It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste. Yet for them it was not intolerable. They had good money in which to do business with each other and with foreigners.

And also good banks. With care they could distinguish between the good and the doubtful notes from the West and either refuse the latter or accept them at an appropriate discount. They had losses but they also have expanding sales. Man of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking. And they explained that the settlers, in their urge to get ahold of bank notes and with their primitive view of economics, or confusing money with capital. The man of wisdom missed the point.

The anarchy served the front here far better than a more orderly system that capped a tight hand on credit could have done. And no naïve confusion of capital and money was involved. For the settler the notes he got from the bank were capital, for they got him capital. It is not often that people misjudge their pecuniary interest on a large-scale over a long time. The great westward movement in the last century was composed of those who did not. Those who suggested otherwise or showing that, then as still, what is called Salant economics is very often what mirrors the needs of the respectively affluent.

The compromise which followed the demise of a second bank of the United States had its price. But currently, and reflecting the euphoria stimulated by other causes, tanks were created and loans were made with abandon. And then, or some precipitating reason, people came to the banks for their money. These were the panics. It will be convenientto look first at the history of this banking and then, in the next installments and series, at the panics which were the price.

The end of the second bank, like the and of the first, left the field of banking – chartering and regulating – entirely to the states. Truly the modern Republicans dream. And as the end of the First Bank was celebrated by a great increase in the number of state banks, so it was again. Only this time it was a stampede. Between 1830 and 1836, the number of banks more than doubled – the increase was from 330 to 713. Paper note circulation went up more or less in proportion – from $61000000-$140000000. Specie holdings – holdings of gold and silver – showed, as might be expected, a more modest gain (these increased only from $22000000-$40000000)

the expansion in these years was facilitated by two legal designs. One was the state owned bank. This, since its immediate purpose was to make loans in its own newly printed notes, was palpably in conflict with the constitutional prohibition on the issue of money by the states.

As though to emphasize the point, the Kentucky Legislature, in providing for such a bank, appropriated money only for printing plates, paper and some furniture. All else was to be paid for with the money then printed. However, as was no evidence, where money is concerned the Constitution could be bent (it was subject to the yet higher laws that reflected public urgency and political need). In a culinary proceeding Chief Justice John Marshall held the mission of “bills of credit” by state banks to be unconstitutional. But in mid-1837, following his death, the full court upheld the right of the state banks to issue notes.

Continued on installment three of “the history of the United States currency and banking system in the 1800s”

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