This system was copied by eighteen other states, in cluding Illinois, Indiana and Wisconsin, but with dis astrous results. In none of these states did the sys tem survive long enough to become perfected. In Illinois, for example, a large amount of the securities deposited were those of the Southern states, which be came valueless at the outbreak of the war. The bank currency circulated at great discounts, varying with the reputation of the issuing bank. In 1857, there were one hundred and twelve banks in Illinois. In 1861, there were only seven and the holders of notes of the defunct banks had realized less than forty cents on the dollar.
The only advantage of this system over that of the safety fund is security. This was proved by the ex perience of New York after the list of acceptable bonds had been restricted to those of the United States and of New York. No currency could be more se cure, that is, more certain of ultimate redemption. This, however, is not the only desideratum of a credit currency. Current redemption is as important as ul timate redemption, and in this the system was defec tive. Moreover, the system was rigid—when the banks deposited securities they were given the right to issue so many notes, and they could not issue ad ditional amounts without first depositing more securi ties, no matter what the needs of business might be. In other words, the system was inelastic. This is an attribute which it handed down to our national bank note circulation along with that of security, and against which most of the attacks on the system have been directed.
11. Indiana and Ohio.—The Bank of Indiana was a successful institution. It was incorporated in 1834 with a capital of $1,600,000, one-half of which was subscribed by the state. It was given a monopoly of banking in the state and the right to establish branches. Each branch was allotted a certain capital, and the issue of notes was restricted to an amount twice as great as the capital. The branch banks were required to accept the notes of other branches at par and to redeem their own notes in specie. During the first years of its existence the bank attempted to loan on real estate security, but the danger of this custom was soon realized and it was discontinued. Subse quently it loaned to farmers on their personal notes and on their crops, but the loans were always for short periods. In this way, it transacted business on sound banking principles and continued to thrive until 1866 when the Federal tax on state bank note issue forced it out of existence.
The State Bank of Ohio was likewise well man aged and highly successful. It had a capital of $3,300,000 and had thirty-six branches. Note issue was restricted to an amount not greater than twice the capital and it was safeguarded further by a safety fund of ten per cent deposited with a board of control. The bank passed out of existence with the expiration of its charter in 1866.
Both these states secured an elastic and sound bank note circulation. They were especially fortunate in securing good officials for their banks.
12. Louisiana.—In 1842, the State of Louisiana passed a bank law which was worthy of imitation in some respects. The following were its principal fea tures: (1) no bank was to have less than fifty share holders, having at least thirty shares each; (2) di rectors were made liable for losses suffered thru violation of the law unless they could prove that they had voted against incurring the liabilities, if present; (3) directors were required to attend meetings or to resign after five succesive absences; (4) absence from the state for more than thirty days automatically retired a director from office; (5) specie reserve had to be equal to one-third of all the liabilities; (6) the other two-thirds of liabilities had to be represented by commercial paper having not over ninety days to run; (7) all commercial paper had to be paid at maturity and, if not paid, the account of the debtor was dosed and his name sent to other banks as a delinquent; (8) no bank was to pay out any note but its own; (9) all banks had to pay their balances to one another in specie every Saturday under penalty of immediate liquidation; (10) all banks were to be examined by state officers, quarterly or oftener.
This was the first law passed in any state requiring a reserve against deposits. The amount required is larger than is now considered necessary. By 1860, Louisiana became the fourth state in the Union in point of banking capital and second in specie holdings. Not all the provisions of the law would be consid ered desirable today, but such as they were, they were conscientiously and intelligently enforced until the capture of the city of New Orleans during the Civil War.