Friction also developed with the state banks over the transfer of public deposits and over the credit to be given to state bank notes. The state banks, with the exception of those in New York, Philadelphia, and Baltimore, refused to help the national bank effect the resumption of specie payments, and when this resumption was accomplished without their help they became embittered. When the national bank charged the delinquent banks interest on overdue balances, they regarded this as "an unprecedented grievance." The withdrawal of government de posits from a state bank usually led to a collision, not with the Treasury but with the national bank with which the funds were placed.
A controversy which centered in the West, where inflation had been carried further than elsewhere, arose over the acceptance of state bank notes tendered in payment of public revenues. The Treasury and the bank instead of co-operating in the matter worked at cross-purposes. The Treasury permitted the collec tors of internal revenue to receive state bank notes, the collection of which was thrown upon the national bank. This responsibility brought the latter into collision with the state banks, which were unable or unwilling to redeem promptly. The national bank held that whatever loss was incurred in the collection of the notes should devolve upon the Treasury, but the Treasury threatened to remove all public deposits rather than deprive the people of the means of paying for public lands and for their taxes. Natur ally this dispute also contributed to the unpopularity of the national bank.
Political expediency as well as the terms of the charter de manded that many branches be established, and 27 in all were founded. Almost every state had at least one, and this was too many for the best business efficiency. Losses were greater in the branches than in the parent bank, for the reason that they were run more loosely and their management tended to yield to local pressure for favors in operation and policy. The branches were established with an eye to equalizing banking facilities over the country and consequently excessive amounts of cash were trans ferred to the South and West. Despite the number of branches, however, it was impracticable to open one in every collection district, and this was a further cause of complaint.
The volume of deposits fluctuated widely from month to month and this fluctuation was a very disturbing factor in the bank's loan operations. The original theory was that the bank and its branches were a unit and, since the bank was required to transmit government funds free of charge, the Treasury drew upon the bank at any place where public money was deposited, whether public funds happened to be there at that time or not, it being understood that the Treasury would give the bank reason able notice of withdrawal so that provision might be made for meeting the draft. Trouble soon arose between the bank and the
Treasury because of lack of sufficient notice, but later a schedule of lengths of notice was arranged. The transfer of public moneys by the bank was a convenient arrangement for the government, and better than any that could have been provided by the state banks.
Defects of Note Redemption System Though the original system of bank note redemption aided in effecting resumption by forcing the state banks to improve the standing of their notes and created a good national currency accepted everywhere, it was nevertheless defective. The parent bank agreed to redeem its own notes and those of the branches north of Charleston, without distinction, at any branch. One result was that the parent bank did not know where or when notes were likely to be presented. Loans were also created freely by certain branches, for the loaning branch knew that its notes would be presented elsewhere for redemption. In consequence, sudden and great demands were made, varying with the balance of trade, and it became useless for any one branch to be conserva tive.
For these reasons the system broke down in 1818, and the bank resolved that no branch should take the notes of other branches except in payments due to the United States. It further resolved that no branch should reissue notes of the parent bank or other branches except when it was a creditor of the other bank, and then only when the exchanges indicated that such reissue was for the interest of the parent bank. By making notes of $5 denomination issued by any branch or by the parent bank acceptable at the others, however, a good currency was provided. But the burden of signing these notes of small denomination was so great that the bank officers sought relief from Congress; failing to secure this relief the bank in 1827 invented "branch drafts," in $5 and $10 denominations. These drafts were signed by the branch president and cashier, and drawn upon the parent bank; they resembled bank notes in form, were indorsed payable to bearer, and circulated freely, supplanting the notes in certain areas. Their issue, however, was a leading cause of complaint against the parent bank, because such drafts were held to be con trary to the provisions of the bank's charter and harmful because they contracted the circulation of the state banks.