orporated 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 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 