We can easily criticize these banking schemes in the light of principles already laid down, but we must be tolerant toward an institution which was in its in fancy and which was striving to do business in an undeveloped country. The chief fault of early bank ing in New York State was its entanglement in poli tics. No new bank could be chartered except by special act of the legislature. Consequently, char ters were handed out as political spoil. The estab lishment of the Bank of the Manhattan Company is an interesting incident in this connection.
4. Bank of the Manhattan Burr, knowing that he could never hope to secure a bank charter from a legislature controlled by the Federalists, hatched a scheme for procuring one by strategy. Taking advantage of a scourge of yellow fever which had just visited New York City and which was attributed to the bad water supply, he ap plied to the legislature for a charter for a $2,000,000 company which was to supply pure water to the city. Toward the end of the charter, which he drew up, an inconspicuous clause was inserted giving the company power to use any surplus capital, not required for the water business, in any moneyed transactions not in consistent with the constitution and laws of the state or the United States. The charter slipped thru without anyone's suspecting the presence of an au thorization of banking operations and, within a few months, one-half of the company's capital was being used in the banking business. The water works were discontinued in 1840 and the bank, which never en tered the national banking system, is still carrying on a large business under its state charter. Its charter is perpetual.
5. First Bank of the United States.—In 1791, the First Bank of the United States, as planned by Alex ander Hamilton, received a charter from Congress. A question was raised as to the constitutionality of the act which established the bank. Jefferson con sidered it unconstitutional, but Hamilton convinced President Washington to the contrary on the grounds that the Act was necessary and appropriate for carry ing out certain other powers conferred on Congress by the Constitution.
The capital of the bank was $10,000,000 and one fifth of this was subscribed by the government. Pri vate subscriptions were payable one-fourth in specie and three-fourths in government bonds bearing in terest at six per cent. Payments were extended over
a period of two years. The government shares were paid in ten equal annual instalments with interest at six per cent. One share was entitled to one vote, three shares to two votes, and so on, no shareholder having over thirty votes. Foreign shareholders could not vote by proxy, which meant practically that they could not vote at all.
The bank was permitted to lend on mortgages, but it could not hold real estate, except such as was re quired for the accommodation of the bank. Debts, above deposits, were limited to an amount equal to the capital stock. Directors were made liable for debts above the legal limit. This was, in effect, a limitation on note issue, and it was the only limit, im posed on that activity. The Secretary of the Treas ury was given the right to examine the affairs of the bank and to require statements as often as each week if he chose. Government funds could be deposited with the bank but no requirement was made. The bank was authorized to establish branches, and it did so in all the more important commercial centers. It was forbidden to buy government or state obliga tions, and to deal in merchandise. The rate of in terest on loans could not exceed six per cent. Notes of the bank were receivable for all public dues so long as the bank maintained specie payment. The charter was granted for a period of twenty years and the Federal government was pledged to grant no charter to another bank during that period.
Altho partly owned by the government, the bank was under private control. The payment for stock in bonds was explained by Hamilton on the ground that the bonds could be gradually converted into money. We see in the charter a provision for stock notes which has already been criticized in a previ ous chapter. The bank was a success from the be ginning and it performed many valuable services for the country. As fiscal agent of the government the bank collected the customs duties. By refusing to accept the notes of any bank which was not maintain ing specie payment, it practically forced the banks of the country to redeem their notes in specie on de mand. This an incalculable benefit to com merce. The bank has been called the regulator of the currency, because of this service which it ren dered.