice and characterized it as a kind of piracy of one bank on another; a bank situated within reach of other banks sometimes had to decide against discounting an application for a loan because of the belief that the bills would be promptly taken up and sent back for redemption. This consequently forced banks to seek for discounts at distant places.

2. In some States banks made their notes payable at some other place than where the office was located; for example, in 1816 the Dedham Bank of Massachusetts issued three-fourths of its circulation drawn on the cashier of the bank at Middletown, Connecticut. The legislature promptly passed an act prohibiting the issue of notes. payable at other banks unless payable also at the bank of issue. This act, however, did not extend to checks or drafts for sums exceeding $100, and it was subsequently learned that the Dedham Bank issued bills for $101 in order to avoid the penalty. In the Southwest this practice became an established custom.

3. Notes were loaned on an agreement that they would not be presented for redemption within a certain time. In 1839 the bank commissioners of Massachusetts complained that some banks in that State loaned bills at a lower rate of interest on condition that they should be kept in circulation. In Connecticut the legislature in 1837 found it necessary to pass a law prohibiting banks from making loans which involved an express agreement that the notes would not be returned to the bank for redemption within a limited time.

4. A most common method was putting notes in circulation at distant points. Its extreme form is to be found in the "Saddlebag Bank" described by Niles in 1820: "A bank whose notes were carried about the country in saddlebags to be exchanged with landowners for their notes." In the middle of the century the practice was illustrated in the development of "Wildcat banks" in the West. But banks in the East were also guilty. Ill-managed banks supplied brokers, shopkeepers, tavern-keepers, drivers, and workmen with quantities of paper and paid them liberally for getting it off. Agents carried these notes to every corner of the country, even to the British provinces, and beset travelers for an exchange of bills. One broker in Rhode Island put off in one year more than $200,000 of the notes of a speculative bank, mostly in one-dollar bills. In 1840 the commissioners of Connecticut complained that several of the banks made

discounts upon an understanding that the notes were to be put in circulation at a distance. Branch banks in the South employed this method to a considerable degree.

After 1837 the question of having an adequate specie basis to support circulation became a matter of common discussion. Practically the only provisions relating to the holding of specie were those requiring original payments in gold and silver of a certain portion of the capital stock before the bank began business, but as a rule banks did not retain this coin after operations were once begun. Another indirect requirement was that which prescribed a penalty in case a bank refused or delayed redemption of bills. In these provisions it will be observed, however, that there was no specification of keeping on hand a fixed amount.

The experience of Massachusetts may be taken as fairly typical of the Northern states. The joint committee on banks and banking reported that it would be unconstitutional to impose upon banks the requirement that they should keep on hand 10 per cent in specie, as this would be a new burden not contemplated in the original charters. In 1850 the subject was again investigated by the legislature, but a committee thought that application of a definite rule was too difficult to determine; there was a great variation in the amount of specie kept by individual banks; in Plymouth County it varied from 16 to 24, and in Norfolk from 6 to 30 per cent. In 1855 the bank commissioners reported that the banks kept too little specie; country banks with a capital of more than $26,000,000 had but about $1,000,000 in specie, and the city banks with a capital of $33,000,000 had an average of only about $3,000,000. In the next year the commissioners again referred to the subject and noted that the banks had not improved their position: "We continue to feel surprised that judicious men connected with banks still continue to speak with indifference of the item of specie." In 1858 an act was passed requiring the banks to keep on hand in specie 15 per cent of their aggregate liability for circulation and deposits. Banks outside of Boston, however, could count as specie their balances in other banks, not bearing interest, which could be applied to the redemption of bills. Under this proviso a country bank was not obliged to keep a dollar in its own vaults.

In 1861 the average holding for both notes and deposits was 7.5 per cent for the country banks and 21 per cent for the banks of Boston. Although there was little legislation in States south of New York on this subject, the need of a better protection to the circulation