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This proposal did not follow the recommendation ofRicardo, who had proposed that one pound notes issued by the Bank ofEngland should be circulated in the place of gold.. At first the cou

would, by implication, meet other expenses by cheque, often in settlement of atradesman’s credit account There were disputes between the currency schooland the banking school, which continued well into the nineteenth century andwhich were to shape subsequent developments The terms appear to have beencoined by George Warde Norman in his evidence to the 1840 Committee ofthe House of Commons on Banks of Issue (but see Clapham 1970 vol ii: 181).The chief proponents of the Currency School were Samuel Jones Loyd(later Lord Overstone), George Warde Norman and Robert Torrens They heldthat money derived, and should derive, its value from metal Paper moneyshould be issued purely for convenience and the amount of paper in circulationshould not exceed the value of the bullion held in reserve Under such a scheme,the paper circulation would be 100 per cent gold backed (The principle wouldwork equally well on a silver standard, but this was not then an issue inEngland.)

Although it is an over-simplification to equate the currency school withmodern day monetarism and with the hard money men in the United States inthe 1890s, they all shared an underlying belief that regulation of the moneysupply is the foundation of economic management They had a deep distrust ofthe wisdom of governments, and a strong preference for formal rules, binding

on the political and monetary authorities, over administrative discretion: aregulation that depended on principle, rather than panic They can be regarded

as the successors of the Bullionist school which had had an intellectual victory

in 1810 where their opponents had sought (inevitably in vain) to deny anyconnection between the extension of the money supply, in a period whereconvertibility into gold was suspended, and ‘the High Price of Gold Bullion’,meant a depreciation in the currency

The Banking School, led by Thomas Tooke, had during the first half of thenineteenth century developed an intellectual coherence far removed from thecrude and nonsensical denial that printing money had anything to do with thelevel of prices or the strength of the currency They did tend to cling to thenạvety of the ‘real bills’ doctrine, according to which the extension of creditcould do no harm provided that it was associated with the genuine needs oftrade and provided that accommodation bills were avoided Thomas Tooke,had supported the findings of the Bullion Committee on the connectionbetween the issue of inconvertible notes and the rise in prices but went on toargue that other means of credit are equally important Other prominentwriters were John Fullarton (1844) and James Wilson (1847) Fullartondeveloped the idea of a self-regulating note issue—‘the theory of the reflux’

A modern writer, Lawrence White (1984), identifies a separate ‘FreeBanking School’ out of those more commonly aligned with the CurrencySchool, and which believed in unrestricted and competitive issues of notesconvertible into specie He claims for this persuasion Sir HenryParnell, Samuel Bailey, James William Gilbart, Alexander Mundell, RobertMusket and others, and regards James Wilson as a ‘fellow traveller’

148 DEPOSIT BANKING IN ENGLAND

The dispute between the banking and currency schools was on how toregulate the banks but there continued to be disputes over the coinage Thesehave been discussed in Part I (Chapter 7) but in practice the central problem ofthe coinage had been solved in 1819 The gold standard, though vigorouslydisputed, was to hold sway in England for the rest of the century The realissue was what constituted ‘money’ The country had to adjust to the idea of

‘broad money’ constituting not just coin, or even just coin and notes, but alsobank deposits

The main issues

Otherwise the main issues argued between 1819 and 1844 were

– Do the banks cause fluctuations and how, if at all, should money supply beregulated?

– Hence, should the Bank of England have a monopoly of note issues and/orshould Joint Stock Banking be encouraged in England?

These were coupled with the analytical questions:

– Can banks create money, and are ‘deposits’ money?

– What effects does the quantity of money (however defined) have on prices?– How does (should) the banking system respond to bullion movements, i.e.payments surpluses or deficits?

– Given that issuing banks should contract the note issue under foreignpressure, how should they react to commercial distress?

The currency school asserted, and the banking school denied, that moneysupply was an immediate cause of fluctuations They wanted ‘a regulation thatdepended upon principle instead of…on panic…that could be measured orregulated by a fixed rule’ (Loyd’s evidence to 1840 Committee, Q2726) Theyworried about controlling country note issues

The level of general public discussion during this period was far higher than

at the time of the Bullion Committee

During the period of the suspension of cash payments, the public was in

a state of very imperfect information upon the subject of currency Thedoctrines of the Bullionists, it is true had been propounded; but had notthen succeeded in making any effectual impression on the community atlarge Silent contempt in some quarters, and jealously and suspicionamount almost to animosity in others, was the reception which theygenerally met with…the self styled practical men rather than the abstractreasoners were the popular heroes of the day

(Loyd 1837:44–5)

A HISTORY OF MONEY 149

By 1819 though: ‘Here terminates the dark age of currency; and we now enter

a period characterised by more enlightened views’ (Loyd 1837:53–4) Maybe

The effects of resumption

Peel’s Act of 1819 had provided for a gradual resumption of payments Theeffective gold price at which notes could be redeemed was to be reduced instages and, from 1 May 1823 full convertibility would be restored The ban onthe melting of and exporting of gold was repealed: the effect of this, coupled withthe plans for the repayment of £10 million by the government to the bank, wasdeflationary The gold price fell, and full convertibility was resumed on 1 May

1821, two years ahead of schedule

Under the Act of 1822, notes of less than £5 were to continue in circulationuntil 5 January 1833 This proposal did not follow the recommendation ofRicardo, who had proposed that one pound notes issued by the Bank ofEngland should be circulated in the place of gold The Bank of Englandcontinued to withdraw one pound notes from circulation but country bankstook advantage of the opportunity to expand their issues once more

The company promotion boom

There was a speculative boom between 1824 and 1825, when over 600 newcompanies were floated, together with a number of South American loans In

1825 Thomas Boys published The South Sea Bubble—a Beacon to the

Unwary In his appendix, he quotes extracts from newspapers of 1719–20

which, he said, ‘require only an alteration of dates to render them appropriate

to the present period’

At first the country banks had followed the lead of the Bank in curtailing theissue of small notes In 1822, Parliament ‘scared by the price fall andinfluenced by a widespread agitation against Peel’s Act’ (Clapham 1970 vol.ii: 76) extended their note issuing powers until 1833 Such notes began to beused for the payment of wages in certain parts of the country Issues of countrybank notes rose from an average £4 million in 1821–3 to £6 million in 1824and £8 million in 1825, a major factor fuelling the boom This enlargedcirculation was in principle payable in gold During the restriction period thepublic had become accustomed to accept Bank of England notes in redemption

of country bank notes This was now often impossible because the Bank ofEngland stopped issuing notes of less than £5 The country banks activelydiscouraged the redemption of their notes for gold but a successful petitionagainst a Bristol bank in June 1825 brought home to the public their right todemand redemption

150 DEPOSIT BANKING IN ENGLAND

The crisis of 1825

The Prime Minister, Lord Liverpool, had in March 1825 already warned thatthere would be a collapse, and that the Government did not propose to bail thebanks out by the issue of Exchequer Bills The balance of payments haddeteriorated We would have recognized this as a warning signal, as indeedwould the mercantilists However, the Bank of England, with its hugereserves, saw no cause for alarm and indeed expanded its own note issue forthe purpose of loans to the Government There was the inevitable collapse, andthe Bank of England did cut back on credit by limiting the volume of billsdiscounted, rationing and sending back a proportion of the bills sent in by City

of London banks There were runs on several country banks In NovemberElford and Company, Plymouth, failed The Bank of England did nothing In

the words of The Times (The Thunderer):

As for relief from the King’s Government, we can tell the speculatingpeople and their great foster-mother in Threadneedle Street that theywould meet with none—no, not a particle—of the species of relief whichthey look for The King’s ministers know very well the causes of theevil, and the extent of it, and its natural and appropriate remedy, and weventure to forewarn the men of paper no such help as they are seekingwill be contributed by the State

(Fetter and Gregory 1973:229)

On the 1 December there was a panic rush to discount at the Bank, said to be

like that for ‘the pit of a theatre on the night of a popular performance’ (The

Times 2 December 1825, quoted by Clapham 1970 vol ii: 98).

However on 5 December a large London bank, Pole, Thornton andCompany (agent for forty-four country banks) asked the Bank for assistance.They were lent £300,000 but even so did not open for business on Monday 12December 1825 Six London and sixty-one country banks ceased payment.The problem was discussed at a meeting of the Bank directors on 15December It was suggested that the State issue Exchequer bills—or evenauthorising them, by Order in Council, to stop payment The Governmentpointed out that the first solution would be useless now that Exchequer bills nolonger circulated as currency The second course was unthinkable—the Bankwould be expected to pay out in full

On Tuesday, 20 December, the Bank tried to help the market by buying

£500,000 of Exchequer Bills, and raised Bank Rate from 4 per cent to 5 percent: in the event not enough This increase did not discourage business

On Thursday 22 it agreed to lend against long bills (over ninety-five days) andapproved securities (Clapham 1970 vol ii: 100) By now

A HISTORY OF MONEY 151

The ordinary, non-discounting, public was clamouring…for money,Bank notes or gold Neither notes nor sovereigns could be made fastenough: it was the literal physical limit that impeded, for gold was belowMint price, and the Mint was working furiously By the evening ofSaturday 17th the Bank had run out of £5 and £10 notes However, asupply came from the printers on the Sunday morning.

(Clapham 1970 vol ii: 100)The situation was partly saved when a famous ‘box of £1 notes’ wasdiscovered locked away

Clapham says that many of the Bank’s advances were not actually on goodsbut on personal security and that the bank was not ‘over nice’ in its choice ofthat security On page 98 he quotes Liverpool, Baring and McCulloch’swarnings and suggests

…not only did it do no good, it actually contributed to the crisis In thecrash and panic of December 1825 Lord Liverpool who nine monthsearlier had specifically stated that the government would not bring relief

to speculators, felt committed not to come to the rescue

The bank now employed Rothschilds to purchase whatever gold it could find.The purchases cost the bank £100,000 more than the mint price The Mintworked night and day turning the bars into coin The bank now lent freely:Government securities, Exchequer bills, commercial bills, othersecurities which the bank normally would never have dreamt of takingwere purchased or held as collateral The actual discounts increased from

£5 to £15 millions in a few weeks Commissioners were appointed to go

to the provinces and advance money on the security of goods to merchants

in difficulties Bank notes were still signed by hand, the clerks of theBank could not keep pace with the issues although they workedfeverishly far into the night

(Fetter and Gregory 1973:222)With the new year (1826) the gold price came back to the mint price By thetime Parliament met in February ‘everyone felt that the crisis was over’.Lord Bentinck commented that the country had come within twenty-fourhours of barter Although the Bank of England blamed the country banks forthe crisis, and vice versa, there was no Parliamentary enquiry as it was fairlyclear already what had happened As William Cobbett said:

The Bank is blamed for putting out paper and causing high prices; andblamed at the same time for not putting out paper to accommodatemerchants and keep them from breaking It cannot be to blame for both,

152 DEPOSIT BANKING IN ENGLAND

and indeed it is blamable for neither It is the fellows that put out thepaper and then break that do the mischief.

(Cobbett 1828 vol ii: 25)Lord Liverpool, with the near unanimous backing of Parliament, resolved thatall notes under £5, including those of the Bank England, should go On 13January he and the Chancellor F.J.Robinson wrote to the Bank at length aboutthe steps to be taken to prevent a repetition of the crisis (Palmer 1837a).Another twist to the problem was that because of the prohibition of jointstock banks, the country banks were all too small; ‘any small tradesman, acheesemonger a butcher or shoemaker may open a country bank, but a set ofpersons with a fortune sufficient to carry on the concern with security are notpermitted to do so’ Liverpool wanted the Bank to open branches, and to ‘give

up its exclusive privilege as to the number of partners engaged in banking,except within a certain distance of the metropolis’ These, he said, were theonly ways to improve the country circulation:

With respect to the extension of the term of their exclusive privileges inthe Metropolis and its neighbourhood, it is obvious that Parliament willnever agree to it… Such privileges are out of fashion, and whatexpectation can the Bank under present circumstances entertain thattheirs will be renewed But there is no reason why the Bank of Englandshould look at this consequence with dismay

(Palmer 1837a:59)The Bank responded with a short sharp resolution effectively refusing to give

up its privileges Further letters of 23 and 28 January were more peremptory intone, and the Government took unilateral action

The proposals were implemented by two Acts One, (22 March 1826 7 Geo

IV & 6) prohibited the issue of new notes of less than £5 in England andWales and provided for the redemption of existing ones within three years.The other (25 May 1826 7 Geo IV & 46) permitted joint stock companies tocarry on the business of banking and issuing notes in any place more thansixty-five miles from London An attempt to extend the ban on small notes toScotland was for the present, defeated Walter Scott (1826), writing as

‘Malachi Malagrowther’ can claim much of the credit

Fetter suggests that

In the situation of late 1825 and early 1826 the Bank of England, albeitreluctantly and belatedly, had acted much as Walter Bagehot might haverecommended But the issue was never squarely faced in anyparliamentary investigation and within the Bank Court itself there seems

to have been, for the next half century, considerable difference ofopinion as to just what the Bank’s responsibilities were

A HISTORY OF MONEY 153

The events of 1825 and 1826 had led to widespread opinion thatthe bank, then subject to no legal reserve requirements of any kind, hadbrought on the crisis by its expansive credit policy No well formulatedproposals emerged, but there began to develop a public opinion whichwould be receptive to specific proposals As early as 1827 JamesPennington prepared a memorandum urging what was the basis of a bank

of 1844—tying fluctuations of the Bank’s notes to fluctuations in itsspecie reserve

(Fetter and Gregory 1973:22)

THE BANK CHARTER ACT OF 1833

In 1833, the year after the Great Reform Act, the Bank of England’s charterwas due for renewal On 22 May 1832, a Secret Committee of the House ofCommons was appointed, on the motion of Lord Althorp (later Earl Spencer),

to look into the question ‘Since the members…had been specially selectedwith the idea of representing all points of view, it is not surprising that theirReport is a somewhat disappointing document’ (Gregory 1929:xiii) ThomasAttwood was a strong advocate of inconvertible paper money and a managedcurrency Carr Glyn and George Grote spoke for the London bankers ThomasTooke gave evidence ‘Nathan Rothschild believed that neither the Bank noranyone else could really control the exchanges: the balance of demand was theirall-powerful regulator’ (Clapham 1970 vol ii: 122–3)

Evidence to the committee

The Act owes much to the influence of Thomas Joplin, a Newcastlestockbroker He had published a pamphlet in 1822 ‘An Essay on the GeneralPrinciples and Present Practice of Banking etc’, praising the stability of theScottish banking system and also pointing out that the law did not in factprohibit the formation of joint stock banks provided that they did not issuenotes (Clapham 1970 vol ii: 92–3) In 1824 he had helped to promote theProvincial Bank of Ireland and in 1826 drew up a plan for a ‘Provincial Bank

of England’ and later became a director of the National Provincial Bank ofEngland, one of the constituents of the present National Westminster In 1832

he published ‘An Analysis and History of the Currency Question’ which sums

up his account of developments to that time

John Horsley Palmer, who had become Governor in 1830, was responsiblefor a provision which freed the discount rate from the operation of the usurylaw It was provided that such law would not apply to any bill of exchange orpromissory note payable within three months So long as the Bank shouldmaintain convertibility with notes into gold, Bank of England notes would belegal tender as such for all purposes, except by the Bank of England This itwas suggested could make it possible in future panics, for notes to be settled

154 DEPOSIT BANKING IN ENGLAND

by the issue by the country bank in Bank of England notes rather than goldcoin However, to soothe doubts of the farmers, the act was reworded toprovide that the Bank of England notes were only legal tender for amounts ‘over’

£5 The presenter of a single £5 note (or a succession of such notes) couldtherefore insist on receiving gold

Palmer had become a director of the Bank in 1811 and must have followedclosely the debates on the Bullion Report He gave authoritative evidencebefore the 1832 Committee Of this, Feaveryear says ‘Palmer’s conception in

1832 of the proper relationship of the Bank to the money market…is of theutmost importance No one had ever before worked out so complete a scheme

of management’ (Feaveryear 1931:230)

His most important contribution was to formulate ‘the Palmer Rule’: thatthe Bank should keep one-third of its assets in bullion and two-thirds ininterest bearing securities (Q72) This would effectively govern the circulation

of the whole country (Q73) and would apply as a reserve against deposits aswell as notes (Q74), although he regarded the liabilities against deposits to bethe less dangerous (Q77) Although the Bank had the power to extend ordiminish the circulation on its own initiative (Q81) it would normally react to

an unfavourable exchange rate not on its own initiative but by letting thepublic act on the Bank (Q82–3) (If there was an outflow of gold, the publicwould redeem notes for gold forcing an automatic contraction in the issue)(Fetter 1965:145–6, and Clapham 1970 vol ii: 162)

In response to a comment that the one-third ratio had remained virtuallyunchanged for four years he said that he kept it ‘as nearly the same as can bemanaged’ (Q84) (Faced with an outflow of gold, the Bank would sellsecurities to restore the balance: there would be a multiplier effect on thecirculation.) He did add (Q85) that the Bank would not necessarily respond to

a temporary influx of gold by increasing its holdings of securities His replies

on the response of the Bank to drains arising from other causes, such as acommercial panic, were less convincing (Q92–6) Palmer also held that theBank should normally compete in the discount market, but should be prepared

to discount at a penalty rate—the ‘lender of last resort’ (Feaveryear 1931:231;see Q 178–88)

The Palmer rule has at times been honoured in the breach Dowd (1991:170) has asked why the Bank’s management chose to submit themselves tothis discipline Did they genuinely believe that optimal policy was to followthe right simple rule, or did they hope that a rule would give them someprotection from a criticism of their policies?

In 1819 the Bank had passed a ‘hostile Resolution’ denying that there wasany evidence that its notes had had any influence on the foreign exchanges: as

a body, it was unconvinced by Ricardian economics Its emergence from theDark Ages was signalled in 1827 when the hostile Resolution was rescinded(Feaveryear 1931:230; Gregory 1929:x) This was on the motion of WilliamWard, a foreign exchange dealer who had been elected to the Court of the

A HISTORY OF MONEY 155

Bank in 1817 He had given evidence to the 1819 Committee in opposition tothe views of the then governor, Harman, was a strong supporter of Palmer in

1832, and may have invented the term ‘currency school’

The 1833 Committee Report

The Committee never formally reported, although the evidence was published.All except for the free trader, Henry Parnell, agreed the Bank’s charter should

be renewed There was ‘a rather fatuous motion of Cobbett’s that it should beread this day six months because the legal tender clause ‘usurped the King’sprerogative’ This was ‘brushed aside as it deserved’ (see Clapham 1970 ii:127–30)

The Act (Bank Charter Act 1833, for text see Gregory 1929 vol i: 19–27)provided that the Bank’s charter be renewed until 1855 This was subject tothe government’s option to terminate on twelve month’s notice being given inthe six month period from 1 August 1844 (v) Bank notes were legal tender,except at the Bank itself (vi) The monopoly of note issuing within sixty-fivemiles of London (ii) but there was a declaratory clause (iii) ‘whereas Doubtshave arisen [it declared and enacted] That any Body Politic …althoughconsisting of more than six persons may carry on the Trade or Business ofBanking in London, or within sixty five miles thereof provided they did notissue notes’—Joplin’s point The parties mainly interested in this provision were

a group of ‘Noblemen and Gentlemen’, mainly Scottish: Bute, Lord Stuart deRothesay, a Stewart, an Arbuthnot and a Douglas They wanted to start a stockbank in London, which was duly formed as ‘The London and WestminsterBank’ The Bank felt ‘very bitterly’ about this provision (Clapham 1970 vol.ii: 128)

Defects of the Currency School

The Currency School were on less strong ground, from a modern perspective,

in assuming that ‘money’ and ‘currency’ were defined only by the total ofbank notes and coin in circulation and that ‘it was the fluctuation of thequantity of these two taken together which alone affected the value of thepound’ (Feaveryear 1931:245) Norman (1841) argued whether notes should

be regarded as an auxiliary currency or as a means of economising the use ofmoney If bank notes are withdrawn they must be replaced by coin; but theabolition of arrangements for dispensing with the use of money will not needthe introduction in their place of an equal amount of coin or bank notes.This, of course, is really a question of ‘velocity’ The school was thereforefaced with discussing what measures need to be taken actually to regulate banknotes There are two problems First there were the independent issuers ofbank notes Norman had written: ‘a single issuer might be easy to deal withbut how are we to deal with 500?’ (Norman 1841:84) The answer was

156 DEPOSIT BANKING IN ENGLAND

gradually to extinguish the issuing rights of all banks save the Bank ofEngland The second problem concerned the Bank of England itself whichwas, until the Bank Charter Act of 1844, totally mixing its issues and bankingbusiness Fetter quotes Palmer as having fallen into the error of regardingnotes and deposits as liabilities of the same kind to which the reserve might beapplied discriminately Other commentators of the time commented on theconflict between the Bank’s public and private business (Fetter 1965:146 saysthat Palmer’s answer to Q.77 ‘could easily suggest to those who wanted totranslate ideas into legislation that a distinction between notes and deposits had

a solid pragmatic basis’)

A HISTORY OF MONEY 157

18 MONEY AND BANKING IN THE

UNITED STATES

INTRODUCTION

Continental currency issued during the Revolution had lost its value by 1781(Chapter 24) Events during the ‘critical period’ between then and 1789, whenthe Constitution came into force were to have a profound influence on theshape of American currency and finance During the period discussed in thischapter an American banking system of sorts emerged, but the new nationemerged with remarkably primitive monetary arrangements

In the early years, the dominant political view in the new nation wasconservative, favouring sound currency and distrusting paper money.However, populist left wing influences at the time of Jackson added to the mix,and helped determine the structure of the US banking system which persistedinto the late twentieth century On 17 September 1787, the Constitution wasadopted The relevant provisions clearly gave the exclusive power of coinage

to Congress and prohibited the States from issuing legal tender bills Did italso prevent the States issuing currency of any kind? If economics is an inexactscience so is law The interpretation of the Constitution, beautifully drafted as

it is, has kept lawyers in fees for two centuries The key provisions were:SEC 8 The Congress shall have power—

To coin money, regulate the value thereof, and of foreign coin, and fixthe standard of weights and measures;

To provide for the punishment of counterfeiting the securities andcurrent coin of the United States;…

To make all laws which shall be necessary and proper for carryinginto execution the foregoing powers, and all other powers vested by thisConstitution in the government of the United States, or in any department

Nothing recognisable as a bank appears to have survived the Revolution Thegap was soon filled The Bank of Pennsylvania was established in June 1780and raised £300,000 including £10,000 from the ubiquitous Robert Morris Itwas essentially an instrument of government finance but was not long lived.Myers (1970:41) quotes Thomas Paine as saying that ‘by means of this bankthe army was supplied throughout the campaign and being at the same timerecruited was enabled to maintain its ground’

The Bank of North America

The Bank of North America was formed on the initiative of Robert Morris,and a Federal charter was granted (by a narrow majority) in May 1781 It had acapital of $400,000, was limited to assets of $10 million, and commencedoperations in January 1782 It was also granted charters in Massachusetts andPennsylvania although the latter rescinded the charter in 1785 ThomasWilling was the first president When

…the pressure of the times was over there were not wanting those whoviewed the prosperous state of the affairs of the bank with a jealous eye[and various fears were spread abroad] as if…the bare possibility ofabuse could ever furnish a good argument against the decided utility of athing; or if a benefit were to be relinquished because all cannot bebenefitted alike

(Goddard 1831:50)The Charter of the Bank of North America was renewed on 7 March 1787 forfourteen years, the pro bank party having regained the ascendancy after a year

of disputes (Hildreth 1837:49) It was renewed again in 1799 and was stillflourishing when Goddard wrote in 1831 It continued into relatively moderntimes, and was absorbed into the East Pennsylvania Banking and TrustCompany in 1929

Two other banks followed: the Bank of New York, promoted by AlexanderHamilton and the Bank of Massachusetts in Boston, both in 1784 The Bank ofNew York still survives as an independent entity, while the Bank ofMassachusetts merged with the First National Bank of Boston in 1903 Thesethree banks were all incorporated as companies, a matter of great dispute inEngland and Scotland, and indeed pioneered the ‘incorporated form’ ofbusiness which was to prove so important in the development of the UnitedStates These three were the only banks established when the FederalConstitution came into operation in 1787, but were joined by the Bank ofMaryland in 1791

MONEY AND BANKING IN THE UNITED STATES 159

FROM 1787 TO THE WAR OF 1812

Alexander Hamilton and the First Bank of the United

States

Alexander Hamilton was appointed first Secretary to the Treasury, established

by Act of Congress on 2 September 1789 The Treasurer had a duty to

‘receive, keep and disburse the money of the United States’ but lacked thephysical means of doing this except through collecting agents and the three(soon to be four) banks Hamilton wrote his ‘Report on the Public Credit’ inJanuary 1790 (Birley 1944 vol i: 150–70) and in December that year hepresented to Congress his ‘Report on a National Bank’ (Goddard 1831: 51–94)recommending the formation of a bank on the lines of the Bank of England.Congress he believed had the right to promote such a bank (He ruled out TheBank of North America, an obvious alternative, as it now had a Pennsylvaniacharter.)

Hamilton belonged to the Federalist party which believed in a strong centralgovernment, and they supported him in Congress He was opposed byJefferson and Madison on ‘States Rights’ grounds, but the Bill incorporatingthe bank passed the House of Senate President Washington rejected the advice

of the Attorney General and the Secretary of State that the Act wasunconstitutional, and signed the bill into law on 25 February 1791

The Bill did not define the ‘business of banking’ but the bank was forbidden

to trade in anything except bills of exchange, gold or silver bullion, or goodspledged for loans and not redeemed The capital of the bank was $10 million,one-fifth of which was subscribed by the Federal Government of the UnitedStates The other subscribers could pay three quarters of their subscription ingovernment securities and the rest in specie The notes were legal tender Itwas prohibited from paying interest of more than 6 per cent and (surprisingly)from purchasing public debt, or lending more than $100,000 to the UnitedStates or to any State, unless authorised by Congress The total debt of thebank was not to exceed the capital plus (making a loophole) the ‘monies thenactually deposited in the bank for safekeeping’ There was no requirement forspecie redemption of its notes or for a specie reserve against this deposit Theissue was promptly over-subscribed The demands of growing cities forbranches over-ruled Hamilton’s wishes Eight branches were opened by 1805.Hildreth discusses the arguments for and against the bank The latter:

…finally settled down upon the constitutional question… That questionhas nothing to do with the theory of banking…the letter of theconstitution is on one side, while there is arrayed upon the other, thepractice of all political parties…the solemn decisions of the SupremeCourt and the opinions of every leading statesman with the singleexception of Mr Jefferson

160 A HISTORY OF MONEY

The establishment of the bank:

…caused deep concern amongst four banks which up to that time hadbeen holding Treasury deposits and conducting foreign exchangeoperations for the government—the Bank of North America, the Bank ofNew York, the Bank of Massachusetts, and the Bank of Maryland

(Hildreth 1837:52–3)Hamilton tried to reassure them, promising the Bank of New York that he would

so conduct the transfer as not to embarrass or distress them, and deposits were,

in fact, run down gradually

In 1811, the bank’s charter came up for renewal The large banks, but notthe by now numerous small ones, supported it Amongst its sympathizers wereMadison, and Gallatin who, as Secretary to the Treasury, had found itsoperations convenient and helpful Many original opponents who had sincebeen profitably involved with State banks, ceased to feel that vehement disliketowards all banking institutions which they had evinced in 1790 (Hildreth1837:55) Its main crime was its association with the Federalist party, and asusual personality played its part Two opponents were John Jacob Astor,apparently for personal reasons, and Henry Clay, leader of the opposition tothe bank in the Senate To anticipate the Duke of Wellington by four years, ‘itwas a near run thing’; re-charter lost by one vote in the House and was lost inthe Senate by the casting vote of ‘Vice President George Clinton of New Yorkwho had never forgiven Gallatin and Madison for opposing his nomination tothe presidency’ (Myers 1970:72) So ended what is known to history as the

‘First’ Bank of the United States

The country was now without a national bank, and the Treasury had to lookfor other banks in which to deposit its funds and through which to makeforeign payments The difficulties of the Treasury, and the uncontrolledproliferation of small, unsound, State banks is now generally blamed on theending of the Government’s relationship with an expert source of financialguidance Hildreth, though, took a different view:

The admirers and advocates of national banks, with the usual logic ofpractical men, have ascribed all the disturbances in the currency… to the

non existence of a national bank These things followed the winding up of the Bank therefore they were produced by it.

[He has other explanations and suggests that the First Bank was lucky that] byceasing to exist [it] escaped temptations to which others succumbed

Since the purpose for which banks had been incorporated was to earninterest on loans which were largely extended in the form of notes, thevolume in circulation inevitably increased…few of the bank charters

MONEY AND BANKING IN THE UNITED STATES 161

contained any requirement that the issuing bank redeemed its notes ondemand, or that a specie reserve be maintained in order to ensureredemption.

(Hildreth 1837:56)Banking on these terms was literally ‘a licence to print money’ with noeffective limit unless and until there were net redemptions of notes and if then(as was almost inevitable) the underlying security for the loans proveddifficult to realise Nemesis was soon to follow

THE WAR OF 1812 AND SUSPENSION

The war of 1812 was an attempt by the fledgling United States to takeadvantage of the diversions of the Napoleonic wars and drive the British out ofCanada It was expensive, bloody and, in the end, unsuccessful When it wasended by the Treaty of Ghent, (December 1814) nothing had been achieved

and the parties simply agreed to restore the status quo ante bellum Brogan

describes the war as ‘one of the most unnecessary in history, and reflects aslittle credit on Britain as any she has ever fought…its greatest battle (NewOrleans) was fought just after peace was signed’ (Brogan 1985: 259) (GeneralAndrew Jackson fought the battle of New Orleans in January 1815: he waslater to fight a financial ‘war’ with Nicholas Biddle with dramaticconsequences for the future of the American banking system The federalistparty which opposed the war effectively sank without a trace.)

Leaving aside the issues and the outcome of the war, how was it financed?The European capital markets were closed to Americans, and ‘at home a largeproportion of the moneyed men were opposed to the war, and not well inclined

to furnish the means of carrying it on’ (Hildreth 1837:57) High interest rateshad to be offered The collapse of trade, and the embargo, had reducedcustoms revenue (Myers 1970:65) The Federal government had no directtaxing powers and could raise revenue only by placing a levy on the States Thatold cynic Hildreth says that the government refrained from levying taxes ‘out

of tenderness for the people or a tender regard for their own popularity, perhaps

a mixture of both’

The war was more popular in the Middle and Southern states, and banksthere provided, directly or indirectly, most of the funds In March 1812attempts were made to raise $11 million in 6 per cent twelve year bonds Eventhough only 12.5 per cent of the subscription price was payable on applicationonly half the issue was sold A later 6 per cent loan could only be sold at aprice of $88 Nominal debt was $150 million by the end of 1815 An Act of 30June 1812 authorised the issue of $5 million of one year treasury notes indenominations of $20 or greater bearing interest at 5.4 per cent An interestingfeature was that these were legal tender for debts due to the government but it

162 A HISTORY OF MONEY