Vol. II
p119 Chapter 7
Banking Problems, 1804‑1835

Inflation — Depression — Liquidation

The state currency was disposed of through the co-operation of the banks. But the old evils of inflation and depreciation, which had characterized the long experience with paper money in all its forms, were perpetuated. The chief difference was that instead of paper money, the bank notes were the cause of confusion and commercial depression. Two influence contributed to this condition. First of all, there was a rapid increase of banking capital. In 1804 the total authorized capital was $450,000 with the right to issue $1,350,000 of notes. In 1810 the authorized capital was increased to $2,050,000 and the possible note issues to $6,150,000. However, the operation of the banks was not so extravagant as these provisions might suggest, for their notes stood the strain of the second war with Great Britain well. Said a legislative report of 1817: "When the banks to the west and the south of New England suspended specie payment, the notes issued by the State Bank of North Carolina became in a general degree a continental currency. In Georgia they were at par, received and issued by the banks of that state. In South Carolina they were always at par, except occasionally in the city of Charleston, where they were subject to a small depreciation. Everywhere else they bore a premium, often a considerable one."​1 In 1816 the notes of the North Carolina banks were in demand in the money markets, being quoted at a premium in Philadelphia, and in 1817 specie payments were resumed by the banks.

 p121  Contemporary with this expansion of the currency there developed a desire for speculation. The more bank notes issued, the greater was the demand for them. This is well illustrated by the re-charter of the banks of New Bern and Cape Fear. In 1814 the directors of those institutions petitioned the legislature for an extension of the charters, which would expire in 1820. The petition was granted on condition that the banks would increase their capital to $800,000 each. In favor of the measure it was argued that the existence of only one bank after 1820, viz.: the State Bank of North Carolina, would create a monopoly and an aristocracy of money which would be dangerous to the liberty of the people. Competition in the banking business was therefore desirable. So the Bank of the Cape Fear was allowed to add 5,250 shares to its capital stock, the bank of New Bern 5,750; of this the state was to subscribe 1,000 shares in each institution, and 180 shares of each subscription should be a bonus, and 410 in each should be paid for in treasury notes, the rest at the convenience of the state with no interest on the deferred payments. The state was to receive dividends on the stock subscribed, but only the margin above six per cent on the stock unpaid for. The life of both corporations was extended to 1835.

Thus an element of confusion was injected into the monetary condition by the issue of $82,000 in treasury notes, with which bank stock was purchased. But the taste for treasury notes, once aroused, could only be satisfied by another issue. So in 1816, when specie was scarce, $80,000 in denominations of less than $1 were thrown into circulation through the State Bank, to be accepted in payments of obligations to the state and again thrown into circulation by the treasurer, and when received at the State Bank were to be credited to the debt of the state to the bank. In the meantime the banks increased their note issues, the State Bank from $145,000 in 1812 to $1,283,677 in 1818; by 1819 that of the Bank of New Bern was $553,180, that of the Bank of the Cape Fear, $739,935.

The desire for banking investments increased with the inflation of the note issues. In 1817 a legislative committee  p122 recommended an increase in the capital stock of the State Bank and when the directors disagreed, the unsold stock, amounting to 4,240 shares, was by legislative action placed on the market. There was a feeling that the state should assume the entire amount, but this seemed impossible because the directors declared that preference was to be given to small investors and that no proxies would be permitted at the time of subscription. The legislature thereupon resolved that members might purchase shares with money advanced by the treasurer and quietly turn them over to the state. Only 18 shares were thus secured; evidently the legislators exhausted their bids in making personal purchases and neglected the commission for the state. At the next session a bill to increase the capital stock of the banks of the Cape Fear and New Bern was introduced but was lost in the Commons.

In 1819 a third influence, the inevitable result of expansion of the currency and speculation, increased the confusion and created an incalculable depression. That was a rapid return of the surplus bank notes upon the banks, and a drain on specie. Brokers began to buy the notes of the banks and to submit them for redemption in specie, thus greatly reducing the coin in the vaults of the banks. The process and its results are well described in a legislative report of 1819 as follows: "Waggon after waggon was loaded with specie until the banks found, or thought they found, that the facility of procuring specie produced an effect opposite to that which is usual with established credit. The notes were not permitted to circulate, but were collected, and sent in for payment. The specie in the vaults was rapidly sinking and the difficulty of continuing specie payments appeared imminent. The only practicable means were to call on the debtors for payment. To the banks it was not material whether the notes were paid in their notes or specie. The first withdrew their notes from the reach of the brokers. The last enabled the banks to meet them by whomsoever presented. Unquestionably this was the regular remedy, if it were not forbidden by peculiar reasons. But it was represented that the situation of the state did not leave it in the power of its citizens to pay these debts without the most ruinous sacrifices of property and universal distress.  p123 This distress the banks were obliged to occasion or hazard the credit of their institution. Thus situated, they adopted the alternative which they believed the less mischievous. * * * They refused specie to brokers but paid them off in drafts of the North to the South. The distinction between brokers and others was too minute to be steadily observed; others have, no doubt, been refused subsequently, or have found difficulty in procuring specie for notes presented."2

The above quotation is notable for two reasons; first, it was made in 1819 at the beginning of the great financial crisis which swept over the South and West and gives a favorable construction to the suspension of specie payment by the North Carolina banks; secondly, it was an official, legislative report, the spirit of which was a contrast to the radicalism which was manifest in the legislature a few years later.

Unfortunately the suspension of specie payment did not put an end to the pressure on the banks. The brokers had recourse to the courts and secured judgments forcing payment in specie. The banks had either to close their doors or to increase the amount of specie. For the latter purpose several questionable methods were resorted to. One, practised by the State Bank and the Bank of New Bern, was to refuse accommodation to customers unless payment should be in specie; as illustration, a loan of $1,000 in notes would be made on condition that the principal and interest should be paid in specie. As the bank notes were discounted at 5 per cent and the rate of interest on the bond was 6 per cent, it was charged that 11 per cent interest was being exacted, which was usury. Another expedient, used by the State Bank and the Bank of Cape Fear, was to buy their own notes outside the state at a figure higher than the market price as means of "appreciating the notes and giving them greater currency." The same institutions also purchased stock of the Second Bank of the United States as a means of securing funds equivalent to specie. Moreover, the president of the State Bank in 1822 and 1827 bought cotton with the bank's funds, selling for specie at a profit in 1822 but at a loss in 1827. This was not

 p125 an irregularity merely; it was a violation of the bank's charter.

By such means the banks endeavored to protect their notes without calling in their loans. The state also offered aid; the legislature in 1820 authorized the purchase of bank stock with the surplus money in the treasury, and in 1821, 153 shares of the State Bank were bought, 53 of the Bank of New Bern, and 108 of the Bank of the Cape Fear. In 1823 further support of the banks was given by the issue of $100,000 of treasury notes, which were to be a legal tender for all financial obligations to the state. These were then thrown into circulation and bank notes and specie received in exchange were to be invested in bank stock. Accordingly 24 shares in the State Bank, 330 in the Bank of New Bern, and 680 in the Bank of the Cape Fear were purchased in 1826. The Literary Board also came to the aid of the banks by purchasing 204 shares of the State Bank, 141 of the Bank of New Bern and 50 of the Bank of the Cape Fear. But all these measures proved ineffective, for in 1825 a powerful influence began to operate which forced a resumption of specie. This was the Second Bank of the United States. In 1825 the branch at Fayetteville began to make payment in its own notes only, but received the notes of the local banks unreservedly, and in 1827 "branch drafts" were offered in exchange for the notes of the North Carolina banks. The result was that the Second Bank secured large amounts of notes of the North Carolina banks, submitted them in demand for specie, and the banks were forced to comply with the demand. The banks, outgeneralled in the game of finance, were forced to call in their loans, which amounted to $5,500,000, while their notes in circulation had shrunk to $1,500,000. In December, 1828, the stockholders of the State Bank met and a committee recommended a wind-up of its business, but action on the report was postponed until the following June.

Undoubtedly some practices of the banks were clear violations of the charters; others if adopted to‑day, when general banking laws have been worked out, would cause the prosecution of bank officials. There was ample material for a political attack on the banks based on their relation to the  p126 state, and an audience was at hand consisting of the debtors who were being forced by the banks to meet their obligations. When the legislature of 1828‑29 met a joint committee made an examination of the affairs of the banks. Its report was two-fold: that of the majority, after reviewing the questionable methods introduced into the banking business during the past few years, recommended that the banks be compelled to meet their obligations in specie. That of the minority magnified the indiscretion and violations of banking rules into extortions of the people, in the following manner. First, the payment in part of the subscriptions for bank stock in personal notes instead of in specie was characterized as a fraud. Referring to the additions to the capital stock of the banks of New Bern and Cape Fear the report said: "It is in evidence to the undersigned that the whole of the additional stock was manufactured by the banks themselves, and that, in many instances, favored individuals were permitted to acquire stock by subscribing their names and putting their notes into the bank, without advancing a single dollar for capital. It follows that the whole amount of the interest drawn from the people, on the loans made from this fictitious capital, was a foul and illegal extortion."3

Likewise the method by which subscriptions to the stock of the State Bank were paid was censured. Of the capital with which the institution began business, amounting to $1,176,000, only $500,000 was in specie, the rest being bank notes. Also when the remainder of the stock was placed on the market in 1818, sales were negotiated in bank notes. "But the charter," says the committee, "authorized the bank to operate on a real and intrinsic capital, and directed that that capital should be paid into the bank by the stockholders. In the transaction referred to, the bank, by a scribbling process of its own, created capital, and paid off a portion of its debt, by the very act by which it also increased its capital."4

The evils of buying stock at advanced rates and of speculation in cotton were also condemned by the minority. The  p127 damage inflicted on the people was described as follows: "It appears that the people of North Carolina, having already paid to the banks since they went into operation a profit of $4,000,000 on their stock — stock, too, three-fourths of which was manufactured by the banks themselves in a fictitious and fraudulent manner — that having paid this immense sum, exceeding four times the amount of actual capital stock ever paid into the bank according to law, they still hold the notes of the people for more than $5,000,000, about four times the amount of the whole circulating medium of the State. Thus it is in the power of the banks absolutely to extinguish the currency of the country, and when they have taken every dollar out of circulation, still to have a debt against the people to the amount of about $4,000,000. * * * The communication from the stockholders of the State Bank now before the committee, expresses the opinion that it is for the interest of the stockholders to withdraw their money from the bank, and take it under their own management; and contains a resolution by which they have proclaimed their determination to assemble June next, in order to wind up their affairs; and, consequently the affairs of the people of North Carolina. Thus, having for years contrived by illegal and fraudulent practices to draw from the people all the profits of their labors, and having by these practices placed the people in an impoverished condition, where they can no longer pay them large profits, they are now preparing by one fell swoop to extort from them the actual means of subsistence."5

In conclusion the minority report expressed the conviction that banks had violated their charters and recommended that the attorney-general institute proceedings against them through the writ of quo warranto, or other legal process.

The question of adopting the majority or minority report led to one of the memorable debates in the legislature of North Carolina. Mr. Potter, chairman of the joint committee and leader of the minority, submitted a bill directing the attorney-general to bring quo warranto proceedings against the banks, the trial to be conducted by the Supreme Court  p128 with a jury, and in case of a verdict of guilty, the Court was to take over the affairs of the banks and the governor was to pledge the faith of the state for the redemption of the notes and debts of the institutions. The opposition to the bill was led in the House of Commons by William Gaston and David L. Swain, who threw some light on the conduct of the banks different from that of the minority report. Mr. Swain showed that the expansion of banking capital was due to pressure of the legislature, while Gaston took up a number of specific accusations against the banks. In reply to the charge of accepting illegally notes for subscription to bank stock, he showed that the amended charters of banks of New Bern and the Cape Fear did not require specie to be paid for the new stock and that subscriptions made to the State Bank in paper (promissory notes) were necessary because at that time the other banks had a monopoly on the specie in the state. Thus expediency, not a desire to defraud, caused this violation of sound banking; but a modern reader of his speech must be surprised at the claim that offering notes redeemable in specie was equivalent to paying in specie. Gaston also maintained that requiring those who applied for loans to pay the principal and interest in specie was not usury, for the intention of the banks was not to get unlawful interest but to preserve specie, and the specie so obtained was soon paid out in redemption of the notes. Practically, however, any one must see that the practice imposed a burden on the debtor equivalent to usury. As to the remedy proposed, a dissolution of the banks, Gaston made the following criticism, the most cogent part of his speech:

In reply to Gaston Mr. Alexander took the position that the debts due the banks would, on the dissolution of the corporation, become the property of the state which would make proper disposition of them, citing the seizure of loyalist property during the Revolution. Gaston, in rejoinder, showed that loyalist property was not the property of citizens but of aliens, while banking property was the property of citizens and by a decision of the courts the property of citizens "is placed out of the power of the collective body of the people and no act of the General Assembly could impair property rights, nor could the legislature provide a new penalty for the punishment of past deeds, for that would be a violation of the charters, retrospective law making, a revolutionary principle in North Carolina and a violation of the federal constitution."

The argument of Gaston was by far the ablest of all the defenders of the banks. Indeed the opposition to the program of the radicals was so strong that Mr. Potter modified his bill so as to make the State Bank alone the object of prosecution and to have the state guarantee its debts. After some discussion of the amended bill the vote was taken. The result was a tie which was broken in favor of the opposition by the ballot of Mr. Settle, the Speaker of the House of Commons.

The charters of the banks were thus saved from judicial procedure, but the conflict between radical and conservative finance took a new form the next year. The banks of New Bern and the Cape Fear petitioned for an extension of their charters so as to give their debtors easier terms in settling  p130 their accounts, the bill being introduced by Mr. Gaston. The radicals opposed the measure; they declared that the banks had known for years when their charters would expire, that they should have taken measures earlier to wind up their business, and that an extension of the charters would not help the people but merely accommodate the banks and in the light of their misdemeanors such a favor should not be granted. Again the most convincing argument was made by Gaston. He showed that the sentiment of the stock holders was to make over the banking property to trustees immediately and wind up the business; that the proposed extension of the charters was suggested by a legislative committee which had been appointed at the last session to examine into the affairs of the banks; and that the measure would be in the interest of the people. Mainly to Mr. Gaston's argument was due the success of the movement for extension. As finally shaped, the law provided for an extension of the charters of all the banks until 1838; prohibited new loans by the State Bank after September 1, 1830, by the others after December 31, 1834; forbade the installments on the existing debts to not more than one twentieth each ninety days and also prohibited the issue of bills under $5 after December 1, 1832, or any denomination after December 31, 1834, and required the redemption of one third of the existing debts by December, 1834; allowed the bank stock to be received in payment of debts; and dividends of capital stock might be issued after January 1, 1833. The State Bank was also allowed to reduce the number of its directors and the tax on the stock of the other banks was to be abolished after 1834.

The second financial issue of 1829‑30 was the establishment of a new bank. This problem was an imperative one on account of the approaching dissolution of the existing banks. In the discussion there was a long and bitter conflict between the influences of sound and radical finance. The matter was opened by a bill for a Bank of the State presented by Mr. Martin, of Rockingham County. The capital of the proposed institution was to consist of all property and stock of the state not otherwise appropriated, including lands,  p131 bank stock, funds and notes due to the state, etc.; its officers were to be elected annually by the legislature, its loans were to be made on real estate or discount notes with two indorsements, and the funds available for loans were to be appropriated among the counties in proportion to the amount of taxes paid, with a trustee in each county to negotiate the loans and to represent the bank; and cash with which the bank would begin operations should be procured by the issue of state bonds to the amount of $300,000, which should be sold for specie, and the state should be reimbursed by the profits of the bank.

In support of this bill the experience of other states was cited, notably that of Alabama and Georgia. It was also argued that the bank would receive on deposits funds realized from the state's stock in other banks and that the production of gold in North Carolina would enable the directors to secure a large amount of the precious metal which would be converted  p132 into specie. In the Senate, although the evils in the plan were ably exposed by Mr. Meares, the bill was carried by a vote of 33 to 25. In the Commons there was a vigorous and successful opposition, Swain and Gaston again making the most effective arguments. Swain advanced the objection that the notes of a bank founded on assets of the state would violate the clause of the Federal Constitution which forbade the states to issue bills of credit, while Gaston emphasized the inherent danger of the state undertaking the banking business. Most remarkable, however, was Gaston's arraignment of the men who fostered the plan for such a bank as that under discussion. He said: —

The opposition to the bill was aided by a technicality: the  p135  text of the bill as presented had some gaps regarding the amount of capital of the proposed bank; it was therefore sent back to the Senate as not "perfect" according to the rules of the legislature. The Senate, however, declared the bill perfect; again the House referred the bill to the Senate, when the gaps were filled in, but by that time the matter was adjusted. Gaston, Swain and other leaders of the opposition in the House had secured strength enough to secure indefinite postponement by a vote of sixty-seven to sixty-three.

The movement for a bank on the funds of the state was again defeated in the sessions of 1830‑1831, 1831‑1832, but in 1832 the State Bank declared a stock dividend of 50 per cent and was nearly ready to close its doors. This made some new provision for banking more urgent than ever. Six bills for a new bank were introduced in the session of 1832‑33; that of Mr. Barringer was finally adopted with some amendments. It provided for a Bank of North Carolina with a capital of $2,000,000, one half of which was to be subscribed by the state; the officers were to be elected the first year by the stockholders, thereafter by the legislature. The institution thus outlined was not organized, the reason therefor being that the private stock was not subscribed, capitalists not caring to be a party to an institution whose officers would be elected by the legislature. So at the next session the charter was remodeled. A new name, Bank of the State of North Carolina, was chosen; its charter was to extend to 1860, the capital was fixed at $1,500,000 to be paid in gold or silver or their equivalents, of which the state was to subscribe two fifths; the number of directors was fixed at ten, of whom four should be appointed by the state, and the treasurer of the state should be a member ex officio. The bank was to open its doors when one half of the stock should be paid in, but no dividends should be declared until the entire stock was sold. The note issues were limited to twice the amount of capital.

At the same session the charter of the Bank of the Cape Fear was extended until January 1, 1855, with a capital of 8,000 shares, and its debt limit was fixed at $1,600,000 above the amount on deposit. Private banks at New Bern and Edenton were chartered at the same session.

 p136  The evils and controversies which arose from the early experience in banking suggest certain questions pertaining to the relation of the banks to the state, the currency, and public opinion. First of these is the value of the state's investment in bank stock. The table on the opposite page shows the total income from each bank, the amount of the state's actual investment, and the resulting profit.

Clearly the investments of the state in bank stock yielded a large profit. Also the state's stock contributed to the growth of new economic and social projects through the Fund for Internal Improvements and the Literary Fund. To the former were appropriated the state's dividends from the Banks of New Bern and the Cape Fear in 1821, while in 1825 the additional stock in these banks purchased with the treasury notes of 1823 was made a part of the Literary Fund. However, the internal improvement policy of the state was a notorious failure, and no expenditures from the Literary Fund were made for schools until 1839. Also the policies of the banks, already reviewed, were not conducive to prosperity among the people; and when the people suffer, any prosperity on the part of the government is very nominal.

The extent to which the currency was inflated can not be determined; but it is certain that the amount of notes in circulation was not so great as the charters of the banks would permit. Also, in 1825 and thereafter, when the influence of the Second Bank of the United States was felt, there was a gradual contraction of the notes in circulation, the issues of the State Bank declining from $1,598,673 to $655,156, those of the Bank of the Cape Fear from $776,417 to $235,460, and those of the Bank of New Bern from $677,597 to $325,444.

An unique feature of the inflation of the currency was the issue between the years 1825 and 1828 of treasury notes by the state. Although the constitutionality of issuing them was questioned, notably by Gaston, no step was taken in the courts to test their validity. They were gradually redeemed  p138 and the redemption was a strain on the treasury in years when the state was facing a deficit. The following table shows the process of redemption:

Total Issue

Amount Burned Yearly

Finally, the cleavage between the forces of conservatism and radicalism in adjusting the banking problem was deep and lasting. Illustrative of this is the fact that Swain and Gaston, the leaders of the conservative faction, were later leaders of the anti-Jackson movement in North Carolina and that the issue which caused the greatest defection from Jackson in the state was his financial policy of 1832. Thus sound financial policies were one of the fundamental bases of the whig party in North Carolina.

---

The Author's Notes:

1 Report of A. D. Murphey on the Banks (Senate Journal, 1817, pp89‑91).

2 Senate Journal, 1819, pp121‑124.

3 Report of the minutes and proceedings of the Joint Committee, p7.

4 Ibid., p8.

5 Ibid., p10.

6 Debates on the bill directing a prosecution of the several banks.

7 Debates on the bill for establishing a Bank of the State.

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