The refusal to continue the National Bank gave full scope to State institutions, and they grew with mushroom rapidity. In 1837 there were 634 of them, with a capital of $291,000,000, of which $149,000,000 were in circulating notes, and $127,000,000 in deposits. The loans and discounts amounted to $525,000,000. The inevi table crash was hastened by an enormous crop of cotton in 1836, a consequent decline in prices, and the depreciation of the credit of cotton dealers and their backers. The tumble began in 1837, and by the first of June there was an entire snspension of specie payments; values fell from dollars to shillings, all business was de ranged, millions of people were reduced from comparative ease to sharp poverty, and a period of wretchedness began which continued nearly five years. However, Congress passed a general bankruptcy law, the States assisted, by limita tion and other laws, and by 1843-44 the country had nearly recovered. The banks had many trials; some resumed only to suspend again. and many went into liquidation. Congress passed the Independent Treasury Act, and thereafter the Federal Government had no direct concern in banking until the Civil War broke out. The old States Bank had its final downfall in the crash of 1837. That crisis taught wisdom to the State banks. and a general retrenchment was the consequence. Between 1838 and 1842 the number of banks was reduced from 675 to 577; capital from $317,000,000 to $229,000,000; circulation from $116,000,000 to $59,000,000; and discounts from $486,000,000 to $254,000,000. Further security was demanded by the public, and among the new measures were the Suffolk Bank plan in Massachusetts. and the New York safety-fund system. The Suffolk Bank plan was merely an arrangement whereby that bank was made the channel through which all notes of New England banks that found their way to Boston, as most of them naturally did, were at once forwarded to the issuers for redemption. The result was that all solid bankers found it for their interest to deposit with the Suffolk a redemption fund, as that insured the accept ance of their notes.
The New York safety-fund system, which is the cardinal principle of the present national banking plan, required each bank to deposit, with the banking department of the State, securi ties consisting of Federal or State stocks, or bonds and mortgages. which, in case of the of the bank, were sold, and the pro ceeds applied to the liquidation of its debts. In 1857 there was another crash, followed by a general suspension of specie payments; but the depression did not long continue.
One of the serious evils. avoided to a great extent by the issue of greenbacks and national bank currency, was counterfeited or altered bills. When almost every bank had its own plates for six or more denominations of notes, the country was flooded with counterfeits and alterations, and no business man ventured to accept a bank-note not well known to him with out previous comparison with counterfeit de tectors, weekly volumes giving description of counterfeits and spurious notes. In 1862 there
were counterfeits on the notes of 253 banks, be sides 1861 bills imitated, and 1685 entirely spu rious notes. On the best notes there was a dis count in the business centres of from 1 to 10 or even 15 per cent.; and exchange was more vari able than the weather. The 'wild-eat' and 'red dog' banks of :Michigan and other Western States were notoriously unsafe. A dozen of them would club together to make a show for one only, when the examiner came along, and the same specie would be an hour in advance of him all along his route. The 'red-dog' bank was so called because of its movable nature, and of the color stamped on its notes. Established in one place on Monday, the 'banker' might pack his carpet-bag at night, and on Tuesday open his bank 50 miles away; in which case he stamped in red ink on the face of his notes the name of the place in which the 'banking-house' was last established.
The Civil War (1861-6S) made large issues of credit necessary, and among the earliest financial proposals was one to enlist the interest of banks in the national credit by permitting them to organize under a national law and issue notes on the basis of bonds purchased by them and deposited with an officer of the Government. It was, however, some time before these proposals took the form of law in February, 1863. In the meantime, Congress had flooded the nation with paper money issued directly by the Government. The banking law of February 25, 1863, created a currency bureau in the Treasury Department, at the head of which is the Comptroller of the Currency, who has power to authorize banking by associations of not less than five persons, and a minimum capital (unless in very small places) of $100,000. one-half to be paid at once, and the remainder in six months. Before commencing business, the association must transfer to the Treasury of the United States interest-bearing bon& of the National Government to the amount of one-third the capital ; whereupon they may receive circulating notes, registered and counter signed, equal to 90 per cent. of the market value of the stocks deposited, but not beyond the amount of their par value. The entire amount of cur rency to be issued was limited to $300,000,000, one-half to be apportioned among the States ac eording to their representative population, and the other half with regard to the existing bank ing capital, resources, and business of the sev eral States. The system was slow in getting into operation. and the aid rendered the Gov ernment by furnishing a market for its bonds was, after all, slight. In January, 1865, there were only 68:3 banks that had organized under the national law. To hasten the process, a law of March 3, 1865, imposed a tax of ten per cent. on the notes of State banks, to go into effect August 1, 1866. Under the stimulus of this law. the reorganization proceeded rapidly, and in October, 1866, the number of national banks had reached 1644. The subsequent devel opment of the national banking system is briefly shown in the following exhibit: