The early experiments in banking in the United States were concerned largely with the issue of circulating notes and with the fiscal operations of the Government. During colonial times several banks were projected in New England with the right to issue circulating notes based on the security of land. These early banking projects assumed that if such security were given for the ultimate payment of the notes, current redemption would be unnecessary. Usually they had no actual paid-in capital but depended upon mortgages as a basis for their operations. These "land bank" schemes to supply a circulating medium were suppressed by the colonial or the English governments.1
The first bank established in the United States was the Bank of North America in Philadelphia, which was chartered by the Continental Congress in 1781. It was planned by Robert Morris, the Superintendent of Finance, in order to give financial support to the Revolution. A little earlier a number of patriotic Philadelphia citizens had organized the so-called "Bank of Pennsylvania," which consisted merely of private subscriptions to provide supplies for the army. The Bank of North America took over its foreign bills and assumed its claims against the Federation.
The Bank of North America was capitalized at $400,000, of which the Government subscribed $250,000. There was so much doubt as to the power of the Continental Congress to charter a bank that a charter was secured under the laws of the State of Pennsylvania in 1782, and the bank operated under this charter until 1864, when it entered the national bank system. It also took out charters in several other states. The Bank of North America rendered an invaluable service by making loans to the government during the troubled years of the Revolution. About this time state banks were organized in Massachusetts and New York. The Bank of Massachusetts located in Boston was chartered in 1784. In the same year the Bank of New York began business under articles of association drawn by Alexander Hamilton, but it did not receive a charter until 1791.
1 For a discussion of some of these Colonial banking schemes, see White: Money and Banking, Bk. III, Ch. IV.
Some of the restrictions imposed upon these early state banks are noteworthy. The charter of the Bank of Massachusetts limited its debts, except sums due to depositors, to twice the paid-in capital, and the debts of the Bank of New York, over and above deposits, were not to exceed three times the paid-in capital. This distinction between the bank's liability to depositors and to noteholders was due to the fact that deposits were not then created by loaning as they are to-day, but by the actual deposit of money. Actual money, not deposit currency, was used in making payments; hence deposits were distinguished from other liabilities in estimating the right to contract debts. Both banks were prohibited from dealing in merchandise. The Bank of New York was prohibited from dealing in the stocks (bonds) of the United States or any of the states, an evident attempt to separate banking and government. It was also prohibited from loaning on real estate or holding it except for banking purposes or when it was necessary to take it to secure the bank against debts previously contracted. This restriction was incorporated in the national bank law passed nearly eighty years later. The Bank of Massachusetts was also prohibited from dealing in bank stocks.