In 1789, after the Constitution had been signed and the new government actually started, Alexander Hamilton, then Minister of Finance, came forward with his famous financial policy. Acting in accordance with it, the United States assumed the bonded. debt previously incurred by the Continental Congress and instituted the Bank of the United States as the central financial power of the country. This institution, located at Philadelphia, was chartered in 1791 for a term of 20 years to issue notes under $10 in value and be the depository of the National moneys as well as the fiscal agent of the Government and of the United States Treasury in every way. Congress took one-fifth of the authorized capital of $10,000,000, the whole amount being subscribed partly in coin and partly in governmental securities. The notes issued by the bank

were receivable by the Government for all debts. The Bank of the United States was empowered also to establish branches, the first one of which to be opened was an office of deposit and discount in New York.

At the same time numerous State banks began to spring up and, although all of them issued notes of

* James D. Reid, The Telegraph in America, Its Founders, Promoters and Noted Men (New York, 1879 and 1886); Thomas T. Eckert, The Telegraph in Chauncey M. Depew (ed.), One Hundred Years of American Commerce (New York, 1895); William Maver, Jr., American Telegraphy and Encyclopedia of the Telegraph (New York, 1909); C. F. and A. M. Briggs, The Story of the Telegraph and a History of the Great Atlantic Cable (New York, 1858); Telephones and Telegraphs (report of the United States Census Bureau, Washington, 1906 and 1909); George B. Prescott, History, Theory and Practice of the Electric Telegraph (New York, 1877).

† Prepared for this History by Henry Clews, Banker, New York; author of Fifty Years in Wall Street and The Wall Street Point of View.

their own, such issues were controlled by the central bank, because of its vastly larger capital. Meanwhile the Bank of the United States did all in its power to maintain the banking of the Nation on a stable basis by refusing the notes of all banks which were not sound, either as deposits or in payments. In 1811, therefore, when the charter of the Bank of the United States expired, the State banks quite naturally united in strenuous opposition to its renewal. A few years before the Government had disposed of its stock in the institution, so that at the time it had no direct interest in it, and the result was that the central bank thereupon went out of existence. The withdrawal of this bank, together with the outbreak of the second war with Great Britain the following year, left the country in a decidedly unfortunate financial condition. Having previously depended upon the Bank of the United States for its credit, the Government then had practically none of its own and was in consequence compelled to fall back largely upon the already established banks then in operation. With the moderating influence of the Bank of the United States removed, the latter increased in number at a tremendous rate. Prior to the chartering of the Bank of the United States there had been but three State banks in the entire country; at the time of the expiration of the charter there were 88, all issuing paper currency; and before the end of 1814 this number had been swelled to

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150, the aggregate note issues of which approximated $62,000,000. With the War of 1812 came a general suspension of specie payments and a disordered condition of bank-note currency throughout the country.

During the entire period from 1789 to 1862 gold and silver coin formed the sole legal tender for private debts in the United States. The only paper currency in circulation at that time was that issued by the private banks, which was redeemable in specie. It was not until 70 years after the Federal Constitution became operative that circulating notes of the general goverment, payable on demand, were put into circulation. The various States were forbidden by the Constitution to issue bills of credit, so that the State banks had all the more power. The varying value of the note issues of the latter, however, was the cause of unlimited financial disturbance and chaos and, coming as they did in the midst of the troublous war times, the necessity of some central money power became fully apparent. Accordingly, on April 3, 1816, the second Bank of the United States was chartered with a capital of $35,000,000, of which the Government again took one-fifth. This bank issued notes worth $5 or more, payable in specie on demand, and conducted a general banking business so successfully that its stock was quoted at 50 per cent. above par. This bank naturally became the official depository of Government funds, as well as the

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agent for negotiating Federal and State loans. It was also given the privilege of instituting branch banks wherever the need should arise. Using this power, it opened branches in all the principal cities of the country, no less than 27 such branches being in highly successful operation up to the year 1830.

With such a reliable institution holding the balance of the financial power, it was only to be expected that the people should view with distrust and disfavor the somewhat questionable methods of the State banks. The immediate upshot of the situation was that the latter were forced either to resume specie payment or pass altogether out of existence. Out of the 446 State banks then in operation, so many were compelled to accept the latter alternative that but 165 survived. In an effort to safeguard depositors from the evils which had characterized this State banking system, almost all the States enacted precautionary measures to regulate the operations of such institutions as continued to keep their doors open. Prominent among these laws was the general banking law passed by the New York Legislature in 1829, known as the "Safety Fund Act," which provided that banks were permitted to issue notes for general circulation to an amount not exceeding twice their capital, at the same time limiting the amount of their loans to two and a half times their capital. In order that banks which became insolvent could

make good the payment of the circulation and other debts, a guarantee fund was at the same time established under which all banks paid into the State treasury one-half of one per cent. on their capital stock until an aggregate of three per cent. had been deposited.

During this same interval, which may practically be termed the reconstruction period in American banking, while so many eminent financiers were busying themselves with the problems of the Bank of the United States and how to make it pay, a new banking development was brought forward by a group of Philadelphia business men. They established in Philadelphia, the home of American banking, an institution called the Philadelphia Saving Fund Society, where persons of moderate means might find a repository for their small savings. This was the first savings bank in the United States and marked the beginning of an institution which has flourished with steadily increasing prosperity ever since. New York and Boston speedily followed the lead of Philadelphia, and before the close of 1820 the savings bank had gained such popularity with the small depositors that there were 10 such institutions throughout the country, with a total of 8,635 depositors and deposits exceeding $1,000,000.

All the while the Bank of the United States was continuing to grow in strength and stability, its report of November 1, 1832, showing that it had

a surplus of $42,296,920.77 after its liabilities (including notes in circulation, deposits, and all other debts) had been checked off against its assets (including specie, cash in Europe, and debts from reliable banking and industrial corporations). This undoubtedly placed it among the richest institutions then in existence, but, despite its undeniable prosperity, the opposition to it from many quarters was strong.

Of all those who cried out against the Bank of the United States none was more vehement in his disapprobation than President Andrew Jackson. In his message to Congress in December of 1829, when the matter of rechartering was being widely discussed, he set himself on record as in every way opposed to such a scheme for centralizing the Nation's fiscal power. He declared that, besides being dangerous to National liberty, it was positively unconstitutional. So strong were his expressions upon this point that it occasioned not the slightest surprise when in July of 1832 he finally vetoed the bill to renew the charter of the bank which had served the country so well and more than once had saved the credit of the Nation.

It then became necessary to withdraw the public funds and, although some difficulty was encountered in the fact that such action could be taken only by the Secretary of the Treasury, who in this particular instance refused to act, the matter was finally adjusted. By vote of Congress, the surplus was

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distributed among the States. Nicholas Biddle succeeded in persuading the Pennsylvania legislature to pass an act incorporating the old institution as the Pennsylvania Bank of the United States and, working under that charter, tried bravely to keep it alive. The effort proved futile, however, and the bank finally closed its doors in 1840.

The unwillingness of the Administration to permit the Bank of the United States to continue gave the State banks the same opportunity they had enjoyed when the first United States Bank suspended in 1811. Once more the field was clear for them, and once more they took advantage of this situation. New issues of State banknotes came out in a perfect flood, and in their wake followed speculation of the most frenzied order. Specie practically disappeared from circulation, and from this time until the beginning of the Civil War the bank issues, such as they were, constituted almost the entire currency of the country. The want of a system of mutual exchange of notes among the banks themselves. was one of the many faults of this paper circulation, while the presence of insolvent or (as they were called) "wildcat" banks, constantly issuing notes which were not worth the paper they were written on, tended to complicate matters still further. Still the banks went on increasing and taking advantage of the situation. In 1837 there were no fewer than 634 of them, with an aggregate capital of $291,000,000, of which $149,000,000 was in

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circulating notes and $127,000,000 in deposits, while their total loans and discounts amounted to $525,000,000. With such a state of affairs, a crash was inevitable sooner or later. Numerous small panics paved the way for it, but the real trouble came in 1837.

This was hastened by two things. In the first place, an abnormally large cotton crop the previous year was accompanied by a proportionate slump in prices and a consequent depreciation in the credit of all those connected with the cotton industry. At the same time President Jackson, apparently feeling it incumbent upon him to bring some sort of order out of the financial confusion wrought by the removal of the central bank, issued his famous.

Specie Circular " as a preliminary step to remolding the fiscal system of the Nation. This document required all agents of public lands to accept nothing but specie in payment. In the fever of speculation which had swept over the land, public lands had attracted the operators to a greater extent than anything else, so that, in accordance with the administrative order, the banks were suddenly called upon to redeem practically all their circulation in specie. The contingency found them utterly unprepared and on May 9, 1837, payment was again suspended. Values slumped with alarming rapidity and the business of the whole Nation was thrown into disorder. Months passed, and still no relief appeared. Representatives of nearly 150 banks gathered in New

York the following November and, although suggestion after suggestion was made, no generally acceptable means of overcoming the situation developed. Meanwhile Jackson had been succeeded in the Presidential chair by Van Buren, who, fully realizing that it was the duty of the Administration to find some way out of the financial dilemma, evolved his subtreasury plan as a safeguard to the public against failing banks. Provident as this suggestion was, however, it encountered at first the bitterest opposition, chiefly because it did not seem to offer any immediate solution of the problem in hand. It was not until 1840 that it was finally made law, when Congress passed it as the Independent Treasury Act. Before that, however, Congress came to the rescue with a bankruptcy law and, aided by the States, which passed statutes of limitations and like measures, some sort of order began to appear out of the chaos. Subsequently the Federal government had no more direct connection with the banking of the coun, try until the outbreak of the Civil War.

One result of this severe crisis was that the banks adopted a policy of retrenchment and generally exercised more caution. During the five years immediately succeeding the suspension of payments in 1837, the number of banks in the country was reduced by almost a hundred, while both circulation and discounts were practically cut in half. Among the numerous protective measures adopted with regard