 ranging from 10 to 30 percent. The
resumption of specie payments nominally took place in 1817, but in 1819 there was a further suspension, which lasted two more years.
The foundation of these early banks was much more often based on political influence than on real commercial necessity. It was attended by abuses in the paying in of capital which were often directly aided by the State. In the case of the First Bank of the United States itself, the United States Government subscription of $200,000,000 was a purely fictitious book entry. Some of the banks had scarcely any capital at all, and nearly all of them had much less than was nominally subscribed, and since the liability of shareholders was limited, there was very little protection for the creditors. The State legislatures, when they did at last set themselves the task of opposing these fraudulent practices, experienced incredible difficulties in framing legislation to deal with them.
Another feature of these early banking formations was their close connection with State Treasuries. It was a common practice for States to require banks to make loans when necessary to the State chartering them. Special provisions were often made for this in their charters, and in addition Acts were passed from time to time authorising specific loans. The result of this frequently was that the banks were so heavily "‘loaned up" to the Government as to have practically no substance left for supplying commercial demands, a factor which must have contributed considerably to their early excesses.
The result of the autonomy of the rather small sparsely populated area of the State was that the banking system tended to assume a very fragmentary nature. A State bank had rights to carry on business only within the borders of the State from which it received its charter. This meant that America could not develop a branch system of banking, and it was perhaps in this circumstance that the chief justification lay for an institution such as the First Bank of the United States. Secretary of the Treasury, Gallatin, expressed the opinion some years later that if the Bank of the United States had been in existence in 1814, the chaotic banking disturbances of that year would not have occurred. The most essential condition for the suppression of excess note issues is their presentation for payment at frequent intervals. A very serious trouble throughout the history of American banking was the lack of a regular system of clearing the notes of the various banks. Notes tended to travel considerable distances, and since a bank in one State had no branches in any other State and generally no correspondents either, there existed no ready-made agencies for collecting the notes of rival banks and presenting them for payment. This was a function that the First Bank had begun successfully to perform, and its consequences must undoubtedly have been to curb the tendencies of the local banks to excessive note issues.
Another experiment in centralised banking institutions was made in 1816 with the foundation of the Second Bank of the United States. In common with the First Bank, part of its capital was subscribed by the Government, and it was to be the depository of the balances of the Federal Treasury without obligation to pay interest on them. It had, moreover, the right to establish branches without consulting the Governments of the States concerned. A new feature of its charter was a clause intended to minimise the likelihood of cash suspensions, by imposing a penalty, in the event of its failing to meet its obligations on demand, in the form of a 12 percent tax on the amount in default.
Gallatin maintains that it was only as a result of the organisation of this bank that the State banks were prevailed upon to resume cash payments, since it was the Second Bank which proposed a convention to which the State banks finally agreed. It is interesting to note that one of the stipulations made by the State banks was that the Bank of the United States should, in any emergency that might menace the credit of any of the sai