The Organisation of Banking in America: Decentralisation without Freedom
The Scottish experiences served as a forceful example in support of the claims of the free-banking school, but appeals to American history can hardly be said to have been so fortunate. The American case was evoked as evidence by both sides in the controversy, but so far as the system as a whole is concerned, it cannot be described as an illustration for either. It was decentralised without freedom; it lacked the essential characteristics both of central banking and of free banking proper.
The distribution of powers between the Federal and the State authorities left legislative control in banking matters in the hands of both. The country started off with a natural dislike of centralised institutions and a jealous regard for individual State rights. Nevertheless, the need for funds in the War of Independence impelled the Federal Government to take the first initiative in the banking sphere in the promotion of the Bank of North America. The lack of a genuine commercial need for banking facilities at this very early period in America's industrial development caused great difficulty in getting private capital for such an enterprise, and the Government was obliged to become a substantial shareholder in the Bank. It shared the unpopularity of all central institutions, and after the war its charter was repealed.
Not very long afterwards banks began to set up in the more progressive States under the separate legal systems of the various States concerned. The usual procedure at the beginning was to apply for a charter which gave the bank the privilege of limited liability. In most cases the charter contained clauses limiting the amount of liabilities the banks might legally incur to a certain multiple of their paid-up capital, and in some instances it imposed also a lower limit on the denomination of notes. In very few States did unchartered banks set up with unlimited liability. Almost as soon as any possibility arose of private individuals and unincorporated associations wanting to set up without charter, restrictions were placed on their entry into the banking business by the legislatures concerned. Most of the eastern States passed laws similar to the 1818 law of New York, which made both deposit banking and note issue conditional on special legal authorisation, and the majority of the Western States followed up the same policy. But the actual effect of this rule varied from State to State according to the ease with which charters were obtainable. There was least stringency in the east, which was, of course, the district in which there was most call for banking facilities. The most liberal policy was to be found in New England and more especially in Massachusetts and Rhode Island, where charters were granted to nearly all
who applied for them. In New York already established banks seem to have exercised a powerful influence in persuading the legislature to refuse to grant charters to new competitors; and there was an increasing tendency to restriction the further you went south and west.
Meanwhile, a second attempt had been made to run a central bank. This was the Federal institution, known as the First Bank of the United States. From its parent bank at Philadelphia the company had early begun to develop branches, and this caused much annoyance to the State banks and their legislatures. The opposition of the Republican Party was forceful enough to secure its suppression when its charter came up for renewal in 1811.
The disappearance of this bank and its branches was followed by a rapid growth of State banks. In 1811 there had been about eighty-eight, and within the next three years a hundred and twenty new bank charters were granted. Most of these banks lent heavily to the Federal Government when war was declared in 1812, and their excessive issues caused about three-quarters of them to seek the sanction of their respective Governments to suspensions of cash payments in 1814. After this their issues expanded still further and their notes fell to discounts