Dominion Notes

Prior to the achievement of their independence the banking facilities of the colonies were not only very limited, but crude and unsettled. No well defined system of finance or banking had been worked out, even in the older countries of Europe. The Bank of England came the nearest to a settled plan, but it was in the experimental stage, constantly changing its policy or methods during the first hundred years of its existence. Men did not understand finance. They were groping about, experimenting, trying all manner of schemes and hoping to find the successful one. The first banking experiment in this country of which we have any reliable account was started in Boston in 1714, and was to be a land bank, patterned no doubt on ideas borrowed from John Law of France. This scheme was entitled "A Projection for Erecting a Bank of Credit in Boston, New England, Founded on Land Security." The capital was fixed at £300,000, and each subscriber to the stock was required to "settle and make over real estate to the value of his respective subscription to the trustees of the partnership or bank, to remain as a fund or security for such bills as shall be emitted therefrom." At meetings of the stockholders, each person should not have more than five votes, irrespective of the number of shares which he held. Loans were to be made on "ratable estates" to the amount of two-thirds their value; on wooden houses, not exceeding the value of the land included with the house; on brick houses, to the extent of one and a half times the value of the land belonging to them; "on iron or other imperishable commodities as a pledge, for a half or two-thirds, according to the market." The scheme was very popular, especially with the irresponsible class and those possessed of real estate but no ready cash, who wanted to borrow money on easy terms. The project was vigorously attacked in a pamphlet by Paul Dudley, attorney general, who showed that the pretended land security for the bills was in reality no security at all, since the holder of them could do nothing with a mortgage if it were turned over to him. He gave it as his legal opinion that the mortgages were without consideration and would not be enforced by the courts. When a charter was applied for, the scheme was vetoed by the Colonial Legislature. Next came the Land Bank of 1741, a "pernicious grand bubble," a scheme which convulsed society in its day and came near producing a revolution. This bank began to issue circulating notes without a charter. The governor issued a proclamation against it and a general quarrel ensued. New banks now began to be organized, in imitation of this one, in all towns of importance and a regular banking mania broke out. The financial schemes were projected by "a vast multitude of necessitous, idle and extravagant persons, (who) contrived to obtain what they call money, at an easy rate and to pay their debts in a precarious, fallacious kind of bills, very illy or not at all secured, of no determined value, bearing no interest," and payable at some indefinite time. The situation resembled somewhat that which had existed in England during the South Sea speculative mania, and to bring the colonists to their senses and put a stop to these wild schemes, Parliament extended the prohibitions and penalties of the Anti-Bubble Act to the colonies. This stirred up much antagonism and resentment in the minds of the people, but resulted in killing the Land Bank. The liquidation of the bank's affairs extended over a period of almost a quarter of a century, and nearly every one who had any connection with the institution was ruined.

During the Revolutionary War, one of the most difficult and embarrassing problems which confronted the Continental Congress was the money question. How to provide the means for keeping the armies in the field was a knotty question. The treasury was bankrupt, and Congress possessed no power to compel the several states comprising the confederacy to pay their just portion of the taxes. Congress undertook to tide over the emergency by issuing bills of credit,* which were to pass as currency, but as millions upon millions of these were printed, and as the prospects of a successful termination of the war became doubtful, these bills sank in value until in 1778 a dollar was worth but sixteen cents in gold. In 1780 it had fallen to two cents, and in 1782 it required $1,000 in notes to equal $1 in gold. Different states issued paper money at the same time which circulated at various values. The people were poor, in debt, and discontented, and general grumbling prevailed. In order to remedy this state of affairs and bring some degree of financial order out of the general confusion, Robert Morris, then superintendent of finance, in 1782 obtained a charter from the Continental Congress for the Bank of North America, at Philadelphia. The continental money was then almost worthless, having caused, as Mr. Morris said, "Infinite private mischief, numberless frauds, and the greatest distress," and he rightly believed that a large bank, properly conducted, and under control of the government would be of great service to both the government and the people. The capital of the bank was $400,000, and its affairs were conducted by a board of twelve directors, under the inspection of the superintendent of finance, who was to receive daily reports of the business of the bank. By the fortunate arrival of $470,-000 in specie from France about this time, which was deposited in the bank, thereby greatly strengthening its standing and credit, the bank was enabled to make large loans to the government for the purchase of army supplies. Mr. Morris afterwards said, "Without the establishment of a national bank, the business of the department of finance could not have been performed," and the war could not have been successfully prosecuted.

•Bills of credit were issues of pure fiat money, based upon no assets and having only the faith of the people in the issuing government to support them.