Reference has been made to some of the early banks chartered by the states, and to the rapid increase in the number of such banks, especially after the dissolution of the First Bank of the United States. The main function of these early state banks, commonly known as "banks of issue," was to supply currency in the form of circulating notes. The check so largely used in our business transactions to-day was then but little developed. The "bills" of different banks circulated together and little regard was paid to the ability and willingness of banks to redeem these notes in coin.
Among the early movements toward a sound banking system the Suffolk Bank system of redemption established in Boston in 1818 is noteworthy. In New England the notes of country banks constituted a large proportion of the money in circulation. Because of the expense of redemption they circulated in Boston at a discount of from 1/2 to 5 per cent. The fact that the city banks would not accept these depreciated notes at par made them circulate all the more actively among merchants, while the notes of the city banks were presented promptly for payment at the banks.
The Suffolk Bank adopted a plan to compel the country banks to redeem their notes at par in Boston. It offered to redeem all such notes at par if the issuing banks would keep with it sufficient funds for the purpose and also a permanent cash deposit to compensate it for its trouble. At first the country banks were not favorably disposed toward this plan, but when six other Boston banks joined the Suffolk in collecting large amounts of country bank notes and sending them home for redemption, they were forced to accept the arrangement. As a result practically all the banks in New England joined the Suffolk system, which served as a clearing house for the bank notes of all New England. The system of redemption was strengthened by a law passed in Massachusetts in 1845 providing that no bank should pay out any notes except its own. Thus constant redemption was kept up, the average life of the bank note being about five weeks, and all notes were maintained at par. The Suffolk system worked so well that specie was seldom demanded and it was not until after the panic of 1857 that banks were required to keep a specified reserve. In 1858, Massachusetts passed a law providing for a reserve of 15 per cent against both notes and deposits, thus recognizing these two kinds of bank liabilities as equal in all respects.