When the government of the United States was first organized it found that banking institutions were almost entirely lacking in this country. Owing to the bad condition of the currency and the disorganization of commercial credit, there was a strong desire that the government should participate actively in restoring business to a condition of greater soundness, and particularly that it should aid in establishing a banking system upon a working basis. At that time the dominant banking idea in European countries was that of large chartered banks standing close to the government. There was such an institution in England, and Alexander Hamilton, who was the conspicuous figure in our government so far as concerned all matters of finance, recommended the establishment of a strong institution of like kind to handle the finances of the government, issue bank notes, and generally act as a conservative and unifying influence in the financial system of the country. Such a bank was chartered and went into operation in 1791. This was the First Bank of the United States. A twenty-year charter was granted to it. This charter followed very much the same lines that had been recommended by Hamilton in his famous report. The details, of course, were shaped in Congress to suit the necessities of the situation, but the main ideas are clearly recognizable.

The bank was given a capital of $10,000,000 divided into 25,000 shares of $400 each. Of this sum $8,000,000 was open to subscription by the public, while the other $2,000,000 was to be subscribed by the United States and paid in ten equal annual installments, with interest at 6 per cent. The subscriptions to the stock were to be paid one-fourth in specie and three-fourths in government 6-per-cent bonds. Each shareholder was entitled to cast one vote for one share, one vote for the next two shares, etc., up to thirty votes, which was practically the maximum vote that could be cast by any one man. The power to inspect all the affairs of the bank except the accounts of private individuals was given to the head of the Treasury, and he was also authorized to call for reports as often as once a week if he chose. The notes were made receivable for public dues as long as they continued to be payable in gold and silver. The bank was allowed to establish branches wherever the directors thought fit, but only for discount and deposit. No trade of any kind could be engaged in, and the bank was not allowed to hold real estate, though it might lend on mortgage security, while it was not permitted to become indebted for an amount greater than its deposits. This practically limited the issues of notes to an amount not in excess of the capital stock. The bank was to transact the fiscal business of the government, and in return it was given an exclusive charter for twenty years.

The capital of the bank was almost instantly subscribed, and the institution promptly went into operation. It proved to be a great success, rendering the currency of the country much more stable, supplying the needed banking accommodation, and providing a note currency which was on the whole quite satisfactory. It was very successful in controlling the state institutions and assuring prompt payment of their obligations, especially of the circulating notes issued by them. In transacting the government's business, making loans as desired, etc., it met the necessities of the situation very satisfactorily.

There was, nevertheless, a considerable opposition to the bank from the first, and this grew stronger as the time came for the expiration of the charter. The bank stockholders were of course desirous of continuing, and as early as 1808 they petitioned for a renewal. Their application was supported by Secretary of the Treasury Gallatin, who showed that the government had made a handsome profit on its stock, besides earning dividends averaging 8 3-8 per cent per annum. The bank was in an exceedingly strong position at this time, as it had on hand about $5,000,000 in specie, while its loans and discounts were $15,000,000, and consisted chiefly of short-term paper. The opposition was due to the fact that a large proportion of the shares was owned abroad, and that the profits, therefore, went to foreign stockholders, while the antagonism of the state banks, which had been growing in number, was very strong. After a bitter struggle, Congress declined to renew the charter, and the bank went out of existence at the expiration of the original charter in 1811.

It was an unfortunate time at which to make a change in the system of banking. The War of 1812 was on the point of breaking out, and the government had reached a stage where it more than ever needed the aid of a strong financial institution. The removal of the First Bank of the United States took away the check that had been imposed upon the small state banks, and the result was that their issues were largely inflated during the years immediately following the cessation of the bank's operations. Added to this was the fact that the government speedily fell into a condition of disordered finance and was obliged to borrow from the state banks and then to sell bonds wherever it could, finally resorting to issues of so-called "treasury notes," which were really small United States bonds that ultimately degenerated into a kind of currency. Finally conditions became so bad that proposals were put forward for the organization of a new bank of the United States; and after the failure of several proposals of this sort Congress succeeded in passing a new charter in 1816.

The Second Bank of the United States was modeled very closely upon the plan which had worked so successfully in the case of the First Bank. The capital was $35,000,000, one-fifth to be subscribed by the government, while one-fourth of the public subscriptions was required to be in coin and three-fourths either in coin or government securities. In order to be assured of an exclusive charter for twenty years, the bank was to pay the government a bonus of $1,500,000. Public deposits were to be made in the Bank of the United States unless the Secretary of the Treasury should order otherwise, laying his reasons for such order before Congress at its next session. In the event of failure to pay notes or deposits on demand in specie, the bank was to be obliged to pay 12 per cent annually on the amount of its obligations thus refused.

There was no trouble in selling the shares, but when they had been sold the subscriptions came in slowly. The original charter had provided that individuals should pay their subscriptions 30 per cent when subscribing, 35 per cent in six months, and 35 per cent in twelve months. When the time came for the payment of the second installment the specie came in only to a small extent, and when the third installment fell due very few of those who owed it met their obligations on time. The bank discounted the notes of stockholders to a large amount, and made loans on its own shares to a substantial extent.

The effect of all this was to throw the institution practically into a condition of insolvency, and it required strenuous effort to get back to a working basis. Such a basis was, however, established by 1819, and, through an arrangement with the leading state banks, resumption of specie payments (which had been suspended during the War of 1812) was accomplished. From the time that the bank was placed in safe hands, however, it began to apply a rigid system of control to the state institutions and insisted on their keeping their notes redeemed in coin upon presentation. Branches were established here and there as needed, and the note currency issued by it became a practically universal circulating medium. Although the bank carried on various operations that were probably outside the scope of its charter and did not conform altogether closely to the limitations with respect to methods of issuing circulating notes, it was undoubtedly the most powerful and best-managed financial institution the country had seen, and its effect was to supply a far greater soundness and a far higher degree of convenience and efficiency in making payments than had ever before been experienced.

The Second Bank, however, like its predecessor, fell into difficulties because of political opposition. There was, as usual, the antagonism of the state banks, which were restive under the restraining authority of the overshadowing federal institution and desired to see it done away with that they might get more business and be freer to do as they chose. Besides this there were large general influences of a political character militating against the bank, and the persistent opposition of President Jackson focused all this antagonism in an irresistible way. A recharter was consequently re-fused, just as in the case of the First Bank.

The bank then, in 1836, obtained a charter for thirty years from the state of Pennsylvania, thus becoming a state institution and retaining its original $35,000,000 of capital. Up to this point the bank had occupied a thoroughly sound position, but it now found itself with too large a capitalization for the more restricted field in which it was compelled to operate. The result was that loans of doubtful character were undertaken, and finally the bank was obliged to suspend and go into liquidation in 1841.

The experience of the First and Second United States banks is of great interest at the present time on account of the tendency toward centralized banking control. It should be noted, of course, that both the First and Second United States banks were institutions decidedly of a different type from any that exist or would be likely to exist at the present day. Thus, in 1834, when the Second Bank of the United States was in an exceedingly flourishing condition, its loans were $55,000,000, deposits about $11,000,000, circulation about $19,000,-000, and specie about $10,000,000. It thus had approximately one-third of its circulation and deposits in the form of specie, while circulation was well toward double the amount of the deposits. This is undoubtedly a different condition from that which would be exhibited by any such bank at the present time. Its methods of doing business were also radically different from those that would be followed to-day. The lessons that can be obtained from the history of the First and Second banks do not he along the line of routine banking business, but are rather to be found in connection with the type of government control and the relation between the central banks and the local banks.

It is plain that political questions will always be of considerable importance in connection with any government bank, and, as in the case of the First and Second banks, they proved destructive, so they might wreck any governmentally controlled central bank.

Whether these questions would be rendered easier of solution by allowing the small local banks to own the stock of the national bank, and thereby eliminate their jealousy in a measure as well as some portion of the political controversy connected with such an institution, is a doubtful point.

The experience of these central banks showed that very excellent results could be obtained by giving to such an institution the management of public funds and intrusting it with the duty of making transfers and carrying on those portions of the fiscal duties of the government that are distinctly of a banking type. Experience with both these banks also showed the good results that can be obtained through the issue of a uniform bank-note currency, elastic in character, but amply secured by sound, short-time commercial paper accepted in the course of an exceedingly conservative loan and discount business.