passed in these states were note-issuing institutions and nothing more, the proprietors profiting from the interest paid on the bonds deposited with the state, said bonds having been directly or indirectly purchased with the notes for the security of which they were deposited. The freebanking laws in these states authorized the issue of notes by any group of persons after the deposit with a designated state officer of certain specified securities. Provided the securities could be purchased from a broker on time, they could be deposited as provided by law, the notes secured and the broker paid with the proceeds. If the broker, as was likely to be the case, did business in New York, Boston, Philadelphia or some other distant place, the notes would enter into circulation at a point far distant from the home of the issuing bank, and would not be likely to return to it for redemption until after the lapse of a considerable portion of time. When they did return, the bank either went to the wall without a struggle or redemption was evaded by the location of the office of the bank in some inaccessible place, or by other devices. The final result was the sale of the securities by the state official charged with that duty, usually at a price considerably below the face value of the notes issued, or their direct exchange for the notes which were usually in the hands of brokers who had purchased them at a heavy discount. In any case the innocent public was fleeced to the advantage of the brokers and bank proprietors.

In addition to the fraudulent practices perpetrated under cover of these laws, difficulty was often experienced on account of the overvaluation of the securities deposited and fluctuations in their value. When a bona fide bank failed, the sale of the securities held often did not realize a sum sufficient for the redemption of the notes that had been issued against them. This difficulty was generally experi

enced at the time of the outbreak of the Civil War the bonds of the southern states having been deposited as security for note-issues in many of the states operating under this system, notably in Wisconsin.

These and other defects of the free-banking system, revealed by early operations under it, especially in the West, were due to defects in the laws themselves and in their administration, and were capable of correction. The principle of free-banking does not necessarily involve the bond or special security system of note-issue and even that system was capable of great improvement as the experience of New York State and later of the United States shows. In frontier communities like Indiana, Illinois and Wisconsin in the fifties, any system under state control was likely to fall into bad hands, to be badly administered and consequently abused, the administration of laws however good in such states being almost necessarily lax, and the art of law-making necessarily imperfect. We must also remember that the principles of sound commercial banking were not well understood by the bankers and legislators of those days. They had to be learned in the hard school of experience.

Previous to the Civil War some thirteen states had experience with banks owned and operated in whole or in part by their respective governments. The history of these banks emphasizes the truth just suggested that our unfortunate early experiences with banking institutions were due more to ignorance of banking principles, bad administration of state laws and regulations devised by the banks themselves than to defects in the systems tried or in the laws designed to regulate and safeguard them. The majority of these state-owned and state-managed banks were bad failures, but a few were great successes. Notable among the former were the Mississippi Union Bank and the State

Bank of Alabama, and among the latter the state banks of Indiana and South Carolina. These banks were to a considerable extent modelled after the United States banks, and in the methods of their organization, and in the laws by which they were to be controlled, differed considerably, but not enough to account for the wide differences in their fates. These differences were chiefly due to the men into whose hands their administration and control fell. The state banks of Indiana and South Carolina were well administered by honest and capable men, the others were badly, and in some cases, dishonestly administered.

8. Origin and development of the national banking system.-The outbreak of our Civil War in 1861 was responsible for the next important step in the development of banking institutions in this country, namely, the establishment of the national banking system. Since 1836 the state banks had had the field entirely to themselves and since 1846 the federal government had managed its own finances through the independent treasury system, using only gold and silver coin in payments and receiving its revenues in that form only. One of the early consequences of the outbreak of hostilities was the partial disorganization of the exchange system of the country by the severing of commercial, including banking, relations between the northern and southern states and a little later by the suspension of specie payments by the banks of most of the states. This was followed by a rapid expansion of note issues and their substitution for coin in the general circulation.

At this time the federal treasury was confronted by a serious problem. Its expenditures, enormously increased by the war, greatly exceeded its revenues from all sources and no adequate plan for meeting past deficits and providing for future needs, either through borrowing or taxation or a combination of both, had been devised and adopted

by Congress. In his annual report of December, 1861, Secretary Chase suggested that a market for government bonds might be created by permitting the issue of bank-notes on the security of such bonds and an adequate provision of specie. His suggestion was incorporated in a bill proposed by Mr. Spaulding, chairman of a sub-committee of the House Committee on Ways and Means, but differences of opinion regarding the wisdom of the measure and its inadequacy to meet the immediate and pressing needs of the Treasury, led to its postponement and to the passage on Feb. 25, 1862, of an act authorizing the issue of $150,000,000 of legal-tender notes in denominations suitable for circulation as money. This act was followed July 11, 1862, Jan. 17, and March 3, 1863, by others authorizing an increase of this class of notes to $450,000,000 in addition to the fractional currency issued to supply the demand for small change. These notes speedily depreciated, became a secondary standard of value, and took the place of coin in bank reserves and as redemption material for bank-notes. The latter, of course, circulated at the same discount as the government notes and fluctuated in value in correspondence with them.

The bill proposed by Mr. Spaulding and embodying the suggestion of Secretary Chase was again brought before Congress in the early part of 1863, and enacted into law Feb. 25th. It authorized the organization of banking associations with a minimum capital of $50,000, of which not less than one-third should be invested in government bonds. Said bonds, when deposited with an officer to be known as the Comptroller of the Currency, authorized the association to secure circulating notes to 90 per cent. of their face, but not to exceed 90 per cent. of their market, value. The total amount of such notes authorized to be issued in the entire country was fixed at $300,000,000 to be distributed

among the states and territories, one-half according to population, and one-half having due regard to existing bank capital and resources. The maximum amount to be issued by any association was limited to the amount of its paid up capital stock. The notes when issued were to be receivable for all government dues except duties on imports and for all government obligations except interest on the public debt and in redemption of the national currency, and were to be accepted at par by all banks in the system. Each bank was required to redeem its circulation on demand in lawful money, and in case of default, the bonds on deposit were to be forfeited to the United States and the notes paid by the Treasurer. These associations were authorized to transact the various kinds of business belonging to a commercial bank under the following limitations: They were not to hold real estate except to the extent necessary for the accommodation of their business or such as may have come into their possession in satisfaction of debts owed them; they were not to loan to any one association or person an amount to exceed one-tenth of their capital stock actually paid in, exclusive of liabilities on bills of exchange and with such liabilities not to exceed one-fifth of their capital stock; they were not to loan on security of their own stock; and they were not to be indebted to an amount exceeding their capital stock actually paid in and unincumbered, except on account of notes in circulation, deposits, bills of exchange or drafts drawn against moneys actually on deposit to their credit and liabilities to stockholders for dividends and reserved profits. They were required to keep a cash reserve of not less than 25 per cent. of their deposits and outstanding notes, three-fifths of which might be deposited with associations in nine principal cities named in the act. At the discretion of the Secretary of the Treasury they might be designated depositories of public