done in favor of the internal industry of the country. Your revenue system, it must be confessed, has afforded it some partial protection; but that system appears to have been calculated only for the purpose of revenue; and, as powerfully as it might be made to encourage domestic manufactures, no act seems to have been adopted with that view; on the contrary commerce has met with your exclusive protection and support." In proof of this they referred to the coast fortifications, the expenditures on the navy, duties on foreign tonnage, and bounties given to fishermen. They were quick to say that they agreed with this policy, and "We complain only because the protection and encouragement of industry is not made universal, and extended to every pursuit which is known in our country. If it be just in a Republic, established for the common good, to give to any one pursuit bounties, encouragement, and protection, we hold it as an undeniable truth that all other pursuits are equally entitled to them."

They noted the unstable conditions on which the commercial prosperity of the country was built. Warring nations in Europe were solely responsible; but "Upon the continuance of this state of thing, we are not to depend. An eternal war in Europe is not to be expected -the state is unnatural; and experience shows that one party must give way when its resources are exhausted, or it is humbled by the victories of its enemy. When this period arrives, what has hitherto been the life of our industry will no longer animate it, and we shall be compelled to look to other resources to preserve the wealth which we have acquired. But how can it be preserved if we do not change our system, and Congress does not give another direction to the industry of the country? Where shall we find a market for the productions of our soil? And where will our shifting find employment?"

The whole situation pointed, it was declared, to the necessity of Congress "directing the industry of our citizens into such channels as will not be affected by the edicts, regulations, and wars of Europe; and to prepare in time for the change in business which must take place (and to the general distress of the country), when a peace there will put an end to our carrying trade, and destroy the markets of our produce."

If our capital were turned to manufacturing our foreign relations would be in a much better state, and we could let the European nations destroy themselves in their mad conflict without greatly being affected ourselves. Of course, patriotism should prompt us to suffer for our country; but there is a limit to all things: "the sailor cannot feed himself in part; the farmer dislikes to lose his crops; the merchant looks with impatience upon blasted prospects and ruined fortunes; and few will be content to live on patriotism, whilst their families are starving. Had our acting capital given life to domestic pursuits; had it given employment to labor; had our provisions been consumed, and our raw materials been fabricated by domestic artisans, instead of the farmer being compelled to look abroad in search of a market for both, we should not have felt so much the pressure of the embargo, nor would our interest have warred with our patriotism. This is the course of human events, and history proves that the rulers of nations have always been obliged to accommodate their differences with others, upon better or worse conditions, according as the contest bore heavy or not upon their own people. Were the citizens of the United States, however, in the situation alluded to, how different would be the attitude which our Government could assume. And how much less would foreign powers calculate upon exciting a clamor against it by the interruption of our commerce, or the general stagnation of our business."

The great value of manufactories as a national asset and stabilizer

was also argued. The manufacturer works up raw products and at the same time creates a demand for the country's products. Let the nation's pursuit "be exclusively agriculture; and the depression of markets (which has often been the case, with respect to our provisions, tobacco and cotton) will paralyze the industry and enterprise of the nation, whereas the multiplication and diversity of pursuits would give a country resources which others could not deprive her of; and the industry of one part of it would cherish, invigorate and support that of another. Nor can it be an unimportant consideration that the increase of manufactures would tend to keep at home the precious metals, the principal and the most convenient as well as the most useful representative of wealth and labor."

The American manufacturer had many handicaps that Congress could remove by granting protection. He is at present poor; he has buildings to erect, workmen to teach, and powerful prejudices to overcome his limited capital often makes it necessary for him to force markets, whilst his opponent can wait for, or command one at pleasure." And, indeed, European nations had not hesitated to use numerous unfair methods to drive our rivals.

When we ask for adequate protection from Congress to our own manufactures, we are aware of jealousies which will be excited against us. Why, it will be asked, tax one portion of the people to benefit another? We answer, for the benefit of the whole, and to equalize the imposts which are laid to support Government. Imposts, levied with this view, are but taking from one pocket what is abundantly repaid to the other. Whatever gives life to the domestic industry of the country benefits every man in it. Whatever sums are paid to keep our resources at home is not lost. As in the human frame, it is like the veins running blood to the heart whereby the whole system may be replenished. Such are the lessons furnished by experience.44

44 American State Papers, VIII, Finance, II.

CHAPTER XLII

BANKS AND BANKING AROUND 1800

Throughout the war with Great Britain, Kentucky was a stalwart supporter of the Federal Government in keeping shut all trade with foreign nations; and when toward the end of hostilities the fetters binding trade were somewhat unloosened, Kentuckians strongly opposed the move.1

With the industrial expansion of the state, there necessarily went the demand for currency and banking facilities. The chronic lack of a circulating medium has heretofore been noted, and the makeshifts that were used mentioned. Barter continued on up into the nineteenth century. A Lexington business house in advertising the arrival of its fall stock, announced that it would place it for sale "on the lowest terms for Cash or Country Produce-such as Whiskey, Country Sugar, Linen, Bacon, Corn, Feathers, Rye, etc." 2 Land warrants were still used for money in many instances.3 The wide variety of coins, previously mentioned, continued to circulate. There was yet so little evidence of the American system of coinage and monetary notation that English designations were used well up into the nineteenth century. The salaries of state officials were popularly listed in pounds, shilling, and pence. In 1802 six shillings were taken as equivalent to one dollar. For small change the larger coins were cut into pieces of varying sizes. But the smallest coins in circulation in the East found no place in Kentucky where prices were habitually high for those things in the purchase of which money would be used. A traveler through this part of the West stated that "The copper coinage of the United States is of no use in Kentucky-the smallest circulating coin being a silver sixteenth of a dollar." 5 There were a few notes of the First Bank of the United States circulating in Kentucky, but they were difficult to get and were generally in very large denominations. In 1802 Samuel McDowell requested John Breckinridge, then a Senator in Washington, to pay the publishers of the Washington Federalist a bill of $5.00, as he could not find a bank note so small in Kentucky to forward.

Apart from the very circumstances that produced a scarcity of United States bank notes in the state, Kentuckians generally had an aversion to bank notes and banks. They had seen the depreciated paper currency of Virginia become even more worthless while they were yet a district of that state. And their knowledge of banks issuing paper currency was not reassuring. Thus, for a decade after the state had entered the union and become master of her own destinies, not a bank existed in her limits.

But in 1802, there was chartered what was called innocently enough the Kentucky Insurance Company. This was a Lexington institution

1 Kentucky Gazette, May 2, 1814.

2 Ibid, May 9, 1898. Such advertisements continued for years.

3 Breckinridge MSS. (1794).

4 F. A. Michaux, Travels in the West, 204.

5 F. Cumming, "Sketches of a Tour to the Western Country through the States of Ohio and Kentucky," in Thwaites, Early Western Travels, IV. 188.

6 Breckinridge MSS. (1802). Dated December 15.

capitalized at $100,000, and organized ostensibly for the purpose of insuring boats on the inland rivers. The lengthy act of incorporation dealt in great detail with the powers of the company and the methods. to be pursued in assessing and paying the insurance on boats meeting with disaster. But in an inconspicuous proviso nestling in a most unsuspecting place, banking privileges were given to this so-called insurance company. In the section detailing the penalties that might be inflicted on the company for infractions of its charter appeared the rather irrelevant statement that "every bond, bill obligatory, or note in writing * * shall be assignable by endorsement thereon, in like manner, and with the like effect of foreign bills of exchange now are; and such of the notes as are payable to bearer, shall be negotiable and assignable by delivery only." The last clause gave the company the right to issue paper money. The charter was to run until 1818, and in the meanwhile no other insurance company was to be chartered by the Legislature to do business in the state.

*

The Kentucky lawmakers had been completely hoodwinked and imposed upon as to the real purpose of the act. One of the main purposes of the company was to secure banking privileges with the power of issuing notes, and this they had succeeded in doing in this law. It is true that they did engage in the business of insuring river vessels; but their banking business soon came to overshadow all else in the eyes of the public. When the people saw what had been done, a most bitter opposition sprang up against the corporation, and the hostility continued for years. An early historian of the state declared that banking "was at first smuggled into Kentucky, and by a fraud upon her legislative understanding, it was foisted into the Commonwealth." And as for the company that perpetrated the deed, it "began in fraud and ended in bankruptcy."

The company was under fire for a great part of the 1804 session of the Legislature. The lawmakers were now seeking to take vengeance on the group of designing men who had played so successfully upon their gullibility. Debate ranged back and forth on this subject to the almost exclusion of other matters. Some members of the Legislature were in favor of repealing the act of incorporation and forcing the trick company out of existence; while others would stop with certain amendments to the act. It was apparent to all that a very dangerous and extensive power had been unwittingly given this company. It not only had the state's sanction to issue circulating notes, but it had the right to issue them in unlimited quantities and with no assurances of their ultimate redemption. There can be little wonder at the impatience of the Legislature when it discovered that it had been tricked into giving such powers to a group of people. But the company had its supporters among the lawmakers. The most prominent of these was Henry Clay. They argued with reasons that were later upheld in the decision of John Marshall in the famous Dartmouth College case, that to change the charter would be unconstitutional. However, their reasoning did not prevail before the Kentucky Legislature. That body on December 19, 1804, passed an amending law to the original act. In the first place, it took away from the Kentucky Insurance Company the monopoly. that had been granted it in the insurance business. The law next struck at the right of unlimited issuing of circulating notes by declaring "That the notes which the said company shall at any time issue, shall not exceed the debts due to them, the money in their vaults, the property, real, personal or mixt, they may own their own capital stock." io

7 Wm. Littell, Statute Law of Kentucky, II, 25-31.

8 Butler, History of Kentucky, 299, 300.

Kentucky Gazette, December 18, 1804.

10 This was not to apply to risks already undertaken.

But the penalty set for disobedience was not particularly compelling in its effect. It stated that if more notes were issued than was provided for by law "and any of such notes shall not be paid by the said company," then, not for issuing more notes than the law allowed but for failure to redeem them, "the said president and directors shall be liable therefore out of their private individual fortunes." 11 These amendments to the charter were assailed by the company as being unconstitutional, and they threatened to test their constitutionality. This enlivened the discussion still more, and made the company still more unpopular generally. In 1805 the Legislature replied to the threats of the corporation by passing an amending act to the charter taking away completely the privileges of the company to issue circulating notes. From the standpoint of interfering with the obligations of a contract set up in a charter 12 the Legislature had been guilty of no greater sin in this last amending act than in the former; but Governor Garrard saw fit to veto the bill. The Senate failed to re-pass it, and so it did not become a law. 13

The Kentucky Insurance Company labored for years under public criticism and hostility. It was charged that it extended credit to Burr when he was collecting his expedition in the West; and it was also claimed that the institution was guilty of favoritism in granting loans. Other rumors circulated against it were that its capital stock was largely owned by British subjects, that it charged usurious rates for money, and that it had greatly increased the insurance rates. But through the use of sound business principles, it weathered successfully all the public clamor and popular criticisms, and steadily grew into a strong financial institution. Its notes circulated above par at home as well as outside the limits of the state. They stood at 102 in New Orleans, and they were among the few that were accepted by the Kentucky State Treasury, when the country come to be flooded with "wildcat bank notes."14 When the charter ran out in 1818, it was extended for an additional two years.

The first bank established in the state under the title and designedly for the purpose of engaging solely in banking was the Bank of Kentucky. Unquestionably there was a great need for proper banking facilities, afforded by an institution which had not forfeited public favor and confidence in its inception. The state's industrial development had reached a point where it imperatively demanded the aid of all that banks had to offer. The undeniable prosperity of the Kentucky Insurance Company, laboring under adverse circumstances, showed the desirability and success of a strong bank. So in answer to this demand, the Legislature on December 27, 1806, incorporated the Bank of Kentucky. Its organization was undoubtedly inspired in part by the First Bank of the United States, which began business in 1791. Its capitalization was $1,000,000, consisting of 10,000 shares at $100 each. It was not to be a purely private undertaking; but rather like the First Bank of the United States it was to be to a great extent under the management of the Government. The state was to subscribe for one half of the shares, and should elect one half of the twelve directors and the president. _To prevent the concentration of power in hands outside of the State Government, no individual or corporation was allowed to control more than thirty votes, or thereby to subscribe for over $3,000 of the capital stock. The privileges of buying stock in the bank were alloted to the principal

11 Littell, Statute Law of Kentucky, II, 213.

12 This doctrine was not set up as binding on a state until John Marshall established it in the Dartmouth College case.

18 Kentucky Gazette, December 18, 1804.

14 E. C. Griffith, "Early Banking in Kentucky" in Proceedings of the Mississippi Valley Historical Association, 1908, 1909, II, 169-175.

Vol. I-37