AMERICAN BANKING BEFORE THE CIVIL WAR 1. Bank of North America.The Bank of North America was the first bank of importance established on the American continent. It was founded by Robert Morris at Philadelphia in 1781 in the hope that it would give financial support to the young Re public. Of the total capital of $400,000, the govern ment subscribed $250,000, and of this subscription $200,000 was paid up, largely in specie which came from France.
Morris' idea in establishing the bank was that it would economize the use of cash. His task at the time was to finance the Revolution. He reasoned that the specie of the government and of other de positors could be made the basis of loans to the extent of two or three times the amount of cash on hand. This judgment was amply vindicated. Large loans were made to the government as well as to individ uals. The bank prospered, paying dividends of four teen per cent per annum.
When doubt arose as to whether Congress had power, under the Articles of Confederation, to char ter a bank, the Bank of North America sought and obtained a charter from the State of Pennsylvania, and it continued to do business under this until 1785. In that year jealous parties forced a repeal of the charter. The bank contended that its charter was irrevocable and it continued to do business, but at the same time it took steps to get a new one from Dela ware. The Legislature of Pennsylvania, fearing that the state would lose the bank, renewed its char ter in 1787. This charter was renewed from time to time until the bank entered the national banking sys tem. Because of its illustrious history, it was not re quired to use the word national in its title, but was permitted to enter the system without changing its name. It has enjoyed almost continuous prosperity.
2. Bank of Massachusetts.—The second bank of importance was the Bank of Massachusetts, which was established at Boston in 1784. It was chartered with no restrictions except a provision for examina tion by the state authorities. The right to issue notes was taken for granted, as the word bank was then un derstood to designate an institution whose chief func tion was issue. At the end of eight years certain re
strictions were imposed, such as: (1) a requirement for semi-annual statements to the governor; (2) pro hibition of dealings in merchandise or in the shares of any bank; (3) a provision that notes should not be issued in denominations smaller than $5; (4) limitation of outstanding notes and loans to double the paid-up capital stock; (5) fixing liability on the directors for losses incurred thru failure to com ply with the law. The imposition of these regula tions illustrates the way in which the American peo ple gradually came to realize the true nature of bank ing. The plan of banking was still crude.
3. Bank of New third bank to be es tablished was the Bank of New York, which was founded by Alexander Hamilton in 1784 as an al ternative to a land bank favored by Livingston. Hamilton saw clearly that land cannot serve as a proper basis for commercial banking. Banking in almost every country has had to pass thru a period of land bank craze. The Bank of New York oper ated successfully for seven years without a charter. Its loans were made for periods not exceeding thirty days and the interest rate was fixed at six per cent. Debts to the bank were payable in its own notes or in specie. As gold coins at that time were badly clipped and abraded, they were received by weight only. The bank was prosperous, but it became un popular thru its refusal to allow borrowers to re new loans and its steady insistence upon prompt pay ment of debts. In 1791, a charter was finally secured which contained the following important provisions: (1) that the bank should not hold real estate, except such as might be necessary for its business or such as had been taken as security for loans previously con tracted; (2) that its debts, above cash deposits held in the bank, should not exceed three times the paid up capital; (3) that it should not deal in merchandise or public securities, except to sell such as were pledged to it as security for loans.