Part 3 (1/2)

It could lend no more than $500,000, to the United States, $50,000, to each State, and nothing to foreigners. It could give no bill of exchange greater than $5,000; bank notes less than $100 were to be payable on demand, and greater sums were not allowed to run longer than sixty days.

Two settlements were to take place every year.

Branches were to be established upon demand of legislative authorities, wherever 2,000 shares of stock were subscribed for.

There were to be no bank notes less than $5.00, and every bill of exchange, or bill payable at sight, was to be receivable by the public Treasury.

The duty of the Bank was especially to pay out and receive the public money, without profit or loss. It was to serve as agent for every State contracting a loan; the cash belonging to the United States was to be deposited at the Bank whenever the Secretary of the Treasury did not dispose of it otherwise, in which case he was to notify Congress.

Neither the Directory nor Congress could suspend payment of the bank notes, discounts, or deposits: such refusal carried a right to 12 per cent. interest. In exchange for this charter the Bank was to give $1,000,000, to the Government in three instalments.

The charter was exclusive during its life, excepting in the District of Columbia, where banks might be authorized, provided their capital did not exceed $6,000,000. The Bank did not open at once, for it sent an agent to Europe to look up bullion. Between July, 1817, and December, 1818, it thus procured $7,311,750, at an expense of $525,000. On the 20th of February, 1817, it was decided that, excepting gold and silver and Treasury notes, no notes would be received at the Government Treasuries, save such as were payable to the banks in hard money.

Notwithstanding this discrimination the Banks decided not to resume specie payment until the 1st of July, 1817.

In the meantime an immense speculation had taken place in its stock, which was compromising for the Bank and for the credit of its Directory, because several of its Directors appointed by the Government took part in it. For example, it became customary to loan a very large amount of money on the Bank's own stock, as much as $125 on each share of $100.

Thus more than the purchase price was loaned upon them: in furnis.h.i.+ng the means of paying for them by credit, speculation was aroused, and on the 1st of September, 1817, the market price advanced to $156.50, at which rate it continued until December, 1818, when it fell to $110.

At last the public perceived that the excessive issue depreciated the bank-note circulation, and that a greater shrinkage was imminent.

An office for the payment of bank dividends was opened in Europe, so as to increase the price of the stock and the speculation in it through this facility, rather than for the permanent benefit of the inst.i.tution.

Let us note here the short-sightedness of the Directors, who thought they would stem the depreciation of their means of payment by persuading all the banks to declare what was not true, that the bank notes were worth par.

On the 21st of February, still aiming at the same end, they announced the resumption of specie payment. The State Banks, remembering the embarra.s.sment of the public, which for two years had paid an exchange of 6 per cent., persuaded themselves that few people would dare to ask for large sums. They hoped to come to an understanding and to cause the acceptance of a promise to pay upon a designated day.

We say ”a promise to pay,” for this was not a serious proposition, inasmuch as foreign money and that of the United States had enjoyed a higher market value for a long time.

The depreciation of the bank notes might result just as well, from the fear of the public's enforcing its rights, as from a refusal of the banks to make good their promises. This understanding was not, properly speaking, a resumption of specie payment, but rather a kind of humbug.

In January the banks of New York, Philadelphia, Baltimore, Richmond, and Norfolk decided to resume specie payment on the 20th of February, provided the balance showing against them was not demanded by the Bank of the United States before discounts became $2,000,000, at New York, as much in Philadelphia, and $1,500,000 in Baltimore; and these conditions were accepted.

The discount line of the Bank of the United States was thus greatly increased; it grew from $3,000,000 on the 27th of February to $20,000,000 on the 30th of April; to $25,000,000 on July 29th, and to $33,000,000 on the 31st of October. The Bank imported much metallic money, redeemed its notes and those of its branches without distinction; the notes of its Eastern and Southern branches were returned as soon as those of the North had paid them, and they were newly issued; consequently eighteen months after this practice began the cash boxes of the North were drained of their capital, the length of discount was reduced, and 5 per cent. was charged for sixty days. On April 1, 1819, only $126,000, cash remained on hand, on the 12th only $7l,000, remained, $196,000, was owed to the city banks.

Scarcely had the Directors of the National Bank succeeded in replacing the paper issued but not redeemed by their bank-note circulation, being fully aware from their own experience that the circulation could only reach a limited amount, than they inundated the market with it, and in a few months all reductions vanished. In this way the market price shortly resumed its former quotation, and all the difficulties reappeared. This imprudent management necessarily threw one portion of the public into debt, from which it had saved itself; and the other portion into the vortex which it had avoided. The critical moment was delayed somewhat, but the day of reckoning was near.

THE PANIC OF 1818.--The Bank at last discovered that it had pa.s.sed the bounds of safety through its issues, and that it was at the mercy of its creditors. It saw firstly, on October 21, 1818, the payment of part of the State of Louisiana's foreign debt withdraw large sums, and then Chinese, Indian, and other goods reach fancy prices because of the depreciation of the circulating medium. All these influences produced a demand for specie payment which the Bank as a public one was obliged to meet, under penalty of 12 per cent. interest, and without power to avail itself of the same accounts as the State banks.

From this moment it thought fixedly of its safety and of how to reduce its notes; this reduction obliged the other banks to imitate it, and a new crisis shook trade in the end of October, 1818. During one year the National Bank furnished from its cash boxes more than $7,000,000, and the others more than $3,000,000.

The State banks naturally followed the same policy in their connection, and their circulation became reduced as follows:

On November 1, 1816, to ............ $4,756,000 ” ” ” 1817, ” ............ 3,782,000 ” ” ” 1818, ” ............ 3,011,000 ” ” ” 1819, ” ............ 1,318,000

It will give a faint idea of the excessive issue to state that the only difficulty was the impossibility of examination by the President and Cas.h.i.+er, and of their jointly signing the notes, which was made obligatory by the regulations; hence they asked power from Congress to grant this right to the Presidents and Cas.h.i.+ers of the Branch Banks.

This facility was refused, but Congress granted a Vice-President and a Vice-Cas.h.i.+er to sign. With these issues and a simple capital of $2,000,000, the Bank discounted as much as $43,000,000, during one year, in addition to $11,000,000, to $12,000,000, loaned upon public securities.

In order to carry on its operations, it exchanged in Europe a portion of its funded debt for gold and silver, and bought specie in the West Indies. From July, 1817, to July, 1818, it imported $6,000,000, of specie, at an expense of $500,000, but the excessive issue of paper drained away the cash more rapidly than the Bank could import it. In the face of this hopeless struggle, in July, 1818, it entirely changed its course and reduced its discounts, and 10 per cent. premium was then paid for cash, and the reduction of nearly $5,000,000, in the discount line in three months only had a disastrous effect, while at the same time they would only receive for redemption the notes issued by each Branch Bank: hence general embarra.s.sment arose, and as the Bank of the United States was withdrawing cash from the local banks, Congress wished to forbid the exportation of gold and silver. The committee appointed on the 30th of November, 1818, to examine the affairs of the Bank concluded that it had violated its charter:

1. In buying $2,000,000, of the Public Debt.

2. In not requiring from the purchasers of its stock the payment of the second and third instalments in cash, and in the Public Debt of the United States.