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Banking in the Early West: Monopoly, Prohibition, and Laissez Faire

Published online by Cambridge University Press:  03 February 2011

Bray Hammond
Bray Hammond
Affiliation:
Somerset, Chevy Chase, Maryland
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Extract

In 1852 the Secretary of the Treasury reported that there were “no incorporated banks in regular and active operation” in Arkansas, California, Florida, Illinois, Iowa, Texas, and Wisconsin—seven of the thirty-one states then in existence—in the District of Columbia, nor in the two organized territories, Minnesota and Oregon. In most of these jurisdictions corporate banking was constitutionally prohibited; in others it was kept out by current opposition. At the same time it was a state-controlled monopoly in Indiana and Missouri, as it was a little later in Iowa. Going to the opposite extreme, Michigan in 1838 made banking free. Her experiment was eventually repeated by Illinois, by Wisconsin, and by Indiana. Meanwhile, there were unincorporated banks throughout the region, though their creation of credit was probably small compared with that of incorporated banks.

Type
Articles
Information
The Journal of Economic History , Volume 8 , Issue 1 , May 1948 , pp. 1 - 25
Copyright
Copyright © The Economic History Association 1948

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References

1 32d Congress, 1st Session, House Document No. 122, p. 1. In 1841 there were four incorporated banks in the District, but Congress refused to renew their charters, which all expired in 1844. The banks seem to have continued either as partnerships or as trusteeships.— Proctor, John Clagett, Washington Past and Present (New York: Lewis Historical Publishing Company, 1930), I, chap, xxviiiGoogle Scholar. In 1863 incorporation under the National Bank Act became possible, but there have also been banks in Washington with charters granted by Arizona, West Virginia, Virginia, and Alabama, as well as banks formed under the laws of the District.

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8 Until it was eclipsed by slavery, banking seems to have been the leading political issue in the West for thirty or forty years. Neither Whigs nor Democrats were consistent on banking questions, but the Whigs were the less schismatic of the two. They generally favored banks, whilst the Democrats were sharply divided between a probank and an antibank wing. Party lines were also confused by the private banks' support of Andrew Jackson in his attack on the Bank of the United States. In Indiana, the State Bank was founded by Whigs and later fostered by Democrats. In Missouri, the State Bank was founded by Democrats, and the Whigs became “antibank” accordingly. In Iowa, both prohibition and state monopoly were Democratic measures.

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11 25th Congress, 3d Session, House Document No. 227, pp. 641–42. The device of moving treasure ahead of the investigators and thereby making a dollar of bank reserves do the work of a dozen was probably one of the most venerable of monetary manipulations. Thucydides (VI, xlvi) records a like performance in Sicily in 415 B.C., when the Athenian ambassadors were taken in by it.

12 Green v. Graves, 1 Doug. Mich. Rep. 366, 372, 351.

13 Knox, History of Banking, p. 736.

14 Green v. Graves, 1 Doug. Mich. Rep. 372. This decision, in 1844, was a year earlier than the similar decision, DcBow v. The People, which found the free-banking law of New York also unconstitutional (1 Denio's New York Reports 9–19).

15 Knox, History of Banking, pp. 740–41.

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22 Fragments, ed. Shambaugh, pp. 102, 74, 197, 68, 69, 70.

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24 Fragments, ed. Shambaugh, p. 351.

25 Quoted in Preston, Howard H., History of Banking in Iowa (Iowa City: State Historical Society of Iowa, 1922), p. 47Google Scholar.

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30 Ibid., pp. 83–84; Thorpe, Constitutions, II, 1150.

31 Knox, History of Banking, pp. 766–68.

32 Bankers' Magazine, June 1858, pp. 953–54; Preston, Banking in Iowa, pp. 90–91.

33 Ibid., p. 85.

34 Thorpe, Constitutions, V, 3013.

For information regarding this provision of the Oregon constitution and its judicial interpretation I am indebted to Mr. Albert C. Agnew, General Counsel, Federal Reserve Bank of San Francisco.

35 Knox, History of Banking, p. 703.

36 Bankers' Magazine, September 1857, pp. 166–67, 170–71.

37 Hunt's Merchants' Magazine, February 1858, p. 261. See the same issue, p. 264, and Bankers' Magazine, August 1859, p. 153, for contemporary descriptions of a free bank in operation and of one broken up by the police.

38 Bankers' Magazine, September 1857, pp. 173–74.

39 Thorpe, Constitutions, II, 1006.

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41 The constitution of 1870 authorized banking, but not till 1887 was legislation adopted. Knox, History of Banking, pp. 725–28; Thorpe, Constitutions, II, 1041.

42 Cable, Bank of Missouri, pp. 254–55.

43 Ibid., pp. 265–66, 290–91.

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45 25th Congress, 2d Session, House Document No. 79, p. 788.

46 McCulloch, Men and Measures, p. 116; 26th Congress, 2d Session, House Document No. 111, p. 1381.

47 Hunt's Merchants' Magazine, June 1843, p. 563; also January 1843, p. 79, and April 1843, p. 368. See also Larson, Henrietta M., Jay Cooke, Private Banker (Cambridge: Harvard University Press, 1936), chap. iv, for a description of unchartered banking in this periodCrossRefGoogle Scholar.

The cognomen “private” for unchartered banks persisted long after incorporated banks had become as private as chartered ones. There was a vestigial reason for this so long as unchartered banks were not supervised, but private banking has been prohibited under the provisions of the banking acts of 1933 and 1935 unless subject to supervision. In 1940, J. P. Morgan and Company, the last great “private” bank, became incorporated under New York laws.

In 1831 Gallatin spoke of Stephen Guard's Bank in Philadelphia as the one important unchartered bank of issue in the country.—Writings of Gallatin, ed. Adams, III, 264.

48 This requirement was based evidently on the unsophisticated supposition that bank capital would be paid in specie, and it was intended to assure convertibility. It was in substance what we should now call a 40 per cent cash reserve. But in time it came to be realized that no dependable relation between a bank's specie and its capital could be assumed, because bank promoters were incorrigible about capitalizing banks with anything but cash, no matter how stern the laws were. About 1830, when almost everything else in the economic world was undergoing revolution, the requirement began to be directed at specie instead of capital, and to be expressed as a percentage of the liability, either note or deposit, whose convertibility was to be protected.

49 Writings of Gallatin, ed. Adams, III, 312. It is relevant, I think, that Isaac Bronson, though a large stockholder in a bank in Bridgeport and an authority on banking, was mainly a private lender. Venit, Abraham H., “Isaac Bronson: His Banking Theory and the Financial Controversies of the Jacksonian Period,” The Journal of Economic History, V (November 1945), 201CrossRefGoogle Scholar. The greater expansibility of deposits seems to have its basis in psychology and custom; depositors evidently have more confidence in banks than noteholders had.

50 Cable, Bank, of Missouri, p. 185.

51 Gouge, Short History, Part I, p. 42.

52 The practice of issuing “certificates of deposit” instead of notes, which the Wisconsin Marine and Fire Insurance Company followed, showed plainly how deposits derive from loans; but contemporaries thought it significant only as a subterfuge.

53 Dunbar, Charles Franklin, Economic Essays (New York: The Macmillan Company, 1904), P. 179Google Scholar.

54 Gouge, Short History, Part II, p. 138

55 Clarke, M. St. Clair and Hall, D. A., Legislative and Documentary History of the Bank of the United States (Washington: Gales and Seaton, 1832), p. 147Google Scholar; Gouge, Short History, Part II, p. 45.

56 Quoted in Ibid., Part II, p. 53.

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66 Bullock, Essays, pp. 1–2.

67 In 1850, the governor of Iowa said that the growth and prosperity of the new state were largely due to its having no banks of issue.—Preston, Banking in Iowa, p. 70. And in 1858 Arkansas ascribed her avoidance of the panic to her freedom from banks.—Bankers' Magazine, January 1859, p. 586; Sumner, History of Banking, p. 453.

68 Banking and Monetary Statistics (Washington: Board of Governors of the Federal Reserve System, 1943), pp. 26, 284Google Scholar.