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Designing a national currency: antebellum payment networks and the structure of the national banking system

Published online by Cambridge University Press:  05 November 2007

Scott A. Redenius
Scott A. Redenius
Affiliation:
Department of Economics, Bryn Mawr College, 101 North Merion Avenue, Bryn Mawr, PA 19010, USA E-mail: [email protected]
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Extract

As reflected in the April 2006 issue of the Financial History Review, monetary historians remain divided over the central features of the US monetary union and their contribution to US economic development. In that issue – which focused on the monetary union formed by the Constitution and early federal monetary legislation – Ronald Michener and Robert E. Wright focused on the creation of a uniform unit of account defined in terms of specie. The establishment of a uniform unit of account ‘simplified domestic and international transactions’ compared with the colonial period when ‘[e]conomic calculations across regions were complicated by the fact that people had to reckon with different units of account, without the aid of electronic calculators’. By contrast, Richard Sylla emphasised the role the Bank of the United States played in reducing the costs and risks of clearing and settling interregional payments. An institution, like the Bank, that operated on a national scale was particularly important in the United States because of the limited geographical scope of state bank operations. The Bank's notes and deposits became a truly national monetary standard, and the Bank helped to maintain the value of state bank notes, the principal means of cash payment in the antebellum economy, by enforcing par redemption.

Type
Research Article
Information
Financial History Review , Volume 14 , Issue 2 , October 2007 , pp. 207 - 228
Copyright
Copyright © European Association for Banking and Financial History 2007

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References

1 I thank Mark A. Carlson, John A. James, Jane E. Knodell, David F. Weiman, an anonymous referee, and participants in the 2004 Southern Economic Association conference session ‘Evolution of American Financial Networks’ and the Rutgers University Workshop in Money, History, and Finance for helpful comments. I also owe a debt to Martin Shubik and William N. Parker under whose guidance I began my study of the antebellum monetary and payment systems. Kari Siegle provided editorial assistance.

2 Michener, R. and Wright, R. E., ‘Development of the US monetary union’, Financial History Review, 13 (2006), pp. 39–40CrossRefGoogle Scholar.

3 R. Sylla ‘The transition to monetary union in the United States, 1787–1795’, Financial History Review, 13 (2006).

4 Consistent with Sylla's view of the role played by the Bank of the United States in the antebellum monetary and payment system, Jane Knodell argues that the Bank's operations lowered and stabilised domestic exchange rates and that domestic exchange rates and exchange rate volatility increased following the expiration of the charter of Second Bank of the United States in 1836. J. Knodell, ‘The demise of central banking and the domestic exchanges: evidence from antebellum Ohio’, Journal of Economic History, 58 (1998); and J. Knodell, ‘Profit and duty in the Second Bank of the United States’ exchange operations', Financial History Review, 10 (2003).

5 The legislation was officially renamed the ‘National-bank Act’ (Act of 20 June 1874, section 1) and is commonly referred to as the National Banking Act. The original name is used here because it better reflects the purpose of the legislation. Throughout the article, the National Currency Acts of 25 February 1863 and 3 June 1864 are referred to by year of passage. The text of the federal legislation referenced here may be found in Laws of the United States Relating to Loans, Paper Money, Banking, and Coinage (Washington, DC, 1896). The legal tender notes or greenbacks, as they became known, already supplied a uniform currency at the time the National Currency Acts were debated and passed. However, the greenbacks were seen as a temporary wartime expedient, and it was expected they would be retired after the war. The notes issued under the National Currency Acts were intended to provide a permanent uniform currency.

6 Act of 1863, section 26; and Act of 1864, section 47. Most discussions of the National Currency Acts have focused on the fact that national bank notes were secured by federal government bonds. However, as stated in the main text, the notes were guaranteed by the Treasury. In contrast with antebellum bond requirements, the requirement in the National Currency Acts, in effect, protected the federal government from loss rather than the note holders.

7 National bank notes could not, however, be used to pay customs duties or interest on the federal debt. The legal tender status of national bank notes was more limited than for greenbacks, which were also legal tender for private debts. Compare Act of 1863, section 20; and Act of 1864, sections 23 and 32, with Act of 25 February 1862, section 1; and Act of 11 July 1862, section 1. State bank notes could not be accepted by the federal government under the Independent Treasury Act.

8 Counting-House Book Keeping (New York, 1863), p. 257. E. E. White, G. B. Meriam, H. B. Bryant and H. D. Stratton describe the limitations of a specie unit of account as follows: ‘In the United States, though the money of account be nominally the same, yet owing to the character of the paper money in circulation, the currencies, and hence the moneys of account of different states and cities, are essentially different.’ Commercial Arithmetic (New York, 1866), p. 167.

9 Counting House Book-Keeping, p. 257.

10 Cheques were not widely used for interregional payments during the antebellum period. Negotiable certificates of deposit were sometimes used instead of drafts.

11 In the example, the same exchange rate is used to compute the Cleveland value of the draft and bank notes required to pay the debt in New York. Though domestic exchange rates specifically refer to draft, or exchange, prices rather than banknote prices, White et al. observe that in locations where a bank's notes were at a discount, they ‘resemble bills of exchange on the places where they are redeemed, and are bought and sold at nearly the same rates as exchange’. Commercial Arithmetic, p. 169.

12 On the other hand, no charge was made for collections in currencies at a premium to the local currency. Bryant et al., Counting House Book-Keeping, pp. 257–8; and Johnson, A. B., ‘A treatise on banking’, in The Banker's Common-Place Book (New York, 1851), pp. 26–7Google Scholar.

13 For an example, see Bankers' Magazine, 10 (1860), p. 363.

14 Using Table 1, $5,000 in Cleveland funds is equivalent to $4,950.50 in New York funds.

15 As described by Bryant et al., ‘The grade of the currency in any locality is regulated in great measure by the banks. Whatever is bankable passes readily at par.’ Counting House Book-Keeping, p. 279. See also pp. 336–7.

16 Remarks on Currency and Banking (Boston, 1857), p. 8.

17 See Scott A. Redenius, ‘The evolution of U.S. banknote redemption networks, 1860–1870’, working paper, 2006.

18 The description in the main text considers only the net private benefit to the bank. Note-clearing systems, such as those organised by the Suffolk Bank and Bank of Mutual Redemption, could increase the number of banks that redeemed in a centre because they internalised the benefits banks received from being able to accept the notes of other member banks. See Howard Bodenhorn, ‘Making the little guy pay: payments-system networks, cross-subsidization, and the collapse of the Suffolk system’, Journal of Economic History, 62 (2002).

19 See Redlich, Fritz, The Molding of American Banking: Men and Ideas (New York, part I 1947, part II 1951; reprinted New York, 1968), ch. 4Google Scholar.

20 Illinois also later adopted such a requirement. Illinois Act of 14 February 1861, article 2. Public Laws of the State of Illinois (1861). Banks organised after the law's passage were required to redeem their notes in Chicago or Springfield. Louisiana law explicitly permitted banks to have a redemption office or agent in New Orleans. Louisiana Act of 30 April 1853, section 28. Reprinted in Krooss, Herman E., Documentary History of Banking and Currency in the United States, vol. 2 (New York, 1969), pp. 1206–18Google Scholar.

21 Ohio Act of 24 February 1845, section 54; and Act of 21 March 1851, section 18. Acts of a General Nature of the General Assembly of the State of Ohio (1845 and 1851). Iowa Act of 20 March 1858, section 30. Acts and Resolutions of the General Assembly of the State of Iowa (1858), ch. 87. Ohio law provided for free banks, independent banks and a state bank with branches. It required that, for example, free banks accept one another's notes but did not require a free bank to accept notes of independent banks or notes of branches of the state bank. In Iowa, the requirement applied to the branches of the state bank, not free banks. Pennsylvania later adopted such a requirement for free banks. Pennsylvania Act of 1 May 1861. Laws of the General Assembly of the State of Pennsylvania (1861).

22 Dewey, Davis Rich, State Banking before the Civil War (Washington, DC, 1910), pp. 220–1Google Scholar; and US Secretary of the Treasury, Condition of the Banks (Washington, DC, 1859), p. 26Google Scholar.

23 US Secretary of the Treasury, Condition of the Banks (1859), pp. 72–3. The quotation is from p. 73.

24 Redlich, The Molding of American Banking, vol. I, p. 261.

25 Holdsworth, John Thom, Financing an Empire: History of Banking in Pennsylvania (Chicago, 1928), p. 578Google Scholar.

26 Finance Report (Washington, DC, 1861), pp. 17–20. See also Finance Report (1862). The impact of the Civil War on the monetary and payment systems is examined in Scott A. Redenius, ‘The road to monetary disunion: state bank note prices during the US Civil War’, working paper, 2006.

27 Basler, Roy P. (ed.), The Collected Works of Abraham Lincoln, vol. 5 (New Brunswick, NJ, 1953), p. 523Google Scholar. See also vol. 6, pp. 60–1; and US Secretary of the Treasury, Finance Report (1861–3).

28 Finance Report (1862), pp. 17–18.

29 The circular is reprinted in Redlich, The Molding of American Banking, ch. 16, appendix 2. The quotation is from p. 137. See also Proceedings of the Meeting in Relation to the Establishment of a Large National Bank in this City (New York, 1863), p. 6.

30 The statement was made in response to a proposed amendment requiring national banks to hold all of their reserves as vault cash. Congressional Globe, 38.1, p. 1377. See also pp. 2143–5 and 2202.

31 Congressional Globe, 37.3, p. 1141. See also p. 850.

32 Congressional Globe, 37.3, p. 873.

33 See Report on the National Currency Act, Its Defect and Its Effects (New York, 1863); ‘The financial credit of the United States: how it can be sustained’, Proceedings of the American Geographical and Statistical Society, vol. 1 (16 January 1862), pp. 1–22; Knox, John J., ‘A uniform national currency’, The Merchants' Magazine and Commercial Review, 48 (1863), pp. 28–34Google Scholar; and Gallatin, James, The National Debt, Taxation, Currency, and Banking System of the United States with some Remarks on the Report of the Secretary of the Treasury (New York, 1864), pp. 14–15Google Scholar.

34 Spaulding, E. G., A Resource of War (Buffalo, NY, 1869), p. 187Google Scholar.

35 The Merchants' Magazine and Commercial Review, 50 (1864), p. 308. While the actions of the state banks and the clearinghouse are consistent with antebellum practice, developments in New York are difficult to separate from conflicts within the New York banking community and between New York and Washington. See David M. Gische, ‘The New York banks and the development of the national banking system, 1860–1870’, The American Journal of Legal History, 23 (1979).

36 The New York Times, 4 January 1864, p. 2; and 8 March 1864, p. 2. It should be noted that, unlike the state banks, the national banks served as government depositories, and therefore had an additional means of disposing of the notes. Because of a shortage of small bills, the New York Treasury office also received national bank notes on deposit and exchanged them for large-denomination greenbacks. The New York Times, 25 January 1864, p. 2.

37 The New York Times, 30 May 1864, p. 2.

38 James, F. Cyril, The Growth of Chicago Banks, vol. 1 (New York, 1938), pp. 357–61Google Scholar.

39 17 April 1864, p. 6.

40 Reprinted in The New York Times, 10 January 1864, p. 2. See also US Comptroller of the Currency, Annual Report (Washington, DC, 1867), p. 7Google Scholar, and (1874), p. 13.

41 Annual Report (1863), p. 8.

42 The Merchants' Magazine and Commercial Review, 50 (1864), p. 309; and Congressional Globe, 38.1, pp. 1269 and 2145.

43 Hooper and Sherman identified this as among the most important modifications to the earlier law. Congressional Globe, 38.1, pp. 1257 and 1865. Most of the House debate was on HR 333, 38th Congress, but the bill referred to the Senate was HR 395, 38th Congress.

44 Congressional Globe, 38.1, p. 1380. See also p. 1378.

45 Congressional Globe, 38.1, p. 1380. See also the exchanges between Brooks and Hooper (pp. 1269–70) and Hooper and Wilson (p. 1378) and Sherman's comments (pp. 1865 and 2181).

46 The New York Times, 17 September 1865, p. 3.

47 Congressional Globe, 38.1, p. 2143. See also pp. 1269–70 and 1377–80.

48 See Congressional Globe, 38.1, pp. 1257, 1378–9, and 2144. See also Congressional Globe, 37.3, p. 850.

49 Congressional Globe, 38.1, p. 1380. See also The New York Times, 17 September 1865, p. 3.

50 Congressional Globe, 38.1, pp. 1270, 1376–81, 1390 and 2143–5.

51 Congressional Globe, 38.1, pp. 1377 and 2143–5.

52 Congressional Globe, 38.1, p. 1378.

53 Congressional Globe, 38.1, pp. 2144–5.

54 Congressional Globe, 38.1, p. 2181.

55 Congressional Globe, 38.1, p. 2621. It also changed the proportion of reserves redemption-city banks could hold in New York from 3/5 to 1/2.

56 S. 349, 39th Congress. The proposal followed the imposition of a prohibitive 10 per cent tax on state bank notes issued after 1 July 1866. Act of 3 March 1865, section 6. Proposals to centralise redemption continued to be offered in Congress until passage of the Act of 20 June 1874.

57 Annual Report (1864), p. 9; and Finance Report (1865), pp. 35–6.

58 Annual Report (1865), p. 6; and Annual Report (1866), pp. 6–8. In his new position as Secretary of the Treasury, McCulloch supported these proposals. Finance Report (1865), p. 35; and Finance Report (1866), pp. 13–15.

59 Annual Report (1869), p. 13.

60 Congressional Globe, 38.1, p. 2181.

61 It was assumed, consistent with antebellum practice, that the banks would absorbed the costs of sorting and shipping notes they could readily clear and settle at par.

62 Hooper's proposals are included in HR 677 and 771, 39th Congress.

63 The draft would not necessarily be at par, however, because drafts were still subject to domestic exchange rates.

64 Quotation from Laughlin, J. Laurence (ed.), Banking Reform (Chicago, 1912; reprinted New York, 1980), p. 12Google Scholar.

65 See Congressional Globe, 38.1, pp. 1379 and 2183.

66 Act of 1863, section 16; and Act of 1864, section 21.

67 The Act also eliminated the reserve requirement for national bank notes.

68 It was also supposed to provide elasticity to the currency by absorbing surplus bank notes. George A. Selgin and Lawrence H. White examine the evolution of the National Currency Acts from this perspective. ‘Monetary reform and the redemption of national bank notes, 1863–1913’, Business History Review, 68 (1994).