increase of business. An encouraging feature of this development has been the fact that increased advances of capital by the parent bank have not been required at the branches in proportion to the increasing volume of business, but the capital has been obtained in the communities themselves. The growth of deposits has also been an encouraging feature of the bank, the amount having increased from about £8,000,000 of all classes at the close of 1893 to £11,741,705 at the close of 1907. Cash resources, which were £2,963,419 at the close of 1899, advanced by normal steps to £4,134,671 at the close of 1906. In the crisis of 1907, the bank pursued the same prudent course as in 1895, so that its cash and money at call at the end of the year stood at £5,023,400. In both Turkey and Egypt, where the operations of the bank are conducted, trade conditions were much disturbed in 1907, and some of the foreign banks felt the consequences seriously.' The failure of the crops caused such suffering in Turkey that the government reduced import duties on grain and made free distributions of seeds. The Imperial Ottoman Bank, however, suffered no material losses and was able to distribute an annual dividend at the rate of nine per cent., which had been paid for 1906, after successive increases from six and a half per cent. in 1902 and 1903 to seven per cent. in 1904 and eight per cent. in 1905.

The circulation of the bank increased gradually until the period of restriction in 1907. It was £832,320 at the close of 1899 and advanced to £1,177,794 for 1904 and £1,181,760 for 1906, but fell to £1,080,763 at the close of 1907. Total assets at the close of 1899 were £15,998,079; for 1904, £19,976,384 ; for 1906, £22,397,344; and for 1907, £21,023,669.'

London, Bankers' Magazine, August, 1908, LXXXVI., 138. 'Économiste Français, July 18, 1908, 118.

3Cf. Moniteur des Intérêts Matériels, July 5, 1907, 2235, and London Bankers' Magazine, August, 1908, LXXXVI., 257.

CHAPTER XIII.

THE BANK OF THE UNITED STATES.

Banks of Issue before the Adoption of the Constitution-Hamilton's Plan for the First Bank of the United States-The Struggle over a New Charter-The Second Bank of the United States: Its Early Errors and its Economic Services-The Bank Dragged into Politics by Jackson and Clay-Jackson's Triumph and the Removal of the Deposits-The Independent Treasury System,

TH

HE pathway of American colonial history is thickly strewn with the failures of government paper money, which might have afforded an instructive lesson to the Continental Congress against its issues of Continental bills. Several cases are found also of issues on private banking credit, but they were not based on sound banking principles and do not shine greatly by comparison with the unrestrained issues resting on the fiat of the State. The "Land and Manufactures Bank," established in Massachusetts in 1740, did not pretend to do better than issue notes redeemable in goods, but they stood for a time so much higher than " Massachusetts bills" that, in spite of the hostility of Governor Belcher, merchants specially advertised goods to be sold for "Manufactory bills." In Connecticut in 1733 the New London Society for Trade and Commerce circulated notes which were current until prohibited by the authorities, and in New Hampshire a company of "private gentlemen" attempted to meet the demand for a circulating medium by an issue of bills. Most of these schemes, including that of the specie bank, formed to counteract the

1

66

1 Weeden, 487.

1

under the prohibition of This act was passed in

Land and Manufactures Bank, fell the Joint Stock Companies' Act. England after the bursting of the South Sea Bubble in 1720 and forbade the formation of banking companies without a special charter, but it was not until 1740 that it was declared by Parliament to extend to the colonies.

The history of banks of issue in the United States can hardly be said to have begun, however, until the foundation of the Bank of Pennsylvania. The bank originated in the plan of a number of citizens of Philadelphia to supply the army with rations, and their first bills, issued in 1780, were nothing more than interest-bearing notes payable at a future time. The advances in Continental money made by the shareholders were secured by bills of exchange for £150,000 drawn on the envoys in Europe, but not intended to be negotiated.' Approval was given by Congress May 26, 1781, to the plan of Robert Morris for the Bank of North America, with a capital of $400,000, to be increased if desired. Morris arranged with the Bank of Pennsylvania to transfer the foreign bills it was holding to the new bank and paid in cash its claims against the Federation. The charter of the Bank of North America was not actually granted until December 31, 1781, and business was begun January 7, 1782. There was so much doubt of the power of Congress to charter a bank that a charter was obtained April 1, 1782, from the State of Pennsylvania, under which the bank continued to operate until absorbed into the national banking system in 1863. The bank did much to restore order to the chaos of Federation finances and loaned Morris, as Superintendent of Finance, $1,249,975, of which $996, 581 was repaid in cash and the remainder by surrendering the bank stock owned by the Federation. The government had originally paid for its stock in silver brought from France, but this silver was infinitely more productive by the skilful management of the bank than it could ever have been if covered into the public treasury. Livingston wrote to Dana December 17, 1782:

1 Sumner, Finances of the American Revolution, II., 22.

Paper is entirely out of circulation, if we except the bank paper, which, being payable at sight in specie, is equal to it in value. So extensive has this circulation been that the managers not long since published a distribution of the first half-year's dividend at four and a half per cent. notwithstanding a variety of expenses to which they had been put in the first organization of the bank.1

2

The first Bank of the United States was incorporated by the First Congress in 1791, as a part of the scheme of Alexander Hamilton to strengthen the new Federal government. Those who had opposed the adoption of the Constitution because of its centralizing tendencies, and some of those who had supported it, opposed the granting of the bank charter upon the ground that the Constitution contained no express grant to Congress of the power to establish a corporation. Their argument was that the case fell plainly within the rule subsequently embodied in the tenth amendment to the Constitution, that "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively or to the people." President Washington obtained the opinion of the members of the cabinet before signing the bill. The opinions of Jefferson and Edmund Randolph were adverse to the constitutionality of the measure; but Washington followed the advice of Hamilton, his brilliant young Secretary of the Treasury, and gave the bill his approval.

The capital of the Bank of the United States was fixed at $10,000,000, divided into 25,000 shares of $400 each. The protection of small investors in bank stock was sought by a graduated scale of voting which did not permit more than thirty votes to any shareholder. Foreign shareholders were not allowed to vote by proxy, which practically prevented their voting at all. The number of directors was fixed at twenty-five, who must be citizens of the United States and not more than three-fourths of whom were eligible for reelection. The bank was not forbidden to loan on real estate security, but could not become an owner of real estate

1 Wharton, Diplomatic Correspondence, VI., 146. 2 Act of February 25, 1791.

(beyond what was needed for banking houses) unless the property came into its hands in satisfaction of mortgages or judgments. The only limitation upon note issues was that which limited all debts other than deposits to the amount of the capital stock. The notes were receivable for dues to the government so long as they were redeemable in coin on demand. The charter was granted for twenty years, with the provision that Congress should not charter another bank within that time. This was far from implying a monopoly of note issues, for the State banks were in no way disturbed in their privileges and methods except so far as the new institution by its example acted as a regulator of the currency. Its large capital and pre-eminent position operated, and were intended to operate, to give it such a commanding position as was occupied by the Bank of England among the country banks of that country.

The charter provided that one-fifth of the capital should be subscribed by the government of the United States, but a loan was to be made to the government equal to the amount subscribed, to be repaid in ten annual instalments of $200,ooo each, with interest at six per cent. No other loans were to be made to the government exceeding $100,000 without authority of law. The practical effect of the government holdings of stock was simply to give the bank the note of the government for its final payment, but as the bank was forbidden to deal in its own stock the process of issue of the government stock was somewhat complicated. It would have been useless for the government to draw money from Europe to pay into the treasury of the bank, to be immediately drawn out again and remitted to Europe for charges there. The course adopted was for the Treasurer of the United States to draw bills of exchange on the American Commissioners in Amsterdam for the amount required to

1 It is significant of Hamilton's growing familiarity with finance that he did not revive the project of the bank of issue based upon landed security which had attracted him a few years before, but laid down in his report the correct theory of a credit currency based upon quick assets.Works, III., 106-107.