ortant centres of business. This was what happened in Massachusetts. The banks of Boston found themselves at a distinct disadvantage because the country banks were securing practically the entire circulation even in Boston. Large numbers of country bank-notes never returned to the banks that had issued them, but remained in Boston circulating without hindrance at the recognised rate of discount. The Boston banks made several attempts to systemise the sending back of notes for redemption. The most successful was the Suffolk Bank system. This bank arranged for New England country banks to keep with it permanent deposits of $5,000 plus a further sum sufficient to redeem notes reaching Boston. The Suffolk undertook to receive at par the notes of banks who made such deposits, and the notes of country banks who refused to come into the scheme would be sent back for redemption. The Suffolk Bank, moreover, refused admittance to its clearing agency to banks whose integrity was not above suspicion. This had the intended effect of curtailing the circulations of the country banks.
The Massachusetts legislature also passed a law, in 1843, to secure the more frequent return of notes by providing that no bank should pay over its counter any notes but its own. A similar law was passed in Louisiana. Other States placed penalties on the default to pay notes in specie on demand, either by the imposition of a percentage tax on the amount involved or by making the offending bank liable to the forfeiture of its charter. This latter measure should have been the most effective if it had been rigidly enforced. Specifications as to reserve requirements also began to emerge in many of the States. The most stringent of these was that of Louisiana requiring a specie reserve of one-third against circulation plus deposits.
In other cases efforts were directed not to preventing the over-issues and ensuring redeemability of notes on demand, but to giving some protection to the note-holder in the actual event of suspensions following such an over-issue. Several States adopted the practice of giving notes a prior lien on assets. Another measure adopted was that of double liabllity which made bank shareholders liable for the debts of the bank to an amount equal to their respective holdings of shares over and above the amount of capital actually invested by them in the bank. The most ambitious scheme was the New York Safety-Fund system. This was a system of compulsory insurance of banks against unmet liabilities. The banks paid contributions to a fund to be allocated to the paying out of the liabilities of insolvent banks where they exceeded their assets. There was, of course, a tendency under this scheme to subsidise weak institutions at the expense of the stronger and more prudently managed ones, especially as the insurance premium was not assessed on the basis of actuarial risks, but was merely computed as a percentage on the capital of the bank. It also had the further unhealthy effect of weakening the public scrutiny over the issues of particular banks, and many of the banks were tempted by this fact itself to risk bigger issues. Between 1840 and 1842 eleven of the safety-fund banks failed, the fund was exhausted, and the solvent banks had to be called upon for increased contributions. Future contributions were also mortgaged in advance for charges in respect of an issue of State bonds made to replenish the fund. After the bankruptcy of the fund in 1842, it was made security for notes only and no longer for deposits as well, but it still proved inadequate.
We have already observed that the banking business in the United States, or at least over the greater part of it, was in the first half century of its growth by no means open to free entry. But from 1838 onwards there was a change of policy in several of the States which made it possible for banks to set up without having to obtain a charter. The new policy was inaugurated by New York in 1838 in a so-called Free-banking Law. Under this law it was made permissible for any person or association to issu